1. A HISTORY OF MONETARY POLICY:
FEDERAL OPEN MARKET COMMITTEE
DECISIONS IN CONTEMPORARY AND
CURRENT PERSPECTIVES
JUNE 2009
ANTONIO ALONSO GONZALEZ
CONGYI LUI
2. Acknowledgments
The authors of this paper thank Professor King for his help and guidance
through the making of this project.
3. Contents:
Introduction, 4
1. Conference Call 4
2. June FOMC meeting 4-34
Financial market conditions 4-5
Evolution of interest rates 5
Economic outlook 6-7
Inflation and Output Gap 7-8
Balance Sheet Developments 8-9
The Supervisory Capital Assessment Program 9-10
Reform of the Financial System 10
Liquidity facilities renewal 11
Forward Guidance 11-12
The Large Scale Asset Purchases Program 12-13
Exit Strategy 14
Policy options and final decision 15-16
Speeches 16-18
Contemporary Perspectives 19-20
Retrospective Information 20-22
References 23-24
Annexure 25-34
4. Introduction
In this paper, we summarize the most important events and the economic and financial
context that influence the monetary policy decisions taken by the Federal Open Market
Committee (FOMC) of the Federal Reserve from the end of April until the June meeting of
2009, held the 23 and 24 of June. It also includes the June Conference Call in June 3. This paper
also includes contemporary comments made in the economic press about the events that
were occurring at that time and about the decision the FOMC took. It also contains comments
on the happenings during the period we study with the lenses of the present.
The month of June presented an improved economic forecast. The FED’s staff forecasted the
beginning of the recovery in the second half of the year. In spite of this improved outlook, the
situation of the financial system remained fragile, and the FOMC Committee was alert of
unexpected shocks. This period is particularly important because it was the exact moment in
which the economic recovery from the Great Recession took place.
SUMMARY OF THE CONFERENCE CALL
In June 3 there was a conference call. In this session, the members talked about the improved
situation of the economy and the policy changes that the Fed might do because of this. The
members of the FOMC Committee agreed on the perceived improvement of the economy and
the absence of a need to change the strategy or any important policy of the FED. Even if they
had that opinion, Ben Bernanke said that the decision in the 23-24 June meeting had to be
made with updated and much more information. We won’t make a detail description of the
meeting because the situation did not change much during the month and in the meeting we
have more detail explanations, and importantly, updated numbers.
The 3 June Conference call was informal and no decision or votation of any kind was made.
23-24 FOMC JUNE MEETING
Financial Market conditions
The basic insights about the development of financial markets during the period are: Risky
asset prices were raising, financial institutions were raising new capital and money markets
continued to heal. In a word, the situation of financial markets improved since the April FOMC
meeting.
In this financial overview I do not talk about the LSAP program and the rising interest rates
because I want to talk about them separately.
5. As the required interest rates for corporate debt was significantly reduced, issuers brought a
heavy flow of new bonds to the market in the weeks before the June meeting. The spreads of
corporate debt to Treasuries reduced by 176 and 405 basis points for the investment-grade
and high-yield debt, respectively. The evolution of the spreads of corporate debt can be seen
in the graph of the top in Figure A.6. Meanwhile, the federal government issued large amounts
of debt, and state and local government debt was estimated to have expanded moderately.
In addition to that, there was an increase in the price of the stocks. The S&P raised a 5% during
the period, continuing its recovery since March. (You can see the time series of stock prices in
Figure A.6, at the bottom). This rising trend was partially due to the better prospects of banks.
Before the release of the results of the stress test investors were scared of investing in banks
because they were not sure about their solvency. The good results in the tests made possible
that banks were able to raise new capital, more than $35 billion in debt. In addition to this, 10
large financial institution repaid TARP funds, returning in total $86 billion to the Treasury.
The willingness of investors to move back from safe assets in the United States to riskier assets
abroad contributed to a weakening of the dollar, Figure A.7, with the broad dollar index off by
about 5 percent.
One notable feature of this period is the improvement of the easiness of getting liquidity in the
market. The three month LIBOR spread did fall, being in similar levels as in early 2008. This is
not true for longer maturities, where the spreads were still very high.
Evolution of the market interest rates
As we know, the monetary policy at that time with federal funds rate in the zero lower bound
consisted on keeping the interest rates in the financial markets low by buying some specific
assets (the Large Scale Asset Purchase). A distinctive feature of this period was that interest
rates were rising sharply in the American financial markets.
Treasury yields, especially bills due in two years and beyond, were raising during the period.
Several factors were blamed in this rising trend, including an improved economic outlook, an
associated reduction is the risk of deflation, the need to hedge mortgage convexity exposure
as rates increase, an ongoing reversal of the flight-to-quality flows and the substantial
increases in the supply of treasury debt. Fed staff did a survey to ask market agents to give
their opinion about the factors that were driving this increase. The results of the survey of the
driving factors and their weight and the evolution of the yields in treasuries are included in the
Annexure, figures A.1 and A.2, respectively.
This rising yields appeared despite of the large purchases of government bonds made by the
FED. The final interpretation of the causes of the rising yields in the financial markets was
probably the key feature of this period. In short, the FOMC Committee in the June meeting had
to decide whether this rise was a signal of a problem or positive news. If the Committee
thought that the run-up in long-term yields represents an unwelcomed tightening of credit
conditions, then the FED had to increase the size of the LSAP Program. If the meaning of this
rise was a symptom that economic recovery was coming, then they had to maintain or start
reducing the size of the program.
6. Economic outlook
The most notable change in the economic outlook of the US economy by late June was the
certainty that the economy was still contracting, tough at a much lower level. In fact, the
Federal Reserve had expected a higher decrease in real GDP for the two first quarters of the
year in the meeting before June (April). This better outcome was produced by a much lower
decrease in non-residential construction and by an increase in household consumption. As we
can see in the table, economic prospects according to the FED improved although economic
growth remained negative for the first two quarters.
Table: Near Term outlook for real GDP growth (Percent change at annual rate)
Despite the expected economic growth still being negative in the second quarter, the forecast
for the third quarter was real positive growth. The forecast for the third quarter was 0.7
percent change at an annual rate. At some extend, this forecast of economic growth in the
third quarter meant that they expected the economic crisis to be over in the third quarter.
Therefore, we can say that they thought that at that point in time they were in the turning
point of the crisis. This increase in the forecast for the third quarter of the year was driven by
an important increase in the real federal purchases [Obama’s stimulus program] and by the
elimination of cuts in local and state governments, as the fiscal stimulus package helped states
and localities to maintain their spending in the face of very weak revenues. Moreover,
reduction in the decrease of investments made by the private sector was thought to play a
role.
The FED also calculated forecast for economic growth in the medium term. The institution
expected a 1.1 percent growth in the second half on that year (2009) and a rate of economic
growth of 3 percent in 2010.
Despite what seemed an improvement in the economic situation of the country, job losses
remained important thought they were going down (jobs were still be destroyed, but at a
slower pace). The unemployment grew compared to the unemployment rate in last meeting
situating at 9.4%. After declining an average of almost 700,000 jobs per month in the first
quarter, private payroll employment fell about 600,000 in April and 340,000 in May, a bit less
than the FED had expected in the April Greenbook. They projected that private employment
would fall an additional 400,000 in June and that job losses would taper off in the third
quarter, according to their June forecast.
7. The expected inflation for the whole year 2009 was predicted in June to be 1.4 percent. This
rise in prices was fueled by an increase in the price of energy (price of oil was expected to rise
$15 in the second half of the year) but also for other reason, like the general improvement of
the economic outlook and the increase of the price on imports (due to the falling value of the
dollar). Predictions of inflation were 1.1 percent for 2010.
Regarding fiscal policy, the stimulus package was expected to boost the change in real GDP by
1 percentage point in 2009 and ¾ percentage point in 2010. FED analysts forecasted in June
large deficits in the federal budget in 2009 and 2010. The amount of the expected deficit for
each year was expected to reach $1.4 trillion dollars. This huge gap between expenditures and
revenues forced the Treasury to issue a large amount of debt.
Inflation & Output Gap
The committee expected overall PCE (personal consumption expenditure) inflation, which is
measures the percentage change in prices of goods and services purchased by consumers
throughout the economy, to slow from 1.4 percent this year to 1.1 percent in 2010. Core
inflation is projected to slow a bit more. The projected deceleration in core inflation reflects the
substantial drag induced by economic slack (Transcript of June 23 2009 FOMC meeting, page
103).
Typically, the output and unemployment gaps typically provide similar signals; this similarity is
largely by construction, as we use information from developments in both product and labor
markets to jointly inform our estimates of potential GDP and the NAIRU. However, a sizable
discrepancy has opened up during this recession—with the unemployment gap suggesting an
even greater degree of slack than suggested by the output gap.
Mr. Kiley employed several possible explanations for the discrepancy In the Greenbook. First,
the GDP data, as currently published, may understate the contraction in real activity; indeed,
the data on Gross Domestic Income, which in principle estimate overall economic activity as
does GDP, have been significantly weaker than GDP since 2007.
Second, labor force participation may currently be boosted to an unusual degree by the
Extended Unemployment Compensation program, by the declines in wealth and their effect on
the labor supply of near-retirees or other workers, or by other factors, such as an unusual
concentration of job losses among individuals with strong labor force attachment; such unusual
boosts to participation would have a large influence on the unemployment gap but not much
effect on the estimated GDP gap.
Finally, we may currently have underestimated the size of shifts in the NAIRU (non-accelerating
inflation rate of unemployment) or other elements of potential, possibly contributing to
mismeasurement of slack (Transcript of June 23 2009 FOMC meeting, page 104).
There are various models can be utilized to estimate potential GDP. The first is the staff estimate,
which is loosely based on a growth accounting approach along with a number of underlying
models (related to productivity dynamics, Okun’s law, and the Phillips curve, for example). The
second is a trend-cycle decomposition of GDP using a simple Phillips curve in which inflation is
a function of the output gap, a model that has been used in many academic studies. The third is
derived from a dynamic stochastic general equilibrium (or DSGE) model developed at the Board
(Transcript of June 23 2009 FOMC meeting, page 104).
8. The uncertainty of the estimates of these three methods is significant. 90 percent
confidence interval for the second quarter of this year spans from about -2 percent of potential
GDP to about -8 percent of potential GDP. Furthermore, the staff’s estimate of the output gap
is in the lower half of the confidence interval, but it is not the most negative estimate; the
estimate from the DSGE model is more negative, at a bit below -7 percent. Finally, the entire
confidence interval for the output gap is below zero, by the largest margin seen over the past
two decades. In summary, it seems highly likely that the economy currently is operating with
considerable slack (Transcript of June 23 2009 FOMC meeting, page 104).
Two risks to the inflation outlook were exhibited during the meeting. An unmooring of
expectations is a risk: For example, expectations could shift down markedly in response to the
weak economy and decelerating wage gains; alternatively, expectations could ramp up, perhaps
in response to our expanding balance sheet (Transcript of June 23 2009 FOMC meeting, page
105). Another important risk surrounding the inflation projection relates to the links between
resource utilization and inflation. Inflation appears less sensitive to resource utilization than
before so inflation will decelerate by less than it did during earlier periods of substantial slack
Throughout the later discussion in the meeting, Mr. Kiley also emphasized the definition of
“potential” here is a statistical definition that’s consistent with the model. The model is
completely independent of that statistical machinery, and wages and prices and everything are
being driven by all of the things that are appropriate in a dynamic stochastic general equilibrium
model. Statistically, from this model we will forecast low inflation (Transcript of June 23 2009
FOMC meeting, page 105). He also pointed once you have sticky prices and sticky wages,
monopoly power, other sources of distorting shocks, there is no simple relationship between
what would happen in the absence of wage and price rigidities and what would happen to
inflation.
Balance Sheet Developments
One of consequences of the monetary policy during the Great Recession was the huge increase
in size of the Balance Sheet of the FED. This fact provoked a lot of attention on the evolvement
of the size of the Balance Sheet through time. In this section, we are going to state the main
changes produced during the intermeeting period.
Since the April FOMC meeting, the Federal Reserve’s total assets remained at around $2
trillion, but their composition shifted significantly. As a result of the asset purchase programs,
securities held outright increased $201 billion, but this increase was roughly offset by a
decrease of $206 billion in liquidity programs and other lending facilities. That is, the share of
long term assets went up and the share of short term assets went down. To see the evolution
of the composition of the Fed’s Balance Sheet, please see Figure A.8
In June 2009, FED reports stated that an increase of the size of the Balance Sheet to $2.8
trillion was expected. In subsequent years, they accounted, TALF loans would be repaid and
securities mature so they expected the Balance Sheet to contract to just under $1.5 trillion in
2016. To see a detail version of the changes during the intermeeting period, please see the
Annexure, Table 2.
9. The substantial changes to the size and composition during the crisis of the Federal Reserve’s
balance sheet posed risks to the net income of the FED. Two were the main risks. One of the
main risks was that, as the policy rate was increased, the income that the Reserve banks would
earn on largely fixed-rate assets becomes insufficient to offset expenses, most importantly the
interest expense on reserve balances. The second risk is the possibility that increases in the
interest rates reduced the market value of the SOMA portfolio so that, in the event that the
Desk needs to sell some of these securities to drain reserves to raise the federal funds rate, the
System realized capital losses. According to the FED analysts, the first risk was not expected to
happen, but they were really worried about the second risk.
The Supervisory Capital Assessment Program
The Supervisory Capital Assessment Program, publicly described as the bank stress tests (even
though some of the companies that were subject to them were not strictly banks), was an
assessment of capital conducted by the Federal Reserve to assess the financial health of the
major US financial organizations. The Supervisory Capital Assessment Program focused on the
nineteen largest US owned bank holding companies, those with assets of $100 billion or more.
Collectively, they held about two-thirds of the assets and half the loans in the US banking
system.
Although the main responsible of the accomplishment of the stress test was the Fed, it can be
argued that this action was a combination of Fed and Treasury forces. It was Timothy Geithner,
the Secretary of the Treasury, not Ben Bernanke the one that announced the plan on February
10. In the conduction of the valuation, both Fed and Treasury analysts intervened.
To understand why the conduction of the Supervisory Capital Assessment Program was such
an important action, we must put this policy in context. Before February 2009, many steps had
already been taken to help stabilize the US banking system. The Treasury Department had
injected capital into banks, the Federal Deposit Insurance Corporation had expanded
guarantees for bank liabilities, and the Federal Reserve had established lending programs to
provide liquidity to a range of financial institutions and markets. However, confidence in banks
remained tenuous in early 2009. In markets, this unease had driven up credit spreads on
corporate bonds issued by banks, impaired banks’ access to short-term funding, and depressed
values of bank equities.
The concerns about banking institutions aroused not only because market participants
expected steep losses on banking assets, but also because the range of uncertainty
surrounding estimated loss rates was exceptionally wide. The stress assessment was
designated both to ensure that banks would have enough capital in the face of potentially
large losses and to reduce the uncertainty about potential losses. To achieve these objectives,
for each financial organization included in the SCAP, supervisors estimated potential losses for
each major category of assets, as well as revenue expectations, under two macroeconomic
scenarios for 2009 and 2010. The baseline scenario reflected the consensus expectations in
February 2009 among professional forecasters on the depth and the duration of the recession,
while the most adverse scenario was designated to characterize a recession that is longer and
more severe than the consensus expectation. The actual numbers used in the valuation for the
key macroeconomic indicators, for both the baseline and more adverse scenario can be seen in
Table 1.
10. The results were published in May 7, 2009. Nine of the nineteen organizations examined had
enough capital to remain viable and continue to lend normally, under the more adverse
scenario. Ten organizations did not fulfill Fed's requirements and their capital needs were
estimated to be around $70 billion. For a detail description of the 19 organizations under
examination and their individual results, please see the Annexure, Table 4. Results show the
need of capital under the most-adverse-scenario.
Banks that did not pass the examination were told that they had six months to raise enough
capital to allow them to remain viable and continue to lend normally, even in the adverse
scenario. If they were unable to raise the required capital from private markets within that
amount of time, they would have to take capital from the TARP under conditions imposed by
the Treasury.
Eventually the valuation exercise was able to eliminate most of the uncertainty that
surrounded at that time to the major banks, showing clearly what banks need to raise capital
and what banks enjoyed a solid enough capital reserves. The fact that the estimated losses
were not as high as the most pessimistic forecasts and the fact that banks that came up short
had a chance to raise capital privately and if they were unable, the Treasury was available to
fill the capital needs with the TARP funds contributed to the restauration of confidence in the
major financial organizations.
At the time of the meeting, the financial organizations had already announced plans to raise
the $70 billion. In addition, they had already issued $35 billion in new debt, including $25
billion that did not use the FDIC guarantee program. We can see the capital raised to capital
requirements by the financial organizations from 7 May to 18 June in Figure A.9.
You never want a serious crisis to go to wasted: reform of the
American Financial System
The financial crisis showed that the supervision of the financial system was a total
failure. For this reason, a new regulatory framework was thought to be created. The
U.S. Treasury Department released a proposal the 17 June for reforming the financial
regulatory system. The proposal called for the creation of a Financial Services
Oversight Council and for new authority for the Federal Reserve to supervise all firms
that pose a threat to financial stability, including firms that do not own a bank. The
earliest draft did not impose any penalty on the size of the banks but addressed the
generalized belief that big size confers advantages to large institution because they will
be bailed-out if they get into trouble. It faced that issue in three ways:
First, it proposed tougher capital, liquidity and risk-management standards for
systematically important institutions, both banks and non-banks (such as AIG and the
Wall Street investment firms). Second, the administration proposed that the FED
supervise all systematically important financial companies. Third, the administration’s
plan planned to give the government the legal tools to take over and dismantle
systematically important financial institutions on the brink of failure.
11. FOMC discussion about liquidity facilities
The Committee discussed extensively about the renovation of several liquidity programs that
the FED had established in the course of the financial crisis because they were planned to
expire in October 30. The improvement of the economy had as consequence that the use of
most of the liquidity facilities declined in the months before June. Despite this lower use,
meeting participants judged that the market conditions remained fragile. They acknowledged
that the availability of the liquidity facilities was a factor that contributed to the reduction of
financial strains and were concerned about the possibility that eliminating the liquidity
programs would produce a renewed pressure on some financial institutions and markets and
tighten credit conditions for business and households. In this circumstances, participants
agreed that most facilities should be extended at least until early 2010.
Following the presentation by Brian Madigan and the later discussion, the Board voted
unanimously to extend the AMLF, the Commercial Paper Funding Facility (CPFF), the Primary
Dealer Credit Facility (PDCF), and the TSLF through February 1, 2010. In addition, the FOMC
extended the swaps lines between the FED and other central banks.
The Board did not extend the Money Market Investor Funding Facility (MMIFF) beyond
October 30. The Board and the FOMC jointly decided to suspend some TSLF auctions and to
reduce the size and frequency of others.
Despite the fact that most liquidity programs were extended, the Committee reduce the
access to most of the liquidity programs justifying this to the improvement of the economy
and the decrease of the demand of liquidity. This measure affected the Term Auction Facility
(TAF), the Term Securities Lending Facility (TSLF), and the Asset-Backed Commercial Paper
Funding Facility (AMLF). In this sense, the Committee agreed on all the proposals presented by
Brian Mandigan.
A brief summary of the thoughts of FOMC members and FED’s staff is the following: they
realized that their liquidity programs were not at that time completely necessary but they
though pragmatically that their existence would help a lot in the case of an unexpected
emergency. They also wanted to show to the markets that liquidity facilities were available in
case of need.
Forward Guidance
MR. Bullard did not took a lot of time talking about forward guidance. He pointed out that
naming a specific date for when we might make future interest rate moves might go the wrong
direction. This will undermine the economy’s evolvement. Though some other countries have
utilized such kind of method before, Bullard enforced people could get announcement effect
only because they surprised the market. Of course, you could always move later and get the
market to move off that, but you’re kind of drawing this line in the sand, and I’m not sure that’s
what the Committee wants to do (Transcript of June 23 2009 FOMC meeting, page 185).
Also, promising keeping rates lower for longer period may work well in models, while some
distortions can occur in reality. This requires everyone has rational expectations and understand
what will happen in the future, which is obviously impractical. Also, when you say “lower for
longer,” you mean relative to what would otherwise be the optimal policy rule, and I’m not sure
that we actually have that embedded out there in the market. I think the effects that we might
get from further strengthening our commitment to low rates further out in the future are
12. probably lost in the reality of the situation that we face(Transcript of June 23 2009 FOMC
meeting, page 186). Also, due to the discounting in the future, there are limits we cannot ignore.
If you promise to keep rates low far into the future, then that gets discounted by the markets
the farther you go into the future. Bullard summarized just keeping the “for an extended period”
language at this meeting and at future meetings.
Evolution of the Large-scale asset purchases program
In this section, I am going to present the main features of the Large-scale purchases program
by June 2009. To start with, given that the federal funds rate was close to zero, the FED had
decided to articulate a large scale asset purchase program to reduce the interest rate of the
overall economy. The program included the purchase of three different kinds of assets: long-
term treasury bills, Mortgage-backed securities and agency-backed securities. The stated
objective of the LSAP programs was to lower private credit rates and increase credit availability
in an effort to stimulate economic activity.
The Large Scale Purchase Program had an important effect in lowering the rates of the
Mortgage backed securities. The spread of these assets to the Treasures narrowed and this
made possible a refinancing wave. In the period we focus on, the rate of Mortgaged backed
securities went up because the investors in the market understood that the FED would not buy
more assets if the rate increased. To see a comparison in the evolution of the rate of
Mortgage-Backed-securities and the comparable Treasury rate, please see Figure A.4
The amount of the investment in MBS assets and agency securities and the size of this market
explained why FED purchases had a large impact in the MBS rate and agency interest rates, as
opposed of FED’s actions in the treasury debt market, where Fed purchases were
overwhelmed by new issuance. It is important to recall that, at that time, due in part to
Obama’s stimulus economic program the Federal Government had an important deficit (9.8%
in 2009) that was financed with bond issues. The relationship between the total amount of
government debt and the size of the purchases of Treasures made by the Fed can be seen in
Figure A.5. Despite the large deficits the Federal Government was running, the yield curve was
showing the same degree of steepness that had around or just after the end of previous
recessions.
Given the fact that the yields were at levels considerably higher than in the prior meetings, the
staff considered that the FOMC probably wanted to increase the size of the asset purchases
program. In the Memos, the staff pointed out that most of the effect of the asset purchases on
lowering interest rates was when the program was announced, at oppose when the FED
effectively bought the assets. Despite the increase in interest rates, the staff was persuaded
that the Large-Scale asset purchases was effective in lowering the interest rates of the
targeted assets. A possible reason why interest rates rose so much during the period was
because the market participants understood that FED’s strategy in buying assets rather than
having a specific interest rate as a target, it followed a constant volume of purchases over
time.
Up to June 2009, the desk had purchased relatively fixed quantities of the various asset classes
each month, factoring the overall size of the purchase programs relative to the stated time
13. horizons of those programs. Program’s main features until June 12 are summarize in the
following table.
The staff considered that if the FOMC committee decided to increase the size of the program,
this increase had to be necessarily in Treasury debt. The staff was concerned about the fact
that the announced amounts of purchases in agency backed securities and MBS were relatively
important relative to the total market size of these assets, and an increase in the purchases
would create a risk of distorting the well-functioning of these markets.
The main lessons learnt of the LSAP program at that time were:
1) For the most part, market responses on long-term interest rates occurred following
announcements of LSAP programs rather than at the time of execution.
2) Short and medium-term effects could be different because of distortions induced by
uncertainty about the size, path, and effect of LSAPs.
3) The effects of LSAP programs on assets prices came through both changing the stock of the
financial assets that investors hold in their portfolios and the flow of the purchases. For MBS
and Agency backed securities, the effects of changes in stocks and flows were equally
important, while for Treasuries the stock effects were more relevant.
Another important point that I want to mention is that the staff urged the FOMC to consider
the LSAP exit strategy. They warned the committee about the “cliff effects” around program
end dates. That is, the risk of a sharp, volatile adjustment in in rates given an abrupt end of the
LSAP program.
Eventually, the FOMC members decided not to expand the LSAP Program. They also chose not
to reallocate the size of the programs within them, they did not want the FED staff to have the
option to do that or to change the constant pace of the purchases. Finally, the FOMC did not
support the purchase of securitizations of hybrid ARMs recommended by the staff.
14. EXIT STRATEGY: HOW TO UNWIND THE MEASURES THAT THEY
PUT IN PLACE
Prior to the crisis, the FED affected the federal funds rate by changing the supply of bank
reserves. In particular, to raise the funds rate, they used to sell securities. The payments
reduced the bank reserves and left banks with greater need to borrow on the interbank
market. More borrowing by banks in turn pushed up the federal funds rate, the interest rate
on bank loans. However, the purchases made by the LSAP program had flooded the banking
system with reserves, to the point that most banks had little reason to borrow from each
other. With virtually no demand for short-term loans between banks, the funds rate was close
to zero. The FED traditional method to control short-term interest rates was not thought to be
useful anymore.
The FED realized that they needed new methods to raise interest rates at the right time. In the
June meeting, they started talking about how to unwind the measures they had put in place.
They did not mean by this that they were thinking to stop the expansionary monetary policy in
the meeting, but they wanted to be prepared to be able to unwind in the future the measures
created due to the financial crisis.
They talked about several channels that would tighten the monetary policy (that is, to raise the
federal funds rate) in a supply and demand kind of thinking.
In the presentation, the beginning point was the current situation (graph A.10), with the
federal funds rate lower than the IOER (Interest Earned on Excess Reserves). To increase the
federal funds rate they proposed to raise or flatten the demand curve and to reduce the
supply of reserves.
On the demand side, the staff proposed to increase the reserve requirement ratios and
establishing a system of voluntary reserve requirements with a higher interest rate than excess
of reserves. The staff not only proposed to move the demand curve to the right, but also make
it more elastic. To achieve that, the staff proposed the pay of interests on reserves for all
account holders (this proposal basically meant to pay interest also to Freddie Mac, Fannie Mae
and the Federal Home Loan Banks. They also proposed to flatten the demand curve to
establish special accounts that would allow federal funds transactions to be collateralized by
balances held at the Federal Reserve. See graph A.11 for a visual explanation
On the supply side, the staff proposed several measures, like issuance of FED bills, the
development of term deposits, an expanded Supplementary Financing Program, expanded use
of reserve repurchase agreements, or just simply assets sales or scaled back liquidity programs.
Graph A.12 summarize graphically the shift of the supply.
In the meeting, the members of the Committee rejected the option to issue FED bonds
because they believed that it was politically unfeasible. To avoid confusion in the market
between signaling that the FED was able to unwind their policy measures and saying that they
were going to do so in the short-term, they did not mention this issue in the Statement. This
discussion was relatively informal and no votation was made. The members of the FOMC
encouraged Bernanke to mention this issue in his imminent testimony of July to the Congress.
In that Testimony, Bernanke states that to unwind the policies, the FED had several tool, like
reverse repurchase agreements, sales of long-term assets and the most important, the ability
to pay interest on balances held at the Fed by depository institutions.
15. Policy options considered and the final policy outcome
In the context of the financial market developments and macroeconomic conditions discussed
above, the Committee considered three policy alternatives (A, B, C) during the meeting.
In characterizing the information on economic activity, all of the alternatives state that the
indicators of consumer and business sentiment had risen, and note that household spending
has shown further signs of stabilizing but remained constraint by job losses, reduced housing
wealth, and tight credit. Each statement based on each policy also refers to cuts in business
spending and staffing while adding that firms are or appear to be making progress in bringing
inventory stocks into better alignment with sales.
At this time, the Staff basically offered three different types of policies. One that expands the
Long Term Asset purchases, one that basically let things untouched, and the other that
announces that the Long Term Asset Purchases program will taper off gradually by the end of
the year.
The Policy Alternative A increases the amount of purchases in Treasuries ($ 750 billion by the
end of the 2009). It says that “timing, composition and amounts”, of the Long Term Asset
purchases program is subject to exit strategy. It clearly states that the recovery could be
undermined by higher long rates, absent further monetary stimulus. It also let the funds rate
close to zero for an extended period.
The Policy Alternative B introduces no change in the Long Asset Purchase Program, and states
that the federal funds rate will be low for an extended period.
The Policy Alternative C considers that some degree of economic recovery has been achieved
and it starts undoing the stimulus policies. It says that the federal funds rate will remain close
to zero until late this year. It also says that the Long Term Assets Purchases program will taper
off gradually by the end of the year.
For a more detail summary of the policies for comparison purposes, please see Table 3.
In the FOMC meeting, the members of the committee expressed their opinions about what
they thought was the best course of action. President Plosser favored Alternative C, pointing
out that given the favorable economic news and forecasts they had to start preparing for the
end of stimulus policies. Another member of the Committee, Janet Yellen, stated the concern
that markets could anticipate the end of stimulus measures because the FED may be tempted
to withdraw the accommodation policy too soon, aborting the recovery. To back her opinion,
she cited historical evidence (the recession after the Great Depression, caused precisely for the
early withdraw of stimulus policies). She did mention an article published at that time in the
Economist by Christina Romer, one of the best economic historians in the world, about the
topic. The vice-chairman Dudley draw the distinction between stressing how well the FED were
prepared to exit, and actually exiting. He was afraid of confusing people into thinking the FED
was about to exit because they were talking in the statement about their ability to exit.
They finally choose the Alternative B, a wait-and-see policy. The members of the FOMC
pointed out the need to start thinking about how to exit the stimulus program (Large Scale
Asset purchases and the federal funds rate close to zero). But at the same time, most of them
emphasized the idea that it was too early to do anything. President Lockhart was probably the
best in articulating this idea: “I am sympathetic to the view that was expressed by both
16. Presidents Plosser and Lacker that if we see better results, we should consider scaling back the
LSAP programs. At the same time, I think it would be a mistake to react too early and strongly
to the signs of stabilization and better financial market conditions.
We also want to mention that the FOMC not just picked Alternative B. They decided to do
some minor changes in the wording of the Statement in order to lower the enthusiasm about
the improvement of the economy. All the members of the FOMC Committee agreed on voting
the Policy Alternative B.
A comparison of the 24 June Statement with the one of 29 April reveals that the June
Statement emphasized more on the improvement of the economic and financial outlook of the
economy. In addition, the June Statement, although it also pointed out that inflation would be
lower than optimality, the FED expected it to be somehow higher. (For a full statement
comparison, see the end of the Annexure). The 29 June Statement said for the first time that
the FED was ready to make adjustments to its credit and liquidity programs as necessary.
Speeches
Kevin Warsh, Governor
At the Institute of International Bankers Annual Meeting, New York, New York
June 16, 2009
The governor, Kevin Warsh, made a speech titled “Defining Deviancy” at the Institution of
International Bankers Annual Meeting in New York on June 16, 2009. “In a seminal essay
delivered about 16 years ago, Senator Daniel Patrick Moynihan offered a striking view of the
degradation of standards in society.1
He observed that deviancy--measured as increases in
crime, broken homes, and mental illness--reached levels unimagined by earlier generations”
(FOMC governor Kevin Warsh’s speech Defining Deviancy, June 16, 2009). Gradually, this
definition has expanded to describe actions that deviant from acceptable standards. The
financial crisis in 2008 caused countless economic deviances, such as deep contraction in real
money and high level of unemployment, that hard to accept. He enforced it is time to say no to
the stability strategy when we face the deviancy of economy.
Stability is a fine goal, but it is not a final one. Long after panic conditions have ended, stability
threatens to displace economic growth as the primary macroeconomic policy objective. (FOMC
governor Kevin Warsh’s speech Defining Deviancy, June 16, 2009). Only holding the pursuit of
stability may end up making economy less productive and adaptive. The market’s ability of self-
adjusting will be lessened as well.
After experiencing 20 months of the significant deviance, reform efforts are highly needed.
Sorely maintaining stability cannot bring US economy back to the ideal development track. Mr
Warsh presented the conduct of monetary policy, for example, aims to achieve price stability
throughout the economic cycle. But central bankers do so because we believe it is the precursor
to strong and sustainable growth (FOMC governor Kevin Warsh’s speech Defining Deviancy, June
16, 2009). He also argued if the policies for fiscal, regulatory, and trade all treat stability as the
ultimate objective, then we might find ourselves with lower growth and diminished economic
potential.
Mr Warsh employedincipient recovery, medium-term prospects, and long-term prospects in the
speech. For incipient recovery, he pointed though recent extraordinary monetary policy actions
are intended to lower risk-free rates and grow balance sheet capacity to help offset the pullback
17. by private financial intermediaries, financial markets may extract penalty pricing if fiscal
authorities are unable to demonstrate a credible return to sustainable budgets (FOMC governor
Kevin Warsh’s speech Defining Deviancy, June 16, 2009). The Federal Reserve should not--and
will not--compromise another kind of stability--price stability--to help achieve other government
policy objectives.
In medium-term, productivity is still the key of growth. So the policies should encourage capital
accumulation and trade further. Looking ahead, if policy is less encouraging of capital
accumulation, or returns to innovations are constrained by policy, we may find a material
reduction in the growth rate of productivity and living standards. Productivity may also suffer at
the hand of policies that discourage trade. Trade enhances productivity by promoting efficient
specialization, permitting economies of scale, and increasing the potential returns to innovation
(FOMC governor Kevin Warsh’s speech Defining Deviancy, June 16, 2009).
In terms of long-term, we should not lose confidence in the inherent innovation, creativity,
dynamism in the U.S. economy, and the inherent good sense of our citizens. If the stability
experiment fails to deliver on its promise of higher employment and better economic
performance, then policymakers ultimately will change their prescriptions yet again (FOMC
governor Kevin Warsh’s speech Defining Deviancy, June 16, 2009).
Governor Elizabeth A. Duke
At the Women in Housing and Finance Annual Meeting, Washington, D.C.
June 15, 2009
During the speech, Duke looked back on the policies that have been implemented throughout
the financial crisis and consider how well they have worked to lessen the broader impact of
financial market disruptions. He talked the policies implemented by both Federal Reserve and
the government, while we only focus on Federal Reserve part here.
Besides traditional Interest Rate Methods of Monetary Policy, which is aggressively easing short-
term interest rates, the Federal Reserve has been supporting credit markets through an
expansion of the asset side of its balance sheet. This approach--described as credit easing--is
conceptually distinct from quantitative easing, the policy approach used by the Bank of Japan
from 2001 through 2006. Credit easing and quantitative easing both share the feature that they
involve the expansion of the central bank's balance sheet (FOMC governor Elizabeth A. Duke’s
speech Containing the Crisis and Promoting Economic Recovery, June 15, 2009). In terms of
quantitative easing, central bank undertakes more open market operations with the objective
of expanding bank reserve balances. However, credit easing focuses on the mix of loans and
securities that the central bank holds as assets on its balance sheet as a means to reduce credit
spreads and improve the functioning of private credit markets. The ultimate objective is
improvement in the credit conditions faced by households and businesses (FOMC governor
Elizabeth A. Duke’s speech Containing the Crisis and Promoting Economic Recovery, June 15,
2009).
18. As figure 1 shown above, there are four main parts of the balance sheet. First, targeted actions
to prevent the failure or substantial weakening of specific systemically important institutions
include the first Maiden Lane transaction in March 2008, which extended support to facilitate
the merger of Bear Stearns and JPMorgan Chase. It also includes loans and facilities supporting
American International Group (AIG). Second, providing liquidity to sound financial institutions in
an environment in which interbank funding markets and repurchase agreement, or repo,
markets (for securities other than Treasury securities) are severely disrupted. Third, lending to
support key financial markets --specifically, markets for commercial paper, asset-backed
securities (ABS), and commercial mortgage backed securities (CMBS). Fourth, purchasing of
high-quality assets aimed at improving mortgage lending and housing markets as well as overall
conditions in private credit markets (FOMC governor Elizabeth A. Duke’s speech Containing the
Crisis and Promoting Economic Recovery, June 15, 2009)
A Fiscal Policy named Emergency Economic Stabilization Act has also been initiated In October
2008 to provide confidence in the financial system and to strengthen market stability. The
ultimate goal of all these initiatives was to increase the flow of financing to U.S. businesses and
consumers and to support the U.S. economy. Moreover, in February of this year, the Federal
Reserve, as part of the Treasury's Financial Stability Plan, initiated the Supervisory Capital
Assessment Program (SCAP) to evaluate whether large U.S. banking institutions would need to
raise a temporary capital buffer to be able to withstand losses in a more challenging economic
environment than generally anticipated (FOMC governor Elizabeth A. Duke’s speech Containing
the Crisis and Promoting Economic Recovery, June 15, 2009).
19. Contemporary perspectives.
Contemporary reactions to the Supervisory Capital Assessment
Program
As Ben Bernanke recalls in his memories: “In the first months of the new administration
[Obama first mandate], completing the stabilization of the Banking System remained a top
priority. It is important to recall (February-May 2009) that after the cases of Citi and Bank of
America, the market confidence in the banks was very low. The share prices of the largest
banks went down by more than 50% and market participants were somehow wondering what
bank will fall next”
To stabilize the situation, several strategies were proposed. Finally the idea of conducting
stress test won. The downside of conducting the valuation was that during the meantime,
doubts about the banking system persisted. An ongoing question was what to do if the test
revealed a capital hole deeper than could be filled by the remaining TARP funds. For instance
Larry Summers, at the time Director of the National Economic Council, was pessimistic about
the results and presumed that, if the tests were to be credible, they would have to show
catastrophic losses that would overwhelm the TARP. He favored nationalizing some troubled
banks. A week after the Secretary of the Treasury announced the stress test Alan Greenspan,
the former head of the FED, raised the possibility of temporarily nationalizing some banks.
Another prominent commentator, Paul Krugman, agreed that it might be necessary.
Before the tests were completed, the central problems were 1) whether the tests would
increase or decrease confidence in any companies that did badly on their tests and 2) whether
or not the $350 billion in bailout funds that remained could cover the needed funding after the
tests.
The Economist, in the publication of 16 May, reacted positively to the results. They pointed out
that the bank stress test helped a lot to restore some confidence in banking. This rise in the
confidence of the investors was only made possible because the stress test showed a credible
estimate of losses ($600 billion), although for some this estimated losses were somehow
optimistic. Due to the test, “investors can now buy a bank’s share and be confident that its
books are not being cooked flagrantly and that it is not about to be nationalized” in the words
of the people of The Economist. The magazine in the 16 May publication emphasize that even
the situation of the banks improved, the banking sector was not yet at that time able to
borrow money at attractive interest rates. Similar views are found in the 7 May edition of The
Wall Street Journal.
The markets judged the results to be highly credible- in part because the FED reported loss
estimates more severe than those of many outside analysts. For example, the results projected
that in the hypothetical adverse scenario that banks would have suffered loan losses of 9
percent over the next two years, higher than the actual losses in any two-year period since
1920, including the years of the Great Depression. However, an addition important factor the
government capital from the TARP could be used to help any financial organization in real
trouble. The availability of TARP funds made the results credible, there were no reason to lie
on them.
20. To conclude this section, one of the leading companies in economic analysis that forecasted
very big losses for the banks, Bridgewater, published in their Daily Observations in the 7 May
that the reported estimated losses were really close to their own estimations.
Contemporary reaction to the release of the statement
The 24 June FOMC statement was well-regarded by the economic press and the markets. The
economic press stressed the complex situation in which the economy was. Probably this
continuation policy, although it was well-received, disappointed some people that would like
to have seen a further stimulus in the economy. Both The Economist and the WSJ pointed that
the FED did not mention this time a concern about the possibility of deflation. As it was
pointed out by Brian Mandigan in the meeting, markets agents were expected that the FED did
not change any substantial part of their core policy measures. He also pointed out that
markets expected the FED to point the better outlook of the economy.
Other contemporary issues
During our time period, the economic press continuously reported worries about massive
government deficits. To monetary policy, the economic press was worried that eventually the
massive government debt issue combined with FED’s strategy to buy government debt would
lead to high inflation rates.
The Economist reported that the FED was planning its way out, planning the exit strategy to
their stimulus program in order to reduce inflation fears. The FED mentioned how the recent
rise in yields on Treasury bonds were caused by this reason. The Economist mentioned that
there were worries about the FED being able to unwind the policies with such a big Balance
Sheet, and mentioned that reverse-repurchase agreements as the conventional tool that FED
could employ. They also mentioned FED bills as a better alternative, but noted that this
measure was politically difficult to implement.
Retrospective information
In hindsight, the decision to do the Stress Tests revealed to be one of the best policy
decisions made during the economic crisis. Both Geithner and Bernanke pointed out in
their memories the release of the results of the Supervisory Capital Assessment
Program as the turning point in the financial crisis. The stress test made possible the
reactivation of the interbank lending and the restoration of stability and reliability of
the American financial system.
Finally the forecasts were right and we observed how the summer of 2009 was the
turning point of the economic crisis. The American economy started growing again,
although at a small pace. It is important to know that the FED expected the economic
crisis to be over in October 2007, and again in the summer of 2008, so this time they
were right. The National Bureau of Economic research stated that the end of the crisis
was in June 2009.
21. The reform of the American Financial system finally was not a great change in the
regulation of financial firms. The final act was passed after several bills were
introduced, and this new legislation probably did not solve the problem of the financial
system. Instead of creating a clear system with few rules, the final outcome of this trial
of reform was to create a much larger and complex regulation and several regulatory
Agencies to avoid future crisis. The new regulation did not tackle in the issue of forcing
the banks to have large capital requirements. According to Anat Admati and Martin
Hellwig, banks should have around 20 to 25 percent of their assets backed by equity if
we want to make sure we avoid the risk of bankruptcy. The example here is Canada.
Canada has large capital requirements and does not have a bankruptcy in more than a
century.
Forecast and actual events
In this section, I am going to compare the forecast about economic growth and inflation with
the actual numbers. I concentrate in inflation and economic growth because both indicators
are the sole mandate of the Federal Reserve. I think this exercise is particularly relevant given
the fact that June was the period in which the economy went out of the recession. The figure
below compares these growth forecasts with retrospect information. The Real GDP growth
was lower than expected for 2009 (-2.8 instead of -1.1 forecasted) especially because although
in the second half of the year growth was positive, it was smaller than expected. Only the
worst case scenario (green line) was closed to the actual number.
22. Similarly, the Figure below compares the Federal Reserve inflation forecasts with retrospective
information for PCE expenditure (excluding food and energy). Here we can see that the Fed
was clearly wrong in its predictions. The deflation scenario is not even close to the -1.52 final
number.
23. References
Bernanke, Ben S.: The Supervisory Capital Assessment Program-one year later. (6 May,2010)
http://www.bis.org/review/r100507a.pdf
Bernanke, Ben S.: The Courage to Act. A memoir of a crisis and its aftermath, Norton, New
York, 2015
Bernanke, Ben S.: Semiannually Monetary Policy Report to the Congress, (21 July 2009)
https://www.federalreserve.gov/newsevents/testimony/bernanke20090721a.htm
Blinder, Alan S.: After the Music Stopped, The Penguin Press, New York, 2013
Board of Governors of the Federal Reserve System, The Supervisory Capital Assessment
Program: Design and Implementation, (April 24, 2009)
http://www.federalreserve.gov/bankinforeg/bcreg20090424a1.pdf
Board of Governors of the Federal Reserve System, The Supervisory Capital Assessment
Program: Overview of Results, (May 9, 2009)
http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090507a1.pdf
Cuñat, Vicente; “El Nuevo traje del banquero” Nada es Gratis, 20 May 2013
http://nadaesgratis.es/cunat/el-nuevo-traje-del-banquero
Federal Reserve Board, Transcript of the Federal Open Market Committee Meeting on June 23-
24, 2009
http://www.federalreserve.gov/monetarypolicy/files/FOMC20090624meeting.pdf
Federal Reserve Board, Federal Open Market Committee Meeting on June 23-24, 2009 :
Presentation materials.
http://www.federalreserve.gov/monetarypolicy/files/FOMC20090624material.pdf
Federal Reserve Board, Federal Open Market Committee Meeting on June 23-24, 2009 SEP :
Individual Proyections.
http://www.federalreserve.gov/monetarypolicy/files/FOMC20090624SEPcompilation.pdf
Federal Reserve Board, Statement of the Federal Open Market Committee Meeting on June 23-
24 (24 June 2009)
http://www.federalreserve.gov/newsevents/press/monetary/20090624a.htm
Federal Reserve Board, Statement of the Federal Open Market Committee Meeting on April 28-
29, 2009 (29 April 2009)
http://www.federalreserve.gov/newsevents/press/monetary/20090429a.htm
Federal Reserve Board, Transcript of the Federal Open Market Commmittee Conference Call on
June 3
http://www.federalreserve.gov/monetarypolicy/files/FOMC20090603confcall.pdf
Federal Reserve Board, Bluebook : Monetary Policy Alternatives (June 18, 2009).
http://www.federalreserve.gov/monetarypolicy/files/FOMC20090429bluebook20090423.pdf
Federal Reserve Board, Beige book : Current Economic Conditions (June 10, 2009)
http://www.federalreserve.gov/fomc/beigebook/2009/20090610/fullreport20090610.pdf
24. Federal Reserve Board, Current Economic and Financial Conditions : Summary and Outlook
(Greenbook- Part I) (June 17, 2009)
http://www.federalreserve.gov/monetarypolicy/files/FOMC20090624gbpt120090617.pdf
Federal Reserve Board, Current Economic and Financial Conditions : Recent Developments
(Greenbook- Part II) (June 17, 2009)
http://www.federalreserve.gov/monetarypolicy/files/FOMC20090624gbpt220090617.pdf
Geithner, Timothy F.: Stress Test, Crown Publishers, New York, 2014.
Staff of the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of
New York, Large-Scale Asset Purchases: Recent Experience and Some Policy Considerations on
June 16, 2009
http://www.federalreserve.gov/monetarypolicy/files/FOMC20090616memo02.pdf
Speeches of Federal Reserve Officials, Defining Deviancy on June 16, 2009
https://www.federalreserve.gov/newsevents/speech/warsh20090616a.htm
Speeches of Federal Reserve Officials, Containing the Crisis and Promoting Economic Recovery
on June 15, 2009
https://www.federalreserve.gov/newsevents/speech/duke20090616a.htm
The Economist, “Finance And Economics: New foundation, walls intact; Financial reform in
America” (20 June 2009)
http://search.proquest.com.ezproxy.bu.edu/docview/223988013/69ECE109753346F3PQ/3?ac
countid=9676
The Economist, Finance And Economics: “This way out; Central banks' exit strategies” ( 6 June
2009)
http://search.proquest.com.ezproxy.bu.edu/docview/223988839/B8B5A70342B14AF2PQ/5?a
ccountid=9676
The Economist, Finance and Economics: “Hospital pass; Stress tests” (16 May 2009)
http://search.proquest.com.ezproxy.bu.edu/docview/223990728/C8C4B8A392F041AFPQ/3?a
ccountid=9676
The Economist, “Too big to swallow” (16 May 2009)
http://search.proquest.com.ezproxy.bu.edu/docview/223983892/C8C4B8A392F041AFPQ/4?a
ccountid=9676
The Wall Street Journal, “Fed Reserved as Slump Eases --- Lack of New Action Disappoints
Investors; Europe Injects $622 Billion Into Banks” (25 June 2009)
http://search.proquest.com.ezproxy.bu.edu/docview/399134583/5DBA3808C2394350PQ/3?a
ccountid=9676
The Wall Street Journal, “Fed Sees Up to $599 Billion in Bank Losses --- Worst-Case Capital
Shortfall of $75 Billion at 10 Banks Is Less Than Many Feared; Some Shares Rise on Hopes Crisis
Is Easing” (8 May 2009)
http://search.proquest.com.ezproxy.bu.edu/docview/399136659/71A4C469BB945B2PQ/2?ac
countid=9676
31. TABLE 3: OVERVIEW OF ALTERNATIVE LANGUAGE FOR THE JUNE 23-24, 2009 FOMC
ANNOUNCEMENT
32. TABLE 4: FINANCIAL ORGANIZATIONS AND RESULTS IN THE SUPERVISORY CAPITAL ASSESMENT
PROGRAM
Asset
ranking
Bank
Result: additional capital needed, or
adequate
1 Bank of America $33.9 billion
2 JPMorgan Chase adequate
3 Citigroup $5.5 billion
4 Wells Fargo $13.7 billion
5 Goldman Sachs adequate
6 Morgan Stanley $1.8 billion
7
Metropolitan Life Insurance
Company
adequate
8 PNC Financial Services $0.6 billion
9 U.S. Bancorp adequate
10 The Bank of New York Mellon adequate
11 GMAC $11.5 billion
12 SunTrust Banks $2.2 billion
13 Capital One adequate
14 BB&T adequate
15 Regions Financial Corporation $2.5 billion
16 State Street Corporation adequate
17 American Express adequate
18 Fifth Third Bank $1.1 billion
19 KeyCorp $1.8 billion
Source : Board of Governors of the Federal Reserve System, The Supervisory Capital
Assessment Program: Overview of Results, (May 9, 2009)
33. STATEMENT OF THE 23-24 JUNE FOMC MEETING
Press Release
Release Date: June 24, 2009
For immediate release
Information received since the Federal Open Market Committee met in April suggests that the
pace of economic contraction is slowing. Conditions in financial markets have generally
improved in recent months. Household spending has shown further signs of stabilizing but
remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses
are cutting back on fixed investment and staffing but appear to be making progress in bringing
inventory stocks into better alignment with sales. Although economic activity is likely to
remain weak for a time, the Committee continues to anticipate that policy actions to stabilize
financial markets and institutions, fiscal and monetary stimulus, and market forces will
contribute to a gradual resumption of sustainable economic growth in a context of price
stability.
The prices of energy and other commodities have risen of late. However, substantial resource
slack is likely to dampen cost pressures, and the Committee expects that inflation will remain
subdued for some time.
In these circumstances, the Federal Reserve will employ all available tools to promote
economic recovery and to preserve price stability. The Committee will maintain the target
range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic
conditions are likely to warrant exceptionally low levels of the federal funds rate for an
extended period. As previously announced, to provide support to mortgage lending and
housing markets and to improve overall conditions in private credit markets, the Federal
Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and
up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will
buy up to $300 billion of Treasury securities by autumn. The Committee will continue to
evaluate the timing and overall amounts of its purchases of securities in light of the evolving
economic outlook and conditions in financial markets. The Federal Reserve is monitoring the
size and composition of its balance sheet and will make adjustments to its credit and liquidity
programs as warranted.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C.
Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker;
Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.
34. STATEMENT COMPARISON : APRIL-JUNE 2009
Information received since the Federal Open Market Committee met in March
indicates that the economy has continued to contract, though the pace of contraction
appears to be somewhat slowerApril suggests that the pace of economic contraction is
slowing. Conditions in financial markets have generally improved in recent months.
Household spending has shown further signs of stabilizing but remains constrained by
ongoing job losses, lower housing wealth, and tight credit., Weak sales prospects and
difficulties in obtaining credit have led businesses to cut back on
inventories,Businesses are cutting back on fixed investment, and staffing.,. Although
the economic outlook has improved modestly since the March meeting, partly
reflecting some easing of financial market conditions, but appear to be making
progress in bringing inventory stocks into better alignment with sales.
Althougheconomic activity is likely to remain weak for a time. Nonetheless.
Nonetheless, the Committee continues to anticipate that policy actions to stabilize
financial markets and institutions, fiscal and monetary stimulus, and market forces will
contribute to a gradual resumption of sustainable economic growth in a context of
price stability.
In light of increasing economic slack here and abroad, the Committee expectThe
prices of energy and other commodities t inflation will remain subdued. Moreover,ve
risen of late. However, substantial resource slack is likely to dampen cost pressures,
and the Committee sees some riskexpects that inflation could persist for a time below
rates that best foster economic growth and price stability in the longer termwill remain
subdued for some time.
In these circumstances, the Federal Reserve will employ all available tools to promote
economic recovery and to preserve price stability. The Committee will maintain the
target range for the federal funds rate at 0 to 1/4 percent and continues
to anticipates that economic conditions are likely to warrant exceptionally low levels
of the federal funds rate for an extended period. As previously announced, to provide
support to mortgage lending and housing markets and to improve overall conditions in
private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion
of agency mortgage-backed securities and up to $200 billion of agency debt by the end
of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury
securities by autumn. The Committee will continue to evaluate the timing and overall
amounts of its purchases of securities in light of the evolving economic outlook and
conditions in financial markets. The Federal Reserve facilitating the extension of credit
to households and businesses and supporting the functioning of financial markets
through a range of liquidity programs. The Committee will continue to carefully
monitor the size and composition of the Federal Reserve's balance sheet in light of
financial and economic developmentsmonitoring the size and composition of its
balance sheet and will make adjustments to its credit and liquidity programs as
warranted.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman;
William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L.
Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh;
and Janet L. Yellen.
