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FOMC Minutes Meeting 23-10-2012

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The Resolve to Keep Money Wall is evident

The Resolve to Keep Money Wall is evident

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  • 1. Page 1_____________________________________________________________________________________________ Minutes of the Federal Open Market Committee October 23–24, 2012A meeting of the Federal Open Market Committee was James A. Clouse, Deputy Director, Division of Mone-held in the offices of the Board of Governors of the tary Affairs, Board of GovernorsFederal Reserve System in Washington, D.C., onTuesday, October 23, 2012, at 1:00 p.m. and continued Andreas Lehnert, Deputy Director, Office of Financialon Wednesday, October 24, 2012, at 9:00 a.m. Stability Policy and Research, Board of GovernorsPRESENT: Linda Robertson, Assistant to the Board, Office of Ben Bernanke, Chairman Board Members, Board of Governors William C. Dudley, Vice Chairman Elizabeth Duke Thomas Laubach, Senior Adviser, Division of Research Jeffrey M. Lacker and Statistics, Board of Governors; Ellen E. Dennis P. Lockhart Meade, Stephen A. Meyer, and Joyce K. Zickler, Sandra Pianalto Senior Advisers, Division of Monetary Affairs, Jerome H. Powell Board of Governors Sarah Bloom Raskin Jeremy C. Stein Eric M. Engen, Michael T. Kiley, and Michael G. Pa- Daniel K. Tarullo lumbo, Associate Directors, Division of Research John C. Williams and Statistics, Board of Governors Janet L. Yellen Joshua Gallin, Deputy Associate Director, Division ofJames Bullard, Charles L. Evans, Esther L. George, and Research and Statistics, Board of Governors Eric Rosengren, Alternate Members of the Federal Open Market Committee Marnie Gillis DeBoer, Assistant Director, Division of Monetary Affairs, Board of GovernorsRichard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, Presidents of the Federal Re- David H. Small, Project Manager, Division of Mone- serve Banks of Dallas, Minneapolis, and Philadel- tary Affairs, Board of Governors phia, respectively Jeremy B. Rudd, Senior Economist, Division of Re-William B. English, Secretary and Economist search and Statistics, Board of GovernorsDeborah J. Danker, Deputy SecretaryMatthew M. Luecke, Assistant Secretary Helen E. Holcomb, First Vice President, Federal Re-David W. Skidmore, Assistant Secretary serve Bank of DallasMichelle A. Smith, Assistant SecretaryScott G. Alvarez, General Counsel Jeff Fuhrer and Loretta J. Mester, Executive Vice Pres-Thomas C. Baxter, Deputy General Counsel idents, Federal Reserve Banks of Boston and Phil-Steven B. Kamin, Economist adelphia, respectivelyDavid W. Wilcox, Economist Troy Davig, Spencer Krane, and Kevin Stiroh, SeniorDavid Altig, Thomas A. Connors, Michael P. Leahy, Vice Presidents, Federal Reserve Banks of Kansas William Nelson, David Reifschneider, Mark S. Sni- City, Chicago, and New York, respectively derman, and William Wascher, Associate Econo- mists William Gavin, Evan F. Koenig, Lorie K. Logan, and Paolo A. Pesenti, Vice Presidents, Federal ReserveSimon Potter, Manager, System Open Market Account Banks of St. Louis, Dallas, New York, and New York, respectivelyMichael S. Gibson, Director, Division of Banking Su- pervision and Regulation, Board of Governors
  • 2. Page 2 Federal Open Market Committee_____________________________________________________________________________________________Thomas D. Tallarini, Jr., Assistant Vice President, Fed- range of information. Some other participants worried eral Reserve Bank of Minneapolis that the public might mistakenly interpret quantitative thresholds as equivalent to the Committee’s longer-runAndreas L. Hornstein, Senior Advisor, Federal Reserve objectives or as triggers that, when reached, would Bank of Richmond prompt an immediate rate increase; but it was noted that the Chairman’s postmeeting press conference andEric T. Swanson, Senior Research Advisor, Federal other venues could be used to explain the distinction Reserve Bank of San Francisco between thresholds and these other concepts. Participants generally agreed that the Committee would need to resolve a number of practical issues before de-Thresholds and Forward Guidance ciding whether to adopt quantitative thresholds toA staff presentation focused on the potential effects of communicate its thinking about the timing of the initialusing specific threshold values of inflation and the un- increase in the federal funds rate. These issues in-employment rate to provide forward guidance regard- cluded whether to specify such thresholds in terms ofing the timing of the initial increase in the federal funds realized or projected values of inflation and the unem-rate. The presentation reviewed simulations from a ployment rate and, in either case, what values for thosestaff macroeconomic model to illustrate the implica- thresholds would best balance the Committee’s objec-tions for policy and the economy of announcing vari- tives of promoting maximum employment and priceous threshold values that would need to be attained stability. Another open question was whether to sup-before the Federal Open Market Committee (FOMC) plement thresholds expressed in terms of the unem-would consider increasing its target for the federal ployment rate and inflation with additional indicatorsfunds rate. Meeting participants discussed whether of economic and financial conditions that might signalsuch thresholds might usefully replace or perhaps aug- a need either to raise the federal funds rate before ament the date-based guidance that had been provided threshold is crossed or to delay until well afterward. Ain the policy statements since August 2011. Partici- final question was whether the statement should alsopants generally favored the use of economic variables, provide forward guidance about the likely path of thein place of or in conjunction with a calendar date, in federal funds rate after the initial increase. It was notedthe Committee’s forward guidance, but they offered that such guidance could have significant effects ondifferent views on whether quantitative or qualitative financial conditions and the economy. At the conclu-thresholds would be most effective. Many participants sion of the discussion, the Chairman asked the staff towere of the view that adopting quantitative thresholds provide additional background material, taking intocould, under the right conditions, help the Committee account the range of participants’ views.more clearly communicate its thinking about how thelikely timing of an eventual increase in the federal funds Developments in Financial Markets and the Fed-rate would shift in response to unanticipated changes in eral Reserve’s Balance Sheeteconomic conditions and the outlook. Accordingly, The Manager of the System Open Market Accountthresholds could increase the probability that market (SOMA) reported on developments in domestic andreactions to economic developments would move foreign financial markets during the period since thelonger-term interest rates in a manner consistent with FOMC met on September 12–13, 2012. The Managerthe Committee’s view regarding the likely future path also reported on System open market operations overof short-term rates. A number of other participants the intermeeting period, focusing on the ongoing rein-judged that communicating a careful qualitative de- vestment into agency-guaranteed mortgage-backed se-scription of the indicators influencing the Committee’s curities (MBS) of principal payments received onthinking about current and future monetary policy, or SOMA holdings of agency debt and agency-guaranteedproviding more information about the Committee’s MBS and the purchases of MBS authorized at the Sep-policy reaction function, would be more informative tember FOMC meeting. By unanimous vote, thethan either quantitative thresholds or date-based for- Committee ratified the Desk’s domestic transactionsward guidance. Several participants were concerned over the intermeeting period. There were no interven-that quantitative thresholds could confuse the public by tion operations in foreign currencies for the System’sgiving the impression that the FOMC focuses on a account over the intermeeting period.small number of economic variables in setting mone-tary policy, when the Committee in fact uses a wide
  • 3. Minutes of the Meeting of October 23–24, 2012 Page 3_____________________________________________________________________________________________Staff Review of the Economic Situation to expand, on balance, in recent months, but newThe information reviewed at the October 23–24 meet- home sales were flat.ing suggested that economic activity continued to in- Real business expenditures on equipment and softwarecrease at a moderate pace in recent months. The un- appeared to edge down in the third quarter. Nominalemployment rate declined but was still elevated. Con- shipments for nondefense capital goods excluding air-sumer price inflation picked up, reflecting higher con- craft continued to decrease in August; the backlog ofsumer energy costs, but longer-run inflation expecta- unfilled orders for these capital goods also declined.tions remained stable. Other forward-looking indicators, such as subduedPrivate nonfarm employment expanded modestly in readings from surveys of business conditions and capi-September, and government employment increased. tal spending plans, also pointed toward roughly flat realThe unemployment rate fell to 7.8 percent, and the expenditures for business equipment in the near term.labor force participation rate rose slightly. The share of Nominal business spending for new nonresidentialworkers employed part time for economic reasons in- construction decreased further in August. Meanwhile,creased somewhat and continued to be elevated, while inventories in most industries were about in line withthe rate of long-duration unemployment edged down sales. In the farm sector, however, drought conditionsfurther but remained high. Other indicators of labor likely reduced inventory accumulation last quarter andmarket conditions, such as surveys of firms’ job open- subtracted from overall economic growth.ings and hiring plans and initial claims for unemploy- Real federal government purchases appeared to edgement insurance, did not show decided improvement up in the third quarter, as data for nominal federalover the intermeeting period. spending in August and September pointed to a slightManufacturing production declined in the third quarter, increase in real defense expenditures. Real state andand the rate of manufacturing capacity utilization edged local government purchases likely moved essentiallydown. Automakers’ schedules pointed to a similar rate sideways in the third quarter. State and local govern-of motor vehicle assemblies in the fourth quarter as in ment payrolls expanded, but nominal constructionthe third quarter. Broader indicators of factory produc- spending continued to decline in recent months.tion, such as the diffusion indexes of new orders from The U.S. international trade deficit widened in August,the national and regional manufacturing surveys, re- as imports fell less than exports. Imports edged down,mained subdued in recent months at levels consistent on net, with higher purchases of services and petro-with only tepid increases in manufacturing output in leum products more than offset by declines in all of thethe near term. other major categories. Across export categories, ex-Real personal consumption expenditures rose at a solid ports of industrial supplies posted a particularly largepace in August. In September, nominal retail sales, decline, as the volume of petroleum product exportsexcluding purchases at motor vehicle and parts outlets, dropped sharply.increased considerably. Light motor vehicle sales also Consumer prices picked up in August and September,expanded. Recent data on factors that tend to support primarily reflecting sharp increases in retail gasolinehousehold spending were mixed. Real disposable in- prices. However, survey data indicated that retail gaso-come declined in August, largely reflecting the effect of line prices were about flat in early October. Consumerhigher consumer energy prices. In contrast, consumer food prices rose modestly in recent months. Thesentiment rose in September and early October, and somewhat better-than-expected crop harvest causedcontinued modest increases in house prices added to spot and futures prices of farm commodities to retracehouseholds’ net worth. some of their rise during the summer; however, farmHousing market conditions improved more generally in commodity prices remained elevated and continued torecent months. Starts and permits of both new single- point toward some temporary upward pressures onfamily homes and multifamily units picked up in Au- retail food prices later this year. Increases in consumergust and September. However, construction activity prices excluding food and energy were subdued in Au-remained at a relatively low level, reflecting the restraint gust and September. Near-term inflation expectationsimposed by tight credit standards for mortgage borrow- from the Thomson Reuters/University of Michiganing and by the large inventory of foreclosed and dis- Surveys of Consumers declined in September and earlytressed properties. Sales of existing homes continued October, while longer-term inflation expectations in
  • 4. Page 4 Federal Open Market Committee_____________________________________________________________________________________________the survey moved down to near the lower end of the Indicators of the condition of domestic financial insti-narrow range where they have remained for some time. tutions were mixed over the intermeeting period. In- dexes of equity prices for those institutions were mod-Available measures of labor compensation indicated estly lower. But spreads on credit default swaps forthat increases in nominal wages stayed relatively mod- large financial institutions declined in recent months,est. The gains in average hourly earnings for all em- and third-quarter earnings of large bank holding com-ployees in the third quarter were subdued. panies that had reported by the time of the FOMCForeign economic growth remained sluggish, restrained meeting were generally in line with expectations.by weak activity in Europe and the associated spillov- Conditions in unsecured dollar funding markets ap-ers—including through trade—to the rest of the world. peared to improve some. In secured funding markets,Euro-area production indicators signaled continued rates on repurchase agreements spiked around quarter-contraction, and the area’s unemployment rate in Au- end but subsequently more than retraced that move,gust stayed at a historical high. In Japan, exports and ending the intermeeting period down slightly.output declined in the summer months, and growth ofreal gross domestic product (GDP) for the first half of Broad equity price indexes were a little lower, on bal-the year was revised down significantly. Data for ex- ance, as gains following the September FOMC meetingports from emerging market economies, especially in and generally better-than-expected economic data re-Asia, showed a drop, although recently released data leases were more than offset by concerns about corpo-for China indicated a pickup in economic activity in the rate profitability. Option-implied volatility for the S&Pthird quarter. Foreign inflation rose slightly in some 500 index fell noticeably following the Septemberemerging market economies in response to higher food FOMC meeting but increased, on net, over the inter-prices but was still generally well contained. Monetary meeting period.policy remained accommodative in most advanced and Yields on investment-grade corporate bonds reached aemerging market economies. record low level, and their spreads to yields on compa-Staff Review of the Financial Situation rable-maturity Treasury securities narrowed on net.Market participants reportedly read the September Yields and spreads on speculative-grade corporateFOMC statement as pointing to a significant increase in bonds also decreased.monetary policy accommodation. As a result, financial The pace of investment- and speculative-grade bondconditions generally eased appreciably early in the in- issuance by nonfinancial firms picked up significantly intermeeting period. However, toward the end of the September from the already robust pace in previousperiod investor sentiment deteriorated somewhat, in months. In the syndicated leveraged loan market, is-part because of concerns about corporate profitability. suance through the first three quarters of 2012 laggedShort- and medium-term nominal Treasury yields that of the same period in 2011 but nonetheless re-ended the intermeeting period up slightly, and long- mained solid. The pace of gross public equity issuanceterm yields were about unchanged on net. At the same by nonfinancial firms moved up some in Septembertime, real yields on Treasury inflation-protected securi- from the subdued levels observed in prior months, butties (TIPS) decreased somewhat, leaving inflation com- overall issuance in the third quarter stayed low com-pensation higher. In part, the rise in inflation compen- pared with the first half of 2012.sation may have reflected upward pressure on nominal Financial conditions in the commercial real estate sec-Treasury yields associated with some unwinding of tor remained weak amid elevated vacancy and delin-safe-haven demands. quency rates. However, some indicators pointed toThe expected path of the federal funds rate based on modest improvement in this sector, and issuance ofmoney market futures was little changed between the commercial mortgage-backed securities was solid in theSeptember and October FOMC meetings. Market- third quarter.based measures of uncertainty about the path of the Residential mortgage rates declined over the intermeet-federal funds rate over medium-to-long horizons de- ing period. The decline in mortgage rates reflected aclined over the period. The survey of primary dealers sizable drop in MBS yields following the Septemberconducted prior to the October meeting showed that FOMC statement. Refinancing activity increased fur-the expected size of the SOMA at the end of 2013 had ther in September and early October. House pricesrisen significantly. continued to rise, and some indicators of credit quality
  • 5. Minutes of the Meeting of October 23–24, 2012 Page 5_____________________________________________________________________________________________on residential real estate loans improved. The fraction Staff Economic Outlookof seriously delinquent existing mortgages remained In the economic forecast prepared by the staff for theelevated, but the rate at which mortgages entered de- October FOMC meeting, real GDP growth in the nearlinquency continued to trend down in July. term was revised up relative to the previous projection. The upward revision to the near-term forecast primarilyConsumer credit expanded briskly in August. Nonre- reflected better-than-expected incoming informationvolving credit continued to increase at a robust pace, for consumer spending, residential construction, andmainly reflecting growth in student and auto loans. labor market conditions that more than offset the re-Revolving credit also rose in August but was little cent data for business fixed investment and industrialchanged, on balance, over the past few months. Delin- production that were weaker than anticipated. Thequency rates for consumer credit remained low, and staff’s medium-term projection for real GDP growthissuance of consumer asset-backed securities was also was revised up, mostly reflecting the monetarystrong in the third quarter, close to the pace seen earlier policy actions announced by the FOMC after the Sep-this year. tember meeting and the resulting improved outlook forBank credit continued to expand at a moderate rate in financial conditions. Nonetheless, with fiscal policythe third quarter, with further growth in loans aug- assumed to be tighter next year than this year, the staffmented by larger gains in securities holdings. Results anticipated that real GDP growth would not materiallyfrom the October Senior Loan Officer Opinion Survey exceed increases in potential output in 2013. In 2014,on Bank Lending Practices indicated that modest frac- economic activity was projected to accelerate gradually,tions of domestic banks, on net, continued to report supported by a lessening in fiscal policy restraint, gainshaving eased their lending standards on some catego- in consumer and business confidence, further im-ries of business and household loans. In addition, for provements in financial conditions and credit availabili-the second straight quarter, reports of stronger demand ty, and accommodative monetary policy. Progress inwere relatively widespread for many types of loans. reducing unemployment over the projection period was expected to be relatively slow.M2 growth picked up somewhat in September, asstrong growth in liquid deposits and currency offset The staff’s near-term forecast for inflation was littleongoing declines in small time deposits and retail mon- changed, on balance, from the projection prepared forey market funds. the September FOMC meeting, notwithstanding recent increases in consumer energy prices. The staff’s pro-The staff’s broad nominal index of the foreign ex- jection for inflation over the medium term was alsochange value of the dollar was little changed, on net, essentially unchanged. Crude oil prices were antic-over the intermeeting period. The dollar rose against ipated to decline slowly from their current levels, thethe currencies of most advanced economies but de- boost to retail food prices from the drought was ex-clined against the euro and most Asian emerging mar- pected to be only temporary and relatively small, long-ket currencies. Of note, the Chinese renminbi appre- run inflation expectations were assumed to remain sta-ciated further against the dollar. A number of central ble, and significant resource slack was projected tobanks eased monetary policy during the period, includ- persist over the projection period. As a result, the staffing those of Australia, Brazil, Japan, Korea, and Thai- continued to forecast that inflation would be subduedland. Foreign equity indexes, which generally rose fol- through 2014.lowing the September FOMC statement, ended theintermeeting period higher in most markets, although Participants’ Views on Current Conditions and thestock prices in the euro area were down on net. Ten- Economic Outlookyear sovereign yields in Germany and the United King- In their discussion of the economic situation and thedom moved down just a few basis points. After declin- outlook, meeting participants viewed the informationing significantly between late July and early September, received since the Committee met in September as in-the yield spread of 10-year sovereign debt in Italy over dicating that economic activity continued to expand atcomparable German bunds declined only slightly fur- a moderate pace. Employment was still rising slowly,ther over the intermeeting period, and the Spanish sov- and the unemployment rate remained elevated.ereign spread edged up. Household spending advanced more quickly in recent months than during the spring, and housing activity showed further signs of improvement. However, busi- ness fixed investment slowed noticeably. Inflation re-
  • 6. Page 6 Federal Open Market Committee_____________________________________________________________________________________________cently picked up somewhat, reflecting higher energy in house prices, sales, and construction in many areas.prices, while longer-run inflation expectations remained Most saw the low levels of mortgage interest rates as anstable. important factor contributing to increased housing de- mand. Although the recovery in the housing sectorParticipants generally saw the economic outlook as lit- appeared to be taking hold, several participants citedtle changed, on balance, from their projections pre- obstacles to more rapid improvement. For example,pared for the September Summary of Economic Pro- several participants reported that lenders’ capacity forjections (SEP), agreeing that the pace of the economic processing home-purchase mortgages was tight andrecovery was likely to stay moderate over coming quar- backlogs were long, in part due to the current heavyters. The recent news on household spending, con- pace of refinancings. These participants also noted thatsumer sentiment, and the housing market was encour- underwriting standards remained quite tight, particular-aging, and most participants expected that highly ac- ly for borrowers with lower credit quality.commodative monetary policy would provide supportfor the recovery in the period ahead. However, many In contrast to the more favorable news on consumerparticipants saw the uncertainty attending the unre- spending and housing, contacts generally reportedsolved U.S. fiscal situation and the ongoing fiscal and slower activity in the business sector. Some partici-financial strains in the euro area as factors likely to re- pants expressed concern about weaker manufacturingstrain the pace of economic growth in coming months. output and new orders in recent months, particularly inMoreover, many participants cited significant downside capital goods industries, although several pointed outrisks to the outlook that might arise from more wide- that manufacturers’ expectations for future orders andspread weakness in global economic activity or an in- production were more positive. A few participantstensification of strains in global financial markets. Re- noted that shipping activity was down, and one partici-garding inflation, the recent run-up in consumer energy pant added that energy production had decelerated. Inprices was expected to subside over the next few contrast, a few participants had received reports of amonths, while the effects of the drought were likely to pickup in nonresidential construction, and one indi-show through to retail food prices. Over the medium cated that high-tech firms were expecting gains in busi-term, most participants anticipated that inflation would ness going forward. In many instances, participants’run at or below the Committee’s 2 percent objective. business contacts stated that they were delaying or cut- ting back on hiring and capital spending because of theConcerning developments in the household sector, uncertain outlook for government spending, taxes, orparticipants observed that the recent news on consum- regulatory policies. One participant, however, reporteder spending and confidence had been positive, with that contacts said that insufficient demand remainedsurveys reporting that households had become noticea- their principal concern. Several participants mentionedbly more optimistic about the outlook for unemploy- that the cautious posture of businesses was apparent inment and income. Sales of motor vehicles remained an national and regional surveys of plans of both large andarea of strength, in part due to favorable credit condi- small firms. Some participants noted that the outlooktions. The increase in consumer spending appeared to for business spending would likely be difficult to assessbe relatively broadly based across the country, although until the direction of U.S. fiscal policy becomes clearer.retailers in a few areas reported that they had seen A few suggested the possibility that a near-term resolu-slower sales recently and expressed concerns about the tion of the fiscal situation might lead to a significantnear-term outlook. Among the factors mentioned that increase in spending as projects now being deferredmight support consumer confidence and a continuation were undertaken; another worried that the uncertaintyof the somewhat stronger pace of spending were an attending the outlook for fiscal policy might weigh onexpected decline in retail energy prices and continued business planning for some time. In addition to thegradual improvement in labor market conditions. In uncertainty about the fiscal outlook, manufacturingaddition, lower mortgage rates had spurred a rise in contacts attributed the weakness in orders and produc-refinancing activity, which, along with the increases in tion to softer export demand; one participant addedhousehold wealth attributable to higher home values that agricultural exports had also softened. Several par-and equity prices, would provide support for consumer ticipants noted that their contacts were concerned notspending going forward. only about the economic slowdown in Europe, but alsoParticipants generally agreed that a recovery in housing about whether the recent slowing in economic activityactivity now appeared to be under way, citing increases in Asia might persist.
  • 7. Minutes of the Meeting of October 23–24, 2012 Page 7_____________________________________________________________________________________________In their comments on labor market developments, par- the situation in the euro area and uncertain U.S. fiscalticipants generally viewed the recent decline in the un- prospects, but a couple noted that measures of financialemployment rate and continued modest gains in payroll market uncertainty were still relatively low. Severalemployment, taken together, as consistent with a grad- participants pointed out that recent policy announce-ually improving job market. However, with economic ments by the European Central Bank were receivedgrowth anticipated to stay moderate, some participants favorably in markets. A number of participants men-expressed concern that the pace of job creation would tioned other signs of greater optimism in financial mar-generate only a slow decline in joblessness. Several kets, including a rise in merger and acquisition activitypointed to a steep drop in the index of hiring plans by and a moderation in pressures on large U.S. financialsmall businesses. A couple of participants mentioned institutions. A few participants observed that low in-that some firms planned to increase their use of part- terest rates had increased demand for riskier financialtime or temporary workers rather than full-time per- products, and a couple of participants saw a risk thatmanent employees, at least partly in order to limit holding interest rates low for a prolonged period couldhealth insurance costs. lead to financial imbalances and imprudent risk-taking. One participant, however, commented that risk aver-Participants saw recent price developments as consis- sion still seemed quite high, citing the very low yieldstent with inflation remaining at or below the Commit- on longer-term TIPS and a large estimated risk pre-tee’s 2 percent objective over the medium run. Al- mium in equity markets.though energy prices had risen sharply in recentmonths, reflecting earlier increases in crude oil costs Participants also discussed the efficacy and potentialand supply disruptions, gasoline prices were anticipated costs of the Committee’s asset purchases. A number ofto move back down in coming months as those pres- participants offered the assessment that the Commit-sures eased. Similarly, effects of the drought were ex- tee’s policy actions, to date, had been effective in mak-pected to show through to retail food prices over the ing financial conditions more accommodative and thatnext few quarters but then subside. By various esti- lower interest rates were providing support to aggregatemates, underlying inflation trends remained subdued, spending, most notably in areas such as housing, autos,and indicators of longer-term inflation expectations and other consumer durables. In particular, somewere generally viewed as stable. pointed out that the favorable developments in mort- gage markets over the intermeeting period suggestedIn their discussion of financial developments over the that the MBS purchases were likely to reinforce theintermeeting period, participants commented on the nascent recovery in the housing market. Several addedeffects of the policy actions taken at the September that, based on the experience with earlier asset pur-meeting to strengthen the Committee’s forward guid- chases, the broader effects on economic activity fromance and to purchase additional MBS. The initial ef- more-accommodative financial conditions were likelyfects were generally viewed as consistent with a marked to accrue over time. Looking ahead, a number of par-easing in financial conditions. For example, yields on ticipants indicated that additional asset purchasesMBS dropped noticeably, leading to a decline in mort- would likely be appropriate next year after the conclu-gage interest rates, and corporate bond yields generally sion of the maturity extension program in order tomoved lower. Yields on nominal Treasury securities achieve a substantial improvement in the labor market.were little changed. Some participants suggested that In that regard, a couple of participants noted the likelymore time would be required to assess the ultimate ef- usefulness of clarifying the range of indicators thatfects of the additional MBS purchases on primary would be evaluated in assessing the outlook for themortgage rates and on financial conditions more broad- labor market. Participants generally agreed that in de-ly. The stability in nominal Treasury yields, paired with termining the appropriate size, pace, and compositiona decline in TIPS yields, implied a modest increase in of further purchases, they would need to carefully as-inflation compensation, on net, over the intermeeting sess the efficacy of asset purchases in fostering strongerperiod. A couple of participants saw this increase as a economic activity and consider the potential risks andsign that the open-ended asset purchases posed a risk costs of such purchases. Several participants ques-to the stability of longer-term inflation expectations. tioned the effectiveness of the current purchases orHowever, others saw the effect on expected inflation as whether a continuation of them would be warranted ifrelatively muted or likely the result of reduced risks of the recent moderate pace of economic recovery wereundesirably low inflation. Participants remained con- sustained. In addition, several participants expressedcerned about risks to financial markets associated with
  • 8. Page 8 Federal Open Market Committee_____________________________________________________________________________________________concerns that sizable asset purchases might eventually the calendar-date-based forward guidance for the fed-have adverse consequences for the functioning of asset eral funds rate. With respect to the statement to bemarkets or that they might complicate the Committee’s released following the meeting, members made onlyability to remove policy accommodation at the appro- relatively small modifications to update the descriptionpriate time and normalize the size and composition of of recent developments in consumer and businessthe Federal Reserve’s balance sheet. A couple of par- spending and in inflation. With the economic outlookticipants noted that an extended period of policy ac- little changed, they agreed that the remainder of thecommodation posed an upside risk to inflation. statement would reiterate the policy actions and inten- tions adopted at the September meeting.Committee Policy ActionMembers viewed the information on U.S. economic At the conclusion of the discussion, the Committeeactivity received over the intermeeting period as sug- voted to authorize and direct the Federal Reserve Bankgesting that the economy was, on balance, expanding of New York, until it was instructed otherwise, to ex-moderately, with a pickup in household spending and ecute transactions in the System Account in accordancefurther improvement in housing markets offset to with the following domestic policy directive:some extent by a slowdown in the business sector. “The Federal Open Market Committee seeksAlthough the unemployment rate declined in recent monetary and financial conditions that will fos-months, monthly gains in nonfarm payroll jobs re- ter price stability and promote sustainablemained modest, and many members noted that, with- growth in output. To further its long-run ob-out sufficient policy accommodation, economic growth jectives, the Committee seeks conditions in re-might not be strong enough to generate sustained im- serve markets consistent with federal fundsprovement in the labor market. Inflation rose recently trading in a range from 0 to ¼ percent. Thebecause of a temporary run-up in energy prices. How- Committee directs the Desk to continue theever, longer-term inflation expectations were stable, maturity extension program it announced inand over the medium run, inflation was anticipated to June to purchase Treasury securities with re-run at or below the Committee’s 2 percent objective. maining maturities of 6 years to 30 years with aIn their discussion of monetary policy for the period total face value of about $267 billion by theahead, Committee members generally agreed that their end of December 2012, and to sell or redeemoverall assessments of the economic outlook were little Treasury securities with remaining maturitieschanged since their previous meeting. Accordingly, all of approximately 3 years or less with a totalbut one member judged that maintaining the current, face value of about $267 billion. For the dura-highly accommodative stance of monetary policy was tion of this program, the Committee directswarranted in order to foster a stronger economic re- the Desk to suspend its policy of rolling overcovery in a context of price stability. The Committee maturing Treasury securities into new issues.judged that continuing both the purchases of MBS at a The Committee directs the Desk to maintainpace of $40 billion per month and the existing program its existing policy of reinvesting principal pay-to extend the average maturity of its Treasury securities ments on all agency debt and agency mortgage-holdings remained appropriate. The Committee also backed securities in the System Open Marketagreed to maintain its policy of reinvesting principal Account in agency mortgage-backed securities.payments from its holdings of agency debt and agency The Desk is also directed to continue purchas-MBS into agency MBS. One member opposed further ing agency mortgage-backed securities at aasset purchases because he viewed them as unlikely to pace of about $40 billion per month. Thehelp the Committee achieve its goals and because he Committee directs the Desk to engage in dollarthought that purchases of MBS represented inappro- roll and coupon swap transactions as necessarypriate credit allocation. Many members saw the ad- to facilitate settlement of the Federal Reserve’sjustments in the Committee’s forward guidance at the agency MBS transactions. The System OpenSeptember meeting as having been effective in com- Market Account Manager and the Secretarymunicating its intention to maintain a highly accom- will keep the Committee informed of ongoingmodative stance of monetary policy for a considerable developments regarding the System’s balancetime after the economic recovery strengthens and sheet that could affect the attainment overjudged that the guidance remained appropriate at this time of the Committee’s objectives of maxi-meeting. However, one member continued to object to mum employment and price stability.”
  • 9. Minutes of the Meeting of October 23–24, 2012 Page 9_____________________________________________________________________________________________The vote encompassed approval of the statement be- The Committee will closely monitor incominglow to be released at 2:15 p.m.: information on economic and financial devel- opments in coming months. If the outlook for “Information received since the Federal Open the labor market does not improve substantial- Market Committee met in September suggests ly, the Committee will continue its purchases that economic activity has continued to expand of agency mortgage-backed securities, under- at a moderate pace in recent months. Growth take additional asset purchases, and employ its in employment has been slow, and the unem- other policy tools as appropriate until such im- ployment rate remains elevated. Household provement is achieved in a context of price spending has advanced a bit more quickly, but stability. In determining the size, pace, and growth in business fixed investment has composition of its asset purchases, the Com- slowed. The housing sector has shown some mittee will, as always, take appropriate account further signs of improvement, albeit from a of the likely efficacy and costs of such pur- depressed level. Inflation recently picked up chases. somewhat, reflecting higher energy prices. Longer-term inflation expectations have re- To support continued progress toward maxi- mained stable. mum employment and price stability, the Committee expects that a highly accommoda- Consistent with its statutory mandate, the tive stance of monetary policy will remain ap- Committee seeks to foster maximum employ- propriate for a considerable time after the eco- ment and price stability. The Committee re- nomic recovery strengthens. In particular, the mains concerned that, without sufficient policy Committee also decided today to keep the tar- accommodation, economic growth might not get range for the federal funds rate at 0 to be strong enough to generate sustained im- ¼ percent and currently anticipates that excep- provement in labor market conditions. Fur- tionally low levels for the federal funds rate are thermore, strains in global financial markets likely to be warranted at least through mid- continue to pose significant downside risks to 2015.” the economic outlook. The Committee also anticipates that inflation over the medium term Voting for this action: Ben Bernanke, William C. likely would run at or below its 2 percent ob- Dudley, Elizabeth Duke, Dennis P. Lockhart, Sandra jective. Pianalto, Jerome H. Powell, Sarah Bloom Raskin, Jere- my C. Stein, Daniel K. Tarullo, John C. Williams, and To support a stronger economic recovery and Janet L. Yellen. to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, Voting against this action: Jeffrey M. Lacker. the Committee will continue purchasing addi- Mr. Lacker dissented for the same reasons he had cited tional agency mortgage-backed securities at a at the September FOMC meeting, including his view of pace of $40 billion per month. The Commit- the likely ineffectiveness of asset purchases and their tee also will continue through the end of the potential inflationary effects, as well as the inappro- year its program to extend the average maturity priateness of credit allocation inherent in purchasing of its holdings of Treasury securities, and it is MBS. He also continued to disagree with the descrip- maintaining its existing policy of reinvesting tion of the time period over which a highly accommo- principal payments from its holdings of agency dative stance of monetary policy would remain appro- debt and agency mortgage-backed securities in priate and exceptionally low levels for the federal funds agency mortgage-backed securities. These ac- rate were likely to be warranted. tions, which together will increase the Com- mittee’s holdings of longer-term securities by Discussion of Communications regarding Eco- about $85 billion each month through the end nomic Projections of the year, should put downward pressure on A staff presentation reviewed the results of the consen- longer-term interest rates, support mortgage sus forecast experiments that the Committee con- markets, and help to make broader financial ducted in conjunction with its August and September conditions more accommodative. meetings. The briefing highlighted the important role of the assumed path for monetary policy in construct-
  • 10. Page 10 Federal Open Market Committee_____________________________________________________________________________________________ing a consensus forecast and reviewed several alterna- the subcommittee on communications to explore po-tive approaches for setting such a path. As a possible tential approaches to providing more informationalternative to a consensus forecast, the staff presenta- about the Committee’s collective judgment regardingtion also discussed potential enhancements to the SEP. the economic outlook and appropriate monetary policyIn their discussion, participants agreed that FOMC through the SEP.communications could be enhanced by clarifying the It was agreed that the next meeting of the Committeelinkage between participants’ economic forecasts, in- would be held on Tuesday–Wednesday, December 11–cluding the underlying policy assumptions, and the 12, 2012. The meeting adjourned at 12:50 p.m. on Oc-Committee’s policy decision as expressed in the post- tober 24, 2012.meeting statement. However, most participants judgedthat, given the diversity of their views about the econ- Notation Voteomy’s structure and dynamics, it would be difficult for By notation vote completed on October 3, 2012, thethe Committee to agree on a fully specified longer-term Committee unanimously approved the minutes of thepath for monetary policy to incorporate into a quantita- FOMC meeting held on September 12–13, 2012.tive consensus forecast in a timely manner, especiallyunder present conditions in which the policy decisioncomprises several elements. Participants agreed to con-tinue to explore ways to increase transparency and clar- _____________________________ity in the Committee’s policy communications, and they William B. Englishindicated a willingness to look into modifications to the SecretarySEP. At the end of the discussion, the Chairman asked

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