Page 1_____________________________________________________________________________________________ Minutes of the Federal Open Market Committee December 13, 2011A joint meeting of the Federal Open Market Commit- Robert deV. Frierson, Deputy Secretary, Office oftee and the Board of Governors of the Federal Reserve the Secretary, Board of GovernorsSystem was held in the offices of the Board of Gover-nors in Washington, D.C., on Tuesday, December 13, Maryann F. Hunter, Deputy Director, Division of2011, at 8:30 a.m. Banking Supervision and Regulation, Board of Governors; William Wascher, Deputy Direc-PRESENT: tor, Division of Research and Statistics, Board Ben Bernanke, Chairman of Governors William C. Dudley, Vice Chairman Elizabeth Duke Andreas Lehnert, Deputy Director, Office of Fi- Charles L. Evans nancial Stability Policy and Research, Board of Richard W. Fisher Governors Narayana Kocherlakota Charles I. Plosser Andrew T. Levin, Special Advisor to the Board, Sarah Bloom Raskin Office of Board Members, Board of Gover- Daniel K. Tarullo nors Janet L. Yellen Linda Robertson, Assistant to the Board, Office of Christine Cumming, Jeffrey M. Lacker, Dennis P. Board Members, Board of Governors Lockhart, Sandra Pianalto, and John C. Wil- liams, Alternate Members of the Federal Open Seth B. Carpenter, Senior Associate Director, Divi- Market Committee sion of Monetary Affairs, Board of Governors; Michael P. Leahy, Senior Associate Director, James Bullard, Esther L. George, and Eric Rosen- Division of International Finance, Board of gren, Presidents of the Federal Reserve Banks Governors of St. Louis, Kansas City, and Boston, respec- tively Ellen E. Meade, Stephen A. Meyer, and Joyce K. Zickler, Senior Advisers, Division of Monetary William B. English, Secretary and Economist Affairs, Board of Governors Deborah J. Danker, Deputy Secretary Matthew M. Luecke, Assistant Secretary Eric M. Engen, Michael T. Kiley, and Michael G. David W. Skidmore, Assistant Secretary Palumbo, Associate Directors, Division of Re- Michelle A. Smith, Assistant Secretary search and Statistics, Board of Governors Scott G. Alvarez, General Counsel Thomas C. Baxter, Deputy General Counsel David H. Small, Project Manager, Division of Steven B. Kamin, Economist Monetary Affairs, Board of Governors David W. Wilcox, Economist Penelope A. Beattie, Assistant to the Secretary, Of- Thomas A. Connors, Loretta J. Mester, Simon Pot- fice of the Secretary, Board of Governors ter, David Reifschneider, Harvey Rosenblum, and Lawrence Slifman, Associate Economists Gordon Werkema, First Vice President, Federal Reserve Bank of Chicago Brian Sack, Manager, System Open Market Ac- count Jeff Fuhrer and Mark S. Sniderman, Executive Vice Presidents, Federal Reserve Banks of Boston Jennifer J. Johnson, Secretary of the Board, Office and Cleveland, respectively of the Secretary, Board of Governors
Page 2 Federal Open Market Committee_____________________________________________________________________________________________ David Altig, Alan D. Barkema, Richard P. Dzina, The unemployment rate dropped to 8.6 percent in No- Spencer Krane, and Christopher J. Waller, vember, and private nonfarm employment continued to Senior Vice Presidents, Federal Reserve Banks increase moderately during the past two months. Nev- of Atlanta, Kansas City, New York, Chicago, ertheless, employment at state and local governments and St. Louis, respectively declined further, and both long-duration unemploy- ment and the share of workers employed part time for Mary C. Daly, Group Vice President, Federal Re- economic reasons remained elevated. Initial claims for serve Bank of San Francisco unemployment insurance moved down, on net, since early November but were still at a level consistent with Alexander L. Wolman, Senior Economist and Re- only modest employment gains, and indicators of job search Advisor, Federal Reserve Bank of openings and businesses’ hiring plans were little Richmond changed. Industrial production rose in October, reflecting in part Samuel Schulhofer-Wohl, Senior Economist, Fed- a rebound in motor vehicle production from the effects eral Reserve Bank of Minneapolis of supply chain disruptions earlier in the year. Factory output outside of the motor vehicle sector also contin- ued to rise, and the rate of manufacturing capacity utili-By unanimous vote, the Committee selected Steven B. zation moved up. However, motor vehicle assembliesKamin to serve as Economist until the selection of a were scheduled to only edge higher, on balance, in thesuccessor at the first regularly scheduled meeting of the coming months, and broader indicators of manufactur-Committee in 2012. ing activity, such as the diffusion indexes of new ordersDevelopments in Financial Markets and the Fed- from the national and regional manufacturing surveys,eral Reserve’s Balance Sheet were at levels that suggested only modest increases inThe Manager of the System Open Market Account production in the near term.(SOMA) reported on developments in domestic and Revised estimates indicated that households’ real dis-foreign financial markets during the period since the posable income declined in the second and third quar-Federal Open Market Committee (FOMC) met on No- ters, and the net wealth of households decreased in thevember 1–2, 2011. He also reported on System open third quarter. Nonetheless, overall real personal con-market operations, including the ongoing reinvestment sumption expenditures (PCE) rose modestly in Octo-into agency-guaranteed mortgage-backed securities ber following significant gains in the previous month,(MBS) of principal payments received on SOMA hold- as spending for consumer goods continued to increaseings of agency debt and agency-guaranteed MBS as well at a strong pace while outlays for consumer servicesas the operations related to the maturity extension pro- were roughly flat. In November, nominal retail sales,gram authorized at the September 20–21 FOMC meet- excluding purchases at motor vehicle and parts outlets,ing. By unanimous vote, the Committee ratified the expanded further, and sales of light motor vehiclesDesk’s domestic transactions over the intermeeting stepped up. But consumer sentiment was still at a sub-period. There were no intervention operations in for- dued level in early December despite some improve-eign currencies for the System’s account over the in- ment in recent months.termeeting period. Activity in the housing market continued to be de-Staff Review of the Economic Situation pressed by the substantial inventory of foreclosed andThe information reviewed at the December 13 meeting distressed properties and by weak demand that reflect-indicated that U.S. economic activity expanded mod- ed tight credit conditions for mortgage loans and un-erately despite some apparent slowing in the growth of certainty about future home prices. Starts and permitsforeign economies and strains in global financial mar- for new single-family homes in October stayed aroundkets. Conditions in the labor market seemed to have the low levels that prevailed since the middle of lastimproved somewhat, while overall consumer price in- year. Sales of new and existing homes remained slowflation continued to be more modest than earlier in the in recent months, and home prices moved down fur-year and measures of long-run inflation expectations ther.remained stable. Real business spending on equipment and software seemed to be decelerating. Nominal orders and ship-
Minutes of the Meeting of December 13, 2011 Page 3_____________________________________________________________________________________________ments of nondefense capital goods excluding aircraft Foreign economic growth, especially in the euro area,edged down in October, and the slowing accumulation appeared to weaken in recent months. Real gross do-of unfilled orders suggested that increases in outlays for mestic product (GDP) in the euro area barely edged upbusiness equipment would be muted in subsequent in the third quarter. Moreover, industrial production inmonths. Also, survey measures of business conditions the region fell sharply in September, and indicators ofand sentiment remained at relatively downbeat levels in manufacturing activity in October and NovemberNovember. Real business spending for nonresidential pointed to lower output. Measures of business andconstruction moved up in October but was still at a consumer confidence in the euro area continued tolow level, reflecting high vacancy rates and restricted decline in recent months. In other advanced foreigncredit conditions for construction loans. Inventories in economies, real GDP in Japan rebounded in the thirdmost industries looked to be reasonably well aligned quarter from the effects of the earthquake in March,with sales, although motor vehicle stocks continued to and real GDP recovered in Canada as oil productionbe lean. picked up after several months of shutdowns; however, available indicators of manufacturing activity in both ofIn the government sector, real federal defense purchas- these economies pointed to declines during the fourthes appeared to have stepped down in October and No- quarter. Among emerging market economies, realvember from their level in the third quarter. At the GDP in Brazil was flat in the third quarter, while ex-state and local level, real purchases seemed to be de- ports from China slowed in recent months, althoughcreasing at a slower pace in recent months than earlier Chinese domestic demand appeared to remain strong.in the year. Staff Review of the Financial SituationThe U.S. international trade deficit narrowed in Octo- The risks associated with the fiscal and financial diffi-ber, as imports decreased more than exports. Declines culties in Europe remained the focus of attention inin imports of petroleum products (reflecting lower financial markets over the intermeeting period and con-prices and lesser volumes), non-oil industrial supplies, tributed to heightened volatility in a wide range of assetand automotive products more than offset increases in markets. Investor concerns about developments incapital goods, consumer goods, and food. Reductions Europe intensified early in the period but subsequentlyin exports of industrial supplies and consumer goods, eased a bit amid signs that European authorities wereled by a few particularly volatile components, out- moving toward agreement on a comprehensive frame-weighed the gains in capital goods. work to address fiscal and financial vulnerabilities andInflation continued to decrease relative to earlier in the after the Federal Reserve and five other major centralyear. Indeed, the PCE price index edged down in Oc- banks announced enhanced currency swap arrange-tober. Consumer prices for energy decreased, and sur- ments, including lower charges on existing dollar liquid-vey data indicated that gasoline prices declined further ity swap lines. Nevertheless, investors appeared to re-in November. Increases in consumer food prices in main cautious.October were substantially slower than the average Yields on nominal Treasury securities were littlepace in the preceding months of this year. Consumer changed following the release of the November FOMCprices excluding food and energy also continued to rise statement. Over the following weeks, movements inat a more modest pace in October than earlier in the yields were reportedly driven by shifts in investors’ as-year. Near-term inflation expectations from the Thom- sessments of the European situation and by U.S. eco-son Reuters/University of Michigan Surveys of Con- nomic data that were somewhat stronger than they ex-sumers declined in early December, and longer-term pected. Both short-term nominal Treasury yields andinflation expectations remained stable. the expected path of the federal funds rate implied byMeasures of labor compensation indicated that nominal money market futures quotes were essentially un-wage gains continued to be subdued. Compensation changed, on balance, over the intermeeting period,per hour in the nonfarm business sector increased while longer-dated Treasury yields ended the periodmoderately over the year ending in the third quarter, slightly higher. Yields on current-coupon agency MBSwhile the 12-month change in average hourly earnings also ended the period about unchanged. Indicators offor all employees remained low in October and No- inflation expectations derived from nominal and infla-vember. Unit labor costs edged up over the past four tion-protected Treasury securities posted mixedquarters. changes, on net, over the period and remained at the low end of their recent ranges.
Page 4 Federal Open Market Committee_____________________________________________________________________________________________Early in the intermeeting period, conditions in short- but remained sluggish relative to its average pace earlierterm wholesale funding markets appeared to deteriorate in the year.somewhat. Following the six major central banks’ cur- Financing conditions for commercial real estate ap-rency swap announcement, some measures of short- peared to remain strained over the intermeeting period.term funding costs moderated, but they remained ele- Issuance of commercial mortgage-backed securitiesvated. In dollar funding markets, the spread of the (CMBS) was light amid deteriorating liquidity condi-three-month London interbank offered rate (Libor) tions in the CMBS market. Prices of most types ofover the overnight index swap (OIS) rate of the same commercial properties continued to be depressed,maturity widened noticeably during the intermeeting while both vacancy rates and delinquency rates forperiod. Some European financial institutions reported- commercial properties stayed close to their recently faced significant pressures in unsecured dollar fund- highs.ing markets. By contrast, in secured funding markets,spreads on asset-backed commercial paper were rela- Interest rates on residential mortgages were littletively steady for U.S. and most European-based issuers, changed, on net, over the intermeeting period and re-and rates on repurchase agreements across various mained at historically low levels. But low mortgagetypes of collateral were stable. rates appeared to have only modest effects on the rate of mortgage refinancing, likely because of tight under-In the December 2011 Senior Credit Officer Opinion writing standards and low levels of home equity. Indi-Survey on Dealer Financing Terms, dealers reported a cators of home prices and the credit quality of oldermoderate tightening of credit terms over the preceding mortgage loans remained weak. The rate of newly de-three months on securities financing transactions and linquent prime mortgages—the pace at which mortgag-over-the-counter derivatives markets trades, particularly es transition from “current” to delinquent—seemed tofor financial counterparties. Dealers also noted that have slowed, but overall delinquency rates on residen-demand for funding all types of securities decreased tial mortgages remained elevated. Market reaction toover the same reference period. the announcements by Fannie Mae and Freddie MacCredit default swap (CDS) spreads and equity prices of on November 15 regarding the expansion of the Homelarge U.S. banking organizations remained volatile over Affordable Refinance Program was limited.the intermeeting period. While the S&P 500 index Consumer credit rose slightly in the third quarter. Theended the period slightly higher, on net, equity prices aggregate volume of credit card solicitations in recentfor most major U.S. banking firms were lower and their months remained at levels comparable to those beforeCDS spreads widened. CDS spreads for European the financial crisis in 2008, though the volume sent tobanks remained elevated as these institutions faced in- low-income households was still well below the levelscreasingly strained conditions in short-term funding at that time. Meanwhile, consumer credit quality im-markets. In the wake of the bankruptcy of MF Global, proved further in recent months, with delinquencymarket participants also expressed renewed concerns rates on credit card loans declining nearly to historicalabout securities dealers that rely heavily on short-term lows and delinquency rates on nonrevolving credit atwholesale funding markets, particularly those institu- commercial banks retreating to pre-crisis levels. Is-tions not affiliated with commercial banking institu- suance of consumer credit asset-backed securities in-tions. creased substantially in November.Yields on investment-grade and speculative-grade cor- M2 expanded at a solid pace in November, likely re-porate bonds rose, on balance, over the period, and flecting increased demand for safe and liquid assets,their spreads over yields on comparable-maturity Treas- given concerns over European financial developments.ury securities were somewhat wider. The debt of non- In part, offshore deposits, which are no longer ex-financial firms increased in November, with corporate cluded from the Federal Deposit Insurance Corpora-bond issuance particularly robust, as some firms re- tion assessment base, appeared to be shifting to on-portedly were eager to issue bonds before year-end. shore offices. In contrast, the monetary base declinedNonfinancial commercial paper outstanding and com- in November. Although currency increased at a robustmercial and industrial loans continued to expand at a pace, reserve balances declined by more, reflecting amoderate pace. In the leveraged loan market, the ex- temporary decrease in the size of the SOMA as a resulttension of loans stepped up somewhat in November of lags in the settlement of MBS reinvestment transac- tions.
Minutes of the Meeting of December 13, 2011 Page 5_____________________________________________________________________________________________Over most of November, yields on many euro-area that will auction term sterling funds against a widesovereign bonds—including those of Italy, Spain, Bel- range of collateral.gium, and France—along with yields on debt issued by Staff Economic Outlookthe European Financial Stability Facility, rose sharply In the economic forecast prepared for the Decemberrelative to the yield on German government bonds. FOMC meeting, the staff’s projection for the increaseBut these spreads subsequently narrowed in anticipa- in real GDP in the near term was little changed, as thetion of the European Union (EU) summit meeting on recent data on spending, production, and the laborDecember 9 and in reaction to the swap announcement market were, on balance, in line with the staff’s expec-by the Federal Reserve and the other central banks on tations at the time of the previous forecast. However,November 30. Near the end of the period, sovereign the medium-term projection for real GDP growth inspreads widened again amid market participants’ appar- the December forecast was lower than the one pre-ent concerns that the actions announced at the EU sented in November, primarily reflecting revisions tosummit would prove to be less effective than they pre- the staff’s view regarding developments in Europe andviously had anticipated. Spreads of yields on most pe- their implications for the U.S. economy. Nonetheless,ripheral euro-area countries’ debt over yields on Ger- the staff continued to project that the pace of econom-man debt ended the period higher on net. German ic activity would pick up gradually in 2012 and 2013,sovereign yields increased as well. supported by accommodative monetary policy, furtherImplied basis spreads from the foreign exchange swap increases in credit availability, and improvements inmarket rose substantially over November, but reversed consumer and business sentiment. Over the forecasta portion of that increase immediately following the period, the gains in real GDP were anticipated to becentral banks’ swap announcement. Against the back- sufficient to reduce the slack in product and labor mar-ground of higher dollar funding costs in the market and kets only slowly, and the unemployment rate was ex-the reduction in the charge on dollar liquidity swaps, pected to remain elevated at the end of 2013.demand at the tender by the European Central Bank The staff’s projection for inflation was little changed(ECB) of three-month dollar liquidity in December from the forecast prepared for the November FOMCjumped to more than $50 billion from less than meeting. The upward pressure on consumer prices$500 million at the November auction. Euro funding from the increases in commodity and import pricespressures also moved higher over the period, with euro earlier in the year was expected to continue to subsideLibor–OIS spreads continuing to rise. In addition, ma- in the current quarter. With long-run inflation expecta-turities for repurchase agreements involving sovereign tions stable and substantial slack in labor and productbonds of euro-area countries other than Germany re- markets anticipated to persist over the forecast period,portedly shortened. Several European banks an- the staff continued to project that inflation would benounced large declines in third-quarter profits, in part subdued in 2012 and 2013.reflecting write-downs of their holdings of Greek sov-ereign debt. Equity prices in both advanced and Participants’ Views on Current Conditions and theemerging market economies fluctuated widely, with Economic Outlookadvanced country equities little changed, on net, and In their discussion of the economic situation and out-emerging market equities ending the period lower. The look, meeting participants agreed that the informationforeign exchange value of the dollar appreciated, on received since their previous meeting indicated thatbalance, over the intermeeting period. economic activity was expanding at a moderate rate, notwithstanding some apparent slowing in global eco-With inflationary pressures waning and the downside nomic growth. Consumer spending continued to ad-risks to the global economic outlook increasing, some vance, but business fixed investment appeared to becentral banks eased policy. China’s central bank cut its decelerating, and home sales and construction re-reserve requirements by 50 basis points, and the central mained at very low levels. Labor market conditionsbank of Brazil lowered its policy rate by the same improved some in recent months, but the unemploy-amount. The ECB reduced its minimum bid rate by ment rate remained elevated despite a noticeable drop25 basis points at both its November and December in November. Inflation moderated from the rates ear-meetings, relaxed its collateral and reserve require- lier in the year, and longer-term inflation expectationsments, and stated that it would begin to offer three- remained stable.year funds at fixed rates. As a precautionary measure,the Bank of England announced a new liquidity facility
Page 6 Federal Open Market Committee_____________________________________________________________________________________________Regarding the economic outlook, participants contin- tional sources, suggesting that conditions in the hous-ued to anticipate that economic activity would expand ing market could be improving.at a moderate rate in the coming quarters and that, Reports from business contacts indicated that, in addi-consequently, the unemployment rate would decline tion to the rise in consumer spending, activity in theonly gradually. The factors that participants cited as manufacturing, energy, and agriculture sectors contin-likely to restrain the pace of the economic expansion ued to advance in recent months. Nonetheless, busi-included an expectation that financial markets would nesses generally reported that they remained cautiousremain unsettled until the fiscal and banking issues in regarding capital spending and hiring because of a highthe euro area were more fully addressed. Other factors level of uncertainty about the economic outlook andthat were expected to weigh on the pace of economic the political environment. In particular, some contactsactivity were the slowdown of economic activity raised concerns about the uncertain fiscal outlook inabroad, fiscal tightening in the United States, high lev- the United States or the possible drag on sales and pro-els of uncertainty among households and businesses, duction from an economic slowdown abroad, whilethe weak housing market, and household deleveraging. others cited uncertainty about the cost implications ofIn assessing the economic outlook, participants judged potential changes in regulatory policies. Several partic-that strains in global financial markets continued to ipants noted that their contacts had ready access topose significant downside risks. With the rate of in- credit at attractive rates. However, some participantscrease in economic activity anticipated to remain mod- continued to view credit as tight, particularly in mort-erate, most participants expected that inflation would gage markets or among small businesses in their Dis-settle over coming quarters at or below levels consis- tricts that were facing difficulties meeting collateral re-tent with their estimates of its longer-run mandate- quirements and obtaining bank loans.consistent rate. A number of recent indicators showed some improve-In discussing the household sector, meeting partici- ment in labor market conditions: Payroll employmentpants generally commented that consumer spending in had posted moderate gains for five months, new claimsrecent months had been stronger than expected, and for unemployment insurance had drifted lower, and theseveral reported cautious optimism among some of unemployment rate had turned down. One participanttheir business contacts about prospects for the holiday noted that the series of upward revisions to the initialshopping season. A few participants thought that the estimates of payroll employment in recent months wasrecent strength in motor vehicle sales and other con- an encouraging sign of sustained hiring, although sev-sumer spending could reflect pent-up demand from eral participants remarked that they saw the labor mar-households for goods and services, and so thought that ket as still improving only slowly. Others indicated thatit might persist for a time. However, others noted that because part of the recent decline in the jobless ratereal disposable personal income had weakened and that was associated with a reduction in labor force participa-households remained pessimistic about their income tion, the drop in the unemployment rate likely over-prospects and uncertain about the economic outlook. stated the overall improvement in the labor market.As a result, a number of those participants suggested Moreover, unemployment, particularly longer-termthat the recent stronger pace of consumer spending unemployment, remained high, and the number of in-might not be sustained. Moreover, some participants voluntary part-time workers was still elevated. Somementioned that households were likely still adjusting to participants again expressed concern that the persis-the loss of wealth over the past few years, which would tence of high levels of long-duration unemploymentweigh on consumer spending going forward. Partici- and the underutilization of the workforce could even-pants generally saw few signs of recovery in the hous- tually lead to a loss of skills and an erosion of potentialing market, with house prices continuing to decline in output. Another participant suggested that the unem-most areas and the overhang of foreclosed and dis- ployment rate was a more useful indicator of cyclicaltressed properties still substantial. Several participants labor market developments than the level of employ-observed that the ongoing weakness in the housing ment relative to the size of the population, which wasmarket came despite low borrowing rates and govern- more likely to be influenced by structural changes inment initiatives to resolve problems in the foreclosure labor demand and supply. Participants expressed aprocess. However, one participant noted that some range of views on the current extent of slack in the la-homebuilders were reporting that land prices were edg- bor market. It was noted that because of factors in-ing up and that financing was available from nontradi- cluding ongoing changes in the composition of availa-
Minutes of the Meeting of December 13, 2011 Page 7_____________________________________________________________________________________________ble jobs and workers’ skills, some part of the increase in concern that, with the persistence of considerable re-unemployment since the beginning of the recession had source slack, inflation might run below mandate-been structural rather than cyclical. Others pointed out consistent levels for some time. However, a couple ofthat the very modest increases in labor compensation participants noted that the rate of inflation over theof late suggested that underutilization of labor was still past year had not fallen as much as would be expectedsignificant. if the gap in resource utilization were large, suggesting that the level of potential output was lower than someMeeting participants observed that financial markets current estimates. Some participants were concernedremained volatile over the intermeeting period in large that inflation could rise as the recovery continued, andpart because of developments in Europe. Participants some business contacts had reported that producersnoted the recent moves by the European authorities to expected to see an increase in pricing power over time.strengthen their commitment to fiscal discipline and to A few participants argued that maintaining a highlyprovide greater resources to backstop sovereign debt accommodative stance of monetary policy over theissuance. But many anticipated that further efforts to medium run would erode the stability of inflation ex-implement and perhaps to augment these policies pectations.would be necessary to fully resolve the area’s fiscal andfinancial problems and commented that financial mar- Committee Policy Actionkets would remain focused on the situation in Europe Members viewed the information on U.S. economicas it evolves. It was noted that the changes to the cen- activity received over the intermeeting period as sug-tral bank currency swap lines announced in late No- gesting that the economy was expanding moderately.vember helped to ease dollar funding conditions facing While overall labor market conditions had improvedEuropean institutions, but such conditions were still some in recent months, the unemployment rate re-strained. However, participants generally saw little evi- mained elevated relative to levels that the Committeedence of significant new constraints on credit availabili- anticipated would prevail in the longer run. Inflationty for domestic borrowers. The balance sheets of most had moderated, and longer-term inflation expectationsU.S. banks appeared to have improved somewhat, and remained stable. However, available indicators pointeddomestic banks reported increases in commercial lend- to some slowing in the pace of economic growth ining, even as some European lenders were pulling back. Europe and in some emerging market economies.Several participants commented on strains affecting Members continued to expect a moderate pace of eco-some community banks, which reportedly had led to nomic growth over coming quarters, with the unem-tighter credit conditions for their small business clients. ployment rate declining only gradually toward levels consistent with the Committee’s dual mandate. StrainsParticipants observed that inflation had moderated in in global financial markets continued to pose significantrecent months as the effects of the earlier run-up in downside risks to economic activity. Members alsocommodity prices subsided. Retail prices of gasoline anticipated that inflation would settle, over cominghad declined, and prices of non-oil imported goods had quarters, at levels at or below those consistent with thesoftened. In addition, labor compensation had risen dual mandate.only slowly, and productivity continued to rise. Somebusiness contacts suggested that pricing pressures had In their discussion of monetary policy for the perioddiminished. Longer-run inflation expectations were ahead, Committee members generally agreed that theirstill well anchored. Most participants anticipated that overall assessments of the economic outlook had notinflation would continue to moderate. Although some changed greatly since their previous meeting. As a re-energy prices had recently increased, many participants sult, almost all members agreed to maintain the existingjudged that the favorable trends in commodity prices stance of monetary policy at this meeting. In particular,might persist in the near term, particularly in light of they agreed to continue the program of extending thesofter global activity, and one noted that expanded average maturity of the Federal Reserve’s holdings ofcrop production, if realized, would hold down agricul- securities as announced in September, to retain the ex-tural prices. More broadly, many participants judged isting policies regarding the reinvestment of principalthat the moderate expansion in economic activity that payments from Federal Reserve holdings of securities,they were projecting and the associated gradual reduc- and to keep the target range for the federal funds ratetion in the current wide margins of slack in labor and at 0 to ¼ percent. With regard to the forward guid-product markets would be consistent with subdued ance to be included in the statement to be released fol-inflation going forward. Indeed, some expressed the lowing the meeting, several members noted that the
Page 8 Federal Open Market Committee_____________________________________________________________________________________________reference to mid-2013 might need to be adjusted be- the maturity extension program it began infore long. A number of members noted their dissatis- September to purchase, by the end of Junefaction with the Committee’s current approach for 2012, Treasury securities with remaining ma-communicating its views regarding the appropriate path turities of approximately 6 years to 30 yearsfor monetary policy, and looked forward to considering with a total face value of $400 billion, and topossible enhancements to the Committee’s communi- sell Treasury securities with remaining matur-cations. For now, however, the Committee agreed to ities of 3 years or less with a total face valuereiterate its anticipation that economic conditions— of $400 billion. The Committee also directsincluding low rates of resource utilization and a sub- the Desk to maintain its existing policies ofdued outlook for inflation over the medium run—are rolling over maturing Treasury securities intolikely to warrant exceptionally low levels for the federal new issues and of reinvesting principal pay-funds rate at least through mid-2013. A number of ments on all agency debt and agency mort-members indicated that current and prospective eco- gage-backed securities in the System Opennomic conditions could well warrant additional policy Market Account in agency mortgage-backedaccommodation, but they believed that any additional securities in order to maintain the total faceactions would be more effective if accompanied by en- value of domestic securities at approximatelyhanced communication about the Committee’s longer- $2.6 trillion. The Committee directs therun economic goals and policy framework. A few oth- Desk to engage in dollar roll transactions asers continued to judge that maintaining the current de- necessary to facilitate settlement of the Fed-gree of policy accommodation beyond the near term eral Reserve’s agency MBS transactions. Thewould likely be inappropriate given their outlook for System Open Market Account Manager andeconomic activity and inflation, or questioned the effi- the Secretary will keep the Committee in-cacy of additional monetary policy actions in light of formed of ongoing developments regardingthe nonmonetary headwinds restraining the recovery. the System’s balance sheet that could affectFor this meeting, almost all members were willing to the attainment over time of the Committee’ssupport maintaining the existing policy stance while objectives of maximum employment andemphasizing the importance of carefully monitoring price stability.”economic developments given the uncertainties and The vote encompassed approval of the statement be-risks attending the outlook. One member preferred to low to be released at 2:15 p.m.:undertake additional accommodation at this meetingand dissented from the policy decision. “Information received since the Federal Open Market Committee met in NovemberWith respect to the statement, members agreed that suggests that the economy has been expand-only relatively small modifications were needed to re- ing moderately, notwithstanding some ap-flect the modest changes to economic conditions seen parent slowing in global growth. While indi-in the recent data and to note that the Committee cators point to some improvement in overallwould continue to implement its policy steps from re- labor market conditions, the unemploymentcent meetings. rate remains elevated. Household spendingAt the conclusion of the discussion, the Committee has continued to advance, but business fixedvoted to authorize and direct the Federal Reserve Bank investment appears to be increasing less rap-of New York, until it was instructed otherwise, to ex- idly and the housing sector remains de-ecute transactions in the System Account in accordance pressed. Inflation has moderated since earli-with the following domestic policy directive: er in the year, and longer-term inflation ex- pectations have remained stable. “The Federal Open Market Committee seeks monetary and financial conditions that will Consistent with its statutory mandate, the foster price stability and promote sustainable Committee seeks to foster maximum em- growth in output. To further its long-run ployment and price stability. The Committee objectives, the Committee seeks conditions continues to expect a moderate pace of eco- in reserve markets consistent with federal nomic growth over coming quarters and funds trading in a range from 0 to ¼ percent. consequently anticipates that the unemploy- The Committee directs the Desk to continue ment rate will decline only gradually toward
Minutes of the Meeting of December 13, 2011 Page 9_____________________________________________________________________________________________ levels that the Committee judges to be con- ployment rate and for inflation to drop below levels sistent with its dual mandate. Strains in consistent with the Committee’s dual mandate. He global financial markets continue to pose continued to support the use of more-explicit forward significant downside risks to the economic guidance about the economic conditions under which outlook. The Committee also anticipates the federal funds rate could be maintained in its current that inflation will settle, over coming quar- range, and he suggested that the Committee also con- ters, at levels at or below those consistent sider additional asset purchases. with the Committee’s dual mandate. How- Monetary Policy Communications ever, the Committee will continue to pay After the Committee’s vote, participants turned to a close attention to the evolution of inflation further consideration of ways in which the Committee and inflation expectations. might enhance the clarity and transparency of its public To support a stronger economic recovery communications. The subcommittee on communica- and to help ensure that inflation, over time, tions recommended an approach for incorporating in- is at levels consistent with the dual mandate, formation about participants’ projections of appropri- the Committee decided today to continue its ate future monetary policy into the Summary of Eco- program to extend the average maturity of its nomic Projections (SEP), which the FOMC releases holdings of securities as announced in Sep- four times each year. In the SEP, participants’ projec- tember. The Committee is maintaining its tions for economic growth, unemployment, and infla- existing policies of reinvesting principal tion are conditioned on their individual assessments of payments from its holdings of agency debt the path of monetary policy that is most likely to be and agency mortgage-backed securities in consistent with the Federal Reserve’s statutory mandate agency mortgage-backed securities and of to promote maximum employment and price stability, rolling over maturing Treasury securities at but information about those assessments has not been auction. The Committee will regularly re- included in the SEP. view the size and composition of its securi- A staff briefing described the details of the subcommit- ties holdings and is prepared to adjust those tee’s recommended approach and compared it with holdings as appropriate. those taken by several other central banks. Most par- The Committee also decided to keep the tar- ticipants agreed that adding their projections of the get range for the federal funds rate at 0 to target federal funds rate to the economic projections ¼ percent and currently anticipates that eco- already provided in the SEP would help the public bet- nomic conditions—including low rates of re- ter understand the Committee’s monetary policy deci- source utilization and a subdued outlook for sions and the ways in which those decisions depend on inflation over the medium run—are likely to members’ assessments of economic and financial con- warrant exceptionally low levels for the fed- ditions. One participant suggested that the economic eral funds rate at least through mid-2013. projections would be more understandable if they were based on a common interest rate path. Another sug- The Committee will continue to assess the gested that it would be preferable to publish a consen- economic outlook in light of incoming in- sus policy projection of the entire Committee. Some formation and is prepared to employ its tools participants expressed concern that publishing informa- to promote a stronger economic recovery in tion about participants’ individual policy projections a context of price stability.” could confuse the public; for example, they saw an ap-Voting for this action: Ben Bernanke, William C. preciable risk that the public could mistakenly interpretDudley, Elizabeth Duke, Richard W. Fisher, Narayana participants’ projections of the target federal funds rateKocherlakota, Charles I. Plosser, Sarah Bloom Raskin, as signaling the Committee’s intention to follow a spe-Daniel K. Tarullo, and Janet L. Yellen. cific policy path rather than as indicating members’ conditional projections for the federal funds rate givenVoting against this action: Charles L. Evans. their expectations regarding future economic develop-Mr. Evans dissented because he continued to view ad- ments. Most participants viewed these concerns asditional policy accommodation as appropriate in cir- manageable; several noted that participants would havecumstances where his outlook was for growth to be too opportunities to explain their projections and policyslow to make sufficient progress in reducing the unem- views in speeches and other forms of communication.
Page 10 Federal Open Market Committee_____________________________________________________________________________________________Nonetheless, some participants did not see providing cluded a six-month extension of the sunset date and apolicy projections as a useful step at this time. 50 basis point reduction in the pricing on the existing liquidity swap arrangements with the Bank of Canada,At the conclusion of their discussion, participants de- the Bank of England, the Bank of Japan, the ECB, andcided to incorporate information about their projec- the Swiss National Bank, as well as the establishment,tions of appropriate monetary policy into the SEP be- as a contingency measure, of swap arrangements thatginning in January. Specifically, the SEP will include would allow the Federal Reserve to provide liquidity ininformation about participants’ projections of the ap- the currencies of the foreign central banks should thepropriate level of the target federal funds rate in the need arise. The proposal was aimed at helping to easefourth quarter of the current year and the next few ca- strains in financial markets and thereby to mitigate thelendar years, and over the longer run; the SEP also will effects of such strains on the supply of credit to U.S.report participants’ current projections of the likely households and businesses, in support of the economictiming of the first increase in the target rate given their recovery.projections of future economic conditions. An accom-panying narrative will describe the key factors underly- The staff provided briefings on financial and economicing those assessments as well as qualitative information developments in Europe. In recent weeks, financialregarding participants’ expectations for the Federal Re- markets appeared to have become increasingly con-serve’s balance sheet. A number of participants sug- cerned that a timely resolution of the European sov-gested further enhancements to the SEP; the Chairman ereign debt situation might not occur despite the meas-asked the subcommittee to explore such enhancements ures that authorities there announced in October; pres-over coming months. sures on European sovereign debt markets had in- creased, and conditions in European funding marketsFollowing up on the Committee’s discussion of policy had deteriorated appreciably. The greater financialframeworks at its November meeting, the subcommit- stress appeared likely to damp economic activity in thetee on communications presented a draft statement of euro area and could pose a risk to the economic recov-the Committee’s longer-run goals and policy strategy. ery in the United States.Participants generally agreed that issuing such a state-ment could be helpful in enhancing the transparency Meeting participants discussed a range of considera-and accountability of monetary policy and in facilitating tions surrounding the proposed changes to the swapwell-informed decisionmaking by households and busi- arrangements. Most participants agreed that suchnesses, and thus in enhancing the Committee’s ability changes would represent an important demonstrationto promote the goals specified in its statutory mandate of the commitment of the Federal Reserve and thein the face of significant economic disturbances. How- other central banks to work together to support theever, a couple of participants expressed the concern global financial system. Some participants indicatedthat a statement that was sufficiently nuanced to cap- that, although they did not anticipate that usage wouldture the diversity of views on the Committee might not, necessarily be heavy, they felt that lower pricing on thein fact, enhance public understanding of the Commit- existing swap lines could reduce the possible stigmatee’s actions and intentions. Participants commented associated with the use of the lines by financial institu-on the draft statement, and the Chairman encouraged tions borrowing dollars from the foreign central banks,the subcommittee to make adjustments to the draft and and so would contribute to improved functioning into present a revised version for the Committee’s fur- dollar funding markets in Europe and elsewhere. Ather consideration in January. few noted that the risks associated with the swap lines were low because the Federal Reserve’s counterpartiesIt was agreed that the next meeting of the Committee would be the foreign central banks themselves, and thewould be held on Tuesday–Wednesday, January 24–25, foreign central banks would be responsible for the2012. The meeting adjourned at 4:00 p.m. on Decem- loans to banks in their jurisdictions. However, someber 13, 2011. participants commented that the proposed changes toVideoconference Meeting of November 28 the swap lines would not by themselves address theOn November 28, 2011, the Committee met by video- need for additional policy action by European authori-conference to discuss a proposal to amend and aug- ties. Several participants questioned whether thement the Federal Reserve’s temporary liquidity swap changes to the swap lines were necessary at this timearrangements with foreign central banks in light of and worried that such changes could be seen as sug-strains in global financial markets. The proposal in- gesting greater concern about financial strains than was
Minutes of the Meeting of December 13, 2011 Page 11_____________________________________________________________________________________________warranted. It was also noted that the proposed reduc- proceeds to U.S. financial institutions shalltion in pricing of the existing swap arrangements could be initiated by the appropriate Reserve Bankput the cost of dollar borrowing from foreign central and approved by the Chairman in consulta-banks below the Federal Reserve’s primary credit rate tion with the Foreign Currency Subcommit-and that non-U.S. banks might be perceived to have an tee. The Foreign Currency Subcommitteeadvantage in meeting their short-term funding needs as will consult with the Federal Open Marketa result. However, U.S. banks did not face difficulties Committee prior to the initial drawing on theobtaining liquidity in short-term funding markets, and foreign currency swap lines if possible undersome participants felt that a cut in the primary credit the circumstances then prevailing.rate at the present time might incorrectly be seen as The Chairman shall establish the rates on thesuggesting concern about U.S. financial conditions. swap arrangements by mutual agreementAt the conclusion of the discussion, all but one mem- with the foreign central banks and in consul-ber agreed to support the changes to the existing swap tation with the Foreign Currency Subcom-line arrangements and the establishment of the new mittee. He shall keep the Federal Openforeign currency swap agreements and approved the Market Committee informed, and the ratesfollowing resolution: shall be consistent with principles discussed with and guidance provided by the Commit- “The Federal Open Market Committee di- tee.” rects the Federal Reserve Bank of New York to extend the existing temporary reciprocal Voting for this action: Ben Bernanke, William C. currency arrangements (“swap arrange- Dudley, Elizabeth Duke, Charles L. Evans, Richard W. ments”) for the System Open Market Ac- Fisher, Narayana Kocherlakota, Sarah Bloom Raskin, count with the Bank of Canada, the Bank of Daniel K. Tarullo, and Janet L. Yellen. England, the Bank of Japan, the European Voting against this action: Jeffrey M. Lacker. Mr. Central Bank, and the Swiss National Bank Lacker voted as alternate member for Mr. Plosser at through February 1, 2013. this meeting. Mr. Lacker dissented because of his op- In addition, the Federal Open Market Com- position to arrangements that support Federal Reserve mittee authorizes the Federal Reserve Bank lending in foreign currencies, which he viewed as of New York to enter into additional swap amounting to fiscal policy. He also opposed lowering arrangements for the System Open Market the interest rate on swap arrangements to below the Account with the Bank of Canada, Bank of primary credit rate. England, the Bank of Japan, the European Notation Vote Central Bank, and the Swiss National Bank By notation vote completed on November 21, 2011, to support the provision by the Federal Re- the Committee unanimously approved the minutes of serve of liquidity in Canadian dollars, British the FOMC meeting held on November 1–2, 2011. pounds, Japanese yen, euros, and Swiss francs. The swap arrangements for provi- sion of liquidity in each of those currencies shall be subject to the same size limits, if any, currently in force for the swap arrangements for provision of liquidity in U.S. dollars to that foreign central bank. These arrange- _____________________________ ments shall terminate on February 1, 2013. William B. English Requests for drawings on the foreign curren- Secretary cy swap lines and distribution of the