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Confira a ata do Fomc na íntegra (em inglês)


São Paulo, 23/11 (Enfoque) –

A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, November 1, 2016, at 10:00 a.m. and continued on Wednesday, November 2, 2016, at 9:00 a.m.1

PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
James Bullard
Stanley Fischer
Esther L. George
Loretta J. Mester
Jerome H. Powell
Eric Rosengren
Daniel K. Tarullo

Charles L. Evans, Patrick Harker, Robert S. Kaplan, Neel Kashkari, and Michael Strine, Alternate Members of the Federal Open Market Committee

Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively

Brian F. Madigan, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Michael Held, Deputy General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist

Thomas A. Connors, Troy Davig, Michael P. Leahy, Stephen A. Meyer, Ellis W. Tallman, Christopher J. Waller, and William Wascher, Associate Economists

Simon Potter, Manager, System Open Market Account

Lorie K. Logan, Deputy Manager, System Open Market Account

Matthew J. Eichner,2 Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors; Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors; Nellie Liang, Director, Division of Financial Stability, Board of Governors

Margie Shanks, Deputy Secretary, Office of the Secretary, Board of Governors

James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors

Trevor A. Reeve, Senior Special Adviser to the Chair, Office of Board Members, Board of Governors

Andrew Figura, Joseph W. Gruber, and Ann McKeehan, Special Advisers to the Board, Office of Board Members, Board of Governors

Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors

Eric M. Engen and Michael G. Palumbo, Senior Associate Directors, Division of Research and Statistics, Board of Governors; Gretchen C. Weinbach,3 Senior Associate Director, Division of Monetary Affairs, Board of Governors; Beth Anne Wilson, Senior Associate Director, Division of International Finance, Board of Governors

Antulio N. Bomfim, Ellen E. Meade, Robert J. Tetlow, and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors; Brian M. Doyle, Senior Adviser, Division of International Finance, Board of Governors; Jeremy B. Rudd, Senior Adviser, Division of Research and Statistics, Board of Governors

Jane E. Ihrig3 and David López-Salido,3 Associate Directors, Division of Monetary Affairs, Board of Governors; John J. Stevens, Associate Director, Division of Research and Statistics, Board of Governors

Min Wei, Deputy Associate Director, Division of Monetary Affairs, Board of Governors

Stephanie R. Aaronson and Glenn Follette, Assistant Directors, Division of Research and Statistics, Board of Governors; Elizabeth Klee, Assistant Director, Division of Monetary Affairs, Board of Governors

Eric C. Engstrom, Adviser, Division of Monetary Affairs, and Adviser, Division of Research and Statistics, Board of Governors

Penelope A. Beattie,4 Assistant to the Secretary, Office of the Secretary, Board of Governors

Dana L. Burnett, Section Chief, Division of Monetary Affairs, Board of Governors

David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors

Kurt F. Lewis,3 Principal Economist, Division of Monetary Affairs, Board of Governors

James M. Lyon, First Vice President, Federal Reserve Bank of Minneapolis

David Altig, Ron Feldman,3 Jeff Fuhrer, Beverly Hirtle, Glenn D. Rudebusch, and Daniel G. Sullivan, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Minneapolis, Boston, New York, San Francisco, and Chicago, respectively

Michael Dotsey, Antoine Martin,3 Susan McLaughlin,3 and Julie Ann Remache,3 Senior Vice Presidents, Federal Reserve Banks of Philadelphia, New York, New York, and New York, respectively

Deborah L. Leonard,3 Ed Nosal,3 and Anna Paulson,3 Vice Presidents, Federal Reserve Banks of New York, Chicago, and Chicago, respectively

Patrick Dwyer,3 Assistant Vice President, Federal Reserve Bank of New York

Andreas L. Hornstein, Senior Advisor, Federal Reserve Bank of Richmond

Anthony Murphy, Economic Policy Advisor, Federal Reserve Bank of Dallas

Jonathan Heathcote, Monetary Advisor, Federal Reserve Bank of Minneapolis

Long-Run Monetary Policy Implementation Framework
Committee participants continued their discussion of potential long-run frameworks for monetary policy implementation, a topic last discussed at the July 2016 FOMC meeting. The staff provided briefings that summarized considerations regarding potential choices of policy rates, operating regimes, and balance sheet policies and highlighted tradeoffs associated with these choices.

The staff noted that if the long-run implementation framework was such that the supply of reserve balances was quite abundant, then operational tools that help establish a floor under short-term interest rates, such as the payment of interest on reserves and the overnight reverse repurchase agreement (ON RRP) facility, would remain important elements of the operating regime. Reserve requirements would probably not be necessary in this case, and the Federal Reserve could likely maintain control of short-term interest rates without needing to conduct frequent open market operations to adjust the supply of reserves. Such an approach could also be effective with an appreciably smaller balance sheet and supply of reserves than at present. In contrast, if in the long run the supply of reserves was quite small, such as was the situation before the financial crisis, either reserve requirements or voluntary reserve targets would probably be needed to help stabilize the demand for reserves and increase its predictability. The Federal Reserve would likely need to conduct frequent open market operations in this case to maintain adequate control of short-term interest rates, and banks would probably trade actively in the federal funds market. Some short-term interest rates could display greater volatility under this approach than one in which the level of reserve balances was relatively high, and operational tools to limit both downward and upward pressure on such rates would probably be needed. Regardless of the level of reserves, the policy rate in either of these cases could be an unsecured overnight market rate or an interest rate administered by the Federal Reserve. The FOMC might instead target an overnight Treasury repurchase agreement rate and use standing facilities to keep repurchase agreement rates close to the target level.

The staff noted the importance of having effective arrangements to provide liquidity in times of stress. Stigma associated with borrowing from the discount window has likely prevented it from effectively enhancing control of short-term interest rates and improving liquidity conditions in various situations. Possible options to provide appropriate liquidity when necessary while mitigating such stigma were mentioned.

The staff discussed the possibility that changes in the size and composition of the Federal Reserve’s balance sheet, including the duration of its securities holdings, could be used to help achieve policymakers’ macroeconomic goals when short-term interest rates had declined to their effective lower bound–and conceivably when short-term interest rates were above that bound. The staff also described the possibility of using balance sheet policies to promote financial stability.

In the discussion that followed the staff presentations, policymakers agreed that decisions regarding the long-run implementation framework were not necessary at this time. They indicated that the current framework was working well and that, with the supply of reserve balances expected to remain large for a while, the present approach to policy implementation would likely remain appropriate for some time. Moreover, policymakers expected to benefit from accruing additional information before making judgments about a future implementation framework. For example, they acknowledged that recent changes in financial regulations were likely to continue to be an important factor in the ongoing evolution of financial markets. Policymakers also underscored the importance of taking account of the possibility that neutral short-term interest rates could remain quite low. For these reasons, policymakers emphasized that their current views regarding the long-run policy implementation framework were preliminary and they expected that further deliberations would be appropriate before decisions were made.

Meeting participants commented on the advantages of using an approach to policy implementation in which active management of the supply of reserves would not be required. Such an approach could be compatible with a balance sheet that was much smaller than at present, though likely at least somewhat larger than in the years before the financial crisis, reflecting trend growth of balance sheet items such as currency as well as a larger supply of reserves. In addition, such an approach was seen as likely to be relatively simple and efficient to administer, relatively straightforward to communicate, and effective in enabling interest rate control across a wide range of circumstances. A number of policymakers stated that they continued to view expansion of the balance sheet through large-scale asset purchases as an important tool to provide macroeconomic stimulus in situations in which short-term interest rates were at their effective lower bound. Most participants did not indicate support for using the balance sheet as an active tool in other situations or for other purposes, although a few expressed support for undertaking further study of this possibility. Policymakers noted the merits of relying on a policy rate that would be robust to shifts in financial market structure, practices, and regulations as well as to changes in premiums for credit risk. Other important considerations for the choice of policy rate included the volatility of the rate, the breadth of the set of Federal Reserve counterparties that would be required to ensure adequate control of short-term interest rates, and the role of the policy rate in FOMC communications.

At the end of the discussion, the Chair reiterated that additional experience with the Federal Reserve’s current monetary policy implementation framework would help inform policymakers’ future deliberation of issues related to a long-run framework and that decisions regarding these issues would not be required for some time. The Chair also noted that the Federal Reserve would proceed cautiously and would communicate any intended changes to its approach to implementing monetary policy well in advance of making the changes.

Developments in Financial Markets and Open Market Operations
The manager of the System Open Market Account (SOMA) reported on developments in financial markets during the period since the Committee met on September 20-21, 2016, including changes in market expectations for U.S. monetary policy, adjustments to foreign central bank monetary policies, and the evolution of investors’ views about risk factors in global financial markets. The deputy manager followed with a briefing on open market operations and developments in money markets. The implementation on October 14 of reforms to the money market fund (MMF) industry generally proceeded smoothly, although the shift in investments from prime to government-only money funds had been substantial and left an imprint on levels of some money market interest rates. Largely reflecting this shift, usage of the System’s ON RRP facility rose somewhat further in the most recent intermeeting period. Federal funds generally continued to trade close to the middle of the FOMC’s target range of 1/4 to 1/2 percent. The deputy manager also updated the Committee on implementation of the new framework for investment of foreign currency reserves and on a proposal to publish data series on interest rates in the market for general collateral repurchase agreements.

By unanimous vote, the Committee ratified the Desk’s domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System’s account during the intermeeting period.

Staff Review of the Economic Situation
The information reviewed for the November 1-2 meeting indicated that real gross domestic product (GDP) expanded at a faster pace in the third quarter than in the first half of the year and that labor market conditions continued to strengthen in recent months. Consumer price inflation increased further above its pace early in the year but was still running below the Committee’s longer-run objective of 2 percent, restrained in part by earlier decreases in energy prices and in prices of non-energy imports. Most survey-based measures of longer-run inflation expectations were little changed, on balance, while market-based measures of inflation compensation moved up but remained low.

Total nonfarm payroll employment expanded at a solid pace in September, and the unemployment rate was little changed at 5.0 percent. The labor force participation rate and the employment-to-population ratio both edged up in September. The share of workers employed part time for economic reasons was still slightly elevated relative to its level before the recession. The rate of private-sector job openings edged down in August, and the rates of hiring and of quits were unchanged. The four-week moving average of initial claims for unemployment insurance benefits remained low. Measures of labor compensation continued to rise at a moderate pace. The employment cost index for private industry workers increased 2-1/4 percent over the 12 months ending in September, and average hourly earnings for all employees increased 2-1/2 percent over the same 12-month period.

The unemployment rates for African Americans and for Hispanics remained above the rate for whites but were close to the levels seen just prior to the most recent recession. The labor force participation rate for white individuals aged 25 to 54 continued to be higher than for African Americans and for Hispanics, but the rates for all three groups appeared to have either moved sideways or edged up recently.

Total industrial production increased slightly in September after little change, on net, in July and August. Mining output continued to rise, on balance, in recent months, but manufacturing production was little changed. Over the previous two years, manufacturing output was relatively flat, reflecting the effects of weak export demand, spillovers from the earlier declines in crude oil and natural gas drilling, and slow domestic capital investment more generally. Automakers’ assembly schedules suggested that motor vehicle production would be about unchanged in the near term, and broader indicators of manufacturing production, such as the new orders indexes from national and regional manufacturing surveys, pointed toward only tepid gains, at best, in factory output in the coming months.

Real personal consumption expenditures (PCE) increased at a moderate pace in the third quarter, supported by continued gains in employment, real disposable personal income, and households’ net worth. Consumer spending increased in September, partly because of an increase in outlays for motor vehicles. Indeed, unit sales of light motor vehicles rose sharply in September and moved higher in October, supported in part by sizable sales incentives. In addition, consumer sentiment as measured by the University of Michigan Surveys of Consumers remained relatively upbeat in October.

Housing market activity was weak in the third quarter. Real residential investment spending decreased, partly reflecting a decline in total housing starts. The most recent construction data were mixed, with starts for new single-family homes increasing in September and starts for multifamily units declining sharply. Building permit issuance for new single-family homes–which tends to be a good indicator of the underlying trend in construction–was little changed, on balance, in recent months and had remained essentially flat since late last year. Sales of new homes decreased, on net, in August and September, but sales of existing homes increased modestly.

Real private expenditures for business equipment and intellectual property were about flat in the third quarter. New orders for nondefense capital goods excluding aircraft were little changed over August and September, but orders were somewhat above the level of shipments, suggesting a modest pickup in business spending for equipment in the near term. Real business expenditures for nonresidential structures increased in the third quarter, and the number of oil and gas rigs in operation, an indicator of spending for structures in the drilling and mining sector, continued to edge up in October. Real inventory investment was positive in the third quarter after subtracting substantially from real GDP growth in the second quarter. Except in the energy sector, inventories generally seemed well aligned with the pace of sales.

Real federal purchases increased in the third quarter, as defense expenditures turned up and nondefense spending continued to rise. Real state and local government purchases decreased, reflecting a decline in real construction spending by these governments that more than offset a net expansion in state and local government payrolls during the third quarter.

Net exports contributed positively to real GDP growth in the third quarter, largely because of the strength of soybean exports. The nominal U.S. international trade deficit widened in August relative to July, as imports rose more than exports. Import growth was driven by higher imports of capital goods and services, while export growth was led in part by higher exports of industrial supplies and automotive products. The Census Bureau’s advance trade estimates for September suggested a narrowing of the trade deficit, with further growth in exports and a decline in imports relative to August.

Total U.S. consumer prices, as measured by the PCE price index, increased about 1-1/4 percent over the 12 months ending in September, partly restrained by recent decreases in consumer food prices and earlier declines in consumer energy prices. Core PCE price inflation, which excludes changes in food and energy prices, was about 1-3/4 percent over those same 12 months, held down in part by decreases in the prices of non-energy imports over part of this period and by the pass-through of earlier declines in energy prices into the prices of other goods and services. Over the 12 months ending in September, total consumer prices as measured by the consumer price index (CPI) rose 1-1/2 percent, while core CPI inflation was around 2-1/4 percent. The Michigan survey measure of median longer-run inflation expectations moved down in October to a new historical low, and the longer-run measure from the Blue Chip Economic Indicators also declined slightly. Measures of longer-run inflation expectations from the Desk’s Survey of Primary Dealers and Survey of Market Participants were unchanged in October.

Foreign real GDP growth appeared to pick up significantly in the third quarter following weak growth in the second quarter that primarily reflected contractions in Canada and Mexico. The recovery of oil production in Canada boosted economic activity there, and a pickup in U.S. economic activity and strong household spending in Mexico supported a sharp rebound in Mexican GDP growth. The improvements in these economies more than offset some moderation of growth in China. In the euro area and Japan, economic growth continued at a modest pace. Inflation generally remained subdued in both the emerging market economies and the advanced foreign economies (AFEs). A notable exception was the United Kingdom, where inflationary pressures increased, partly as a result of a substantial depreciation of the pound in recent months.

Staff Review of the Financial Situation
Domestic financial markets were relatively calm over the period since the September FOMC meeting. Asset prices were little changed, and volatility was mostly low. Market expectations for an increase in the target range for the federal funds rate before the end of the year rose modestly. Nominal Treasury yields edged up on net. No significant market disruptions were observed around the October 14 compliance deadline for MMF reform. Financing conditions for nonfinancial firms and households remained accommodative, on balance, and the credit quality of nonfinancial corporations continued to show signs of stabilization after having deteriorated in earlier quarters.

Federal Reserve communications immediately following the September meeting, notably the Summary of Economic Projections, were interpreted by market participants as slightly more accommodative than expected. Subsequent Federal Reserve communications and U.S. economic data releases over the intermeeting period were generally interpreted as in line with market expectations. The expected path for the federal funds rate implied by quotes on overnight index swap rates steepened slightly, on net, over the intermeeting period. Market-based estimates of the probability of a rate increase before the end of the year rose modestly to about 65 percent. Consistent with market-based estimates, respondents to the Desk’s November surveys of primary dealers and market participants on average assigned a probability of about 60 percent to a rate increase by the end of this year. Based on the median responses, the most likely path of the target federal funds rate in 2017 and 2018 was little changed from that reported in the September surveys.

Nominal Treasury yields edged up, on net, since the September FOMC meeting. Yields declined early in the period following the September FOMC communications and amid concerns about developments potentially affecting profitability in the European banking sector, but they subsequently rose. Although those market concerns ebbed somewhat, they remained significant. Nominal yields were pushed up by an increase in inflation compensation, which appeared attributable to a combination of factors, including the recent rise in oil prices and a decline in investors’ concerns about the risk of very low inflation outcomes, as implied by quotes on inflation caps and floors.

Broad stock price indexes were little changed, on net, since the September FOMC meeting. Realized and implied volatility in equity markets remained relatively low. Spreads of yields on nonfinancial investment-grade and speculative-grade corporate bonds over those of comparable-maturity Treasury securities declined a bit, with both spreads finishing the period at levels close to their medians during the economic expansions of the past two decades. Based on available reports and analysts’ estimates, aggregate corporate earnings per share appeared to continue to rebound in the third quarter, reflecting improvements across a wide range of industries, including the energy sector.

Foreign equity indexes broadly increased over the intermeeting period. Nonetheless, foreign financial markets were sensitive to news about upcoming negotiations between the United Kingdom and the European Union (EU) over the U.K. exit from the EU as well as to ongoing developments in the European banking sector. Over the period, the dollar appreciated against most AFE currencies; the appreciation against the pound was particularly pronounced, reflecting increased concerns that negotiations between U.K. and European officials would result in an outcome featuring less economic integration than anticipated earlier. Concerns about U.K.-EU negotiations and higher U.K. inflation compensation also drove up 10-year gilt yields. In contrast, the dollar depreciated against the currencies of most commodity-exporting countries, including the Mexican peso and Russian ruble, consistent with the increase in oil prices.

Money market reform continued to affect several short-term funding markets in the weeks leading up to the October 14, 2016, compliance deadline, as investors continued to shift from prime funds to government funds. However, these flows slowed significantly in the days just before October 14 and remained subdued afterward. Measures of the liquidity of institutional prime funds, which had increased substantially ahead of the compliance deadline, subsequently declined. The rise in total assets of government funds over the intermeeting period appeared to contribute to moderately elevated take-up at the System’s ON RRP facility. Overnight Eurodollar deposit volumes fell substantially in the weeks preceding the MMF reform compliance deadline and remained low as prime funds pulled back from lending in this market. Despite these volume changes, there was little effect on overnight money market rates, although the spread between the three-month London interbank offered rate and the overnight index swap rate remained elevated.

Financing conditions for nonfinancial firms remained generally accommodative. Gross issuance of corporate bonds was robust in September amid strong global demand for bonds and low yields. Growth of commercial and industrial (C&I) loans slowed overall in the third quarter but picked up in September. Demand and lending standards for C&I loans remained unchanged, on net, in the third quarter, according to the October Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS).

The credit quality of nonfinancial corporations, which had deteriorated somewhat over the past few quarters, continued to show signs of stabilization. The volume of bond downgrades only slightly outpaced that of upgrades in September. Default rates and expected year-ahead default rates for nonfinancial firms both edged down, although they remained elevated compared with their ranges in recent years.

Financing conditions for commercial real estate (CRE) also remained largely accommodative but showed some signs of tightening. Growth of CRE loans on banks’ books continued to be strong in the third quarter, even though a significant number of banks reported in the October SLOOS that they had tightened lending standards on CRE loans. Issuance of commercial mortgage-backed securities (CMBS) picked up in the third quarter relative to its pace in the first half of the year. Spreads on CMBS were little changed over the intermeeting period.

In the municipal bond market, gross issuance of bonds was brisk and yields on general obligation bonds, on balance, edged up. The credit quality of state and local governments was generally stable.

Financing conditions in the residential mortgage market were little changed since the September FOMC meeting, and credit remained readily available for most borrowers. Interest rates on 30-year fixed-rate mortgages edged up but stayed at a low level. In the October SLOOS, several large banks noted a continued easing of standards for home-purchase loans eligible for purchase by the government-sponsored enterprises. Indicators suggested that refinancing activity continued to increase and reached its highest level since 2013 in response to the low level of mortgage rates.

Conditions in consumer credit markets were little changed, on balance, against a backdrop of largely stable credit quality. Growth in both revolving and nonrevolving loans remained robust. While auto credit standards were broadly unchanged, respondents to the October SLOOS indicated that they had tightened credit card standards for subprime customers. Yield spreads for securities backed by credit card and auto loans over Treasury securities of comparable maturities were little changed on balance. Issuance of consumer asset-backed securities picked up somewhat in the third quarter from the levels seen earlier this year.

In its latest report on potential risks to the stability of the U.S. financial system, the staff continued to judge that overall vulnerabilities remained moderate. Vulnerabilities associated with maturity and liquidity transformation appeared to have been reduced, reflecting the effects of newly implemented rules for prime MMFs. Vulnerabilities emanating from leverage in the financial sector remained low, as the largest U.S. banks had strong regulatory capital and liquidity positions. Valuation pressures across major asset categories remained at a moderate level: Although some metrics for CRE transactions indicated notable valuation pressures, CRE lending standards had tightened somewhat over the previous year, and valuations for domestic corporate equity and bonds were, on balance, in the middle of their historical ranges in relation to still-low Treasury yields. Vulnerabilities from leverage in the private nonfinancial sector were seen as moderate overall, reflecting the combination of relatively high aggregate leverage in the corporate sector, a sharp slowdown in the expansion of the riskiest forms of corporate debt, and a continued modest rise in aggregate household debt that accrued almost exclusively to borrowers with very high credit scores.

Monetary policy announcements by foreign central banks had limited effects on asset prices. At its September monetary policy meeting, the Bank of Japan (BOJ) announced that it will purchase Japanese government bonds (JGBs) to keep the yield on 10-year JGBs around zero; the BOJ also announced that it will continue to expand the monetary base until consumer price inflation exceeds the 2 percent target and stays above the target in a stable manner. No further changes were announced following the BOJ’s October meeting. The European Central Bank kept its policy stance unchanged at its October meeting while signaling that further changes to its asset purchase program could be announced at its next meeting.

Staff Economic Outlook
In the U.S. economic projection prepared by the staff for the November FOMC meeting, the pace of real GDP growth was forecast to be faster over the second half of this year than in the first half, as business investment was anticipated to turn up and the drag from inventory investment was expected to end. However, the forecast for the second half was lower than in the September projection, primarily reflecting softer-than-expected data on consumer spending. The staff’s forecast for real GDP growth over the next couple of years was also slightly lower than in the previous projection, primarily reflecting the effects of higher assumed paths for the dollar and for crude oil prices. Nonetheless, the staff projected that real GDP would expand at a modestly faster pace than potential output in 2017 and 2018, supported by solid gains in consumer spending and, to a lesser degree, by pickups in both residential and business investment; in 2019, GDP was projected to expand at the same rate as its potential. The unemployment rate was forecast to edge down gradually through the end of 2018 and then flatten out in 2019; the path for the unemployment rate was a little higher than in the previous projection but was still projected to run below the staff’s estimate of its longer-run natural rate.

The near-term forecast for consumer price inflation was somewhat higher than in the previous projection, reflecting incoming data on core prices and energy prices. Beyond the near term, the inflation forecast was generally little revised. The staff continued to project that inflation would increase over the next several years, as food and energy prices along with the prices of non-energy imports were expected to begin rising steadily this year. However, inflation was projected to be marginally below the Committee’s longer-run objective of 2 percent in 2019.

The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The risks to the forecast for real GDP were seen as tilted to the downside, reflecting the staff’s assessment that both monetary and fiscal policy appeared to be better positioned to offset large positive shocks than adverse ones. In addition, the staff continued to see the risks to the forecast from developments abroad as skewed to the downside. Consistent with the downside risks to aggregate demand, the staff viewed the risks to its outlook for the unemployment rate as tilted to the upside. The risks to the projection for inflation were seen as roughly balanced. The possibility that longer-term inflation expectations may have edged down was roughly counterbalanced by the risks that somewhat firmer inflation this year could be more persistent than expected, particularly in an economy that was projected to continue operating above its long-run potential.

Participants’ Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants agreed that information received over the intermeeting period indicated that the labor market had continued to strengthen and that growth of economic activity had picked up from the modest pace seen in the first half of the year. Job gains had been solid in recent months, although the unemployment rate was little changed. Household spending had been rising moderately, but business fixed investment had remained soft. Inflation had increased somewhat since earlier this year but remained below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation had moved up but remained low; most survey-based measures of longer-term inflation expectations had changed little, on balance, in recent months. Domestic and global asset markets remained relatively calm over the intermeeting period, and U.S. financial conditions continued to be broadly accommodative.

Participants generally indicated that their economic forecasts had changed little over the intermeeting period. They continued to anticipate that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would strengthen somewhat further. Inflation was expected to rise to 2 percent over the medium term, as the transitory effects of past declines in energy and import prices continued to dissipate and the labor market strengthened further. A substantial majority viewed the near-term risks to the economic outlook as roughly balanced, although a few participants judged that significant downside risks remained, citing various factors including the low value of the neutral federal funds rate and its proximity to the effective lower bound, the possibility of weaker-than-expected growth in foreign economies, the continued uncertainty associated with the United Kingdom’s exit from the EU, or financial fragilities in some countries. Participants agreed that the Committee should continue to closely monitor inflation indicators and global economic and financial developments.

Participants noted that although real GDP growth in the third quarter was appreciably above the slow pace of the first half, it had been boosted in part by transitory factors, including a surge in agricultural exports and a bounceback in inventory investment. Excluding these factors, underlying economic growth had been relatively modest: Growth of consumer spending had slowed from its brisk pace earlier in the year, residential investment had fallen again, and business fixed investment had remained soft. Retailers in a few Districts reported weak to moderate activity, although some contacts thought that holiday sales were likely to peak late in the season. Real economic activity was expected to advance at a moderate pace in coming quarters, primarily reflecting solid growth in consumer spending, consistent with ongoing employment gains, increases in household wealth, and low interest rates.

Participants continued to expect economic activity in the coming quarters to be supported by a pickup in business investment. Recent increases in oil and gas drilling activity in response to higher energy prices were seen as a positive development for the investment outlook; however, a few participants reported that uncertainty about prospects for government policy, shorter investment time horizons for businesses, or the potential for advances in technology to disrupt existing business models were likely weighing on capital spending plans. A few participants noted weakness in nonresidential construction. District reports on residential construction activity were mixed. One participant reported generally strong conditions in the District’s housing markets but also cited various factors that were restraining residential construction in some locales, including constraints on builder financing, limitations on the supply of buildable lots, and shortages of skilled labor.

In their discussion of business activity in their Districts, participants provided mixed reports on manufacturing, with a few areas that had been adversely affected by the downturn in energy prices reporting a modest pickup in output. In the agricultural sector, low crop prices were said to continue to weigh on farm income and farm spending.

Participants noted that economic growth in many foreign economies remained subdued, and that inflation rates abroad generally were still quite low. Some participants observed that important international downside risks remained, including constraints on monetary policies in the low interest rate environments of some countries; investors’ concerns about developments potentially affecting profitability in the European banking sector; the possible consequences of upcoming negotiations and eventual terms of the United Kingdom’s exit from the EU; potential deleterious effects from rapid credit growth in China; and the potential for further dollar appreciation, which could restrain U.S. inflation for a considerable time.

Participants generally agreed that labor market conditions had continued to improve over the intermeeting period. Reports from some Districts pointed to a tightening in labor markets, evidenced by shortages of qualified workers in some occupations, increases in overtime hours, or a pickup in wage inflation. In several of these Districts, business contacts had undertaken workforce development and worker training to address a shortage of labor with the necessary skills.

Many participants commented on the rise in the labor force participation rate since late 2015. A few of them noted that the increase had largely reflected a diminution in the flow of individuals leaving the workforce rather than an increase of new entrants into the labor force and had been more prevalent among workers with relatively less education. Participants expressed uncertainty about how long the participation rate could be expected to continue rising, particularly in light of the downward structural trend in this series. On the one hand, the participation rate for prime-age males remained significantly below its level before the financial crisis, suggesting that it could rise further over time. In addition, there was some uncertainty around estimates of the longer-run trend rate of labor force participation and it could be higher than previously thought, reflecting, for example, a shift toward later retirement. On the other hand, from a business cycle perspective, the increase in the participation rate in recent months was consistent with a tightening labor market and an economy nearing full employment; furthermore, it was not clear that output growth above the economy’s potential growth rate would succeed in drawing new entrants permanently into the labor force. Overall, while some participants expressed the view that the economy was close to or at full employment, several others judged that appreciable slack could remain in the labor market. Some participants characterized wage pressures as only moderate, although one noted that wage growth was similar to its pace at the peak of the previous economic expansion.

Readings on headline and core PCE price inflation had come in somewhat higher than expected in recent months. Participants generally regarded this as a positive development, consistent with headline inflation rising over the medium term to the Committee’s objective of 2 percent. A few participants observed that it was difficult to judge how much of the uptick in core PCE price inflation reflected transitory factors, while a couple of others saw the incoming data as suggesting that inflation could move up to the Committee’s objective more rapidly than previously expected. Participants discussed possible policy implications of the risks surrounding the outlook for inflation, including the possibility that achieving the Committee’s inflation objective sooner than previously anticipated could cause a revision in market expectations of the path for policy rates and a sharp rise in longer-term interest rates, or the possibility that a further appreciation of the dollar stemming from developments abroad could renew disinflationary pressures and postpone the need for policy firming. Some participants regarded the uptick in market-based measures of inflation compensation over the intermeeting period as a welcome suggestion of further progress toward the Committee’s inflation goal. However, several cautioned that these measures remained low or that the measures still appeared to embed a significant weight on undesirably low inflation outcomes. The median expectation for inflation over the next 5 to 10 years from the Michigan survey edged down in October to a new historical low, although it was noted that this drop could be explained by a reduction in the number of respondents who had previously expected relatively high inflation outcomes. Overall, participants judged that survey-based measures of inflation expectations had been fairly stable in recent months.

Participants discussed a range of issues related to recent developments in financial markets and financial stability. MMF reforms that became effective in mid-October had resulted in a substantial shift of assets out of prime funds and into government-only funds. It was observed that these reforms had contributed to a sizable reduction of risk in the shadow banking system. Participants also discussed some causes of the low yields on longer-term Treasury securities and their embedded term premiums, which were below historical average levels. Among the factors cited were a persistent decline in the neutral federal funds rate, and depressed term premiums likely owing to the elevated size of the Federal Reserve’s balance sheet as well as the reduced likelihood of high inflation relative to several decades ago. Some of these factors could endure for some time.

In connection with the participants’ discussion of the long-run monetary policy implementation framework, many participants noted that the Committee’s broader monetary policy strategy needed both to be considered in conjunction with the design of such a framework and to receive careful further consideration in its own right. In particular, accumulating evidence of slow trend productivity and output growth and associated persistently low levels of neutral interest rates, both in the United States and abroad, had potential implications for the most effective policy implementation framework for the Federal Reserve in coming years as well as the monetary policy strategy that would best promote the Committee’s macroeconomic objectives. Among other factors that needed to be taken into account, it was observed that neutral real short-term interest rates could decline further if central bank balance sheets contracted or the positive effects of quantitative easing on economic activity waned over time. Participants agreed that issues associated with monetary policy implementation should be discussed within the context of the current and potential future economic and financial environment and the Committee’s strategy for monetary policy.

Against the backdrop of their views of the economic outlook, participants discussed whether the available information warranted taking another step to reduce policy accommodation at this meeting. Based on the relatively limited information received since the September FOMC meeting, participants generally agreed that the case for increasing the target range for the federal funds rate had continued to strengthen. Participants saw recent information as indicating that labor market conditions had improved further and considered the firming in inflation and inflation compensation to be positive developments, consistent with continued progress toward the Committee’s 2 percent inflation objective. However, a number of participants expressed the view that some modest slack remained in the labor market or noted that readings on inflation compensation and inflation expectations remained low. Moreover, some participants suggested that current conditions did not point to an immediate need to tighten policy or that some further evidence of continued progress toward the Committee’s objectives would provide greater support for policy firming.

Most participants expressed a view that it could well become appropriate to raise the target range for the federal funds rate relatively soon, so long as incoming data provided some further evidence of continued progress toward the Committee’s objectives. Some participants noted that recent Committee communications were consistent with an increase in the target range for the federal funds rate in the near term or argued that to preserve credibility, such an increase should occur at the next meeting. A few participants advocated an increase at this meeting; they viewed recent economic developments as indicating that labor market conditions were at or close to those consistent with maximum employment and expected that recent progress toward the Committee’s inflation objective would continue, even with further gradual steps to remove monetary policy accommodation. In addition, many judged that risks to economic and financial stability could increase over time if the labor market overheated appreciably, or expressed concern that an extended period of low interest rates risked intensifying incentives for investors to reach for yield, potentially leading to a mispricing of risk and misallocation of capital. In contrast, some others judged that allowing the unemployment rate to fall below its longer-run normal level for a time could result in favorable supply-side effects or help hasten the return of inflation to the Committee’s 2 percent objective; noted that proximity of the federal funds rate to the effective lower bound places potential constraints on monetary policy; or stressed that global developments could pose risks to U.S. economic activity. More generally, it was emphasized that decisions regarding near-term adjustments of the stance of monetary policy would appropriately remain dependent on the outlook as informed by incoming data, and participants expected that economic conditions would evolve in a manner that would warrant only gradual increases in the federal funds rate.

Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that the information received since the Committee met in September indicated that the labor market had continued to strengthen and that growth of economic activity had picked up from the modest pace seen in the first half of this year. Although the unemployment rate was little changed in recent months, job gains had been solid. Household spending had been rising moderately but business fixed investment had remained soft. Inflation had increased somewhat since earlier this year but was still below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation had moved up but remained low; most survey-based measures of longer-term inflation expectations were little changed, on balance, in recent months.

With respect to the economic outlook and its implications for monetary policy, members continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would strengthen somewhat further. Almost all of them continued to judge that near-term risks to the economic outlook were roughly balanced. Members generally observed that labor market conditions had improved appreciably over the past year, a development that was particularly evident in the solid pace of monthly payroll employment gains and the increase in the labor force participation rate. It was noted that allowing the unemployment rate to modestly undershoot its longer-run normal level could foster the return of inflation to the FOMC’s 2 percent objective over the medium term. A few members, however, were concerned that a sizable undershooting of the longer-run normal unemployment rate could necessitate a steep subsequent rise in policy rates, undermining the Committee’s prior communications about its expectations for a gradually rising policy rate or even posing risks to the economic expansion.

Members continued to expect inflation to remain low in the near term, but most anticipated that, with gradual adjustments in the stance of monetary policy, inflation would rise to the Committee’s 2 percent objective over the medium term. Some members observed that the increases in inflation and inflation compensation in recent months were welcome, although a couple of them noted that inflation was still running below the Committee’s objective. Against this backdrop and in light of the current shortfall of inflation from 2 percent, members agreed that they would continue to carefully monitor actual and expected progress toward the Committee’s inflation goal.

After assessing the outlook for economic activity, the labor market, and inflation, as well as the risks around that outlook, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent at this meeting. Members generally agreed that the case for an increase in the policy rate had continued to strengthen. But a majority of members judged that the Committee should, for the time being, await some further evidence of progress toward its objectives of maximum employment and 2 percent inflation before increasing the target range for the federal funds rate. A few members emphasized that a cautious approach to removing accommodation was warranted given the proximity of policy rates to the effective lower bound, as the Committee had more scope to increase policy rates, if necessary, than to reduce them. Two members preferred to raise the target range for the federal funds rate by 25 basis points at this meeting. They saw inflation as close to the 2 percent objective and viewed an increase in the federal funds rate as appropriate at this meeting because they judged that the economy was essentially at maximum employment and that monetary policy was unable to contribute to a permanent further improvement in labor market conditions in these circumstances.

The Committee agreed that, in determining the timing and size of future adjustments to the target range for the federal funds rate, it would assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee expected that economic conditions would evolve in a manner that would warrant only gradual increases in the federal funds rate and that the federal funds rate was likely to remain, for some time, below levels that are expected to prevail in the longer run. However, members emphasized that the actual path of the federal funds rate would depend on the economic outlook as informed by incoming data.

The Committee also decided to maintain its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipated doing so until normalization of the level of the federal funds rate is well under way. Members noted that this policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the SOMA in accordance with the following domestic policy directive, to be released at 2:00 p.m.:

“Effective November 3, 2016, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1/4 to 1/2 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 0.25 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.

The Committee directs the Desk to continue rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions.”

The vote also encompassed approval of the statement below to be released at 2:00 p.m.:

“Information received since the Federal Open Market Committee met in September indicates that the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. Although the unemployment rate is little changed in recent months, job gains have been solid. Household spending has been rising moderately but business fixed investment has remained soft. Inflation has increased somewhat since earlier this year but is still below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation have moved up but remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The Committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.”

Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, James Bullard, Stanley Fischer, Jerome H. Powell, Eric Rosengren, and Daniel K. Tarullo.

Voting against this action: Esther L. George and Loretta J. Mester.

Mses. George and Mester dissented because they preferred to increase the target range for the federal funds rate by 25 basis points at this meeting.

Ms. George judged that, with the labor market near full employment and inflation approaching the Committee’s 2 percent objective, another step in the gradual adjustment of monetary policy was appropriate. While a low level of the target range for the federal funds rate had supported achieving the Committee’s objectives, such low levels were no longer warranted and, if maintained, could pose a risk to the sustainability of the economic expansion with stable inflation. In particular, she viewed the supply-side benefits of allowing labor utilization to rise above its neutral level as temporary, and noted that monetary policy was unable to affect the longer-run growth potential of the economy.

Ms. Mester judged that the economy was essentially at full employment in terms of what can be achieved through monetary policy. The unemployment rate was at her estimate of its longer-run normal level, and labor market conditions were projected to tighten further. In addition, she noted that inflation was moving up and was close to the Committee’s 2 percent objective. In these circumstances, she believed it appropriate to gradually increase the target range for the federal funds rate from its current low level, which would allow monetary policy to continue to lend support to the economic expansion. A gradual path would allow the Committee to better calibrate policy over time as it learns more about the underlying structural aspects of the economy. Ms. Mester saw taking the next step in removing policy accommodation as consistent with the Committee’s communications about the appropriate path for monetary policy.

Consistent with the Committee’s decision to leave the target range for the federal funds rate unchanged, the Board of Governors took no action to change the interest rates on reserves or discount rates.

It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, December 13-14, 2016. The meeting adjourned at 10:00 a.m. on November 2, 2016.

Notation Vote
By notation vote completed on October 11, 2016, the Committee unanimously approved the minutes of the Committee meeting held on September 20-21, 2016.

(por Gabriel Codas)


Fonte: Enfoque
Publicado em: 23/11/2016 17:03:24

Ricardo Eletro - Finance One
LATAM - Ofertas Brasil - Finance One

** CONFIRA A ATA DO FOMC NA ÍNTEGRA (EM INGLES)


São Paulo, 20/05 (Enfoque) – A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, April 28, 2015, at 1:00 p.m. and continued on Wednesday, April 29, 2015, at 9:00 a.m.
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
Charles L. Evans
Stanley Fischer
Jeffrey M. Lacker
Dennis P. Lockhart
Jerome H. Powell
Daniel K. Tarullo
John C. Williams

James Bullard, Christine Cumming, Esther L. George, Loretta J. Mester, and Eric Rosengren, Alternate Members of the Federal Open Market Committee

Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis

Helen E. Holcomb and Blake Prichard, First Vice Presidents, Federal Reserve Banks of Dallas and Philadelphia, respectively

Thomas Laubach, Secretary and Economist

Matthew M. Luecke, Deputy Secretary

David W. Skidmore, Assistant Secretary

Michelle A. Smith, Assistant Secretary

Scott G. Alvarez, General Counsel

Steven B. Kamin, Economist

David W. Wilcox, Economist

David Altig, Thomas A. Connors, Eric M. Engen, Michael P. Leahy, and William Wascher, Associate Economists

Simon Potter, Manager, System Open Market Account

Lorie K. Logan, Deputy Manager, System Open Market Account

Robert deV. Frierson,1 Secretary of the Board, Office of the Secretary, Board of Governors

Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors

Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors

James A. Clouse and Stephen A. Meyer, Deputy Directors, Division of Monetary Affairs, Board of Governors

William B. English, Senior Special Adviser to the Board, Office of Board Members, Board of Governors

Andrew Figura, David Reifschneider, and Stacey Tevlin, Special Advisers to the Board, Office of Board Members, Board of Governors

Trevor A. Reeve, Special Adviser to the Chair, Office of Board Members, Board of Governors

Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors

Michael T. Kiley, Senior Adviser, Division of Research and Statistics, and Senior Associate Director, Office of Financial Stability Policy and Research, Board of Governors

Ellen E. Meade and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors; Jeremy B. Rudd, Senior Adviser, Division of Research and Statistics, Board of Governors

Joshua Gallin, Associate Director, Division of Research and Statistics, Board of Governors; Fabio M. Natalucci,2 Associate Director, Division of Monetary Affairs, Board of Governors; Beth Anne Wilson, Associate Director, Division of International Finance, Board of Governors

Jane E. Ihrig1 and David López-Salido, Deputy Associate Directors, Division of Monetary Affairs, Board of Governors

Edward Nelson, Assistant Director, Division of Monetary Affairs, Board of Governors

Burcu Duygan-Bump, Adviser, Division of Monetary Affairs, Board of Governors; Eric C. Engstrom, Adviser, Division of Research and Statistics, Board of Governors

Penelope A. Beattie,1 Assistant to the Secretary, Office of the Secretary, Board of Governors

Dana L. Burnett, Section Chief, Division of Monetary Affairs, Board of Governors

Katie Ross,1 Manager, Office of the Secretary, Board of Governors

Jonathan E. Goldberg, Economist, Division of Monetary Affairs, Board of Governors

James M. Lyon, First Vice President, Federal Reserve Bank of Minneapolis

James J. McAndrews, Executive Vice President, Federal Reserve Bank of New York

Troy Davig, Michael Dotsey, Evan F. Koenig, and Spencer Krane, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Philadelphia, Dallas, and Chicago, respectively

Todd E. Clark, Sylvain Leduc, Giovanni Olivei, Douglas Tillett, and David C. Wheelock, Vice Presidents, Federal Reserve Banks of Cleveland, San Francisco, Boston, Chicago, and St. Louis, respectively

Kei-Mu Yi, Special Policy Advisor to the President, Federal Reserve Bank of Minneapolis

Matthew D. Raskin, Assistant Vice President, Federal Reserve Bank of New York

Andreas L. Hornstein, Senior Advisor, Federal Reserve Bank of Richmond

James M. Egelhof,1 Markets Officer, Federal Reserve Bank of New York

Developments in Financial Markets and the Federal Reserve’s Balance Sheet
In a joint session of the Federal Open Market Committee (FOMC) and the Board of Governors of the Federal Reserve System, the manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets. The deputy manager followed with a review of System open market operations conducted during the period since the Committee met on March 17-18, 2015. The deputy manager also discussed the outcomes of continued testing of the Federal Reserve’s term and overnight reverse repurchase agreement operations (term RRP operations and ON RRP operations, respectively). The Open Market Desk conducted two term RRP operations over the March quarter-end. The combination of term and ON RRP operations continued to provide a soft floor for money market rates over the intermeeting period, including around quarter-end. Based on experience around recent quarter-ends, the deputy manager discussed possible plans for June test RRP operations. The manager summarized ongoing staff work related to improved data collection for, and possible adjustments to, the calculation of the effective federal funds rate that were intended to provide a more robust measure of trading conditions in the federal funds market over time.

The Committee voted to renew the reciprocal currency arrangements with the Bank of Canada and the Bank of Mexico; these arrangements are associated with the Federal Reserve’s participation in the North American Framework Agreement of 1994. In addition, the Committee voted to renew the dollar and foreign currency liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank. The votes to renew the Federal Reserve’s participation in these standing arrangements are taken annually at the April meeting. Mr. Lacker dissented on both votes because of his opposition, as indicated at the January meeting, to foreign exchange market intervention by the Federal Reserve, which such swap arrangements might facilitate, and because, in his view, such arrangements were best left to fiscal authorities.

By unanimous vote, the Committee ratified the Desk’s domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System’s account over the intermeeting period.

Normalization Procedures
The staff provided a briefing on issues related to the implementation of monetary policy during the period immediately following the first increase in the target range for the federal funds rate, when it becomes appropriate. In their subsequent discussion, participants agreed that the Committee’s testing of normalization tools, in conjunction with its other planning, had created conditions under which policy normalization would likely proceed smoothly once it commences. Nonetheless, as part of prudent contingency planning, participants agreed to have the staff provide more frequent updates on financial market developments for a period after firming begins. Such updates would ensure that, if adjustments to policy normalization tools prove necessary to maintain appropriate control over money market rates, policymakers could make such changes in a timely manner. Participants also considered whether it might be appropriate, when the Committee first raises the target range for the federal funds rate, to increase the spread between the primary credit rate and the top of the federal funds rate target range. One participant argued for such a step in order to bring the spread up to a level closer to that prevailing prior to the financial crisis, but several participants favored maintaining the current spread at least until the process of policy normalization was well under way and policymakers had considered carefully the potential benefits and costs of such a change. In part, that view reflected concerns that an increase in the spread that coincided with the initial step in policy normalization could complicate communications regarding the Committee’s policy intentions.

The Board meeting concluded at the end of the discussion of normalization procedures.

Staff Review of the Economic Situation
The information reviewed for the April 28-29 meeting indicated that real gross domestic product (GDP) only edged up in the first quarter, with growth likely held down, in part, by transitory factors. The pace of improvement in labor market conditions moderated somewhat, and the unemployment rate was unchanged over the intermeeting period. Consumer price inflation continued to run below the FOMC’s longer-run objective of 2 percent, partly restrained by earlier declines in energy prices along with further decreases in non-energy import prices. Market-based measures of inflation compensation were still low, while survey measures of longer-run inflation expectations remained stable.

Payroll employment expanded at a solid pace in the first quarter, on average, but the gain in March was smaller than in earlier months. The unemployment rate remained at 5.5 percent in March, the labor force participation rate edged down, and the employment-to- population ratio was little changed. The share of workers employed part time for economic reasons was also little changed. In the private sector, the rate of job openings edged up in February and was well above its pre-recession level, while the rates of hiring and of quits were about flat and remained slightly above their levels of a year ago.

Industrial production fell in the first quarter, with another drop in the drilling of new oil and gas wells as well as a decrease in manufacturing output that appeared to reflect, in part, the effects of the labor dispute at West Coast ports. Automakers’ assembly schedules suggested that light motor vehicle production would increase at a solid pace in the second quarter, but broader indicators of manufacturing activity, such as the readings on new orders from national and regional manufacturing surveys, pointed to only modest gains in factory output over the next several months.

Real personal consumption expenditures (PCE) increased in the first quarter, albeit at a much slower pace than in the fourth quarter of 2014. Light motor vehicle sales, as well as the components of nominal retail sales used by the Bureau of Economic Analysis (BEA) to construct its estimate of PCE, rebounded in March after declining in February, suggesting that unusually severe winter weather in February likely held down spending. Among the factors that influence household spending, real disposable income rose strongly, on net, in the first quarter, buoyed in part by earlier declines in energy prices. In addition, further gains in house values and equity prices likely raised households’ net worth, and the index of consumer sentiment in the University of Michigan Surveys of Consumers remained near its highest level since prior to the most recent recession.

Residential investment increased at a slow pace in the first quarter, and other indicators of housing-sector activity remained weak. Starts and building permits for single-family homes decreased during the first quarter despite small gains in March; starts of multifamily units also declined during the first quarter. Sales of new homes were little changed, on average, over February and March, while existing home sales edged up on net.

Real private expenditures on business equipment and intellectual property products rose modestly in the first quarter, and forward-looking indicators–including data on orders and shipments of nondefense capital goods and the national and regional surveys of business conditions–were generally consistent with only small further gains in the near term. Real spending for nonresidential structures fell considerably in the first quarter, as outlays for drilling and mining structures dropped sharply and outlays for other structures declined.

Real government purchases moved down in the first quarter. Federal spending was flat. But construction expenditures by state and local governments contracted, while these governments’ payrolls were unchanged.

The U.S. international trade deficit narrowed sharply in February, as imports fell more than exports. Imports of all major categories of goods moved lower as imports from several major trading partners–including Canada, China, Japan, and Korea–registered declines. Disruptions related to the West Coast port labor disputes likely contributed to the decline in imports in February. The reduction in exports was largest for durable goods and industrial supplies, with exports to Canada and China accounting for most of the drop. Despite the narrowing of the nominal trade deficit in February, the BEA estimated that real net exports were a substantial drag on the growth of real GDP in the first quarter.

Total U.S. consumer prices in the first quarter, as measured by the PCE price index, were only 1/4 percent higher than a year earlier, importantly reflecting the decrease in consumer energy prices. The core PCE price index, which excludes food and energy prices, increased 1-1/4 percent over the same four-quarter period, partly restrained by the declines in prices of non-energy imported goods. The PCE price index in February and the consumer price index (CPI) in March rose at a faster pace than in previous months, as energy prices reversed a small part of their earlier declines. Survey-based measures of expected long-run inflation were stable, with the measure from the Desk’s Survey of Primary Dealers unchanged and the Michigan survey measure down a little but still in the range seen over recent years. Market-based measures of inflation compensation at longer horizons increased somewhat but were still low. Over the 12 months ending in March, nominal average hourly earnings for all employees increased 2 percent, somewhat faster than the increase in core consumer prices over the same period.

Economic growth in both advanced foreign and emerging market economies appeared to slow, on balance, in the first quarter of 2015. Global trade and industrial production weakened. Among advanced economies, output growth declined in the United Kingdom and economic indicators for Canada and Japan also pointed to slower growth in the first quarter. In contrast, real GDP growth seemed to have increased in the euro area. In emerging market economies, real GDP growth slowed sharply in China and indicators of activity weakened in Mexico and Brazil, but real GDP growth picked up in some emerging Asian economies. Inflation remained low in most economies, partly as a result of earlier declines in oil prices.

Staff Review of the Financial Situation
Financial conditions eased, on balance, over the intermeeting period. Federal Reserve communications that were reportedly viewed as more accommodative than anticipated put downward pressure on interest rates. A number of weaker-than-expected U.S. economic data releases, including the March employment report, also pushed interest rates lower. On net, measures of inflation compensation rose, equity prices increased somewhat, and the foreign exchange value of the dollar declined.

The expected path of the federal funds rate moved down following the March FOMC statement and the Chair’s postmeeting press conference. Investors reportedly took note of changes in the Summary of Economic Projections, including downward revisions to FOMC participants’ projections of the appropriate level of the federal funds rate at the end of 2015, 2016, and 2017. During the remainder of the intermeeting period, the expected policy rate path implied by financial market quotes shifted down further, in part because U.S. economic data were weaker, on net, than anticipated. Results from the Survey of Primary Dealers and Survey of Market Participants for April indicated that respondents saw the September 2015 meeting as the most likely time for the first increase in the target range for the federal funds rate; the probabilities attached to scenarios in which policy firming did not begin until after the July 2015 meeting were higher than the corresponding probabilities in the surveys conducted before the March meeting.

Over the intermeeting period, 5- and 10-year nominal Treasury yields decreased, but yields on Treasury Inflation-Protected Securities declined by a greater amount. Measures of inflation compensation over the next 5 years rose significantly, consistent with increases in oil prices and somewhat higher-than-expected February and March consumer price inflation data. Inflation compensation 5 to 10 years ahead also increased but remained at the lower end of its range over the past few years.

On balance, U.S. equity price indexes rose somewhat and option-implied volatility for the S&P 500 index over the next month declined. Energy firms’ stock prices retraced a small portion of their substantial drop since mid-2014. Spreads of yields on 10-year speculative-grade corporate bonds over those on comparable-maturity Treasury securities narrowed, in part because of a further decrease in spreads on speculative-grade bonds issued by energy firms. About 40 percent of firms in the S&P 500 index had reported earnings for the first quarter, with those reports generally viewed as better than anticipated. Nonetheless, first-quarter earnings per share were expected to be lower than in the previous quarter.

Financing conditions for nonfinancial firms remained accommodative. Corporate bond issuance was strong in the first quarter, and seasoned equity offerings rose. Commercial and industrial loans on banks’ books again expanded briskly. In the leveraged loan market, issuance of new money loans to institutional investors slowed in the first quarter but stayed robust, supported by continued strong issuance of collateralized loan obligations.

Financing for commercial real estate (CRE) remained broadly available. CRE loans on banks’ books increased appreciably in the first quarter, consistent with stronger loan demand reported in the April Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS). Issuance of commercial mortgage-backed securities continued to be robust.

Measures of residential mortgage lending conditions were generally little changed over the intermeeting period, and lending volumes remained light. In the April SLOOS, some large banks reported having eased lending standards for a number of categories of residential mortgage loans in the first quarter. House prices continued to rise moderately in February. Nonetheless, estimates of the share of mortgages in a negative equity position were little changed in recent quarters, and they remained elevated when judged against levels prevailing prior to the crisis.

Financing conditions in consumer credit markets stayed generally accommodative. Auto and student loan balances expanded robustly through February. Growth in credit card loans slowed a bit on a year-over-year basis, likely reflecting weaker retail activity.

The U.S. dollar depreciated during the intermeeting period, as U.S. macroeconomic data generally came in weaker than expected, and as market participants appeared to mark down somewhat their expectations for the path of the federal funds rate. Nonetheless, the cumulative appreciation of the dollar since mid-2014 remained substantial. Government bond yields in most advanced foreign economies declined modestly, pushing some yields, particularly in Europe, further into negative territory. By contrast, Greek sovereign yields stayed elevated as the difficult negotiations between Greece and its official creditors continued. Spillovers from Greek markets into other peripheral financial markets remained limited. Equity prices in most advanced foreign economies moved higher, buoyed in part by ongoing monetary policy accommodation. Equity prices also rose in most emerging market economies, with the stock market in China outperforming.

The staff provided its latest report on potential risks to financial stability. A number of factors appeared to limit the vulnerability of the U.S. financial system to adverse shocks. Leverage in the banking system remained relatively low, and increases in household debt stayed modest and continued to be associated primarily with borrowers with strong credit scores. However, some indicators suggested that valuations remained stretched for some asset classes. An estimate of the expected real return on equities moved down, reflecting an increase in stock prices and downward revisions to forecasts of corporate earnings, and corporate bond spreads declined somewhat. The staff also noted changes in the structure of some fixed-income markets that could increase volatility. In addition, the staff discussed the risks to financial stability associated with the possibility of substantial unanticipated changes in longer-term U.S. interest rates, including the scope for a sharp increase in such rates to affect financial conditions in emerging market economies. A number of other risks were noted, including geopolitical tensions and the potential for an increase in financial strains related to the negotiations between Greece and its official creditors.

Staff Economic Outlook
In the U.S. economic forecast prepared by the staff for the April FOMC meeting, real GDP growth in the first half of the year was lower than in the projection prepared for the March meeting, as the data on economic activity received during the intermeeting period were generally weaker than the staff had expected. However, much of this weakness was attributed to transitory factors or statistical noise, with little implication for the pace of expansion beyond the near term. Indeed, the medium-term projection for real GDP growth was revised up modestly, as monetary policy was assumed to be a little more accommodative in this projection and the projected path for the foreign exchange value of the dollar was a little lower. The staff continued to project that real GDP would expand at a faster pace than potential output in 2015 and 2016, supported by increases in consumer and business confidence and a small pickup in foreign economic growth, even as the normalization of monetary policy was assumed to begin. In 2017, real GDP growth was projected to slow toward, but to remain above, the rate of growth of potential output. The expansion in economic activity over the medium term was expected to lead to a gradual reduction in resource slack; the unemployment rate was projected to decline slowly and to move a little below the staff’s estimate of its longer-run natural rate for a time.

The staff’s forecast for inflation in the near term was revised up a little, reflecting the slightly higher-than-expected recent monthly data on core consumer prices and a path for crude oil prices that was a bit higher than in the previous projection. The medium-term forecast for inflation was little changed, with inflation in 2016 and 2017 projected to move closer to, but remain below, the Committee’s longer-run objective of 2 percent, as energy prices were expected to rise, import prices to turn up, and resource utilization to tighten further. Thereafter, inflation was anticipated to move back to 2 percent, with inflation expectations in the longer run assumed to be consistent with the Committee’s objective and slack in labor and product markets projected to have waned.

The staff viewed the uncertainty around its April projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The risks to the forecast for real GDP and inflation were seen as tilted to the downside, reflecting the staff’s assessment that neither monetary nor fiscal policy appeared well positioned to help the economy withstand substantial adverse shocks. At the same time, the staff viewed the risks around its outlook for the unemployment rate as roughly balanced.

Participants’ Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants regarded the information received over the intermeeting period as suggesting that economic growth had slowed during the winter months, in part reflecting transitory factors. The pace of job gains had moderated, and the unemployment rate had remained steady, with a range of labor market indicators suggesting that underutilization of labor resources was little changed. Most participants expected that, following the slowdown in the first quarter, real economic activity would resume expansion at a moderate pace, and that labor market conditions would improve further. Inflation continued to run below the Committee’s longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports. Market-based measures of inflation compensation remained low, while survey-based measures of longer-term inflation expectations had remained stable. Participants generally anticipated that inflation would rise gradually toward the Committee’s 2 percent objective as the labor market improved further and the transitory effects of declines in energy prices and non-energy import prices dissipated. Participants judged that recent domestic economic developments had increased uncertainty regarding the economic outlook. While participants continued to see potential downside risks resulting from foreign economic and financial developments, most still viewed the risks to the outlook for economic growth and the labor market as nearly balanced.

Participants generally agreed that data on private spending for the first quarter had been disappointing, with unexpectedly weak household expenditures and investment spending. Retail sales had continued to be tepid, although consumer sentiment stayed high and auto sales rebounded in March. The recovery in the housing sector remained slow. Business fixed investment softened, in part reflecting sizable reductions in capital expenditures in the energy sector. Exports contracted, likely reflecting the damping influence of the dollar’s appreciation. In combination with a decline in government spending, the weakness of private spending had led to a substantial slowing in economic growth in the first quarter.

Participants discussed whether the weakness of spending in the first quarter primarily reflected temporary factors or instead suggested a longer-lasting loss of momentum for the economy. A number of reasons were advanced for believing that the weakness in spending observed during the first quarter was partly or even largely transitory. Most notably, the severe winter weather in some regions had reportedly weighed on economic activity, and the labor dispute at West Coast ports temporarily disrupted some supply chains. Furthermore, a pattern observed in previous years of the current expansion was that the first quarter of the year tended to have weaker seasonally adjusted readings on economic growth than did the subsequent quarters. This tendency supported the expectation that economic growth would return to a moderate pace over the rest of this year. Participants also pointed to other reasons for anticipating that the weakness seen in the first quarter would not endure. A number of the fundamental factors that drive consumer spending remained favorable, among them low interest rates, high consumer confidence, and rising household real income. In addition, business contacts in several parts of the country continued to be optimistic and expected sales, investment, and hiring to expand over the rest of the year. In the agricultural sector, drought effects had worsened in some parts of the country, but effects on production were limited and planting intentions remained strong. Finally, if the decline in oil prices and the rise in the foreign exchange value of the dollar did not continue, then their influence on the growth rate of investment and the change in net exports would likely recede.

Various reasons were also advanced for believing that some of the recent weakness in the pace of economic activity might persist. A number of participants suggested that the damping effects of the earlier appreciation of the dollar on net exports or of the earlier decline in oil prices on firms’ investment spending might be larger and longer-lasting than previously anticipated. In addition, the expected boost to household spending from lower energy prices had apparently so far not materialized, highlighting the possibility of less underlying momentum in consumer expenditures than participants had previously judged. Some participants expressed particular concern about this prospect, as their expectations of a moderate expansion of economic activity in the medium term, combined with further improvements in labor market conditions, rested largely on a scenario in which consumer spending grows robustly despite softness in other components of aggregate demand. Participants discussed downside risks to economic growth, and a few indicated that, in their assessment, such risks had risen since the March meeting. However, most participants continued to see the risks to the outlook for economic growth and the labor market as nearly balanced.

In their discussion of the foreign economic outlook, several participants noted that the foreign exchange value of the U.S. dollar had fallen back somewhat over the intermeeting period. Nonetheless, the value of the dollar had increased significantly since the middle of last year, and it was seen as likely to continue to be a factor restraining U.S. net exports and economic growth for a time. It was suggested that one element underpinning the strength of the U.S. dollar was the increasing prevalence of negative interest rates on sovereign debt in some key European economies. Participants also pointed to a number of risks to the international economic outlook, including the slowdown in growth in China and fiscal and financial problems in Greece.

Many participants judged that the pace of improvement in labor market conditions had slowed. The March increase in payrolls had been smaller than expected, and the unemployment rate had remained steady. However, it was noted that the intermeeting period had also witnessed some more-positive news on labor market conditions, including a further increase in the rate of job openings. Various business contacts in energy-related sectors reported layoffs in response to low oil prices, but some information received from business contacts suggested a tightening in labor markets, with shortages of skilled labor reported in some areas and sectors; there had also been an increase in transitions of workers to better-paying jobs. Larger wage gains were also reported in some regions, although in other parts of the country wage pressures reportedly remained muted. One participant suggested that a significant rise in aggregate nominal wage growth should be a criterion in assessing the Committee’s degree of confidence regarding the return of inflation to the Committee’s 2 percent longer-run objective. However, a couple of other participants argued that the behavior of nominal wage growth should not play a significant role in that assessment, on the grounds that there was only a loose relationship between nominal wage growth and inflation in the United States.

Many participants noted that measures of inflation averaged over several months or more continued to run below the Committee’s longer-run objective. However, this shortfall partly reflected the earlier declines in energy prices and decreasing prices of non-energy imports, and some participants pointed out that, by some measures, the most recent monthly inflation readings had firmed a bit. Although participants expected that inflation would continue, in the near term, to be below the Committee’s 2 percent longer-run objective, energy prices were no longer declining and most participants continued to expect that inflation would move up toward the Committee’s 2 percent objective over the medium term as the effects of the transitory factors waned and conditions in the labor market and the overall economy improved further. Survey-based measures of inflation expectations had remained broadly stable. Market-based measures of inflation compensation had risen slightly but remained low. One participant suggested that, in the past, market-based measures of inflation compensation had been of little value in predicting inflation one to two years ahead, and that measures of inflation expectations from surveys of professional forecasters were more useful for forecasting inflation. Another participant argued that low values for market-based measures of inflation compensation should concern policymakers, on the grounds that these low values reflected investors placing at least some likelihood on adverse outcomes in which low inflation was accompanied by weak economic activity.

In their discussion of financial market developments and financial stability issues, policymakers highlighted possible risks related to the low level of term premiums. Some participants noted the possibility that, at the time when the Committee decides to begin policy firming, term premiums could rise sharply–in a manner similar to the increase observed in the spring and summer of 2013–which might drive longer-term interest rates higher. In this connection, it was suggested that the tendency for bond prices to exhibit volatility may be greater than it had been in the past, in view of the increased role of high-frequency traders, decreased inventories of bonds held by broker-dealers, and elevated assets of bond funds. A couple of participants underscored the need for a better understanding of the structure of the bond market in the current environment, including the effect on bond market behavior of regulatory changes. Some participants noted that careful Committee communications regarding its policy intentions could help damp any resulting increase in market volatility around the time of the commencement of normalization. It was also noted that financial stability and the Committee’s macroeconomic goals were likely to be complementary objectives, but different views were expressed about the potential implications for financial stability of monetary policy tightening in current economic conditions.

In their discussion of communications regarding the path of the federal funds rate over the medium term, participants expressed a range of views about when economic conditions were likely to warrant an increase in the target range for the federal funds rate. Participants continued to judge that it would be appropriate to raise the target range for the federal funds rate when they had seen further improvement in the labor market and were reasonably confident that inflation would move back to its 2 percent objective over the medium term. Although participants expressed different views about the likely timing and pace of policy firming, they agreed that the Committee’s decision to begin firming would appropriately depend on the incoming data and their implications for the economic outlook. A few anticipated that the information that would accrue by the time of the June meeting would likely indicate sufficient improvement in the economic outlook to lead the Committee to judge that its conditions for beginning policy firming had been met. Many participants, however, thought it unlikely that the data available in June would provide sufficient confirmation that the conditions for raising the target range for the federal funds rate had been satisfied, al-though they generally did not rule out this possibility. Participants discussed the merits of providing an explicit indication, in postmeeting statements released prior to the commencement of policy firming, that the target range for the federal funds rate would likely be raised in the near term. However, most participants felt that the timing of the first increase in the target range for the federal funds rate would appropriately be determined on a meeting-by-meeting basis and would depend on the evolution of economic conditions and the outlook. In keeping with this data-dependent approach, some participants further suggested that the postmeeting statement’s description of the economic situation and outlook, and of progress toward the Committee’s goals, provided the appropriate means by which the Committee could help the public assess the likely timing of the initial increase in the target range for the federal funds rate.

During their discussion of economic conditions and monetary policy, participants also commented on different concepts of the equilibrium real federal funds rate–that is, a reference value of the inflation-adjusted federal funds rate consistent with the economy achieving, over a specified time horizon, maximum employment and price stability. Estimates of such equilibrium real interest rates were highly uncertain, but some participants reported that their estimates were currently unusually low by historical standards, reflecting, for example, factors weighing persistently on aggregate demand. In light of their low estimates, afew of these participants questioned whether the Committee was providing sufficient accommodation at the present time and cautioned against initiating policy firming in the near future. However, other participants cited factors, including the current low level of term premiums, that might cast doubt on the notion that the equilibrium real federal funds rate was particularly low. Some participants observed that more discussion of this topic was likely to be helpful in assessing these issues. One participant suggested that, in part because of the evidence that the equilibrium real interest rate was low by historical standards, the Committee should discuss the possibility of increasing its longer-run inflation objective. This participant and a few others thought such a discussion could be useful but emphasized that any decision to change the Committee’s longer-run goals and policy strategy should not be made lightly. One of these participants noted, in particular, that a decision to raise the Committee’s longer-run inflation objective might work against the achievement of maximum employment and price stability because such a change could undermine the Committee’s credibility and, in addition, lead to adverse changes in inflation dynamics that could pose significant challenges for policymakers.

Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the FOMC met in March suggested that economic growth slowed during the winter months, in part reflecting transitory factors. The pace of job gains moderated, and the unemployment rate remained steady. A range of labor market indicators suggested that underutilization of labor resources was little changed. Although growth in household spending declined, households’ real incomes rose strongly, partly reflecting earlier declines in energy prices, and consumer sentiment remained high. Business fixed investment softened, the recovery in the housing sector remained slow, and exports declined. Inflation continued to run below the Committee’s longer-run objective, but this partly reflected earlier declines in energy prices and decreasing prices of non-energy imports. Market-based measures of inflation compensation remained low, while survey-based measures of longer-term inflation expectations had remained stable. Despite the slower growth in output and employment observed of late, members continued to expect that, with appropriate policy accommodation, economic activity would expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judged consistent with its dual mandate. Members generally continued to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation was anticipated to remain near its recent low level in the near term, but members expected inflation to rise gradually toward 2 percent over the medium term as further improvement in the labor market occurred and the transitory effects of declines in energy and import prices dissipated. In light of the uncertainties associated with the outlook for inflation, the Committee agreed that it would continue to monitor inflation developments closely.

In their discussion of language for the postmeeting statement, members agreed that the wording should reflect their assessment that economic conditions had progressed to a stage at which the Committee’s decision to begin normalizing policy would appropriately be determined on a meeting-by-meeting basis. The Committee agreed that the statement should indicate that the data received over the intermeeting period suggested that economic growth had slowed and to note that this partly reflected transitory factors. The Committee also agreed to change the statement’s characterization of the labor market data to note that the pace of job growth slowed over the intermeeting period and that a number of labor market indicators suggested that there was little change in underutilization of labor resources, and to update the statement’s description of investment and export behavior in light of the recent weaker readings. In addition, members agreed to modify the discussion of inflation developments to indicate that inflation, although no longer declining, was still below the Committee’s longer-term objective and was likely to remain so in the near term, partly because of transitory factors such as earlier declines in energy prices and decreasing prices of non-energy imports. The Committee altered its characterization of the economic outlook to indicate that, while economic growth slowed in the first quarter, the Committee continued to expect that, with appropriate policy accommodation, economic activity would expand at a moderate pace, and that it anticipated that labor market indicators would resume their movement toward levels that the Committee judged consistent with its dual mandate. With respect to the outlook for inflation, members expected inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate.

The Committee agreed to maintain the target range for the federal funds rate at 0 to 1/4 percent and to reaffirm in the statement that the Committee’s decision about how long to maintain the current target range for the federal funds rate would depend on its assessment of actual and expected progress toward its objectives of maximum employment and 2 percent inflation. Members continued to judge that this assessment of progress would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Members agreed to retain the indication that the Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

The Committee also decided to maintain its policy of reinvesting principal payments from agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. The Committee agreed to reiterate its expectation that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the SOMA in accordance with the following domestic policy directive:

“Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions. The System Open Market Account manager and the secretary will keep the Committee informed of ongoing developments regarding the System’s balance sheet that could affect the attainment over time of the Committee’s objectives of maximum employment and price stability.”

The vote encompassed approval of the statement below to be released at 2:00 p.m.:

“Information received since the Federal Open Market Committee met in March suggests that economic growth slowed during the winter months, in part reflecting transitory factors. The pace of job gains moderated, and the unemployment rate remained steady. A range of labor market indicators suggests that underutilization of labor resources was little changed. Growth in household spending declined; households’ real incomes rose strongly, partly reflecting earlier declines in energy prices, and consumer sentiment remains high. Business fixed investment softened, the recovery in the housing sector remained slow, and exports declined. Inflation continued to run below the Committee’s longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Although growth in output and employment slowed during the first quarter, the Committee continues to expect that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Charles L. Evans, Stanley Fischer, Jeffrey M. Lacker, Dennis P. Lockhart, Jerome H. Powell, Daniel K. Tarullo, and John C. Williams.

Voting against this action: None.

It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, June 16-17, 2015. The meeting adjourned at 11:00 a.m. on April 29, 2015.

Notation Vote
By notation vote completed on April 7, 2015, the Committee unanimously approved the minutes of the Committee meeting held on March 17-18, 2015.

_____________________________

Thomas Laubach
Secretary


(por Gabriel Codas)


Fonte: Enfoque
Publicado em: 20/05/2015 15:30:19

Ricardo Eletro - Finance One
CVC - Hoteis - Finance One

Confira a ata do Fomc na íntegra (em inglês)


São Paulo, 18/03 (Enfoque) – Information received since the Federal Open Market Committee met in January suggests that economic growth has moderated somewhat. Labor market conditions have improved further, with strong job gains and a lower unemployment rate. A range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately; declines in energy prices have boosted household purchasing power. Business fixed investment is advancing, while the recovery in the housing sector remains slow and export growth has weakened. Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of energy price declines and other factors dissipate. The Committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Consistent with its previous statement, the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.


(por Gabriel Codas)


Fonte: Enfoque
Publicado em: 18/03/2015 15:06:01

Ricardo Eletro - Finance One
LATAM - Ofertas Brasil - Finance One

Confira a ata do Fomc na íntegra (em inglês)


São Paulo, 18/02 (Enfoque) – A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, January 27, 2015, at 10:00 a.m. and continued on Wednesday, January 28, 2015, at 9:00 a.m.
PRESENT:

Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
Charles L. Evans
Stanley Fischer
Jeffrey M. Lacker
Dennis P. Lockhart
Jerome H. Powell
Daniel K. Tarullo
John C. Williams

James Bullard, Esther L. George, Loretta J. Mester, and Eric Rosengren, Alternate Members of the Federal Open Market Committee

Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, Presidents of the Federal Reserve Banks of Dallas, Minneapolis, and Philadelphia, respectively

Thomas Laubach, Secretary and Economist

Matthew M. Luecke, Deputy Secretary

Michelle A. Smith, Assistant Secretary

Scott G. Alvarez, General Counsel

Thomas C. Baxter, Deputy General Counsel

Steven B. Kamin, Economist

David W. Wilcox, Economist

David Altig, Thomas A. Connors, Michael P. Leahy, Jonathan P. McCarthy, William R. Nelson, Glenn D. Rudebusch, Daniel G. Sullivan, and William Wascher, Associate Economists

Simon Potter, Manager, System Open Market Account

Lorie K. Logan, Deputy Manager, System Open Market Account

Robert deV. Frierson,1 Secretary of the Board, Office of the Secretary, Board of Governors

Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors

Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors

James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors

William B. English, Senior Special Adviser to the Board, Office of Board Members, Board of Governors

Andrew Figura, David Reifschneider, and Stacey Tevlin, Special Advisers to the Board, Office of Board Members, Board of Governors

Trevor A. Reeve, Special Adviser to the Chair, Office of Board Members, Board of Governors

David E. Lebow, Senior Associate Director, Division of Research and Statistics, Board of Governors

Michael T. Kiley, Senior Adviser, Division of Research and Statistics, and Senior Associate Director, Office of Financial Stability Policy and Research, Board of Governors

Jeremy B. Rudd, Senior Adviser, Division of Research and Statistics, Board of Governors; Joyce K. Zickler, Senior Adviser, Division of Monetary Affairs, Board of Governors

Fabio M. Natalucci2 and Gretchen C. Weinbach,3 Associate Directors, Division of Monetary Affairs, Board of Governors

Joseph W. Gruber, Deputy Associate Director, Division of International Finance, Board of Governors; David López-Salido, Deputy Associate Director, Division of Monetary Affairs, Board of Governors

Jennifer Gallagher, Special Assistant to the Board, Office of Board Members, Board of Governors

Edward Nelson, Assistant Director, Division of Monetary Affairs, Board of Governors; Shane M. Sherlund, Assistant Director, Division of Research and Statistics, Board of Governors

Burcu Duygan-Bump and Robert J. Tetlow,2 Advisers, Division of Monetary Affairs, Board of Governors; Eric C. Engstrom, Adviser, Division of Research and Statistics, Board of Governors

Penelope A. Beattie,1 Assistant to the Secretary, Office of the Secretary, Board of Governors

Dana L. Burnett and Christopher J. Gust, Section Chiefs, Division of Monetary Affairs, Board of Governors

Katie Ross,1 Manager, Office of the Secretary, Board of Governors

David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors

Carlos O. Arteta, Senior Economist, Division of International Finance, Board of Governors; Kimberly Bayard, Senior Economist, Division of Research and Statistics, Board of Governors; Elmar Mertens, Senior Economist, Division of Monetary Affairs, Board of Governors

Bernd Schlusche and Emre Yoldas, Economists, Division of Monetary Affairs, Board of Governors

Peter M. Garavuso, Information Management Analyst, Division of Monetary Affairs, Board of Governors

Blake Prichard, First Vice President, Federal Reserve Bank of Philadelphia

Jeff Fuhrer and Alberto G. Musalem, Executive Vice Presidents, Federal Reserve Banks of Boston and New York, respectively

Troy Davig, Michael Dotsey, Joshua L. Frost,4 Evan F. Koenig, Samuel Schulhofer-Wohl, and Christopher J. Waller, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Philadelphia, New York, Dallas, Minneapolis, and St. Louis, respectively

Todd E. Clark and Douglas Tillett, Vice Presidents, Federal Reserve Banks of Cleveland and Chicago, respectively

Robert L. Hetzel, Senior Economist, Federal Reserve Bank of Richmond

Annual Organizational Matters5
In the agenda for this meeting, it was reported that advices of the election of the following members and alternate members of the Federal Open Market Committee (the “Committee”) for a term beginning January 27, 2015, had been received and that these individuals had executed their oaths of office.

The elected members and alternate members were as follows:

William C. Dudley, President of the Federal Reserve Bank of New York, with Christine Cumming, First Vice President of the Federal Reserve Bank of New York, as alternate

Jeffrey M. Lacker, President of the Federal Reserve Bank of Richmond, with Eric Rosengren, President of the Federal Reserve Bank of Boston, as alternate

Charles L. Evans, President of the Federal Reserve Bank of Chicago, with Loretta J. Mester, President of the Federal Reserve Bank of Cleveland, as alternate

Dennis P. Lockhart, President of the Federal Reserve Bank of Atlanta, with James Bullard, President of the Federal Reserve Bank of St. Louis, as alternate

John C. Williams, President of the Federal Reserve Bank of San Francisco, with Esther L. George, President of the Federal Reserve Bank of Kansas City, as alternate

By unanimous vote, the following officers of the Committee were selected to serve until the selection of their successors at the first regularly scheduled meeting of the Committee in 2016:

Janet L. Yellen Chairman
William C. Dudley Vice Chairman
Thomas Laubach Secretary and Economist
Matthew M. Luecke Deputy Secretary
David W. Skidmore Assistant Secretary6
Michelle A. Smith Assistant Secretary
Scott G. Alvarez General Counsel
Thomas C. Baxter Deputy General Counsel
Richard M. Ashton Assistant General Counsel
Steven B. Kamin Economist
David W. Wilcox Economist

David Altig
Thomas A. Connors
Eric M. Engen
Michael P. Leahy
Jonathan P. McCarthy
William R. Nelson
Glenn D. Rudebusch
Daniel G. Sullivan
John A. Weinberg
William Wascher Associate Economists

By unanimous vote, the Federal Reserve Bank of New York was selected to execute transactions for the System Open Market Account (“SOMA”).

By unanimous vote, the Committee selected Simon Potter and Lorie K. Logan to serve at the pleasure of the Committee as manager and deputy manager of the SOMA, respectively, on the understanding that their selection was subject to their being satisfactory to the Federal Reserve Bank of New York.

Secretary’s note: Advice subsequently was received that the manager and deputy manager selections indicated above were satisfactory to the Federal Reserve Bank of New York.
By unanimous vote, the Authorization for Domestic Open Market Operations was approved with two sets of amendments. The first set of amendments aimed at simplifying the language by defining common terms, eliminating duplication of language, and standardizing references to the Committee.7 The second set of amendments clarified or modified existing authority, in particular by introducing the defined term “Selected Bank” as part of prudent planning to simplify transfer of authority from the Federal Reserve Bank of New York to another Federal Reserve Bank selected by the Committee in the event of a significant contingency, removing the authorization to use agents for agency mortgage-backed securities (“MBS”) transactions, defining the types of collateral accepted in securities lending operations described in paragraph 3, and updating the language relating to the Chair’s authority to act in exceptional circumstances.8 The Guidelines for the Conduct of System Open Market Operations in Federal-Agency Issues remained suspended.

AUTHORIZATION FOR DOMESTIC OPEN MARKET OPERATIONS
(As amended effective January 27, 2015)

1. The Federal Open Market Committee (the “Committee”) authorizes and directs the Federal Reserve Bank selected by the Committee to execute open market transactions (the “Selected Bank”), to the extent necessary to carry out the most recent domestic policy directive adopted by the Committee:

A. To buy or sell in the open market securities that are direct obligations of, or fully guaranteed as to principal and interest by, the United States, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, that are eligible for purchase or sale under Section 14(b) of the Federal Reserve Act (“Eligible Securities”) for the System Open Market Account (“SOMA”):

i. As an outright operation with securities dealers and foreign and international accounts maintained at the Selected Bank: on a same-day or deferred delivery basis (including such transactions as are commonly referred to as dollar rolls and coupon swaps) at market prices; or

ii. As a temporary operation: on a same-day or deferred delivery basis, to purchase such Eligible Securities subject to an agreement to resell (“repo transactions”) or to sell such Eligible Securities subject to an agreement to repurchase (“reverse repo transactions”) for a term of 65 business days or less, at rates that, unless otherwise authorized by the Committee, are determined by competitive bidding, after applying reasonable limitations on the volume of agreements with individual counterparties;

B. To allow Eligible Securities in the SOMA to mature without replacement;

C. To exchange, at market prices, in connection with a Treasury auction, maturing Eligible Securities in the SOMA with the Treasury, in the case of Eligible Securities that are direct obligations of the United States or that are fully guaranteed as to principal and interest by the United States; and

D. To exchange, at market prices, maturing Eligible Securities in the SOMA with an agency of the United States, in the case of Eligible Securities that are direct obligations of that agency or that are fully guaranteed as to principal and interest by that agency.

2. The Committee authorizes the Selected Bank to undertake transactions of the type described in paragraph 1 from time to time for the purpose of testing operational readiness, subject to the following limitations:

A. All transactions authorized in this paragraph 2 shall be conducted with prior notice to the Committee;

B. The aggregate par value of the transactions authorized in this paragraph 2 that are of the type described in paragraph 1.A.i shall not exceed $5 billion per calendar year; and

C. The outstanding amount of the transactions described in paragraph 1.A.ii shall not exceed $5 billion at any given time.

3. In order to ensure the effective conduct of open market operations, the Committee authorizes the Selected Bank to operate a program to lend Eligible Securities held in the SOMA to dealers on an overnight basis (except that the Selected Bank may lend Eligible Securities for longer than an overnight term to accommodate weekend, holiday, and similar trading conventions).

A. Such securities lending must be:

i. At rates determined by competitive bidding;

ii. At a minimum lending fee consistent with the objectives of the program;

iii. Subject to reasonable limitations on the total amount of a specific issue of Eligible Securities that may be auctioned; and

iv. Subject to reasonable limitations on the amount of Eligible Securities that each borrower may borrow.

B. The Selected Bank may:

i. Reject bids that, as determined in its sole discretion, could facilitate a bidder’s ability to control a single issue;

ii. Accept Treasury securities or cash as collateral for any loan of securities authorized in this paragraph 3; and

iii. Accept agency securities as collateral only for a loan of agency securities authorized in this paragraph 3.

4. In order to ensure the effective conduct of open market operations, while assisting in the provision of short-term investments or other authorized services for foreign central bank and international accounts maintained at a Federal Reserve Bank (the “Foreign Accounts”) and accounts maintained at a Federal Reserve Bank as fiscal agent of the United States pursuant to section 15 of the Federal Reserve Act (together with the Foreign Accounts, the “Customer Accounts”), the Committee authorizes the following when undertaken on terms comparable to those available in the open market:

A. The Selected Bank, for the SOMA, to undertake reverse repo transactions in Eligible Securities held in the SOMA with the Customer Accounts for a term of 65 business days or less; and

B. Any Federal Reserve Bank that maintains Customer Accounts, for any such Customer Account, when appropriate and subject to all other necessary authorization and approvals, to:

i. Undertake repo transactions in Eligible Securities with dealers with a corresponding reverse repo transaction in such Eligible Securities with the Customer Accounts; and

ii. Undertake intraday reverse repo transactions in Eligible Securities with Foreign Accounts.

Transactions undertaken with Customer Accounts under the provisions of this paragraph 4 may provide for a service fee when appropriate. Transactions undertaken with Customer Accounts are also subject to the authorization or approval of other entities, including the Board of Governors of the Federal Reserve System and, when involving accounts maintained at a Federal Reserve Bank as fiscal agent of the United States, the United States Department of the Treasury.

5. The Committee authorizes the Chairman of the Committee, in fostering the Committee’s objectives during any period between meetings of the Committee, to instruct the Selected Bank to act on behalf of the Committee to:

A. Adjust somewhat in exceptional circumstances the stance of monetary policy and to take actions that may result in material changes in the composition and size of the assets in the SOMA; or

B. Undertake transactions with respect to Eligible Securities in order to appropriately address temporary disruptions of an operational or highly unusual nature in U.S. dollar funding markets.

Any such adjustment described in subparagraph A of this paragraph 5 shall be made in the context of the Committee’s discussion and decision about the stance of policy at its most recent meeting and the Committee’s long-run objectives to foster maximum employment and price stability, and shall be based on economic, financial, and monetary developments since the most recent meeting of the Committee. The Chairman, whenever feasible, will consult with the Committee before making any instruction under this paragraph 5.

The Committee voted to amend the Authorization for Foreign Currency Operations and the Procedural Instructions with Respect to Foreign Currency Operations, and to reaffirm the Foreign Currency Directive in the form shown below. The approval of these documents included approval of the System’s warehousing agreement with the U.S. Treasury. A change was made to the Authorization for Foreign Currency Operations to increase the duration limit of the foreign currency portfolio to 24 months from 18 months. This change was made to provide greater flexibility in the management of the foreign currency portfolio, in an environment in which interest rates are low in many major economies. Mr. Lacker dissented in the votes on the Authorization for Foreign Currency Operations and the Foreign Currency Directive to indicate his opposition to foreign currency intervention by the Federal Reserve. In his view, such intervention would be ineffective if it did not also signal a shift in domestic monetary policy; and if it did signal such a shift, it could potentially compromise the Federal Reserve’s monetary policy independence.

AUTHORIZATION FOR FOREIGN CURRENCY OPERATIONS
(As amended effective January 27, 2015)

1. The Federal Open Market Committee (the “Committee”) authorizes and directs the Federal Reserve Bank selected by the Committee to execute open market transactions (the “Selected Bank”), for the System Open Market Account, to the extent necessary to carry out the Committee’s foreign currency directive and express authorizations by the Committee pursuant thereto, and in conformity with such procedural instructions as the Committee may issue from time to time:

A. To purchase and sell the following foreign currencies in the form of cable transfers through spot or forward transactions on the open market at home and abroad, including transactions with the U.S. Treasury, with the U.S. Exchange Stabilization Fund established by section 10 of the Gold Reserve Act of 1934, with foreign monetary authorities, with the Bank for International Settlements, and with other international financial institutions:

Australian dollars
Brazilian reais
Canadian dollars
Danish kroner
euro
Japanese yen
Korean won
Mexican pesos
New Zealand dollars
Norwegian kroner
Pounds sterling
Singapore dollars
Swedish kronor
Swiss francs
B. To hold balances of, and to have outstanding forward contracts to receive or to deliver, the foreign currencies listed in paragraph A above.

C. To draw foreign currencies and to permit foreign banks to draw dollars under the arrangements listed in paragraph 2 below, in accordance with the Procedural Instructions with Respect to Foreign Currency Operations.

D. To maintain an overall open position in all foreign currencies not exceeding $25.0 billion. For this purpose, the overall open position in all foreign currencies is defined as the sum (disregarding signs) of net positions in individual currencies, excluding changes in dollar value due to foreign exchange rate movements and interest accruals. The net position in a single foreign currency is defined as holdings of balances in that currency, plus outstanding contracts for future receipt, minus outstanding contracts for future delivery of that currency, i.e., as the sum of these elements with due regard to sign.

2. The Committee directs the Selected Bank to maintain for the System Open Market Account (subject to the requirements of section 214.5 of Regulation N, Relations with Foreign Banks and Bankers):

A. Reciprocal currency arrangements with the following foreign banks:
Foreign bank Amount of arrangement
(millions of dollars equivalent)
Bank of Canada 2,000
Bank of Mexico 3,000
B. Standing dollar liquidity swap arrangements with the following foreign banks:

Bank of Canada
Bank of England
Bank of Japan
European Central Bank
Swiss National Bank
C. Standing foreign currency liquidity swap arrangements with the following foreign banks:

Bank of Canada
Bank of England
Bank of Japan
European Central Bank
Swiss National Bank
Dollar and foreign currency liquidity swap arrangements have no pre-set size limits. Any new swap arrangements shall be referred for review and approval to the Committee. All swap arrangements are subject to annual review and approval by the Committee.

3. All transactions in foreign currencies undertaken under paragraph 1.A above shall, unless otherwise expressly authorized by the Committee, be at prevailing market rates. For the purpose of providing an investment return on System holdings of foreign currencies or for the purpose of adjusting interest rates paid or received in connection with swap drawings, transactions with foreign central banks may be undertaken at non-market exchange rates.

4. It shall be the normal practice to arrange with foreign central banks for the coordination of foreign currency transactions. In making operating arrangements with foreign central banks on System holdings of foreign currencies, the Selected Bank shall not commit itself to maintain any specific balance, unless authorized by the Committee. Any agreements or understandings concerning the administration of the accounts maintained by the Selected Bank with the foreign banks designated by the Board of Governors under section 214.5 of Regulation N shall be referred for review and approval to the Committee.

5. Foreign currency holdings shall be invested to ensure that adequate liquidity is maintained to meet anticipated needs and so that each currency portfolio shall generally have an average duration of no more than 24 months (calculated as Macaulay duration). Such investments may include buying or selling outright obligations of, or fully guaranteed as to principal and interest by, a foreign government or agency thereof; buying such securities under agreements for repurchase of such securities; selling such securities under agreements for the resale of such securities; and holding various time and other deposit accounts at foreign institutions. In addition, when appropriate in connection with arrangements to provide investment facilities for foreign currency holdings, U.S. government securities may be purchased from foreign central banks under agreements for repurchase of such securities within 30 calendar days.

6. All operations undertaken pursuant to the preceding paragraphs shall be reported promptly to the Foreign Currency Subcommittee (the “Subcommittee”) and the Committee. The Subcommittee consists of the Chairman and Vice Chairman of the Committee, the Vice Chairman of the Board of Governors, and such other member of the Board as the Chairman may designate (or in the absence of members of the Board serving on the Subcommittee, other Board members designated by the Chairman as alternates, and in the absence of the Vice Chairman of the Committee, the Vice Chairman’s alternate). Meetings of the Subcommittee shall be called at the request of any member, or at the request of the manager, System Open Market Account (“manager”), for the purposes of reviewing recent or contemplated operations and of consulting with the manager on other matters relating to the manager’s responsibilities. At the request of any member of the Subcommittee, questions arising from such reviews and consultations shall be referred for determination to the Committee.

7. The Chairman is authorized:

A. With the approval of the Committee, to enter into any needed agreement or understanding with the Secretary of the Treasury about the division of responsibility for foreign currency operations between the System and the Treasury;

B. To keep the Secretary of the Treasury fully advised concerning System foreign currency operations, and to consult with the Secretary on policy matters relating to foreign currency operations;

C. From time to time, to transmit appropriate reports and information to the National Advisory Council on International Monetary and Financial Policies.

8. All Federal Reserve Banks shall participate in the foreign currency operations for System Account in accordance with paragraph 3G(1) of the Board of Governors’ Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks dated January 1, 1944.

9. The Committee authorizes the Selected Bank to undertake transactions of the type described in paragraphs 1, 2, and 5, and foreign exchange and investment transactions that it may be otherwise authorized to undertake from time to time for the purpose of testing operational readiness. The aggregate amount of such transactions shall not exceed $2.5 billion per calendar year. These transactions shall be conducted with prior notice to the Committee.

FOREIGN CURRENCY DIRECTIVE
(As reaffirmed effective January 27, 2015)

1. System operations in foreign currencies shall generally be directed at countering disorderly market conditions, provided that market exchange rates for the U.S. dollar reflect actions and behavior consistent with IMF Article IV, Section 1.

2. To achieve this end the System shall:

A. Undertake spot and forward purchases and sales of foreign exchange.

B. Maintain reciprocal currency arrangements with foreign central banks in accordance with the Authorization for Foreign Currency Operations.

C. Maintain standing dollar liquidity swap arrangements with foreign banks in accordance with the Authorization for Foreign Currency Operations.

D. Maintain standing foreign currency liquidity swap arrangements with foreign banks in accordance with the Authorization for Foreign Currency Operations.

E. Cooperate in other respects with central banks of other countries and with international monetary institutions.

3. Transactions may also be undertaken:

A. To adjust System balances in light of probable future needs for currencies.

B. To provide means for meeting System and Treasury commitments in particular currencies, and to facilitate operations of the Exchange Stabilization Fund.

C. For such other purposes as may be expressly authorized by the Committee.

4. System foreign currency operations shall be conducted:

A. In close and continuous consultation and cooperation with the United States Treasury;

B. In cooperation, as appropriate, with foreign monetary authorities; and

C. In a manner consistent with the obligations of the United States in the International Monetary Fund regarding exchange arrangements under IMF Article IV.

PROCEDURAL INSTRUCTIONS WITH RESPECT TO FOREIGN CURRENCY OPERATIONS
(As amended effective January 27, 2015)

In conducting operations pursuant to the authorization and direction of the Federal Open Market Committee (the “Committee”) as set forth in the Authorization for Foreign Currency Operations and the Foreign Currency Directive, the Federal Reserve Bank selected by the Committee to execute open market transactions (the “Selected Bank”), through the manager, System Open Market Account (“manager”), shall be guided by the following procedural understandings with respect to consultations and clearances with the Committee, the Foreign Currency Subcommittee (the “Subcommittee”), and the Chairman of the Committee, unless otherwise directed by the Committee. All operations undertaken pursuant to such clearances shall be reported promptly to the Committee.

1. For the reciprocal currency arrangements authorized in paragraphs 2.A of the Authorization for Foreign Currency Operations:

A. Drawings must be approved by the Subcommittee (or by the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available) if the swap drawing proposed by a foreign bank does not exceed the larger of (i) $200 million or (ii) 15 percent of the size of the swap arrangement.

B. Drawings must be approved by the Committee (or by the Subcommittee, if the Subcommittee believes that consultation with the full Committee is not feasible in the time available, or by the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available) if the swap drawing proposed by a foreign bank exceeds the larger of (i) $200 million or (ii) 15 percent of the size of the swap arrangement.

C. The manager shall also consult with the Subcommittee or the Chairman about proposed swap drawings by the System.

D. Any changes in the terms of existing swap arrangements shall be referred for review and approval to the Chairman. The Chairman shall keep the Committee informed of any changes in terms, and the terms shall be consistent with principles discussed with and guidance provided by the Committee.

2. For the dollar and foreign currency liquidity swap arrangements authorized in paragraphs 2.B and 2.C of the Authorization for Foreign Currency Operations:

A. Drawings must be approved by the Chairman in consultation with the Subcommittee. The Chairman or the Subcommittee will consult with the Committee prior to the initial drawing on the dollar or foreign currency liquidity swap lines if possible under the circumstances then prevailing; authority to approve subsequent drawings for either the dollar or foreign currency liquidity swap lines may be delegated to the manager by the Chairman.

B. Any changes in the terms of existing swap arrangements shall be referred for review and approval to the Chairman. The Chairman shall keep the Committee informed of any changes in terms, and the terms shall be consistent with principles discussed with and guidance provided by the Committee.

3. Any operation must be approved by:

A. The Subcommittee (or by the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available) if it:

i. Would result in a change in the System’s overall open position in foreign currencies exceeding $300 million on any day or $600 million since the most recent regular meeting of the Committee.

ii. Would result in a change on any day in the System’s net position in a single foreign currency exceeding $150 million, or $300 million when the operation is associated with repayment of swap drawings.

iii. Might generate a substantial volume of trading in a particular currency by the System, even though the change in the System’s net position in that currency (as defined in paragraph 1.D of the Authorization for Foreign Currency Operations) might be less than the limits specified in 3.A.ii.

B. The Committee (or by the Subcommittee, if the Subcommittee believes that consultation with the full Committee is not feasible in the time available, or by the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available) if it would result in a change in the System’s overall open position in foreign currencies exceeding $1.5 billion since the most recent regular meeting of the Committee.

4. The Committee authorizes the Selected Bank to undertake transactions of the type described in paragraphs 1, 2, and 5 of the Authorization for Foreign Currency Operations and foreign exchange and investment transactions that it may be otherwise authorized to undertake from time to time for the purpose of testing operational readiness. The aggregate amount of such transactions shall not exceed $2.5 billion per calendar year. These transactions shall be conducted with prior notice to the Committee.

By unanimous vote, the Committee amended its Program for Security of FOMC Information with changes to how Federal Reserve Banks classify and access Committee information.

In its annual reconsideration of the Statement on Longer-Run Goals and Monetary Policy Strategy, participants generally agreed that only a minor update was required at this meeting. Several participants observed that this statement had helped to increase public understanding of the Committee’s goals and policy framework. It was noted, however, that the Committee should continue to discuss possible enhancements to the statement over the coming year.

Following the discussion, the Committee voted to reaffirm the statement with an updated reference to participants’ estimates of the longer-run normal unemployment rate. Mr. Tarullo abstained because he did not believe the statement reflects sufficient consensus in the principles underlying the Committee’s policy actions so as to significantly advance public understanding of its monetary policy strategy.

STATEMENT ON LONGER-RUN GOALS AND MONETARY POLICY STRATEGY
(As amended effective January 27, 2015)

“The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.

Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee’s policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee’s goals.

The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee’s ability to promote maximum employment in the face of significant economic disturbances. The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee’s policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants’ estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC’s Summary of Economic Projections. For example, in the most recent projections, FOMC participants’ estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 5.5 percent.

In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee’s assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate.

The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January.”
Developments in Financial Markets and the Federal Reserve’s Balance Sheet
In a joint session of the Committee and the Board of Governors of the Federal Reserve System, the manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets. The deputy manager followed with a review of System open market operations conducted during the period since the Committee met on December 16-17, 2014. The deputy manager also discussed the outcomes of recent tests of term and overnight reverse repurchase agreements (term RRPs and ON RRPs, respectively). These tests suggested that the combination of term RRP and ON RRP operations had been effective in supporting money market rates leading into and over year-end. The presentation also outlined some staff recommendations for further testing of Term Deposit Facility operations.

By unanimous vote, the Committee ratified the Open Market Desk’s domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System’s account over the intermeeting period.

Liftoff Tools and Possible Liftoff Options
A staff briefing provided some background on possible options for the use of supplementary tools, in addition to interest on excess reserves (IOER), that the Committee could choose to use during the early stages of policy normalization. The purpose of these options was to help ensure sufficient control over the federal funds rate and other short-term interest rates during this period while mitigating potential risks associated with particular policy tools. The presentation discussed the possibility of establishing, on a temporary basis, an aggregate cap for ON RRP operations that was substantially above the cap the Committee had chosen for the purposes of testing such operations. In addition, the presentation discussed the possible use of term RRP operations, either before or after the commencement of policy firming, as a way to reinforce control of short-term interest rates and to manage the size of the ON RRP program. Other possible options presented at the briefing included adjusting the values of the IOER and ON RRP rates associated with a given target range for the federal funds rate and the use of term deposits.

In their discussion of these issues, participants generally agreed that it was very important for the commencement of policy firming to proceed successfully. Consequently, most were prepared to take the steps necessary to ensure that the federal funds rate traded within the target range established by the Federal Open Market Committee (FOMC). However, a few participants noted that day-to-day volatility in the federal funds rate, potentially including temporary movements outside the target range, would not be surprising, and that historical experience suggested that such temporary movements had few, if any, implications for overall financial conditions or the aggregate economy.

With regard to the appropriate setting of the cap for ON RRP operations at the beginning of normalization, the staff reported that testing to date suggested that ON RRP operations have generally been successful in establishing a floor on the level of the federal funds effective rate and other short-term interest rates, as long as market participants judge that the aggregate cap is quite unlikely to bind. Against this backdrop, most meeting participants indicated that a sizable ON RRP cap would be appropriate to support policy implementation at the time of liftoff, and a couple of participants suggested that the aggregate cap might be suspended for a time. A couple of participants expressed continued concerns about the potential risks to financial stability associated with a large ON RRP facility and the possible effect of such a facility on patterns of financial intermediation. Moreover, some participants were concerned that a decision to allow a temporary increase in the maximum size of the ON RRP facility could be viewed by market participants as a signal that a large ON RRP facility would be maintained for a longer period than those participants deemed appropriate. While acknowledging these concerns, many participants believed that a temporarily elevated cap on the ON RRP operations at a time when the Committee saw conditions as appropriate to begin normalization would likely pose limited risks; another participant judged that an ON RRP program was, in any case, unlikely to materially increase the risks to financial stability. Some participants noted that a relatively high cap could be established and then reduced fairly soon after the initial policy firming if it was determined that it was not needed, and that such a reduction could help underscore the Committee’s intent to use such a facility only to the extent necessary. A number of participants emphasized that the Committee should develop plans to ensure that such a facility is temporary and that it can be phased out once it is no longer needed to help control the federal funds rate.

With regard to the possible use of term RRP operations as an additional supplementary tool, participants noted that recent testing showed that term RRP operations ahead of the year-end were associated with a significant decline in the level of take-up at ON RRP operations. The staff presentation suggested that risks to financial stability associated with term RRPs could be somewhat lower than those associated with ON RRP operations because term RRP operations would be conducted only on selected dates, the Federal Reserve would set the quantity auctioned, and the rate on term RRPs would be determined by the auction process. However, a few participants expressed the view that term RRPs were unlikely to lower risks to financial stability significantly. In addition, some participants noted that the use of term RRP operations could complicate communications. A few others observed that the Committee should not design its operations to reduce year-end or quarter-end volatility induced by financial firms’ reporting practices. Nonetheless, many participants agreed that the use of term RRP operations during the period of policy tightening could be useful in some situations.

With regard to the potential use of other tools, several participants noted that the IOER and ON RRP rates should be set at the top and bottom, respectively, of the target range for the federal funds rate. To deviate from such a structure would complicate communications about the policy framework and therefore should be avoided if possible. However, some participants judged that adjustments to the relationship of the IOER rate and the ON RRP rate to the target range for the federal funds rate might, in some circumstances, be helpful for improving control of the federal funds rate. A few participants noted that use of term deposits during the tightening phase could also be appropriate in some circumstances.

The staff presentation also discussed a technical issue related to the calculation of the payment of interest on reserves. Under current arrangements, an increase in the IOER rate that is implemented in the middle of a reserve maintenance period is not fully reflected in interest payments to depository institutions until the beginning of a new maintenance period. Participants generally suggested that it would be useful for the staff to investigate changes in the method used to determine the interest payments on reserves that could tighten the link between the IOER rate in place each day and the level of reserve balances held by depository institutions each day.

At the conclusion of their discussion, participants generally agreed that it would be useful to discuss further at coming meetings specific calibrations of policy tools that could be used during the early stages of policy normalization. In addition, many noted that it would be useful to communicate additional information to the public on these issues to provide greater clarity about the Committee’s approach to policy implementation at that time.

A staff briefing outlined two proposals that the Committee could consider for further testing of term RRP operations. In the first of these proposals, the Desk would conduct a series of preannounced term RRP operations that would span the end of the first quarter. In the second proposal, the Desk would conduct small term RRP operations in February and early March, in addition to the quarter-end option presented in the first proposal. In their discussion of term RRP testing, participants noted that the testing could provide further information about the substitutability between the ON and term RRP operations, including outside year-end and quarter-end periods. A number of participants emphasized that, even if the Committee conducted additional tests, it had not yet decided whether to use term RRP operations as part of policy normalization.

Following the discussion of the testing of term RRP operations, the Committee approved the following resolution on term RRP testing over the end of the first quarter of 2015:

“During the period of March 19, 2015, to March 30, 2015, the Federal Open Market Committee (FOMC) authorizes the Federal Reserve Bank of New York to conduct a series of term reverse repurchase operations involving U.S. government securities. Such operations shall: (i) mature no later than April 9, 2015; (ii) be subject to an overall size limit of $200 billion outstanding at any one time; (iii) be subject to a maximum bid rate of five basis points above the ON RRP offering rate in effect on the day of the operation; (iv) be awarded to all submitters: (A) at the highest submitted rate if the sum of the bids received is less than or equal to the preannounced size of the operation, or (B) at the stop-out rate, determined by evaluating bids in ascending order by submitted rate up to the point at which the total quantity of bids equals the preannounced size of the operation, with all bids below this rate awarded in full at the stop-out rate and all bids at the stop-out rate awarded on a pro rata basis, if the sum of the counterparty offers received is greater than the preannounced size of the operation. Such operations may be for forward settlement. The System Open Market Account manager will inform the FOMC in advance of the terms of the planned operations. The Chair must approve the terms of, timing of the announcement of, and timing of the operations. These operations shall be conducted in addition to the authorized overnight reverse repurchase agreements, which remain subject to a separate overall size limit of $300 billion per day.”
The Committee also approved the following resolution on testing term RRP operations during February and March:

“During the period of February 12, 2015, to March 10, 2015, the Federal Open Market Committee (FOMC) authorizes the Federal Reserve Bank of New York to conduct a series of term reverse repurchase operations involving U.S. government securities. Such operations shall: (i) mature no later than March 12, 2015; (ii) be subject to an overall size limit of $50 billion outstanding at any one time; (iii) be subject to a maximum bid rate of five basis points above the ON RRP offering rate in effect on the day of the operation; (iv) be awarded to all submitters: (A) at the highest submitted rate if the sum of the bids received is less than or equal to the preannounced size of the operation, or (B) at the stop-out rate, determined by evaluating bids in ascending order by submitted rate up to the point at which the total quantity of bids equals the preannounced size of the operation, with all bids below this rate awarded in full at the stop-out rate and all bids at the stop-out rate awarded on a pro rata basis, if the sum of the counterparty offers received is greater than the preannounced size of the operation. Such operations may be for forward settlement. The System Open Market Account manager will inform the FOMC in advance of the terms of the planned operations. The Chair must approve the terms of, timing of the announcement of, and timing of the operations. These operations shall be conducted in addition to the authorized overnight reverse repurchase agreements, which remain subject to a separate overall size limit of $300 billion per day.”
Mr. Lacker dissented in the votes on both resolutions because he felt that the testing to date had already provided sufficient information about this tool, and that authorizing further testing could encourage the incorrect impression that the Committee had already decided that it would be engaging in term RRP operations during the period of policy normalization.

The Board meeting concluded at the end of the discussion of liftoff tools and possible liftoff options.

Staff Review of the Economic Situation
The information reviewed for the January 27-28 meeting indicated that economic activity expanded at a solid pace over the second half of 2014, and that labor market conditions had again improved in recent months. Consumer price inflation moved further below the FOMC’s longer-run objective of 2 percent, held down by continuing large decreases in energy prices. While longer-term market-based measures of inflation compensation declined substantially in recent months, survey measures of longer-run inflation expectations remained stable.

Total nonfarm payroll employment expanded in December and the gains for October and November were revised up, putting the increase for the fourth quarter above that for the third quarter. The unemployment rate declined to 5.6 percent in December, the labor force participation rate decreased, and the employment-to-population rate was unchanged. The share of workers employed part time for economic reasons declined. The rate of private-sector job openings moved up in November, while the rates of hiring and of quits edged down but remained well above their year-earlier readings.

Industrial production rose at a robust pace in the fourth quarter, with a strong increase in manufacturing output and a modest gain in mining output. Automakers’ assembly schedules for the first quarter and broader indicators of manufacturing production, such as the readings on new orders from national and regional manufacturing surveys, generally pointed to moderate gains in factory output early this year. In contrast, some indicators of mining activity, such as counts of drilling rigs in operation, weakened, presumably reflecting the recent sharp declines in energy prices.

Real personal consumption expenditures (PCE) appeared to have risen at a robust pace over the second half of 2014. Data on spending in the third quarter were revised up, and the components of nominal retail sales used to construct estimates of PCE rose briskly in the fourth quarter. Light motor vehicle sales in the fourth quarter maintained their robust third-quarter pace. Important factors influencing household spending remained supportive of further solid gains in real PCE early this year. Real disposable personal income increased in November; since then, continued declines in energy prices likely raised the purchasing power of households’ incomes. Households’ net worth likely increased as home values and equity prices advanced, and consumer sentiment, as measured by the Thomson Reuters/University of Michigan Surveys of Consumers, moved up in early January to its highest level in more than a decade.

The pace of housing market activity improved somewhat but remained slow. Starts of new single-family homes increased in December to their highest level since 2008, and permits for new construction also moved higher. Starts of multifamily units were unchanged in December and within the range they have been in for the past year. Sales of new homes increased, on net, in November and December, while sales of existing homes declined, on average, over those two months.

Real private expenditures for business equipment and intellectual property appeared to decelerate in the fourth quarter. Nominal orders and shipments of nondefense capital goods, excluding aircraft, declined in November and December. Moreover, the level of new orders for these capital goods was only a little above that for shipments, which pointed to modest near-term gains in business equipment spending despite relatively positive readings on business conditions from national and regional surveys. Firms’ nominal spending for nonresidential structures edged down in November but remained higher than in the third quarter.

Real federal government purchases appeared likely to have decreased sharply in the fourth quarter, reversing much of the surprisingly strong increase in the third quarter. Real state and local government purchases were rising modestly in the fourth quarter, as nominal construction expenditures for October and November were little changed, on net, and the payrolls of these governments increased somewhat.

The U.S. international trade deficit narrowed substantially in November, with imports declining more than exports. The decrease in the value of imports stemmed in large part from a reduction in the value of petroleum imports, reflecting both lower prices and volumes. However, many other categories of goods imports were also weaker. Export declines were concentrated in capital goods, particularly aircraft. Despite the narrowing of the nominal trade deficit in November, real net exports appeared to be on track to decline in the fourth quarter after adding considerably to real gross domestic product (GDP) growth in the third quarter.

Total U.S. consumer prices, as measured by the PCE price index, increased 1-1/4 percent over the 12 months ending in November, while core prices, as measured by PCE prices excluding food and energy, rose about 1-1/2 percent; consumer energy prices declined, and consumer food prices increased faster than overall prices. Over the 12 months ending in December, total inflation as measured by the consumer price index (CPI) was 3/4 percent, while core CPI inflation was 1-1/2 percent. Over the 3 months ending in December, the total CPI decreased at an annual rate of 2-1/2 percent, reflecting recent declines in consumer energy prices, and the core CPI increased at a 1 percent pace. Measures of expected long-run inflation from a variety of surveys, including the Michigan survey and the Desk’s Survey of Primary Dealers, remained stable. In contrast, market-based measures of inflation compensation 5 to 10 years ahead declined further. Over the 12 months ending in December, nominal average hourly earnings for all employees increased only slightly faster than core consumer price inflation.

Foreign real GDP growth appeared to increase slightly in the fourth quarter. In the euro area, retail sales, car registrations, and industrial production through November were above their third-quarter averages, and in Japan, strengthening consumption and exports suggested a recovery of output after two quarters of contraction. However, growth slowed in China, partly reflecting further moderation in residential investment, and declining construction activity also contributed to slowing GDP growth in Korea and the United Kingdom. Inflation in the advanced foreign economies declined sharply at the end of last year, amid rapidly falling energy prices. By contrast, inflation in the emerging market economies fell only modestly, as several of these economies have government-administered energy prices and some have been experiencing upward price pressures from currency depreciations.

Staff Review of the Financial Situation
Over the intermeeting period, amid trading that was volatile at times, longer-term sovereign yields in the United States and other advanced economies declined. These moves were attributed in part to a deterioration in market sentiment associated with downward pressure on inflation, increased concern about the global economic outlook, and announced and anticipated foreign central bank policies. Moreover, continued sharp declines in oil prices and U.S. economic data releases that were viewed by investors as a bit weaker than anticipated, on balance, reportedly weighed on sentiment.

Federal Reserve communications over the intermeeting period were apparently seen as about in line with expectations on balance. However, reflecting in part the deterioration in market sentiment, the expected path for the federal funds rate implied by market quotes shifted down. Results from the Desk’s January Survey of Primary Dealers indicated that dealers continued to put the highest probability on scenarios in which the FOMC chooses to commence policy firming around the middle of the year, although the average probability assigned to a commencement after June increased somewhat.

Yields on nominal Treasury securities continued to move lower over the intermeeting period, with market expectations of the policy rate path being revised downward, and with term premiums declining, in part reflecting actual and expected policy easing abroad. On balance, the Treasury yield curve flattened over the intermeeting period, while interest rate volatility increased somewhat. Although the measure of inflation compensation over the next 5 years based on Treasury Inflation-Protected Securities (TIPS) increased, inflation compensation 5 to 10 years ahead declined further to its lowest level in a decade. Yields on 5- and 10-year TIPS moved lower over the period.

Over the intermeeting period, U.S. equity markets were volatile. Option-implied volatility for the S&P 500 index declined, on balance, but remained in the upper half of the range seen over the past year. Broad U.S. equity price indexes moved higher, while stock prices for large domestic banking organizations moved lower on net. Corporate bond spreads were also volatile over the intermeeting period but were little changed, on net, for investment-grade issuers and ended the period lower for speculative-grade issuers, particularly energy companies.

Credit flows to nonfinancial firms generally remained strong through the last quarter of 2014, though they slowed somewhat for riskier firms. Gross corporate bond issuance continued to be solid, although speculative-grade bond issuance declined late in the year and remained subdued into January. Commercial and industrial loans on banks’ books continued to expand at a robust rate in the fourth quarter of 2014, consistent with the stronger loan demand from large and middle-market firms reported in the January Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS). Issuance of syndicated leveraged loans in the fourth quarter was at its slowest pace in two years, as spreads on newly issued loans increased and refinancing activity declined significantly. Issuance of collateralized loan obligations declined but remained elevated; 2014 was the strongest year on record for the issuance of such securities.

Financing conditions in the commercial real estate (CRE) sector stayed accommodative. In the January SLOOS, banks reported that standards continued to ease, on net, for CRE lending and noted stronger demand for all CRE loan types. Issuance of commercial mortgage-backed securities continued at a solid pace in November and December.

Residential mortgage credit conditions, while remaining tight, showed some further signs of gradual easing. According to the January SLOOS, lending standards eased for a number of categories of residential mortgage loans in the fourth quarter. The price of mortgage credit for qualified borrowers declined again over the intermeeting period, with interest rates on 30-year fixed-rate mortgages reaching levels close to their all-time lows. Refinance applications rose near the end of the intermeeting period.

Conditions in consumer credit markets stayed largely accommodative over the intermeeting period. Auto and student loan balances continued to post significant gains through November, while the expansion of credit card loans on banks’ books remained moderate during the fourth quarter as a whole. Respondents to the January SLOOS indicated that demand for auto and credit card loans had strengthened further in the fourth quarter. Consumer credit quality has remained strong on balance. The credit performance of auto loans, however, reportedly deteriorated a bit further for some lenders, and several banks indicated in the January SLOOS that they expect the performance of subprime auto loans to worsen this year.

The U.S. dollar strengthened against the currencies of most other advanced economies amid investor concerns about growth in those economies as well as increased monetary accommodation in some of them; the dollar was largely unchanged, on average, against the currencies of emerging market economies. Sovereign yields abroad moved lower, with euro-area yields reflecting the expected and actual easing of the stance of monetary policy by the European Central Bank (ECB) and U.K. yields responding to a shift in expectations toward a later start of Bank of England policy firming. Global equity markets were broadly higher, rebounding from declines in mid-December.

Several central banks announced monetary policy actions during the period. The ECB announced that it would expand its asset purchase program to include the purchase of sovereign bonds; the euro depreciated significantly against the dollar both in anticipation of and following this announcement. The Swiss National Bank (SNB) ended its policy of defending the exchange rate floor of 1.20 Swiss francs per euro, resulting in a significant appreciation of the franc. At the same time, the SNB reduced policy rates, moving the rate it pays on deposits and its target range for Swiss franc LIBOR, or London interbank offered rate, further into negative territory. The Bank of Canada, National Bank of Denmark, Reserve Bank of India, and Central Bank of Turkey also cut policy rates in January to support their economies and, in some cases, to foster higher inflation, while the Central Bank of Brazil raised rates in response to concerns about elevated inflation.

The staff provided its latest report on potential risks to financial stability. Relatively high levels of capital and liquidity in the banking sector, moderate levels of maturity transformation in the financial sector, and a relatively subdued pace of borrowing by the nonfinancial sector continued to be seen as important factors limiting the vulnerability of the financial system to adverse shocks. However, the staff report noted valuation pressures in some asset markets. Such pressures were most notable in corporate debt markets, despite some easing in recent months. In addition, valuation pressures appear to be building in the CRE sector, as indicated by rising prices and the easing in lending standards on CRE loans. Finally, the increased role of bond and loan mutual funds, in conjunction with other factors, may have increased the risk that liquidity pressures could emerge in related markets if investor appetite for such assets wanes. The effects on the largest banking firms of the sharp decline in oil prices and developments in foreign exchange markets appeared limited, although other institutions with more concentrated exposures could face strains if oil prices remain at current levels for a prolonged period.

Staff Economic Outlook
The staff estimated that real GDP growth in the second half of 2014 was faster than in the projection prepared for the December meeting, primarily reflecting stronger-than-expected consumer spending. Even so, real GDP was still estimated to have risen more slowly in the fourth quarter than in the third quarter, as changes in both net exports and federal government purchases appeared likely to have subtracted from real GDP growth in the fourth quarter following large positive contributions in the previous quarter.

The staff’s outlook for economic activity over the first half of 2015 was revised up since December, in part reflecting an anticipated boost to consumer spending from declines in energy prices. However, the forecast for real GDP growth over the medium term was little revised, as the greater momentum implied by recent spending gains and the support to household spending from lower energy prices was about offset by the restraint implied by the recent appreciation of the dollar. The staff continued to forecast that real GDP would expand at a modestly faster pace in 2015 and 2016 than it did in 2014 and that it would rise more quickly than potential output, supported by increases in consumer and business confidence and a pickup in foreign economic growth, as well as by a U.S. monetary policy stance that was assumed to remain highly accommodative for some time. In 2017, real GDP growth was projected to begin slowing toward, but to remain slightly above, the rate of growth of potential output. The expansion in economic activity over the medium term was anticipated to lead to a slow reduction in resource slack, and the unemployment rate was expected to decline gradually and to move slightly below the staff’s estimate of its longer-run natural rate for a time.

The staff’s forecast for inflation in the near term was revised down, as further sharp declines in crude oil prices since the December FOMC meeting pointed toward a somewhat larger transitory decrease in the total PCE price index early this year than was previously projected. In addition, the incoming data on consumer prices apart from those for energy showed a somewhat smaller rise than anticipated. The staff’s forecast for inflation in 2016 and 2017 was essentially unchanged, with inflation projected to remain below the Committee’s 2 percent objective. Nevertheless, inflation was projected to reach 2 percent over time, with inflation expectations in the longer run assumed to be consistent with the Committee’s objective and slack in labor and product markets anticipated to fade.

The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average over the past 20 years. The risks to the forecast for real GDP growth were viewed as tilted a little to the downside, reflecting the staff’s assessment that neither monetary policy nor fiscal policy was well positioned to help the economy withstand adverse shocks. At the same time, the staff viewed the risks around its outlook for the unemployment rate as roughly balanced. The downside risks to the forecast for inflation were seen as having increased somewhat, partly reflecting the recent soft monthly readings on core inflation.

Participants’ Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants regarded the information received over the intermeeting period as indicating that economic activity had been expanding at a solid pace. Although growth likely slowed from the rapid rate recorded for the third quarter of 2014, a variety of indicators suggested that real GDP continued to grow faster than potential GDP late in the year and during January. Labor market conditions improved further, with strong job gains and a lower unemployment rate; participants judged that the underutilization of labor resources was continuing to diminish. Participants expected that, over the medium term, real economic activity would increase at a moderate pace sufficient to lead to further improvements in labor market conditions toward levels consistent with the Committee’s objective of maximum employment. Inflation had declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices, and was anticipated to decline further in the near term. Market-based measures of inflation compensation 5 to 10 years ahead had registered a further decline, while survey-based measures of longer-term inflation expectations remained stable. Participants generally anticipated that inflation would rise gradually toward the Committee’s 2 percent objective as the labor market improved further and the transitory effects of lower energy prices and other factors dissipated. The risks to the outlook for economic activity and the labor market were seen as nearly balanced. Participants generally regarded the net effect of the recent decline in energy prices as likely to be positive for economic activity and employment. Many participants continued to judge that a deterioration in the foreign economic situation could pose downside risks to the outlook for U.S. economic growth. Several saw those risks as having diminished over the intermeeting period, with lower oil prices and actions of foreign central banks both being supportive of growth abroad, but others pointed to heightened geopolitical and other risks.

With respect to the U.S. economy, participants noted that household spending was rising moderately. Recent declines in oil prices, which had boosted household purchasing power, were among the factors likely to underpin consumer spending in coming months; other factors cited as supporting household spending included low interest rates, easing credit standards, and continued gains in employment and income. However, it was noted that the recovery in the housing sector remained slow and that tepid nominal wage growth, if continued, could become a significant restraining factor for household spending.

Industry contacts pointed to generally solid business conditions, with businesses in many parts of the country continuing to express optimism about prospects for further improvement in 2015. Although manufacturing activity appeared to have slowed somewhat over the intermeeting period in some regions, business contacts suggested that this slowing was likely to prove temporary, and information from some parts of the country suggested that capital investment was poised to pick up. Several participants noted that there were signs of layoffs in the oil and gas industries, and that persistently low energy prices might prompt a larger retrenchment of employment in these industries. In addition, it was observed that if capital investment in energy-producing industries slowed significantly, it could damp the overall expansion of economic activity for a period, especially if the slowing took place after most of the positive effects of lower energy prices on growth in household spending had occurred. A few participants observed that government spending was unlikely to be a major contributor to the expansion of demand in the period ahead, with real federal purchases projected to be fairly flat over the medium term.

In their discussion of the foreign economic outlook, participants noted that a number of developments over the intermeeting period had likely reduced the risks to U.S. growth. Accommodative policy actions announced by a number of foreign central banks had likely strengthened the outlook abroad. The decline in energy prices was also seen as potentially exerting a stronger-than-anticipated positive effect on growth in the domestic economy and abroad. However, the increase in the foreign exchange value of the dollar was expected to be a persistent source of restraint on U.S. net exports, and a few participants pointed to the risk that the dollar could appreciate further. In addition, the slowdown of growth in China was noted as a factor restraining economic expansion in a number of countries, and several continuing risks to the international economic outlook were cited, including global disinflationary pressure, tensions in the Middle East and Ukraine, and financial uncertainty in Greece. Overall, the risks to the outlook for U.S. economic activity and the labor market were seen as nearly balanced.

Participants noted that inflation had moved further below the Committee’s longer-run objective, largely reflecting declines in energy prices and other transitory factors. A number of participants observed that, with anchored inflation expectations, the fall in energy prices should not leave an enduring imprint on aggregate inflation. It was pointed out that the recent intensification of downward pressure on inflation reflected price movements that were concentrated in a narrow range of items in households’ consumption basket, a pattern borne out by trimmed mean measures of inflation. Several participants remarked that inflation measures that excluded energy items had also moved down in recent months, but these declines partly reflected transitory factors, including downward pressure on import prices and the pass-through of lower energy costs to the prices of non- energy items. Nonetheless, several participants saw the continuing weakness of core inflation measures as a concern. In addition, a few participants suggested that the weakness of nominal wage growth indicated that core and headline inflation could take longer to return to 2 percent than the Committee anticipated. In contrast, a couple of participants suggested that nominal wage growth provides little information about the future behavior of price inflation. Participants also discussed the possibility that, because of the infrequent occurrence of reductions in nominal wages, wages may not have fully adjusted downward in the period of high unemployment, and therefore pent-up wage deflation might have weighed on wage gains for a time during the expansion. If this was the case, nominal wage growth could be expected to pick up in coming periods and to resume a more normal relationship with labor market slack. Most participants expected that continuing reductions in resource slack would be helpful in returning inflation over the medium term to the Committee’s 2 percent longer-run objective, but a few participants voiced concern that nominal wage growth might rise rapidly and inflation might exceed 2 percent for a time.

Participants discussed the sizable decline in market-based measures of inflation compensation that had been observed over the past year and continued over the intermeeting period. A number of them judged that the decline mostly reflected a reduction in the risk premiums embedded in nominal interest rates rather than a decline in inflation expectations; this interpretation was supported by results of some analytical models used to decompose movements in market-based measures of inflation compensation and also by the continuing stability of survey-based measures of inflation expectations. However, other participants put some weight on the possibility that the decline in inflation compensation reflected a reduction in expected inflation. These participants further argued that the stability of survey-based measures of inflation expectations should not be taken as providing much reassurance; in particular, it was noted that in Japan in the late 1990s and early 2000s, survey-based measures of longer-term inflation expectations had not recorded major declines even as a disinflationary process had become entrenched. In addition, a few participants argued that even if the shift down in inflation compensation reflected lower inflation risk premiums rather than reductions in expected inflation, policymakers might still want to take that decline into account because it could reflect increased concern on the part of investors about adverse outcomes in which low inflation was accompanied by weak economic activity. Participants generally agreed that the behavior of market-based measures of inflation compensation needed to be monitored closely.

Participants also discussed other aspects of the substantial decline in nominal longer-term interest rates and its implications. The fall had occurred despite the strengthening U.S. economic outlook and market expectations that policy normalization could begin later this year. Some participants suggested that shifts of funds from abroad into U.S. Treasury securities may have put downward pressure on term premiums; the shifts, in turn, may have reflected in part a reaction to declines in foreign sovereign yields in response to actual and anticipated monetary policy actions abroad. A couple of participants noted that the reduction in longer-term real interest rates tended to make U.S. financial conditions more accommodative, potentially calling for a somewhat higher path for the federal funds rate going forward. Others observed that insofar as the shifts reflected concerns about growth prospects abroad or were accompanied by a stronger dollar, the implications for U.S. monetary policy were less clear. It was further noted that investment flows from abroad could also be contributing to the decline in TIPS-based measures of inflation compensation, as such flows tend to be concentrated in nominal Treasury securities rather than inflation-protected securities.

Participants saw broad-based improvement in labor market conditions over the intermeeting period, including strong gains in payroll employment and a further reduction in the unemployment rate. Some participants believed that considerable labor market slack remained, especially when indicators other than the unemployment rate were taken into account, including the unusually large fraction of the labor force working part time for economic reasons. A few observed that the combination of recent labor market improvements and continued softness in inflation had led them to lower their estimates of the longer-run normal rate of unemployment. However, a few others saw only a limited degree of remaining labor underutilization or anticipated that underutilization would be eliminated relatively soon.

Participants’ Discussion of Policy Planning
Participants discussed considerations related to the choice of the appropriate timing of the initial firming in monetary policy and pace of subsequent rate increases. Ahead of this discussion, the staff gave a presentation that outlined some of the key issues likely to be involved, including the extent to which similar economic outcomes could be generated by different combinations of the date of the initial firming of policy and the pace of rate increases thereafter, how these combinations could affect the risks to economic outcomes, a review of past episodes in the United States and abroad in which monetary policy transitioned to a tightening phase after a lengthy period of low policy rates, and issues related to communications regarding the likely timing and pace of normalization.

Participants discussed the tradeoffs between the risks that would be associated with departing from the effective lower bound later and those that would be associated with departing earlier. Several participants noted that a late departure could result in the stance of monetary policy becoming excessively accommodative, leading to undesirably high inflation. It was also suggested that maintaining the federal funds rate at its effective lower bound for an extended period or raising it rapidly, if that proved necessary, could adversely affect financial stability. Some participants were concerned that a decision to delay the commencement of tightening could be perceived as indicating that an overly accommodative policy is likely to prevail during the firming phase. In connection with the risks associated with an early start to policy normalization, many participants observed that a premature increase in rates might damp the apparent solid recovery in real activity and labor market conditions, undermining progress toward the Committee’s objectives of maximum employment and 2 percent inflation. In addition, an earlier tightening would increase the likelihood that the Committee might be forced by adverse economic outcomes to return the federal funds rate to its effective lower bound. Some participants noted the communications challenges associated with the prospect of commencing policy tightening at a time when inflation could be running well below 2 percent, and a few expressed concern that in some circumstances the public could come to question the credibility of the Committee’s 2 percent goal. Indeed, one participant recommended that, in light of the outlook for inflation, the Committee consider ways to use its tools to provide more, not less, accommodation.

Many participants indicated that their assessment of the balance of risks associated with the timing of the beginning of policy normalization had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time. Some observed that, even with these risks taken into consideration, the federal funds rate may have already been kept at its lower bound for a sufficient length of time, and that it might be appropriate to begin policy firming in the near term. Regardless of the particular strategy undertaken, it was noted that, provided that the data-dependent nature of the path for the federal funds rate after its initial increase could be communicated to financial markets and the general public in an effective manner, the precise date at which firming commenced would have a less important bearing on economic outcomes.

Participants discussed the economic conditions that they anticipate will prevail at the time they expect it will be appropriate to begin normalizing policy. There was wide agreement that it would be difficult to specify in advance an exhaustive list of economic indicators and the values that these indicators would need to take. Nonetheless, a number of participants suggested that they would need to see further improvement in labor market conditions and data pointing to continued growth in real activity at a pace sufficient to support additional labor market gains before beginning policy normalization. Many participants indicated that such economic conditions would help bolster their confidence in the likelihood of inflation moving toward the Committee’s 2 percent objective after the transitory effects of lower energy prices and other factors dissipate. Some participants noted that their confidence in inflation returning to 2 percent would also be bolstered by stable or rising levels of core PCE inflation, or of alternative series, such as trimmed mean or median measures of inflation. A number of participants emphasized that they would need to see either an increase in market-based measures of inflation compensation or evidence that continued low readings on these measures did not constitute grounds for concern. Several participants indicated that signs of improvements in labor compensation would be an important signal, while a few others deemphasized the value of labor compensation data for judging incipient inflation pressures in light of the loose short-run empirical connection between wage and price inflation.

Participants discussed the communications challenges associated with signaling, when it becomes appropriate to do so, that policy normalization is likely to begin relatively soon while remaining clear that the Committee’s actions would depend on incoming data. Many participants regarded dropping the “patient” language in the statement, whenever that might occur, as risking a shift in market expectations for the beginning of policy firming toward an unduly narrow range of dates. As a result, some expressed the concern that financial markets might overreact, resulting in undesirably tight financial conditions. Participants discussed some possible communications by which they might further underscore the data dependency of their decision regarding when to tighten the stance of monetary policy. A number of participants noted that while forward guidance had been a very useful tool under the extraordinary conditions of recent years, as the start of normalization approaches, there would be limits to the specificity that the Committee could provide about its timing. Looking ahead, some participants highlighted the potential benefits of streamlining the Committee’s postmeeting statement once normalization has begun. More broadly, it was suggested that the Committee should communicate clearly that policy decisions will be data dependent, and that unanticipated economic developments could therefore warrant a path of the federal funds rate different from that currently expected by investors or policymakers.

Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the FOMC met in December indicated that economic activity had been expanding at a solid pace. Labor market conditions had improved further, with strong job gains and a lower unemployment rate; numerous labor market indicators suggested that the underutilization of labor resources was continuing to diminish. Household spending was rising moderately; recent declines in energy prices had boosted household purchasing power. Business fixed investment was advancing, while the recovery in the housing sector remained slow. Inflation had declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices, and was expected to decline further in the near term. Market-based measures of five-year, five-year-forward inflation compensation had declined substantially in recent months, but survey-based measures of longer-term inflation expectations had remained stable. The Committee expected that, with appropriate monetary policy accommodation, economic activity would continue to expand at a moderate pace, with labor market indicators moving toward levels the Committee judges consistent with its dual mandate. The Committee also expected that inflation would rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. In view of the uncertainties about the inflation outlook, the Committee agreed that it should continue to monitor inflation developments closely.

In their discussion of language for the postmeeting statement, members generally agreed that they should acknowledge the solid growth over the second half of 2014 as well as the further improvement in labor market conditions over the intermeeting period. Job gains had been strong, and the Committee judged that labor market slack continued to diminish. In addition, members decided that the statement should note the further decline of inflation seen of late and the additional decline that was in prospect in the near term, while also registering their judgment that these short-term movements of inflation largely reflected the recent decline in energy prices and other transitory factors, and that inflation was likely to rise gradually toward 2 percent over the medium term. Members also agreed that it was appropriate to observe that lower energy prices had boosted household purchasing power. The Committee further decided that the postmeeting statement should explicitly acknowledge the role of international developments as one of the factors influencing the Committee’s assessment of progress toward its objectives of maximum employment and 2 percent inflation.

The Committee agreed to maintain the target range for the federal funds rate at 0 to 1/4 percent and to reaffirm the indication in the statement that the Committee’s decision about how long to maintain the current target range for the federal funds rate would depend on its assessment of actual and expected progress toward its objectives of maximum employment and 2 percent inflation. Members agreed to continue to include, in the forward guidance, language indicating that the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. Members agreed that their policy decisions would remain data dependent, and they continued to include wording in the statement noting that if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate would likely occur sooner than currently anticipated, and, conversely, that if progress proves slower than expected, then increases in the target range would likely occur later than currently anticipated. The Committee decided to maintain its policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. Finally, the Committee also decided to reiterate its expectation that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the SOMA in accordance with the following domestic policy directive:

“Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions. The System Open Market Account manager and the secretary will keep the Committee informed of ongoing developments regarding the System’s balance sheet that could affect the attainment over time of the Committee’s objectives of maximum employment and price stability.”
The vote encompassed approval of the statement below to be released at 2:00 p.m.:

“Information received since the Federal Open Market Committee met in December suggests that economic activity has been expanding at a solid pace. Labor market conditions have improved further, with strong job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately; recent declines in energy prices have boosted household purchasing power. Business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices. Market-based measures of inflation compensation have declined substantially in recent months; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to decline further in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. The Committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Charles L. Evans, Stanley Fischer, Jeffrey M. Lacker, Dennis P. Lockhart, Jerome H. Powell, Daniel K. Tarullo, and John C. Williams.

Voting against this action: None.

It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, March 17-18, 2015. The meeting adjourned at 12:55 p.m. on January 28, 2015.

Notation Vote
By notation vote completed on January 6, 2015, the Committee unanimously approved the minutes of the Committee meeting held on December 16-17, 2014.


(por Gabriel Codas)


Fonte: Enfoque
Publicado em: 18/02/2015 18:58:59

Ricardo Eletro - Finance One
LATAM - Ofertas Brasil - Finance One

Confira a Ata do Fomc na íntegra (em inglês)


São Paulo, 08/10 (Enfoque) – Clique aqui e confira o arquivo em PDF.


(por André Teixeira)


Fonte: Enfoque
Recebido em: 08/10/2014 15:07:47

Ricardo Eletro - Finance One
LATAM - Ofertas Brasil - Finance One

Confira a Ata do Fomc na íntegra (em inglês)


São Paulo, 20/08 (Enfoque) – Clique aqui e confira o arquivo em PDF


(por Gabriel Codas)


Fonte: Enfoque
Recebido em: 20/08/2014 15:19:10

Ricardo Eletro - Finance One
CVC - Hoteis - Finance One

Confira a ata do Fomc na íntegra (em inglês)

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, April 24, 2012, at 1:00 p.m., and continued on Wednesday, April 25, 2012, at 8:30 a.m.
PRESENT:
Ben Bernanke, Chairman
William C. Dudley, Vice Chairman
Elizabeth Duke
Jeffrey M. Lacker
Dennis P. Lockhart
Sandra Pianalto
Sarah Bloom Raskin
Daniel K. Tarullo
John C. Williams
Janet L. Yellen
James Bullard, Christine Cumming, Charles L. Evans, Esther L. George, and Eric Rosengren, Alternate Members of the Federal Open Market Committee
Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, Presidents of the Federal Reserve Banks of Dallas, Minneapolis, and Philadelphia, respectively
William B. English, Secretary and Economist
Deborah J. Danker, Deputy Secretary
Matthew M. Luecke, Assistant Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Thomas C. Baxter, Deputy General Counsel
Steven B. Kamin, Economist
David W. Wilcox, Economist
David Altig, Thomas A. Connors, Michael P. Leahy, William Nelson, Simon Potter, David Reifschneider, and William Wascher, Associate Economists
Brian Sack, Manager, System Open Market Account
Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors
Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors
Jon W. Faust and Andrew T. Levin, Special Advisors to the Board, Office of Board Members, Board of Governors
James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors; Matthew J. Eichner, Deputy Director, Division of Research and Statistics, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Thomas Laubach, Senior Adviser, Division of Research and Statistics, Board of Governors; Ellen E. Meade, Senior Adviser, Division of Monetary Affairs, Board of Governors
Daniel M. Covitz and David E. Lebow, Associate Directors, Division of Research and Statistics, Board of Governors
David Bowman, Deputy Associate Director, Division of International Finance, Board of Governors; Gretchen C. Weinbach, Deputy Associate Director, Division of Monetary Affairs, Board of Governors
Jane E. Ihrig, Assistant Director, Division of Monetary Affairs, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Gregory L. Stefani, First Vice President, Federal Reserve Bank of Cleveland
Jeff Fuhrer, Loretta J. Mester, Harvey Rosenblum, and Daniel G. Sullivan, Executive Vice Presidents, Federal Reserve Banks of Boston, Philadelphia, Dallas, and Chicago, respectively
Troy Davig, Ron Feldman, Mark E. Schweitzer, Christopher J. Waller, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Minneapolis, Cleveland, and St. Louis, respectively
John Fernald, Group Vice President, Federal Reserve Bank of San Francisco
Andreas L. Hornstein and Lorie K. Logan, Vice Presidents, Federal Reserve Banks of Richmond and New York, respectively
Monetary Policy under Alternative Scenarios
A staff presentation provided an overview of an exercise that explored individual participants’ views on appropriate monetary policy responses under alternative economic scenarios. Committee participants discussed the potential value and drawbacks of this type of exercise for both internal deliberations and external communications about monetary policy. Possible benefits include helping to clarify the factors that individual participants judge most important in forming their views about the economic outlook and their assessments of appropriate monetary policy. Two potential limitations of this approach are that the scenario descriptions must by necessity be incomplete, and the practical range of scenarios that can be examined may be insufficient to be informative, given the degree of uncertainty surrounding possible outcomes. Some participants stated that exercises using alternative scenarios, with appropriate adjustments, could potentially be helpful for internal deliberations and, thus, should be explored further. However, no decision was made at this meeting regarding future exercises along these lines.
Developments in Financial Markets and the Federal Reserve’s Balance Sheet
The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Federal Open Market Committee (FOMC) met on March 13, 2012. He also reported on System open market operations, including the ongoing reinvestment into agency-guaranteed mortgage-backed securities (MBS) of principal payments received on SOMA holdings of agency debt and agency-guaranteed MBS as well as the operations related to the maturity extension program authorized at the September 20-21, 2011, FOMC meeting. By unanimous vote, the Committee ratified the Desk’s domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System’s account over the intermeeting period.
With Mr. Lacker dissenting, the Committee agreed to extend the reciprocal currency (swap) arrangements with the Bank of Canada and the Banco de México for an additional year beginning in mid-December 2012; these arrangements are associated with the Federal Reserve’s participation in the North American Framework Agreement of 1994. The arrangement with the Bank of Canada allows for cumulative drawings of up to $2 billion equivalent, and the arrangement with the Banco de México allows for cumulative drawings of up to $3 billion equivalent. The vote to renew the System’s participation in these swap arrangements was taken at this meeting because a provision in the Framework Agreement requires each party to provide six months’ prior notice of an intention to terminate its participation. Mr. Lacker dissented because of his opposition, as indicated at the January meeting, to foreign exchange market intervention by the Federal Reserve, which such swap arrangements might facilitate, and because of his opposition to direct lending to foreign central banks.
Staff Review of the Economic Situation
The information reviewed at the April 24-25 meeting suggested that economic activity was expanding moderately. Payroll employment continued to move up, and the unemployment rate, while still elevated, declined a little further. Overall consumer price inflation increased somewhat, primarily reflecting higher prices of crude oil and gasoline, but measures of long-run inflation expectations remained stable.
The unemployment rate declined to 8.2 percent in March. The share of workers employed part time for economic reasons also moved down, but the rate of long-duration unemployment remained elevated. Private nonfarm employment rose at a slower pace in March than in the preceding three months, while total government employment was little changed in recent months after declining last year. Some indicators of job openings and firms’ hiring plans improved. After being roughly flat over most of the intermeeting period, initial claims for unemployment insurance rose moderately toward the end of the period but remained at a level consistent with further moderate job gains in the coming months.
Manufacturing production expanded, on net, in February and March, while the rate of manufacturing capacity utilization was essentially unchanged. In recent months, the production of motor vehicles continued to rise appreciably in response to both higher vehicle sales and dealers’ additions to relatively low levels of inventories; output gains in other industries also were solid and widespread. Motor vehicle assemblies were scheduled to step up further in the second quarter, and broader indicators of manufacturing activity, such as the diffusion indexes of new orders from the national and regional manufacturing surveys, were at levels consistent with moderate increases in factory output in the second quarter.
Real personal consumption expenditures (PCE) rose briskly in February, even though households’ real disposable incomes declined. In March, nominal retail sales excluding purchases of motor vehicles increased solidly, while motor vehicle sales fell off a little from their brisk pace in the previous month. Consumer sentiment was little changed, on balance, in March and early April and remained subdued.
Some measures of home prices rose in January and February, but activity in the housing market continued to be held down by the large inventory of foreclosed and distressed properties and by tight underwriting standards for mortgage loans. Starts of new single-family homes fell back in February and March to a level more in line with permit issuance; starts were apparently boosted by unseasonably warm weather in December and January. Moreover, sales of new and existing homes edged down, on net, in recent months.
Real business expenditures on equipment and software appeared to rise modestly in the first quarter. Nominal shipments of nondefense capital goods excluding aircraft increased in February and March after declining in January; new orders for these capital goods increased, on balance, in February and March, and they continued to run above the level of shipments. The buildup of unfilled orders in recent months, along with improvements in survey measures of capital spending plans and some other forward-looking indicators, pointed toward a pickup in the pace of expenditures for business equipment. In contrast, nominal business spending for nonresidential construction declined in January and February. Inventories in most industries looked to be fairly well aligned with sales in recent months, although motor vehicle stocks were still relatively lean.
Data for federal government spending in recent months indicated that real defense expenditures rose modestly in the first quarter. Real state and local government purchases appeared to be about flat last quarter, as the payrolls of these governments edged up in the first quarter and their nominal construction spending declined slightly, on net, in January and February.
The U.S. international trade deficit narrowed in February as exports rose and imports fell. The export gains were concentrated in services. Exports of goods declined largely because of a decrease in exports of automotive products. The drop in imports reflected significant declines in imports of petroleum products, automotive products, capital goods, and consumer goods. Imports from China were especially weak, which may in part reflect seasonal adjustment issues related to the timing of the Chinese New Year.
Overall U.S. consumer prices, as measured by the PCE price index, rose at a somewhat faster rate in February than in the preceding six months. In March, prices measured by the consumer price index increased at that same faster pace. Consumer energy prices climbed markedly in February and March, although survey data indicated that gasoline prices stepped down in the first half of April. Meanwhile, increases in consumer food prices were relatively subdued in recent months. Consumer prices excluding food and energy rose moderately in February and March. Near-term inflation expectations from the Thomson Reuters/University of Michigan Surveys of Consumers increased in March but then fell back in early April, while longer-term inflation expectations in the survey remained stable.
Available measures of labor compensation indicated that nominal wage gains continued to be muted. Average hourly earnings for all employees rose modestly in March, and their rate of increase from 12 months earlier remained low.
Recent indicators suggested that foreign economic activity improved on balance in the first quarter, but there were important differences across economies. In the euro area, economic indicators pointed to weakening activity as financial stresses worsened, whereas in the emerging market economies, recent data were consistent with continued expansion. Readings on foreign inflation eased, although they were still relatively high in some Latin American countries.
Staff Review of the Financial Situation
Broad financial market conditions changed little, on balance, since the March FOMC meeting. However, asset prices fluctuated substantially over the period, apparently in response to the evolving views on the U.S. and global economic outlook and changing expectations regarding the future course of monetary policy.
Yields on nominal Treasury securities moved up early in the period, reportedly as investors read incoming information, including the March FOMC statement and minutes along with the results of the Comprehensive Capital Analysis and Review (CCAR), as suggesting a somewhat stronger economic outlook than previously expected. Over subsequent weeks, however, yields drifted lower in response to disappointing economic news and increased concerns about the strains in Europe. On net, nominal Treasury yields finished the period slightly lower and measures of the expected path for the federal funds rate derived from overnight index swap (OIS) rates moved down.
Conditions in unsecured short-term dollar funding markets were stable over most of the intermeeting period despite the increase in concerns about Europe in the latter part of the period. In secured funding markets, the overnight general collateral Treasury repurchase agreement rate declined for a time late in the period, reportedly in response to the seasonal reduction in Treasury bill issuance in April, but ended the period roughly unchanged.
Broad U.S. stock price indexes followed the general pattern observed across asset markets, rising early in the period on increased investor optimism and then falling later on, to end the period little changed on net. Equity prices of financial institutions increased, reportedly as investors interpreted the first-quarter earnings of several large banking organizations and the results of the CCAR as better than expected. Yields and spreads on investment-grade corporate bonds were about unchanged, but yields and spreads on speculative-grade corporate bonds increased somewhat.
Businesses continued to raise substantial amounts of funds in credit and capital markets over recent months. Bond issuance by financial firms picked up further in March from the strong pace recorded in the previous two months. Domestic nonfinancial firms’ bond issuance and growth in commercial and industrial (C&I) loans were robust in the first quarter. Leveraged loan issuance was brisk over this period as well, reportedly supported by investor demand for newly issued collateralized loan obligations as well as by interest from pension funds and other institutional investors. Gross public equity issuance by nonfinancial firms stayed strong in March. In contrast, financial conditions in the commercial real estate (CRE) sector remained strained amid weak fundamentals and tight underwriting conditions, and issuance of commercial mortgage-backed securities in the first quarter of 2012 was below that of a year ago.
With respect to credit to households, developments over the intermeeting period were mixed. Although mortgage rates remained near their historical lows, mortgage refinancing activity was subdued, and conditions in residential mortgage markets continued to be weak. By contrast, consumer credit rose at a solid pace, on balance, in recent months; nonrevolving credit, particularly student loans, expanded. Issuance of consumer asset-backed securities (ABS) edged up in recent months, supported by auto-loan ABS issuance.
Gross issuance of long-term municipal bonds was subdued in the first quarter. The ratio of general obligation municipal bond yields to yields on comparable-maturity Treasury securities was little changed over the intermeeting period, and the average spreads on credit default swaps for debt issued by states declined on net.
Bank credit slowed in March but expanded at a solid pace in the first quarter as a whole. The Senior Loan Officer Opinion Survey on Bank Lending Practices conducted in April indicated that, in the aggregate, domestic banks eased slightly their lending standards on core loans–C&I, real estate, and consumer loans–and experienced somewhat stronger demand for such loans in the first quarter of 2012. C&I loans at domestic banks continued to expand in March, with growth concentrated at large domestic banks. Banks’ holdings of closed-end residential mortgage loans expanded, while home equity loans and CRE loans continued to decline. Consumer loans on banks’ books rose modestly in March.
M2 expanded at a moderate pace in March, reflecting growth in liquid deposits and currency that was only partially offset by declines in small time deposits and in balances in retail money market funds.
Financial strains within the euro area increased over the intermeeting period. Spreads of yields on sovereign Italian and Spanish debt over those on comparable-maturity German bonds rose, amid official warnings that Spain would miss its fiscal target for this year and would need to make further budget cuts, as well as renewed concerns in the market about the prospects for Spanish banks. Although the spread of the three-month euro London interbank offered rate over the comparable OIS rate narrowed on balance over the period, euro-area bank equity indexes dropped sharply, driven by declines in the share prices of Spanish and Italian banks. Five-year credit default swap premiums rose for a broad range of euro-area banks, especially Spanish banks.
Against the background of these increased stresses within the euro area, foreign equity indexes declined and corporate credit spreads widened. The staff’s broad nominal index of the foreign exchange value of the dollar was about unchanged over the intermeeting period as the dollar appreciated against most emerging market currencies but depreciated moderately against the yen and sterling. Amid some volatility, yields on benchmark sovereign bonds for Germany and Japan ended the period somewhat lower. Monetary policy abroad remained generally accommodative.
The total outstanding amount on the Federal Reserve’s dollar liquidity swap lines declined to $32 billion, down from $65 billion at the time of the March FOMC meeting; demand for dollars fell at the lending operations of the European Central Bank, the Bank of Japan, and the Swiss National Bank.
Staff Economic Outlook
In the economic forecast prepared for the April FOMC meeting, the staff revised up slightly its near-term projection for real gross domestic product (GDP) growth, reflecting that the unemployment rate was a little lower, the level of overall payroll employment a bit higher, and consumer spending noticeably stronger than the staff had expected at the time of the previous forecast. However, the staff’s medium-term projection for real GDP growth in the April forecast was little changed from the one presented in March. The staff continued to project that real GDP would accelerate gradually through 2014, supported by accommodative monetary policy, further improvements in credit availability, and rising consumer and business sentiment. Increases in economic activity were expected to be sufficient to decrease the wide margin of slack in the labor market slowly over the projection period, but the unemployment rate was anticipated to still be elevated at the end of 2014.
The staff’s forecast for inflation over the projection period was just a bit above the forecast prepared for the March FOMC meeting, reflecting somewhat higher-than-expected data on core consumer prices and a slightly narrower margin of economic slack than in the March forecast. However, with the pass-through of the recent run-up in crude oil prices into consumer energy prices seen as nearly complete, oil prices expected to edge lower from current levels, substantial resource slack persisting over the projection period, and stable long-run inflation expectations, the staff continued to forecast that inflation would be subdued through 2014.
Participants’ Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, meeting participants–the five members of the Board of Governors and the presidents of the 12 Federal Reserve Banks, all of whom participate in the deliberations of the FOMC–submitted their assessments of real output growth, the unemployment rate, inflation, and the target federal funds rate for each year from 2012 through 2014 and over the longer run, under each participant’s judgment of appropriate monetary policy. The longer-run projections represent each participant’s assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These economic projections and policy assessments are described in more detail in the Summary of Economic Projections (SEP), which is attached as an addendum to these minutes.
In their discussion of the economic situation and outlook, meeting participants agreed that the information received since the Committee’s previous meeting suggested that the economy continued to expand moderately. Labor market conditions improved in recent months. So far this year, payroll employment had expanded at a faster pace than last year and the unemployment rate had declined further, although it remained elevated. Household spending and business fixed investment continued to expand. There were signs of improvement in the housing sector, but from a very low level of activity. Despite some volatility in financial markets over the intermeeting period, financial conditions in U.S. markets continued to improve; bank credit quality and loan demand both increased. Mainly reflecting the increase in the prices of crude oil and gasoline earlier this year, inflation had picked up somewhat. However, longer-term inflation expectations remained stable.
Participants’ assessments of the economic outlook were little changed, with the intermeeting information generally seen as suggesting that economic growth would remain moderate over coming quarters and then pick up gradually. Reflecting the moderate pace of economic growth, most anticipated a gradual decline in the unemployment rate. The incoming information led some participants to become more confident about the durability of the recovery. However, others thought it was premature to infer a stronger underlying trend from the recent positive indicators, since those readings may partially reflect the effects of the mild winter weather or other temporary influences. A number of factors continued to be seen as likely limiting the economic expansion to a moderate pace in the near term; these included slow growth in some foreign economies, prospective fiscal tightening in the United States, slow household income growth, and–notwithstanding some recent signs of improvement–ongoing weakness in the housing market. Participants continued to expect most of the factors restraining economic expansion to ease over time and so anticipated that the recovery would gradually gain strength. The strains in global financial markets, though generally less pronounced than last fall, continued to pose a significant risk to the outlook, and the possibility of a sharp fiscal tightening in the United States was also considered a sizable risk. Most participants anticipated that inflation would fall back from recent elevated levels as the effects of higher energy prices waned, and still expected that inflation subsequently would run at or below the 2 percent rate that the Committee judges to be most consistent with its statutory mandate. However, other participants saw upside risks to the inflation outlook given the recent pickup in inflation and the highly accommodative stance of monetary policy.
In discussing the household sector, meeting participants generally noted that consumer spending continued to expand moderately, notwithstanding high gasoline prices. The recent strengthening in the pace of light motor vehicle sales was attributed to both pent-up demand and the desire for increased fuel efficiency in the wake of higher gasoline prices. Looking forward, increases in household wealth from the rise in equity prices, improving consumer sentiment, and a diminishing drag from household deleveraging were seen as helping to support continued increases in household expenditures, notwithstanding sluggish growth in real disposable income and restrictive fiscal policies.
Recent housing-sector indicators, including sales and starts, suggested some upward movement, but some participants saw the improvement as likely related to unusually warm winter weather in much of the country. Overall, the level of activity in the sector remained depressed. House prices appeared to be stabilizing but had not yet begun to rise in most markets. Most participants anticipated that the housing sector was likely to recover only slowly over time, but a few were more optimistic about the potential for a more rapid housing recovery given reports of stronger demand in some regions and of improved sentiment among builders, as well as signs that recent changes to the Home Affordable Refinance Program were contributing to the refinancing of performing high loan-to-value mortgages.
Reports from business contacts indicated that activity in the manufacturing, energy, and agriculture sectors continued to advance in recent months. Auto production had picked up in light of strengthening demand. Business contacts suggested that sentiment was improving, but many firms remained somewhat cautious in their hiring and investment decisions, with most capital investment being undertaken to improve productivity or gain market share rather than to expand capacity. Reportedly, this caution reflected in part continued uncertainty about the strength and durability of the economic recovery, as well as about government policies.
Participants expected that the government sector would be a drag on economic growth over coming quarters. They generally saw the U.S. fiscal situation also as a risk to the economic outlook; if agreement is not reached on a plan for the federal budget, a sharp fiscal tightening could occur at the start of 2013. Several participants indicated that uncertainty about the trajectory of future fiscal policy could lead businesses to defer hiring and investment. It was noted that agreement on a longer-term plan to address the country’s fiscal challenges would help to alleviate uncertainty and consequent negative effects on consumer and business sentiment.
Exports have supported U.S. growth so far this year; however, some participants noted risks to the export picture from economic weakness in Europe or from a more significant slowdown in the pace of expansion in China and emerging Asia.
Labor market conditions continued to improve, although unusually warm weather may have inflated payroll job figures somewhat earlier this year. Contacts in some parts of the country said that highly qualified workers were in short supply; overall, however, wage pressures had been limited so far. The decline in labor force participation, which has been sharpest for younger workers, has been a factor in the nearly 1 percentage point decline in the unemployment rate since last August, a drop that was larger than would have been predicted from the historical relationship between real GDP growth and changes in the unemployment rate. Assessing the extent to which the changes in labor force participation reflect cyclical factors that will be reversed once the recovery picks up, as opposed to changes in the trend rate of participation, was seen as important for understanding unemployment dynamics going forward. One participant cited research suggesting that about half of the decline in labor force participation had reflected cyclical factors, and thus, as participation picks up, unemployment may decline more slowly in coming quarters compared with the recent pace. Another posited that the strength in payroll job growth in recent months may be a one-time reaction to the sharp layoffs in 2008 and 2009 and that future job gains may be somewhat weaker unless the pace of economic growth increases. Participants expressed a range of views on the extent to which the unemployment rate was being boosted by structural factors such as mismatches between the skills of unemployed workers and those being demanded by hiring firms. A few participants acknowledged there could be structural factors at work, but said that in their view, slack remained high and weak aggregate demand was the major reason that unemployment was still elevated. Two noted the possibility that sustained high levels of long-term unemployment could result in higher structural unemployment, an outcome that might be forestalled by increased aggregate demand. A few participants noted that current measures of labor market slack would be overstated if structural factors accounted for a large portion of the current high levels of unemployment. As a result, such measures might be an unreliable guide as to how close the economy was to maximum employment. These participants pointed out that, over time, estimates of the potential level of output have declined, reducing, as a consequence, estimates of the level of economic slack. Some participants cited the recent rise in inflation, abstracting from the direct effect of the rise in energy prices, as supportive of the view that the level of slack was lower than some believe.
Participants judged that, in general, conditions in domestic credit markets had continued to improve since the March FOMC meeting. Bank credit quality and consumer and business loan demand were increasing, although commercial and residential real estate lending remained relatively weak. U.S. equity prices had risen early in the intermeeting period but subsequently declined, ending the period little changed on net; investment-grade corporate bond yields were flat to down slightly and remained at very low levels. Many U.S. financial institutions had been taking steps to bolster their resiliency, including increasing capital levels and liquidity buffers, and reducing their European exposures. A few participants indicated that they were seeing signs that very low interest rates might be inducing some investors to take on imprudent risks in the search for higher nominal returns. In contrast to improved conditions in domestic credit markets, investors’ concerns about the sovereign debt and banking situation in the euro area intensified during the intermeeting period. Some participants said they thought the policy actions taken in Europe would most likely ease stress in financial markets, but some expressed the view that a longer-term solution to the banking and fiscal problems in the euro area would require substantial further adjustment in the banking and public sectors. Participants expected that global financial markets would remain focused on the evolving situation in Europe.
Readings on consumer price inflation had picked up somewhat mainly because of increases in oil and gasoline prices earlier in the year. In recent weeks, oil prices had begun to fall and readings from the oil futures market suggested this may continue; non-energy commodity prices had remained relatively stable. Several participants noted that increases in labor costs continued to be subdued. With longer-run inflation expectations well anchored and the unemployment rate elevated, most participants anticipated that after the temporary effect of the rise in oil and gasoline prices had run its course, inflation would be at or below the 2 percent rate that the Committee judges to be most consistent with its mandate. Overall, most participants viewed the risks to their inflation outlook as being roughly balanced. However, some participants saw a risk that inflation pressures could increase as the expansion continued; they pointed to the fact that inflation was currently above target and were skeptical of models that rely on economic slack to forecast inflation partly because of the difficulty in measuring slack, especially in real time. These participants were concerned that maintaining the current highly accommodative stance of monetary policy over the medium run could erode the stability of inflation expectations and risk higher inflation. In this regard, one participant noted the potential risks and costs associated with additional balance sheet actions.
In their discussion of the economic outlook and policy, some participants noted the potential usefulness of simple monetary policy rules, of the type the Committee regularly reviews, as guides for monetary policy decisionmaking and for external communications about policy. These participants suggested that because such rules give an indication of how policy should systematically respond to changes in economic conditions they might help clarify the relationship between appropriate monetary policy and the evolution of the economic outlook. While acknowledging that there could be differences across participants in the type of rules they might favor–for example, one participant expressed a preference for rules based on growth rates rather than output gaps because of measurement issues–a few participants indicated that the likely degree of commonality across participants was suggestive that this might be a promising approach to explore. However, a few other participants were more skeptical. One thought that, while prescriptions from rules might provide useful benchmarks, applying the rules mechanically and with little thought about the embedded assumptions would be counterproductive. Another participant questioned the value of interest rate rules when the policy rate is constrained by the zero lower bound on nominal interest rates and unconventional policy options are being used, but others indicated they believed the rules could be appropriately adjusted to account for these factors. Interest was expressed in examining the usefulness of simple policy rules in a more normal environment, as well as in the current environment in which the policy rate is at the zero lower bound and large-scale asset purchases and the maturity extension program have been implemented. Participants planned to discuss further, at a future meeting, the potential merits and drawbacks of using simple rules as guides to monetary policy decisionmaking and for communications.
Committee Policy Action
Members viewed the information on U.S. economic activity received over the intermeeting period as suggesting that the economy had been expanding moderately and generally agreed that the economic outlook was broadly similar to that at the time of their March meeting. Labor market conditions had improved in recent months, and the unemployment rate had fallen, but almost all of the members saw the unemployment rate as still elevated relative to levels that they viewed as consistent with the Committee’s mandate. Growth was expected to be moderate over coming quarters and then to pick up over time. Members expected the unemployment rate to decline gradually. Strains in global financial markets stemming from the sovereign debt and banking situation in Europe continued to pose significant downside risks to economic activity both here and abroad. The possibilities that U.S. fiscal policy would be more contractionary than anticipated and that uncertainty about fiscal policy could lead to a deferral of hiring and investment were other downside risks. Recent readings indicated that inflation remained above the Committee’s 2 percent longer-run target, primarily reflecting the increase in oil and gasoline prices seen earlier in the year. With longer-term inflation expectations stable, most members anticipated that the increase in inflation would prove temporary and that subsequently inflation would run at or below the rate that the Committee judges to be most consistent with its mandate. However, one member thought that there were upside risks to inflation, especially if the current degree of highly accommodative monetary policy were maintained much beyond this year.
In their discussion of monetary policy for the period ahead, the Committee members reached the collective judgment that it would be appropriate to maintain the existing highly accommodative stance of monetary policy. In particular, the Committee agreed to keep the target range for the federal funds rate at 0 to 1/4 percent, to continue the program of extending the average maturity of the Federal Reserve’s holdings of securities as announced last September, and to retain the existing policies regarding the reinvestment of principal payments from Federal Reserve holdings of securities.
With respect to the statement to be released following the meeting, members agreed that only relatively small modifications to the first two paragraphs were needed to reflect the incoming economic data and the modest changes to the economic outlook. With the economic outlook over the medium term not greatly changed, almost all of the members again agreed to indicate that the Committee expects to maintain a highly accommodative stance for monetary policy and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. Most members continued to anticipate that the unemployment rate would still be well above their estimates of its longer-run level, and inflation would be at or below the Committee’s longer-run objective, in late 2014. Some Committee members indicated that their policy judgment reflected in part their perception of downside risks to growth, especially since the Committee’s ability to respond to weaker-than-expected economic conditions would be somewhat limited by the constraint imposed on monetary policy when the policy rate is near the zero lower bound. The need to compensate for a substantial period during which the policy rate was constrained by the zero bound was also cited by a few members as a possible reason to maintain a very low level of the federal funds rate for a longer period than would otherwise be the case.
While almost all of the members agreed that the change in the outlook over the intermeeting period was insufficient to warrant an adjustment to the Committee’s forward guidance, particularly given the uncertainty surrounding economic forecasts, it was noted that the forward guidance is conditional on economic developments and that the date given in the statement would be subject to revision should there be a significant change in the economic outlook. Some members recalled that gains in employment strengthened in early 2010 and again in early 2011 only to diminish as those years progressed; moreover, the uncertain effects of the unusually mild winter weather were cited as making it harder to discern the underlying trend in the economic data. They viewed these factors as reinforcing the case for leaving the forward guidance unchanged at this meeting and preferred adjusting the forward guidance only once they were more confident that the medium-term economic outlook or risks to the outlook had changed significantly. In contrast, another member thought that the forward guidance should be more responsive to changes in economic developments; that member suggested that the Committee would need to determine the appropriate threshold for altering the guidance.
The Committee also stated that it will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability. Several members indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough.
Committee members discussed the desirability of providing more clarity about the economic conditions that would likely warrant maintaining the current target range for the federal funds rate and those that would indicate that a change in monetary policy was appropriate. Doing so might help the public better understand the conditionality in the Committee’s forward guidance. The Committee also discussed the relationship between the Committee’s statement, which expresses the collective view of the Committee, and the policy projections of individual participants, which are included in the SEP. The Chairman asked the subcommittee on communications to consider possible enhancements and refinements to the SEP that might help better clarify the link between economic developments and the Committee’s view of the appropriate stance of monetary policy.
At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive:

“The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to continue the maturity extension program it began in September to purchase, by the end of June 2012, Treasury securities with remaining maturities of approximately 6 years to 30 years with a total face value of $400 billion, and to sell Treasury securities with remaining maturities of 3 years or less with a total face value of $400 billion. The Committee also directs the Desk to maintain its existing policies of rolling over maturing Treasury securities into new issues and of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve’s agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System’s balance sheet that could affect the attainment over time of the Committee’s objectives of maximum employment and price stability.”
The vote encompassed approval of the statement below to be released at 12:30 p.m.:

“Information received since the Federal Open Market Committee met in March suggests that the economy has been expanding moderately. Labor market conditions have improved in recent months; the unemployment rate has declined but remains elevated. Household spending and business fixed investment have continued to advance. Despite some signs of improvement, the housing sector remains depressed. Inflation has picked up somewhat, mainly reflecting higher prices of crude oil and gasoline. However, longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters then to pick up gradually. Consequently, the Committee anticipates that the unemployment rate will decline gradually toward levels that it judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The increase in oil and gasoline prices earlier this year is expected to affect inflation only temporarily, and the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.
The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.”
Voting for this action:  Ben Bernanke, William C. Dudley, Elizabeth Duke, Dennis P. Lockhart, Sandra Pianalto, Sarah Bloom Raskin, Daniel K. Tarullo, John C. Williams, and Janet L. Yellen.
Voting against this action:  Jeffrey M. Lacker.
Mr. Lacker dissented because he did not believe that economic conditions were likely to warrant exceptionally low levels of the federal funds rate through late 2014. In his view, an increase in the federal funds rate was likely to be necessary by mid-2013 to prevent the emergence of inflationary pressures.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, June 19-20, 2012. Because some participants had expressed a preference for the two-day format over the one-day format for FOMC meetings, the Chairman raised the possibility of revising the FOMC meeting schedule to incorporate more two-day meetings to allow additional time for discussion. The meeting adjourned at 11:10 a.m. on April 25, 2012.
Notation Vote
By notation vote completed on April 2, 2012, the Committee unanimously approved the minutes of the FOMC meeting held on March 13, 2012.
 

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Confira a ata do Fomc na íntegra (em inglês)

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, November 1, 2011, at 10:30 a.m. and continued on Wednesday, November 2, 2011, at 8:30 a.m.
PRESENT:
Ben Bernanke, Chairman
William C. Dudley, Vice Chairman
Elizabeth Duke
Charles L. Evans
Richard W. Fisher
Narayana Kocherlakota
Charles I. Plosser
Sarah Bloom Raskin
Daniel K. Tarullo
Janet L. Yellen
Christine Cumming, Jeffrey M. Lacker, Dennis P. Lockhart, Sandra Pianalto, and John C. Williams, Alternate Members of the Federal Open Market Committee
James Bullard, Esther L. George, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively
William B. English, Secretary and Economist
Deborah J. Danker, Deputy Secretary
Matthew M. Luecke, Assistant Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
David W. Wilcox, Economist
James A. Clouse, Thomas A. Connors, Steven B. Kamin, Loretta J. Mester, Simon Potter, David Reifschneider, Harvey Rosenblum, Lawrence Slifman, Daniel G. Sullivan, and Kei-Mu Yi, Associate Economists
Brian Sack, Manager, System Open Market Account
Jennifer J. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors
Patrick M. Parkinson, Director, Division of Banking Supervision and Regulation, Board of Governors
Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors
Robert deV. Frierson, Deputy Secretary, Office of the Secretary, Board of Governors
William Nelson, Deputy Director, Division of Monetary Affairs, Board of Governors
Andrew T. Levin, Special Adviser to the Board, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Charles S. Struckmeyer, Deputy Staff Director, Office of the Staff Director, Board of Governors
Michael P. Leahy, Senior Associate Director, Division of International Finance, Board of Governors; William Wascher, Senior Associate Director, Division of Research and Statistics, Board of Governors
Ellen E. Meade, Senior Adviser, Division of Monetary Affairs, Board of Governors
Daniel M. Covitz and Michael T. Kiley,1 Associate Directors, Division of Research and Statistics, Board of Governors
Christopher J. Erceg,1 Deputy Associate Director, Division of International Finance, Board of Governors; Fabio M. Natalucci, Deputy Associate Director, Division of Monetary Affairs, Board of Governors
Brian J. Gross,1 Special Assistant to the Board, Office of Board Members, Board of Governors
David Lopez-Salido,1 Assistant Director, Division of Monetary Affairs, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Mark A. Carlson, Senior Economist, Division of Monetary Affairs, Board of Governors
Penelope A. Beattie, Assistant to the Secretary, Office of the Secretary, Board of Governors
Sarah G. Green, First Vice President, Federal Reserve Bank of Richmond
Glenn D. Rudebusch, Executive Vice President, Federal Reserve Bank of San Francisco
David Altig, Geoffrey Tootell, and Christopher J. Waller, Senior Vice Presidents, Federal Reserve Banks of Atlanta, Boston, and St. Louis, respectively
Todd E. Clark, Edward S. Knotek II, and Nathaniel Wuerffel, Vice Presidents, Federal Reserve Banks of Cleveland, Kansas City, and New York, respectively
Deborah L. Leonard, Assistant Vice President, Federal Reserve Bank of New York
Robert L. Hetzel, Senior Economist, Federal Reserve Bank of Richmond
By unanimous vote, the Committee selected David W. Wilcox to serve as Economist, and Lawrence Slifman to serve as Associate Economist, effective November 1, 2011, until the selection of their successors at the first regularly scheduled meeting of the Committee in 2012.
Developments in Financial Markets and the Federal Reserve’s Balance Sheet
The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign markets during the period since the Federal Open Market Committee (FOMC) met on September 20-21, 2011. He also discussed the developments in connection with the bankruptcy filing of MF Global Holdings Ltd. and its finance subsidiary, MF Global Finance USA Inc., and with the termination of MF Global Inc. as a primary dealer. The Manager reported on System open market operations, including the ongoing reinvestment into agency-guaranteed mortgage-backed securities (MBS) of principal payments received on SOMA holdings of agency debt and agency-guaranteed MBS as well as the operations related to the maturity extension program authorized at the September 20-21 FOMC meeting. By unanimous vote, the Committee ratified the Desk’s domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System’s account over the intermeeting period.
Monetary Policy Strategies and Communication
The staff gave a presentation on alternative monetary policy strategies, and meeting participants discussed those alternatives as well as potential approaches for enhancing the clarity of their public communications. No decision was made at this meeting to change the Committee’s policy strategy or communications. It was noted that many central banks around the world pursue an explicit inflation objective, maintain flexibility to stabilize economic activity, and seek to communicate their forecasts and policy plans as clearly as possible. Many participants pointed to the merits of specifying an explicit longer-run inflation goal, but it was noted that such a step could be misperceived as placing greater weight on price stability than on maximum employment; consequently, some suggested that a numerical inflation goal would need to be set forth within a context that clearly underscored the Committee’s commitment to fostering both parts of its dual mandate. More broadly, a majority of participants agreed that it could be beneficial to formulate and publish a statement that would elucidate the Committee’s policy approach, and participants generally expressed interest in providing additional information to the public about the likely future path of the target federal funds rate. The Chairman asked the subcommittee on communications to give consideration to a possible statement of the Committee’s longer-run goals and policy strategy, and he also encouraged the subcommittee to explore potential approaches for incorporating information about participants’ assessments of appropriate monetary policy into the Summary of Economic Projections.
Committee participants shared their views regarding the potential merits and pitfalls of making conditional commitments regarding the future course of monetary policy. As noted in the staff briefing, economic theory and model simulations suggested that a policy strategy involving such commitments could foster better macroeconomic outcomes than a discretionary approach of reoptimizing policy at every meeting, so long as the public understood the central bank’s strategy and believed that policymakers would follow through on those commitments. Some participants noted that conditional commitments might be particularly helpful in providing additional accommodation and mitigating downside risks when the policy rate is close to its effective lower bound, because a central bank can commit to a shallower interest rate trajectory than investors would expect if policymakers followed a purely discretionary approach. However, many pointed out that the implementation of such a strategy could pose substantial communication challenges and that the benefits would be diminished if the strategy was not fully credible. Indeed, one participant suggested that additional purchases of longer-term securities would be a clearer and more effective way to provide additional monetary accommodation when the federal funds rate was near its lower bound.
Given the potential pitfalls of pursuing commitment strategies extending far out into the future, many participants thought that the Committee should consider policies intended to accrue some of the gains from conditional commitments and to perform well in a wide range of alternative scenarios. In this vein, a number of participants expressed support for the possibility of clarifying the conditionality of the Committee’s forward guidance about the trajectory of the federal funds rate through setting numerical thresholds for unemployment and inflation that would warrant exceptionally low levels for the policy rate. However, several participants noted that such thresholds could be confusing in the absence of a clear expression of the Committee’s longer-term goals. Moreover, others suggested that such an approach could be problematic in light of significant uncertainties about the longer-run normal rate of unemployment. One participant pointed to those uncertainties as instead supporting the use of thresholds as a way of managing potential inflation risks associated with additional accommodation.
The Committee also considered policy strategies that would involve the use of an intermediate target such as nominal gross domestic product (GDP) or the price level. The staff presented model simulations that suggested that nominal GDP targeting could, in principle, be helpful in promoting a stronger economic recovery in a context of longer-run price stability. Other simulations suggested that the single-minded pursuit of a price-level target would not be very effective in fostering maximum sustainable employment; it was noted, however, that price-level targeting where the central bank maintained flexibility to stabilize economic activity over the short term could generate economic outcomes that would be more consistent with the dual mandate. More broadly, a number of participants expressed concern that switching to a new policy framework could heighten uncertainty about future monetary policy, risk unmooring longer-term inflation expectations, or fail to address risks to financial stability. Several participants observed that the efficacy of nominal GDP targeting depended crucially on some strong assumptions, including the premise that the Committee could make a credible commitment to maintaining such a strategy over a long time horizon and that policymakers would continue adhering to that strategy even in the face of a significant increase in inflation. In addition, some participants noted that such an approach would involve substantial operational hurdles, including the difficulty of specifying an appropriate target level. In light of the significant challenges associated with the adoption of such frameworks, participants agreed that it would not be advisable to make such a change under present circumstances.
Staff Review of the Economic Situation
The information reviewed at the November 1-2 meeting indicated that the pace of economic activity strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that weighed on economic growth in the first half of the year. However, labor market conditions continued to be weak. Overall consumer price inflation was more moderate than earlier in the year, as prices of energy and some commodities declined from their recent peaks. Inflation for other goods and services also appeared to have moderated, and measures of longer-run inflation expectations remained stable.
Private nonfarm employment rose modestly in September, boosted in part by the return of communications workers who were on strike in August. Nonetheless, the pace of private-sector job gains in the third quarter as a whole was less than it was in the first half of the year. Meanwhile, employment in the state and local government sector continued to trend lower. The unemployment rate held at 9.1 percent in September, and both long-duration unemployment and the share of workers employed part time for economic reasons were still high. Initial claims for unemployment insurance have edged down since the middle of September but have remained at a level consistent with only modest employment growth, and most indicators of businesses’ hiring plans have showed no improvement.
Industrial production rose modestly in September, and the manufacturing capacity utilization rate edged up. Output in the motor vehicle–related sectors continued to step up following the disruptions associated with the earthquake in Japan earlier in the year, but the pace of factory production outside of those sectors was sluggish. Motor vehicle assemblies were scheduled to rise further in the fourth quarter, but broader indicators of near-term manufacturing activity, such as the diffusion indexes of new orders from the national and regional manufacturing surveys, remained at levels consistent with only modest increases in production in the coming months.
Real personal consumption expenditures (PCE) rose briskly in September but posted a more moderate gain for the third quarter as a whole. Motor vehicle purchases increased significantly in September to a level well above that in the spring (when availability of some models was limited by supply chain disruptions), and sales of new light motor vehicles stepped up further in October. However, real disposable income declined in the third quarter, as increases in consumer prices more than offset small gains in nominal income. Moreover, consumer sentiment continued to be downbeat in October.
Housing market activity remained very weak, held down by the large overhang of foreclosed and distressed properties along with limited demand in an environment of uncertainty about future home prices and tight underwriting standards for mortgage loans. Although starts and permits for new single-family homes edged up in September, they stayed near the depressed levels seen since the middle of last year. Sales of new and existing homes continued to be soft in recent months, and home prices trended lower.
Real business purchases of equipment and software expanded appreciably in the third quarter. Moreover, new orders for nondefense capital goods continued to run ahead of shipments in August and September; the buildup of unfilled orders pointed toward further increases in spending for business equipment in subsequent months. Nevertheless, survey measures of business conditions and sentiment in October suggested that firms remained cautious. Real business expenditures for nonresidential construction also rose appreciably in the third quarter, but spending was still at a relatively low level and continued to be held back by elevated vacancy rates and tight credit conditions for construction loans. In the third quarter, businesses increased their inventories at a much slower pace than in the second quarter, and inventory-to-sales ratios in most industries appeared to be in a comfortable range.
Real federal purchases increased in the third quarter, as defense expenditures continued to rise from unusually low levels early in the year, more than offsetting a decrease in nondefense spending. At the state and local level, real purchases declined in the third quarter at a noticeably slower rate than in the first half of the year as the pace of reductions in payrolls eased and construction spending rose slightly.
The U.S. international trade deficit was virtually the same in August as it was in July, as both exports and imports moved down only by small amounts. The decrease in exports reflected lower sales of automotive products and capital goods, which more than offset increases in exports of industrial supplies and consumer goods. The dip in imports was the result of lower purchases of capital goods, automotive products, and consumer goods, which outweighed an increase in petroleum imports. The advance release of the third-quarter data for the national income and product accounts showed real exports of goods and services expanding faster than real imports. As a result, net exports were estimated to have made a small positive contribution to real GDP growth in the third quarter, a contribution of about the same size as in the second quarter.
Overall U.S. consumer price inflation, as measured by the PCE price index, was more moderate in the third quarter than in the first half of the year. Consumer prices for food and energy increased last quarter at a slower pace than earlier in the year, and consumer prices excluding food and energy rose a bit less than in the preceding quarter. Near-term inflation expectations from the Thomson Reuters/University of Michigan Surveys of Consumers in October continued to be well below the elevated level seen in the spring, and longer-term inflation expectations in the survey remained stable.
Measures of labor compensation showed that wage increases continued to be subdued. The employment cost index increased at a modest rate over the year ending in the third quarter, and compensation per hour in the nonfarm business sector appeared to have decalerated somewhat last quarter. Similarly, the 12-month change in average hourly earnings for all employees remained subdued in September.
Foreign economic activity appeared to have largely recovered from the effects of the Japanese disaster in March, as production in Japan rebounded and supply disruptions waned. However, recent data pointed to considerable weakness in the euro-area economy. Elsewhere, indicators were somewhat more upbeat, with employment in Canada continuing to rise through September, while GDP growth in China over the year ending in the third quarter was a little less than in the first half of the year but still quite robust. Foreign inflation remained contained, although the reversal of earlier increases in energy prices appeared to be passing through to consumer price inflation relatively slowly in some countries.
Staff Review of the Financial Situation
Financial markets were quite volatile over the period since the September FOMC meeting. Investor sentiment was strongly influenced by prospects for Europe, as market participants remained highly attuned to developments regarding possible steps to contain the fiscal and banking problems there. Economic data releases that were, on balance, somewhat better than market participants expected provided some support to financial markets.
Longer-term Treasury yields declined appreciably following the release of the September FOMC statement. Investors reportedly viewed the Committee’s assessment of the economic outlook as more downbeat than anticipated. In addition, the announcement that the Federal Reserve would lengthen the average maturity of its portfolio by purchasing longer-term Treasury securities and selling an equivalent amount of shorter-term Treasury securities reportedly contributed to the decline in longer-term yields on the day. Yields on current-coupon agency MBS also moved lower on the announcement that the Federal Reserve would begin to reinvest principal payments on agency securities in agency MBS. Over the following weeks, movements in yields were driven by shifts in investors’ assessments of the ongoing efforts to address the European fiscal and banking situation and by somewhat stronger-than-expected U.S. economic data. On balance since the September FOMC meeting, Treasury yields on shorter-dated securities and the expected path of the federal funds rate implied by money market futures quotes were not much changed. Yields on Treasury securities with maturities beyond 10 years moved down. Measures of near-term inflation compensation derived from nominal and inflation-protected Treasury securities rose slightly over the intermeeting period, while similar measures of longer-term inflation compensation were about unchanged.
Credit default swap (CDS) spreads and equity prices of large U.S. banking organizations were again volatile over the period. Investor sentiment toward these financial institutions was strongly influenced by changes in investors’ assessments of the risks associated with the European fiscal and banking problems and the exposure of various financial institutions to Europe. Third-quarter U.S. bank earnings reports generally met investors’ expectations. On net, equity prices for U.S. banking firms were not much changed over the period since the last FOMC meeting, while their CDS spreads were a bit higher. European bank CDS spreads remained elevated, and these institutions continued to face somewhat strained conditions in short-term bank funding markets.
Although equity markets were volatile, broad U.S. equity price indexes ended the intermeeting period little changed. Earnings reports for nonfinancial firms generally came in somewhat better than investors expected and about in line with second-quarter levels. Gross public equity issuance by nonfinancial firms continued to be very weak in September and October, with a large number of firms shelving planned initial public offerings amid the volatility in equity markets.
Yields on investment- and speculative-grade corporate bonds edged lower, on net, over the period, leaving their spreads to Treasury securities slightly narrower. Credit flows for nonfinancial firms were mixed in September and October. The pace of bond financing by investment-grade nonfinancial corporations slowed some in October from its robust September pace, while bond issuance by speculative-grade firms was limited. Nonfinancial commercial paper outstanding posted solid growth in October. In the leveraged loan market, issuance financed by institutional investors slowed significantly in the third quarter.
Financing conditions for commercial real estate (CRE) markets appeared to have deteriorated in some respects. Issuance of commercial mortgage-backed securities (CMBS) slowed further in the third quarter amid widening CMBS spreads, and only a small number of deals were in the pipeline for the rest of the year. Prices of most types of commercial properties remained depressed, and aggregate vacancy and delinquency rates for commercial properties were close to their recent highs.
Interest rates on residential mortgages changed little, on net, over the intermeeting period but remained at historically low levels. The recent low rates appeared to have only a modest effect on the pace of mortgage refinancing, as tight underwriting standards and low home equity continued to limit the access of many households to the mortgage market. However, in October, the Federal Housing Finance Agency announced changes to the Home Affordable Refinance Program to expand eligibility and take-up among borrowers with mortgages backed by Fannie Mae and Freddie Mac. Indicators of home prices remained weak, reflecting a large inventory of unsold properties and modest demand for homes. The pace at which performing prime mortgages became newly delinquent rose over the summer but remained below last year’s levels.
Consumer credit decreased in August. Growth in nonrevolving credit, which had been volatile due to a shift in the timing of student loan originations, stepped down from the pace seen earlier in the year but remained solid in recent months. Issuance of consumer credit asset-backed securities continued at a moderate pace through mid-October. Delinquency rates for several categories of consumer loans remained low, a reflection in part of tighter underwriting standards that shifted the composition of borrowers toward those with stronger credit histories.
Core commercial bank loans expanded slightly in the third quarter. Commercial and industrial (C&I) loans accelerated following the already strong increases seen over the first half of the year. That growth was concentrated among large domestic banks and non-European foreign institutions. Consumer loans on banks’ books advanced modestly in the third quarter, ending a two-year string of quarterly declines. Closed-end residential mortgage loans held by banks also increased amid the modest pickup in refinancing activity, while CRE loans contracted. The October Senior Loan Officer Opinion Survey on Bank Lending Practices showed less net easing of lending standards by domestic banks than in the past few surveys. In particular, domestic banks reported little change in their standards on C&I loans over the third quarter, on net, compared with more widespread reports of easing in the previous several quarters. Demand for loans reportedly was little changed, on balance, over the third quarter.
M2 grew at a modest pace in September and October, well below the rapid rate seen in July and August. Some of the factors that contributed to M2 growth over the summer, such as concerns about European financial developments and equity market volatility, persisted and supported elevated levels of M2 deposits but did not trigger additional sizable inflows. The monetary base also grew moderately as its major components–reserve balances and currency–increased over the period.
Foreign financial markets remained volatile over the intermeeting period, and funding pressures for many European financial institutions continued. After falling sharply in August and early September, foreign equity prices rose, with stocks in the euro area outperforming those in most other economies. For most of the period, market participants seemed heartened by European leaders’ efforts to address the fiscal and financial challenges present in the euro area, although the news late in the period on a possible Greek referendum sent stock prices down sharply. Benchmark sovereign yields increased over the period, but spreads of yields on 10-year sovereign bonds of the most vulnerable euro-area countries over yields on German bunds were little changed on net. Some reversal of safe-haven flows in October reportedly led the dollar to give back most of the gains it registered in late September, leaving the broad nominal foreign exchange value of the dollar little changed, on balance, relative to its level at the time of the September FOMC meeting. At the end of October, Japanese officials intervened in foreign exchange markets through sales of yen.
The first round of the three-month U.S. dollar auctions that major foreign central banks announced on September 15 was held in October; demand was quite limited, and only the European Central Bank (ECB) drew on its swap line with the Federal Reserve. Korea and Japan announced that they would increase the size and scope of their bilateral currency swap arrangements, expanding the size of their existing won–yen swap arrangement and establishing a $30 billion facility in which dollars could be swapped for either won or yen.
A number of central banks announced additional measures to stimulate economic activity. The Bank of England and Bank of Japan each announced expansions of their respective asset purchase programs, and the ECB announced that it would conduct two refinancing operations with maturities of slightly more than a year and launched a new covered bond purchase program. The central banks of Brazil, Indonesia, and Israel lowered their policy rates, citing a potential slowdown in global growth.
Staff Economic Outlook
With the recent data on spending, particularly for consumer expenditures and business outlays for capital goods and nonresidential construction, stronger than the staff anticipated at the time of the September FOMC meeting, the staff’s near-term projection for the rate of increase in real GDP was revised up. However, other important near-term indicators of economic activity remained downbeat: Measures of consumer sentiment were still very low, business surveys pointed to continued caution by firms, conditions in the labor market remained weak, and gains in manufacturing production outside of the motor vehicle–related sectors were sluggish. Moreover, many of the factors that have been restraining the recovery, such as the large overhang of vacant houses, tight credit conditions, and elevated risk premiums, remained in place. Consequently, the staff’s outlook for economic activity over the medium term was similar to the projection prepared for the September FOMC meeting. The staff continued to project that real GDP would accelerate gradually in 2012 and 2013, supported by accommodative monetary policy, further improvements in credit conditions, and a pickup in consumer and business sentiment from their current low levels. Over the forecast period, the increase in real GDP was projected to be sufficient to reduce the slack in product and labor markets only slowly, and the unemployment rate was expected to remain elevated at the end of 2013.
The staff’s forecast for inflation was essentially unchanged from the projection prepared for the September FOMC meeting. The upward pressure on consumer prices from the rise in commodity and import prices early in the year was anticipated to ease further in the current quarter. With longer-run inflation expectations stable and significant slack anticipated to persist in labor and product markets, the staff continued to expect prices to rise at a subdued pace in 2012 and 2013.
Participants’ Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, all participants–the five members of the Board of Governors and the presidents of the 12 Federal Reserve Banks–provided projections of output growth, the unemployment rate, and inflation for each year from 2011 through 2014 and over the longer run. Longer-run projections represent each participant’s assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. Although participants had revised downward their projections for growth since their previous forecasts in June, they continued to anticipate that economic growth would pick up and the unemployment rate would decline gradually through 2014. They also continued to project that inflation would settle at or below levels consistent with the Committee’s dual mandate. Participants’ forecasts are described in more detail in the Summary of Economic Projections, which is attached as an addendum to these minutes.
In their discussion of the economic situation and outlook, meeting participants regarded the information received during the intermeeting period as indicating that economic growth had strengthened somewhat in the third quarter, reflecting in part a reversal of temporary factors that had weighed on the economic recovery in the first half of the year. Participants noted that global supply chain disruptions associated with the natural disaster in Japan had diminished, and that the prices of energy and some commodities had come down from their recent peaks, easing strains on household budgets and likely contributing to a somewhat stronger pace of consumer spending in recent months. More broadly, final demand from consumers and businesses was stronger than had been expected at the time of the September FOMC meeting. Nonetheless, most participants anticipated that the pace of economic growth would remain moderate over coming quarters. While they believed that the economic recovery would continue to be supported by accommodative monetary policy, ongoing improvements in households’ and businesses’ financial positions, and pent-up demand for goods and services, a number of factors were seen as likely to continue to restrain the pace of economic growth. Those included persistent weakness in the labor and housing markets, still-tight credit conditions for many households and small businesses, low consumer and business confidence, fiscal consolidation at all levels of government, and elevated volatility in financial markets. Moreover, the recovery was still subject to significant downside risks, including strains in global financial markets. With longer-term inflation expectations remaining stable, the effects of earlier increases in the prices of energy and other commodities continuing to wane, and low levels of resource utilization restraining increases in prices and wages, most participants anticipated that inflation would settle, over coming quarters, at or below levels they judged to be most consistent with their dual mandate.
In the household sector, incoming data on retail sales were somewhat stronger than expected, and participants reported scattered optimism among their contacts regarding the prospects for holiday spending. Some participants thought that the effects of balance sheet deleveraging might be running their course or that such effects could be less powerful than had been thought. Others noted that the recent pickup in consumer spending outpaced growth in after-tax incomes and was accompanied by a decline in the saving rate, raising doubts about its sustainability unless income growth picked up. In addition, households appeared to remain pessimistic about the prospects for their future income, the job market was still weak, consumer confidence was historically very low, and credit conditions for many households were still tight. The housing sector continued to be depressed, and some meeting participants indicated that the elevated supply of available homes and the overhang of foreclosures, together with limited access to mortgage credit, were continuing to put downward pressure on house prices and housing construction. A few participants noted that recent government initiatives aimed at helping high-loan-to-value borrowers refinance could be useful steps toward stabilizing the housing market.
Business contacts in many parts of the country were reported to be cautious and uncertain about the economic and political outlook and so remained reluctant to hire or expand capacity. However, production in the manufacturing, agriculture, and energy sectors continued to increase, and the auto sector was rebounding from earlier supply chain disruptions. In addition, businesses in a number of regions reported ongoing capital investment to increase productivity. Input cost pressures were said to have abated somewhat, while labor costs remained subdued. Overall, credit costs were low, and profits and balance sheets at nonfinancial corporations were healthy, with many firms continuing to hold very high levels of cash.
Despite some signs of improvement of late, the available indicators pointed to continued weakness in overall labor market conditions, and the unemployment rate remained elevated. Some participants suggested that the persistently high level of unemployment reflected the impact of structural factors, including mismatches between the skills of the unemployed and the skills demanded in sectors in which jobs were currently available. Consistent with this view, some business contacts reportedly were concerned about the low quality of many job applicants, while other contacts noted that workers with some specialized skills continued to be in short supply. However, other participants indicated that such concerns were not new and that much of the current elevated level of unemployment reflected cyclical factors, with one pointing to the lack of wage pressures as evidence. As a result, they expected that unemployment would fall back as the economy recovered. Some participants again warned that the exceptionally high level of long-term unemployment could ultimately lead to permanent negative effects on the skills and employment prospects of the unemployed.
Meeting participants observed that financial markets continued to be particularly volatile during the intermeeting period as investors responded to incoming economic data and to news regarding fiscal and financial developments in Europe. Liquidity in many markets worsened, in part because financial institutions more reliant on short-term funding markets reportedly pulled back from risk-taking and became somewhat less willing to make markets. Participants noted the announcement by European policymakers of a new package of measures to address Greece’s fiscal situation as well as the vulnerabilities of European banks and sovereigns. However, participants indicated that many details of the new plan had not yet been worked out and that a number of important issues remained unresolved. Participants took note of the possible adverse effects on U.S. financial markets and the broader U.S. economy if European sovereign debt and banking problems intensified. Participants observed, however, that the capital and liquidity positions of U.S. banks had strengthened in recent quarters and that the credit quality of loans to businesses and households had improved further. Contacts in the banking sector reported that U.S. banks continued to be willing to extend loans to creditworthy borrowers, but loan demand remained weak and competition for such borrowers was putting pressure on net interest margins. It was noted that very low interest rates were negatively affecting pension funds and the profitability of the life insurance industry. Participants also discussed the events surrounding the bankruptcy filing of MF Global Holdings Ltd. and saw the financial stability implications of this development as limited to date.
Participants generally agreed that measures of total inflation appeared to have moderated since earlier in the year as prices of energy and some commodities declined from their peaks. Measures of core inflation also seemed to have declined in recent months, and longer-term inflation expectations remained well anchored. Nonetheless, some participants noted that core inflation had not come down as quickly or by as much as they had expected in light of the reduction in commodity prices, perhaps suggesting that the level of potential output was lower than had been thought. However, other participants pointed to the subdued pace of gains in labor costs as a factor damping inflation, and reports from contacts suggested that upward pressure on wages remained limited.
Regarding their overall outlook for economic activity, participants generally agreed that, even with the positive news received over the intermeeting period, the most probable outcome was a moderate pace of economic growth over the medium run with only a gradual decline in the unemployment rate. While some factors were seen as likely to support growth going forward–such as pent-up demand, improvements in household and business balance sheets, and accommodative monetary policy–participants observed that the pace of economic recovery would likely continue to be held down for some time by persistent headwinds. In particular, they pointed to very low levels of consumer and business confidence, further efforts by households to deleverage, cutbacks at all levels of government, elevated financial market volatility, still-tight credit conditions for some households and small businesses, and the ongoing weakness in the labor and housing markets. While recent incoming data suggested reduced odds that the economy would slide back into recession, participants still saw significant downside risks to the outlook for economic growth. Risks included potential spillovers to U.S. financial markets and institutions, and so to the broader U.S. economy, if the European debt and banking crisis were to worsen significantly. In addition, participants noted the risk of a larger-than-expected fiscal tightening and the possibility that structural problems in the housing market had attenuated the transmission of monetary policy actions to the real economy. It was also noted that the extended period of highly accommodative monetary policy could eventually lead to a buildup of financial imbalances. A few participants, however, mentioned the possibility that economic growth could be more rapid than currently expected, particularly if gains in output and employment led to a virtuous cycle of improvements in household balance sheets, increased confidence, and easier credit conditions.
With respect to the outlook for inflation, participants generally anticipated that inflation would recede further over coming quarters and would settle over the medium run at levels at or below those judged to be most consistent with the Committee’s dual mandate. They pointed to the further dissipation of the effects of earlier increases in the prices of energy and some commodities, the significant slack in resource utilization, the continued subdued growth in labor compensation, and well-anchored inflation expectations as factors likely to contribute to the moderation in inflation over time. A number of participants saw the risks to the outlook for inflation as roughly balanced. A few participants felt that the continuation of the current stance of monetary policy, coupled with the possibility of a rebound in energy and commodity prices, posed some upside risks to inflation. Other participants instead saw inflation risks as tilted to the downside, in light of their expectations for persistent resource slack. It was noted that U.S. inflation had been influenced relatively more by commodity price fluctuations in recent years; because commodity prices reflect global economic conditions, U.S. inflation might be less affected by domestic factors and more linked to the global outlook than in the past.
Committee Policy Action
Members noted that information received over the intermeeting period pointed to somewhat stronger economic growth in the third quarter, partly reflecting a reversal of temporary factors that had depressed economic growth in the first half of the year. However, overall labor market conditions remained weak. Members generally anticipated that unemployment would decline only gradually from levels significantly above those that the Committee would expect to prevail in the longer run, with inflation likely to settle at levels at or below those consistent with the Committee’s dual mandate. Accordingly, in the discussion of monetary policy for the period ahead, all Committee members agreed to continue the program of extending the average maturity of the Federal Reserve’s holdings of securities as announced in September. The Committee decided to maintain its existing policy of reinvesting principal payments from its holdings of agency debt and agency MBS in agency MBS and of rolling over maturing Treasury securities at auction. In addition, the Committee agreed to keep the target range for the federal funds rate at 0 to 1/4 percent and to reiterate its expectation that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. A few members expressed interest in using language specifying a period of time during which the federal funds rate was expected to remain exceptionally low, rather than a calendar date, arguing that such language might be better to indicate a constant stance of monetary policy over time. However, members generally preferred to retain the existing forward guidance, at least for now. A few members indicated that they believed the economic outlook might warrant additional policy accommodation. However, it was noted that any such accommodation would likely be more effective if it were provided in the context of a future communications initiative, and most of these members agreed that they could support retention of the current policy stance at this meeting. One member dissented from the policy decision on the grounds that additional monetary policy accommodation was warranted at this time. With the Committee in the process of reviewing its monetary policy strategies and communication, and no additional accommodation being provided at this meeting, a few members indicated that they could support the Committee’s decision even though they had not favored recent policy actions. The Committee reiterated that it will regularly review the size and composition of its securities holdings and that it is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in the context of price stability. With respect to the statement to be released following the meeting, members agreed that only relatively small changes were needed to reflect the modest improvement in the economic outlook and to note that the Committee would continue to implement its policy steps from recent meetings.
At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive:
“The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to continue the maturity extension program it began in September to purchase, by the end of June 2012, Treasury securities with remaining maturities of approximately 6 years to 30 years with a total face value of $400 billion, and to sell Treasury securities with remaining maturities of 3 years or less with a total face value of $400 billion. The Committee also directs the Desk to maintain its existing policies of rolling over maturing Treasury securities into new issues and of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve’s agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System’s balance sheet that could affect the attainment over time of the Committee’s objectives of maximum employment and price stability.”
The vote encompassed approval of the statement below to be released at 12:30 p.m.:

“Information received since the Federal Open Market Committee met in September indicates that economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year. Nonetheless, recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has increased at a somewhat faster pace in recent months. Business investment in equipment and software has continued to expand, but investment in nonresidential structures is still weak, and the housing sector remains depressed. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.
The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability.”
Voting for this action: Ben Bernanke, William C. Dudley, Elizabeth Duke, Richard W. Fisher, Narayana Kocherlakota, Charles I. Plosser, Sarah Bloom Raskin, Daniel K. Tarullo, and Janet L. Yellen.
Voting against this action: Charles L. Evans.
Mr. Evans dissented because he saw the high unemployment rate and the outlook for only weak economic growth as calling for additional policy accommodation at this meeting. Moreover, the longer the current situation of low resource utilization lasted, the more the economy’s longer-term growth potential could be impaired. Furthermore, given current policy, his outlook was for inflation to come in below levels consistent with the Committee’s dual mandate, bolstering the case for additional monetary easing at this time. He also believed policies with more-explicit forward guidance about the economic conditions under which exceptionally low levels of the funds rate could be maintained would improve the prospects for growth and employment and, while possibly admitting somewhat higher inflation for a time, would still safeguard price stability.
It was agreed that the next meeting of the Committee would be held on Tuesday, December 13, 2011. The meeting adjourned at 10:30 a.m. on November 2, 2011.
Notation Vote
By notation vote completed on October 11, 2011, the Committee unanimously approved the minutes of the FOMC meeting held on September 20-21, 2011.
 
_____________________________
William B. English
Secretary
 

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Confira a ata do Fomc na íntegra (em inglês)

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, December 14, 2010, at 8:30 a.m.

PRESENT:
Ben Bernanke, Chairman
William C. Dudley, Vice Chairman
James Bullard
Elizabeth Duke
Thomas M. Hoenig
Sandra Pianalto
Sarah Bloom Raskin
Eric Rosengren
Daniel K. Tarullo
Kevin Warsh
Janet L. Yellen

Christine Cumming, Charles L. Evans, Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, Alternate Members of the Federal Open Market Committee

Jeffrey M. Lacker and Dennis P. Lockhart, Presidents of the Federal Reserve Banks of Richmond and Atlanta, respectively

John F. Moore, First Vice President, Federal Reserve Bank of San Francisco

William B. English, Secretary and Economist
Deborah J. Danker, Deputy Secretary
Matthew M. Luecke, Assistant Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Nathan Sheets, Economist
David J. Stockton, Economist

Alan D. Barkema, James A. Clouse, Thomas A. Connors, Jeff Fuhrer, Steven B. Kamin, Lawrence Slifman, Christopher J. Waller, and David W. Wilcox, Associate Economists

Brian Sack, Manager, System Open Market Account

Patrick M. Parkinson, Director, Division of Bank Supervision and Regulation, Board of Governors

Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors

William Nelson, Deputy Director, Division of Monetary Affairs, Board of Governors

Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors

Charles S. Struckmeyer, Deputy Staff Director, Office of the Staff Director, Board of Governors

David Reifschneider and William Wascher, Senior Associate Directors, Division of Research and Statistics, Board of Governors

Andrew T. Levin, Senior Adviser, Office of Board Members, Board of Governors

Michael G. Palumbo and Joyce K. Zickler, Deputy Associate Directors, Division of Research and Statistics, Board of Governors; Gretchen C. Weinbach, Deputy Associate Director, Division of Monetary Affairs, Board of Governors

Fabio M. Natalucci, Assistant Director, Division of Monetary Affairs, Board of Governors

Randall A. Williams, Records Management Analyst, Division of Monetary Affairs, Board of Governors

Dale Roskom, First Vice President, Federal Reserve Bank of Cleveland

Harvey Rosenblum, Daniel G. Sullivan, and John C. Williams, Executive Vice Presidents, Federal Reserve Banks of Dallas, Chicago, and San Francisco, respectively

David Altig, Richard P. Dzina, Mark E. Schweitzer, and Kei-Mu Yi, Senior Vice Presidents, Federal Reserve Banks of Atlanta, New York, Cleveland, and Minneapolis, respectively

Tobias Adrian, Vice President, Federal Reserve Bank of New York

Satyajit Chatterjee, Senior Economic Adviser, Federal Reserve Bank of Philadelphia

Alexander L. Wolman, Senior Economist, Federal Reserve Bank of Richmond

Developments in Financial Markets and the Federal Reserve’s Balance Sheet
The manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets since the Federal Open Market Committee (FOMC) met on November 2-3, 2010. He also reported on System open market operations, including the continuing reinvestment into longer-term Treasury securities of principal payments received on the SOMA’s holdings of agency debt and agency-guaranteed mortgage-backed securities (MBS) as well as the ongoing purchases of additional Treasury securities authorized at the November 2-3 FOMC meeting. Since the last meeting, the Open Market Desk at the Federal Reserve Bank of New York purchased a total of about $105 billion of Treasury securities, reflecting about $30 billion of purchases with the proceeds of principal payments and about $75 billion as part of the authorized expansion of the Federal Reserve’s securities holdings. Purchases were concentrated in nominal Treasury securities with maturities of 2 to 10 years, though some longer-term securities were purchased along with some Treasury inflation-protected securities (TIPS). The Manager also discussed the Desk’s intention to place additional limits on its purchases of individual securities, as the Federal Reserve’s holdings of such securities increased beyond 35 percent of the total outstanding; these limits were intended to help ensure that Federal Reserve purchases do not impair the liquidity in Treasury markets. In addition, the Manager updated the Committee on the SOMA’s holdings of foreign-currency instruments. There were no open market operations in foreign currencies for the System’s account over the intermeeting period. By unanimous vote, the Committee ratified the Desk’s transactions over the intermeeting period.

In light of ongoing strains in some foreign financial markets, the Committee considered a proposal to extend its dollar liquidity swap arrangements with foreign central banks past January 31, 2011. After discussing possible alternative periods for such an extension, the Committee unanimously approved the following resolution:

The Federal Open Market Committee directs the Federal Reserve Bank of New York to extend the existing temporary reciprocal currency arrangements (“swap arrangements”) for the System Open Market Account with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank. The swap arrangements shall now terminate on August 1, 2011, unless further extended by the Committee.

Staff Review of the Economic Situation
The information reviewed at the December 14 meeting indicated that economic activity was increasing at a moderate rate, but that the unemployment rate remained elevated. The pace of consumer spending picked up in October and November, exports rose rapidly in October, and the recovery in business spending on equipment and software (E&S) appeared to be continuing. In contrast, residential and nonresidential construction activity was still depressed. Manufacturing production registered a solid gain in October. Nonfarm businesses continued to add workers in October and November, and the average workweek moved up. Longer-run inflation expectations were stable, but core inflation continued to trend lower.

Labor demand rose further in recent months, but unemployment stayed at a high level. The average increase in private nonfarm payroll employment in October and November was close to the pace over the preceding six months, while the average workweek for all employees edged higher. The bulk of the private-sector job gains continued to be in the services industries; employment in manufacturing, construction, and retail trade declined, on average, in October and November. Employment at state and local governments rose slightly over the two-month period. A number of indicators of job openings and hiring plans improved in October and November, and initial claims for unemployment insurance trended steadily lower through November and early December. However, the unemployment rate, which remained at 9.6 percent during the preceding three months, increased to 9.8 percent in November, while the labor force participation rate and the employment-population ratio remained depressed.

Industrial production in the manufacturing sector increased at a solid pace in October, with advances widespread across industries; total industrial production was unchanged due to an offsetting weather-related drop in the output of utilities. The manufacturing capacity utilization rate continued to move up in October, although it remained significantly below its 1972-2009 average. Most indicators of near-term industrial activity, such as the new orders diffusion indexes in the national and regional manufacturing surveys, were at levels consistent with moderate gains in industrial production in the near term. Motor vehicle assemblies, which rose in October, fell back in November but were scheduled to move up again in coming months.

The pace of consumer spending picked up in recent months from the modest rate that prevailed earlier in the year. Nominal retail sales, excluding purchases at motor vehicles and parts outlets, posted a strong gain in November, and revised estimates showed larger increases in September and October than previously reported. In addition, sales of new light motor vehicles stepped up in October and remained at that higher level in November. A number of factors supporting consumer spending also improved. Revised data on personal income indicated that it was stronger last spring and summer than previously reported. Household net worth rose further in the third quarter, as an increase in equity values more than offset the effect of a drop in house prices. Consumer sentiment turned more positive in November and early December, retracing most of the decline that occurred during the summer. However, while consumer credit outstanding showed signs of stabilizing after two years of runoffs, credit terms were still noticeably less favorable than in the past, and demand for credit appeared to remain weak.

Activity in the housing market was still quite depressed. In October, starts of new single-family homes remained at the very low level that had prevailed since August. Moreover, the level of permit issuance, which is typically a near-term indicator of new homebuilding, continued to run below starts. The persistence of a large excess supply of existing homes on the market and tight credit conditions for construction appeared to constitute a significant restraint on new homebuilding. Demand for housing also remained very weak: Sales of new homes in October were at the lowest level in the 48-year history of the series. Purchases of existing homes edged lower in October; in part, the still-low level of sales likely reflected the payback from the earlier surge in sales associated with the homebuyer tax credit and also the moratoriums on sales of bank-owned properties. Measures of house prices declined recently, and households’ concerns that home values might continue to fall, their pessimism about the outlook for employment and income, and the tight standards faced by many mortgage borrowers appeared to be weighing on demand.

Real business investment in equipment and software appeared to be increasing, although the pace of spending seemed to have moderated from the rapid rate of the first half of the year. The rise in E&S spending during the third quarter, while somewhat slower than earlier in the year, remained solid and broad based, but the available data for the fourth quarter were mixed. Nominal orders and shipments of nondefense capital goods excluding aircraft declined in October, and business purchases of new vehicles in October and November were down a bit from their third-quarter level. In contrast, sales of software still appeared to be on a solid uptrend, and deliveries of completed aircraft picked up in November. Surveys of purchasing managers reported plans to step up capital spending in 2011; however, reports from small businesses on their planned expenditures remained downbeat. Business outlays on nonresidential structures appeared to be declining further, with a drop in spending on building construction offset only slightly by increased investment in drilling and mining structures. Overall borrowing by nonfinancial corporations was robust again in November, indicators of credit quality continued to improve, and small businesses noted some easing in credit availability. However, financing conditions for commercial real estate remained tight.

Real inventory investment rose sharply in the third quarter, but book-value data for October suggested that the pace of accumulation was slowing. Although inventory-sales ratios rose during the third quarter, survey data implied that few businesses perceived inventory stocks as being too high.

Consumer price inflation trended lower in October. The 12-month change in the total personal consumption expenditures (PCE) price index reached its lowest level of the past year; the 12-month change in the PCE price index for core goods and services also moved down. In October, core PCE prices were unchanged for a second month, as goods prices declined and prices of non-energy services posted a small increase. The broad-based deceleration in underlying inflation was also apparent in other measures, such as the trimmed-mean PCE price index and a diffusion index of PCE price changes. Despite the rise in agricultural commodity prices, the increase in retail food prices was modest. In contrast, consumer energy prices continued to rise rapidly in October, and spot prices of imported crude oil moved higher, on net, during November and early December. The rise in prices of nonfuel industrial commodities moderated over the intermeeting period as spot prices of metals declined, but the producer price index for domestically manufactured intermediate goods accelerated in October and November. In November and early December, survey measures of households’ short- and long-term inflation expectations remained in the ranges that have prevailed since the spring of 2009.

Available measures of labor compensation showed that labor cost pressures were still restrained. The 12-month change in average hourly earnings for all employees remained low in November. In the third quarter, the modest rise in hourly compensation in the nonfarm business sector was matched by a similar increase in productivity.

The U.S. international trade deficit narrowed considerably in October, shrinking to its lowest level since the beginning of the year, as exports surged and imports edged down. The strength in exports was relatively broad based. Exports of industrial supplies and agricultural goods registered the largest increases, although rising prices accounted for some of those gains. Exports of machinery and automotive products also rose strongly. The decrease in imports was concentrated in petroleum products, reflecting lower volumes, and in computers. In contrast, imports of consumer goods posted a noticeable increase.

Recent data releases confirmed that, in the aggregate, the rise in foreign real gross domestic product (GDP) slowed sharply in the third quarter from the very rapid pace earlier in the year. The slowdown was most pronounced in the emerging market economies (EMEs), where economic activity was restrained by the abatement of inventory rebuilding and the associated waning of the rebound in global trade, the unwinding of fiscal stimulus measures, and a continued tightening of monetary policies in several countries. More recent indicators for the EMEs, including purchasing managers indexes (PMIs), pointed to a rebound in economic activity in the fourth quarter. The advanced foreign economies (AFEs) also saw a slower rise in real economic activity in the third quarter than occurred earlier in the year. In the euro area, economic performance continued to diverge across countries. The increase in German economic activity in the third quarter was nearly twice the euro-area average rate, and recent indicators, including PMIs and consumer and business sentiment, showed further solid performance. In contrast, Spanish economic activity stagnated in the third quarter, Greek GDP extended its decline, and more-recent indicators point to continued weakness in peripheral European economies. Headline inflation rates generally picked up in the foreign economies, driven largely by food and energy prices; measures of inflation excluding food and energy prices were relatively steady.

Staff Review of the Financial Situation
The decision by the FOMC at its November meeting to maintain the 0 to 1/4 percent target range for the federal funds rate was widely anticipated. The decision to expand its holdings of longer-term securities by $600 billion by the end of the second quarter of 2011 was also roughly in line with market expectations, although market participants appeared to expect the purchase program would be increased over time. In the weeks following the November meeting, yields on nominal Treasury securities increased significantly, as investors reportedly revised down their estimates of the ultimate size of the FOMC’s new asset-purchase program. Incoming economic data that were viewed, on balance, as favorable to the outlook and news of a tentative agreement between the Administration and some members of the Congress regarding a package of fiscal measures also reportedly contributed to the backup in yields. Market participants pointed to abrupt changes in investor positions, the effects of the approaching year-end on market liquidity, and hedging flows associated with investors’ holdings of MBS as factors that may have amplified the rise in yields. Futures quotes suggested that the path for the federal funds rate expected by market participants rose over the intermeeting period.

The increase in yields on nominal Treasury coupon securities was accompanied by increases in yields on TIPS. TIPS-based inflation compensation moved up at the 5-year horizon amid rising energy prices, but forward inflation compensation 5 to 10 years ahead was about unchanged. Yields on investment-grade corporate bonds rose about in line with those on comparable-maturity Treasury securities, leaving risk spreads about unchanged; spreads on speculative-grade corporate bonds moved down somewhat. Secondary-market prices for leveraged loans rose slightly over the intermeeting period, while bid-asked spreads in that market continued to drift down.

Some signs of modest stress emerged in certain short-term funding markets over the intermeeting period as investors focused increasingly on the evolving situation in Europe. The spread of the three-month London interbank offered rate (or Libor) forward rate agreement over the three-month forward overnight index swap (OIS) rate moved a bit higher, on balance, perhaps pointing to heightened concerns about future funding conditions. In the commercial paper market, spreads increased on paper issued by financial institutions with parents in peripheral European countries, and the amount outstanding of such paper declined. Spreads on asset-backed commercial paper were somewhat volatile over the intermeeting period. Nonetheless, spreads on nonfinancial commercial paper remained at low levels, as did the spreads of dollar Libor over OIS rates at one- and three-month maturities.

Broad U.S. equity price indexes increased moderately, on net, over the intermeeting period, in part reflecting incoming economic data that were read by investors as suggesting that the recovery could be gaining traction, at least outside the housing sector. Stock prices for domestic commercial banks were volatile but outperformed broad indexes on balance. Option-implied volatility on the S&P 500 index fell modestly, and the spread between the staff’s estimate of the expected real return on equity for S&P 500 firms and the real 10-year Treasury yield–a rough measure of the equity risk premium–narrowed a bit, although it remained elevated relative to longer-run norms.

In the December 2010 Senior Credit Officer Opinion Survey on Dealer Financing Terms, dealers reported an easing of credit terms over the preceding three months with respect to securities financing transactions and across a range of counterparties. Dealers also noted that demand for funding of all types of securities increased over the same reference period.

Net debt financing by U.S. nonfinancial corporations continued to be robust in November. Gross issuance of corporate bonds was very heavy, particularly for speculative-grade firms. Investor demand for syndicated leveraged loans also appeared to have remained high. Nonfinancial commercial paper outstanding declined noticeably during October and November, in part because some firms reportedly shifted to bond financing. Gross public equity issuance by nonfinancial firms through seasoned and initial public offerings was particularly strong in November. Measures of the credit quality of nonfinancial corporations continued to improve.

Conditions in the commercial real estate market remained tight. Commercial mortgage debt was estimated to have declined in the third quarter, and the delinquency rates for securitized commercial mortgages and those for existing properties at commercial banks increased further. However, some modest signs of improvement continued to surface. Prices of commercial real estate changed little, on balance, over September and October, holding in the relatively narrow range that had prevailed since the spring when the steep decline in these prices ended. Issuance of commercial mortgage-backed securities increased in November but was still far below pre-crisis levels.

Residential mortgage rates rose considerably over the intermeeting period, though not by as much as rates on longer-term Treasury securities. The spread between mortgage rates and MBS yields dropped back, reversing the widening of the spread that occurred over the preceding several months. Refinancing activity declined in response to the higher mortgage rates. Outstanding residential mortgage debt was estimated to have contracted in the third quarter at about the average rate of decline seen over the preceding year. Delinquency rates on prime and subprime mortgages ticked down but remained extremely elevated.

In contrast, the consumer credit market exhibited continued signs of stabilization. Although consumer credit contracted in the third quarter, the decline was the smallest since late 2008, and consumer credit edged higher in October. The pace of issuance of consumer asset-backed securities in November was slightly above the average for the year to date, and the delinquency rate on consumer loans at banks declined further in the third quarter.

Commercial bank credit was about flat, on average, during October and November. Banks continued to increase their holdings of securities, while core loans–the sum of commercial and industrial (C&I), real estate, and consumer loans–decreased moderately. The declines were attributable to a drop in consumer loans as well as to continued runoffs in commercial real estate and home equity loans. In contrast, C&I loans edged up, ending a nearly two-year string of monthly declines. In addition, the Survey of Terms of Business Lending conducted in the first week of November showed that interest rates on C&I loans were generally little changed while spreads remained extremely wide.

According to the latest Call Report data, bank profitability was little changed in the third quarter, remaining positive but well below pre-crisis levels. As in the second quarter, banks’ net incomes were supported by declines in loan loss provisioning, while revenues declined. Banks continued to boost regulatory capital ratios, likely, at least in part, in anticipation of the need to eventually meet stricter Basel III standards.

M2 expanded at a moderate rate in November. Interest rates available on all M2 assets remained very low, and households continued to shift their holdings of M2 assets toward liquid deposits, which continued to rise rapidly, and away from small time deposits and retail money market mutual funds. Currency increased strongly, with indicators suggesting robust demand from abroad.

The foreign exchange value of the dollar, which depreciated immediately following the FOMC’s November announcement of further asset purchases, subsequently appreciated amid intensifying concerns about stresses in the euro area and some apparent reassessment by investors of the monetary policy outlook in the United States. On net, the dollar ended the intermeeting period up against most currencies, with particularly large gains against the euro. The announcement of the European Union (EU)-International Monetary Fund (IMF) financial aid package for Ireland on November 28 did little to reverse the depreciation of the euro, as investors reportedly became increasingly concerned about other euro-area economies and the adequacy of resources available to support them should they come under stress. Spreads of sovereign yields in some peripheral euro-area countries over those on German bunds rose to new highs, although they fell back near the end of the intermeeting period amid reports that the European Central Bank (ECB) had increased its purchases of Irish and Portuguese sovereign debt. Banks in the euro-area periphery continued to rely heavily on funding from the ECB, and some signs of increased dollar funding pressures emerged. Implied short-term interest rates for the coming year shifted down in the euro area, as market participants apparently scaled back the pace at which they expected the ECB to normalize policy, but rose in some other AFEs. Ten-year sovereign yields increased significantly throughout the AFEs, although by less than yields in the United States. Headline stock price indexes in the AFEs generally ended the period higher, whereas bank stocks in Europe declined.

The People’s Bank of China raised the required reserve ratio for banks a cumulative 150 basis points over the intermeeting period, and other central banks in emerging Asia increased policy rates. China’s Shanghai Composite Index fell in the wake of Chinese policy actions, while other emerging market stock indexes were mixed over the period. In Latin America, Brazil’s central bank also raised reserve requirements late in the period. The dollar appreciated slightly, on average, against the emerging market currencies, although it edged down against the Chinese renminbi.

Staff Economic Outlook
With the recent data on production and spending stronger, on balance, than the staff anticipated at the time of the November FOMC meeting, the staff revised up its projected increase in real GDP in the near term. However, the staff’s outlook for real economic activity over the medium term was little changed, on net, relative to the projection prepared for the November meeting. The staff forecast incorporated the assumption that new fiscal actions, some of which had not been anticipated in its previous forecast, were likely to boost the level of real GDP in 2011 and 2012. But, compared with the November forecast, a number of other conditioning assumptions were less favorable: House prices and housing activity were likely to be lower, while interest rates, oil prices, and the foreign exchange value of the dollar were projected to be higher, on average, than previously assumed. As a result, although the staff projection showed a higher level of real GDP, the average pace of growth over 2011 and 2012 was little changed from the November forecast, and the unemployment rate was still projected to decline slowly.

The underlying rate of consumer price inflation in recent months was lower than the staff expected at the time of the November meeting, and the staff forecast anticipated that core PCE prices would rise a bit more slowly in 2011 and 2012 than previously projected. As in earlier forecasts, the persistent wide margin of economic slack in the projection was expected to sustain downward pressure on inflation, but the ongoing stability in inflation expectations was anticipated to stem further disinflation. The staff anticipated that relatively rapid increases in energy prices would raise total consumer price inflation above the core rate in the near term, but that this upward pressure would dissipate by 2012.

Participants’ Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and outlook, meeting participants saw the information received during the intermeeting period as pointing to some improvement in the near-term outlook, and they expected that economic growth, which had been moderate, would pick up somewhat going forward. Indicators of production and household spending had strengthened, and the tone of the labor market was a little better on balance. The new fiscal package was generally expected to support the pace of recovery next year. However, a number of factors were seen as likely to continue restraining growth, including the depressed housing market, employers’ continued reluctance to add to payrolls, and ongoing efforts by some households and businesses to delever. Moreover, the recovery remained subject to some downside risks, such as the possibility of a more extended period of weak activity and lower prices in the housing sector and potential financial and economic spillovers if the banking and sovereign debt problems in Europe were to worsen. In light of recent readings on consumer inflation, participants noted that underlying inflation had continued trending downward, but several saw the risk of deflation as having receded somewhat.

In the household sector, incoming data on retail sales were somewhat stronger than expected, and there were some reasonably upbeat reports from business contacts regarding holiday spending. Consumer confidence appeared to be improving. Financial obligations and debt service costs had been declining as a share of household income, and that process was seen as providing greater latitude for a pickup in discretionary purchases. Nonetheless, there were indications that retail spending by middle- and lower-income households had risen less than spending by high-income households, suggestive of ongoing financial pressures on those of more modest means. Furthermore, the housing sector, including residential construction and home sales, continued to be depressed. Some participants noted that the elevated supply of available homes and the overhang of foreclosed homes were contributing to a further decline in house prices. The lower house prices, in turn, were seen as reducing household wealth and thus restraining growth in consumer spending.

A number of participants noted that their business contacts had become more optimistic about the outlook for sales and production. Nonetheless, many contacts remained cautious about hiring and investment, with some reportedly concerned about the potential effects of government policies. The manufacturing, agriculture, and energy sectors showed particular signs of strength, and the high-tech sector appeared to be improving. However, nonresidential construction remained very weak, apart from drilling and mining. It was noted that credit conditions had eased further, although nonfinancial corporations continued to hold very high levels of cash.

Conditions in the labor market appeared to be improving on balance. That improvement was reflected in a range of recent indicators, including a declining number of new jobless claims, an increase in job openings, and an uptick in the average workweek. Nonetheless, participants noted that the pace of hiring was still sluggish; indeed, the unemployment rate had edged higher in November, and the employment-population ratio remained very low.

Interest rates at intermediate and longer maturities rose substantially over the intermeeting period, while credit spreads were roughly unchanged and equity prices rose moderately. Participants pointed to a number of factors that appeared to have contributed to the significant backup in yields, including an apparent downward reassessment by investors of the likely ultimate size of the Federal Reserve’s asset-purchase program, economic data that were seen as suggesting an improved economic outlook, and the announcement of a package of fiscal measures that was expected to bolster economic growth and increase the deficit over coming quarters. It was noted that the backup in rates may have been amplified by year-end positioning, as well as by some reported mortgage-related hedging flows. A number of participants indicated that, because the backup in rates appeared to importantly reflect changes in investors’ expectations about the size of Federal Reserve asset purchases, the backup was consistent with purchases helping to keep longer-term yields lower than would otherwise be the case. Several meeting participants mentioned the communications challenges faced in conducting effective policy, including the need to clearly convey the Committee’s views while appropriately airing individual perspectives.  

Measures of underlying inflation continued to trend downward over the intermeeting period, with the slowdown in price increases evident across categories of goods and services and across different inflation measures. Although the prices of some commodities and imported goods had risen appreciably, several participants noted that businesses seemed to have little ability to pass these increases on to their customers, given the significant slack in the economy. Also, the high level of unemployment was limiting gains in wages and thereby contributing to the low level of inflation. TIPS-based measures of inflation compensation had risen modestly over the intermeeting period, while surveys of households and professional forecasters continued to suggest that longer-term inflation expectations remained stable.

Regarding their overall outlook for economic activity, participants generally agreed that, even with the positive news received over the intermeeting period, the most likely outcome was a gradual pickup in growth with slow progress toward maximum employment. However, they held a range of views about the risks to that outlook. A few mentioned the possibility that growth could pick up more rapidly than expected, particularly in light of the very accommodative stance of monetary policy currently in place. It was noted that such an acceleration would likely be accompanied by significantly more rapid growth in bank lending and in the monetary aggregates, suggesting that such indicators might prove to be useful sources of information. Others pointed to downside risks to growth. One common concern was that the housing sector could weaken further in light of the considerable supply of houses either on the market or likely to come to market. Another concern was the ongoing deterioration in the fiscal position of U.S. states and localities, which could lead to sharp cuts in spending and increases in taxes. In addition, participants expressed concerns about a possible worsening of the banking and financial strains in Europe, which could spill over to U.S. financial markets and institutions, and so to the broader U.S. economy. They observed that market stresses in Europe intensified during the intermeeting period, requiring an assistance package for Ireland from the EU and the IMF, and that after that package was announced, market attention appeared to shift to other European countries. Participants noted, however, that the European authorities were taking steps to stabilize conditions in the euro area.

Regarding the outlook for inflation, participants generally anticipated that inflation would remain for some time below levels judged to be most consistent, over the longer run, with maximum employment and price stability. In particular, most participants expected that underlying measures of inflation would bottom out around current levels and then move gradually higher as the recovery progresses. A few participants pointed to the risk that the ongoing expansion of the Federal Reserve’s balance sheet and the sustained low level of short-term interest rates could trigger undesirable increases in inflation expectations and so in actual inflation. To minimize such risks, it was noted that the Committee should continue its planning for the eventual exit from the current exceptionally accommodative stance of policy. Other participants noted that, with substantial resource slack persisting, underlying inflation might fall further below the levels that the Committee sees as consistent with its mandate. Nonetheless, several participants saw the risk of deflation as having receded somewhat over recent months.

Committee Policy Action 
Members noted that, while incoming information over the intermeeting period had increased their confidence in the economic recovery, progress toward the Committee’s dual objectives of maximum employment and price stability was disappointingly slow. In addition, members generally expected that progress was likely to remain modest, with unemployment and inflation deviating from the Committee’s objectives for some time. Accordingly, in their discussion of monetary policy for the period immediately ahead, nearly all Committee members agreed to continue expanding the Federal Reserve’s holdings of longer-term securities as announced in November in order to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with the Committee’s mandate. The Committee decided to maintain its existing policy of reinvesting principal payments from its securities holdings into longer-term Treasury securities. In addition, the Committee agreed to continue buying longer-term Treasury securities with the intention of purchasing $600 billion of such securities by the end of the second quarter of 2011, a pace of about $75 billion per month. While the economic outlook was seen as improving, members generally felt that the change in the outlook was not sufficient to warrant any adjustments to the asset-purchase program, and some noted that more time was needed to accumulate information on the economy before considering any adjustment. Members emphasized that the pace and overall size of the purchase program would be contingent on economic and financial developments; however, some indicated that they had a fairly high threshold for making changes to the program. The Committee also decided to maintain the target range for the federal funds rate at 0 to 1/4 percent and to reiterate its expectation that economic conditions are likely to warrant exceptionally low levels for the federal funds rate for an extended period. One member dissented from the Committee’s policy decision, judging that, in light of the improving economy, a continued high level of monetary accommodation would increase the risks of future economic and financial imbalances. Members agreed that the Committee should continue to regularly review the pace of its securities purchases and the overall size of the program in light of incoming information–including information on the economic outlook, the efficacy of the program, and any unintended consequences that might arise–and make adjustments as needed to best foster maximum employment and price stability. With respect to the statement to be released following the meeting, members agreed that only small changes were necessary to reflect the modest improvement in the near-term economic outlook.

At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive:

“The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to execute purchases of longer-term Treasury securities in order to increase the total face value of domestic securities held in the System Open Market Account to approximately $2.6 trillion by the end of June 2011. The Committee also directs the Desk to reinvest principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System’s balance sheet that could affect the attainment over time of the Committee’s objectives of maximum employment and price stability.”

The vote encompassed approval of the statement below to be released at 2:15 p.m.:

“Information received since the Federal Open Market Committee met in November confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment. Household spending is increasing at a moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have continued to trend downward.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and 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, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.”

Voting for this action: Ben Bernanke, William C. Dudley, James Bullard, Elizabeth Duke, Sandra Pianalto, Sarah Bloom Raskin, Eric Rosengren, Daniel K. Tarullo, Kevin Warsh, and Janet L. Yellen.

Voting against this action: Thomas M. Hoenig.

Mr. Hoenig dissented because he judged that economic conditions were improving, and that the current highly accommodative stance of monetary policy was inconsistent with the Committee’s long-run mandate. Mr. Hoenig noted that the economic recovery was shifting from transitory to more sustainable sources of growth and was picking up momentum. In his assessment, maintaining highly accommodative monetary policy in the current economic environment would increase the risk of future imbalances and, over time, cause an increase in longer-term inflation expectations. Mr. Hoenig also was concerned that the eventual orderly reduction of policy accommodation would become more difficult the longer the first step in that process was delayed. In Mr. Hoenig’s view, the Committee should begin preparing markets for a reduction in policy accommodation. Accordingly, he thought the press statement should indicate that sufficient monetary stimulus was in place to support the recovery.

It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, January 25-26, 2011. The meeting adjourned at 12:55 p.m. on December 14, 2010.

Notation Vote
By notation vote completed on November 22, 2010, the Committee unanimously approved the minutes of the FOMC meeting held on November 2-3, 2010.

 

_____________________________
William B. English
Secretary

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Confira a ata do Fomc na íntegra (em inglês)

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, August 10, 2010, at 8:00 a.m.

PRESENT:

Ben Bernanke, Chairman
William C. Dudley, Vice Chairman
James Bullard
Elizabeth Duke
Thomas M. Hoenig
Donald L. Kohn
Sandra Pianalto
Eric Rosengren
Daniel K. Tarullo
Kevin Warsh

Christine Cumming, Charles L. Evans, Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, Alternate Members of the Federal Open Market Committee

Jeffrey M. Lacker, Dennis P. Lockhart, and Janet L. Yellen, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively

William B. English, Secretary and Economist
Matthew M. Luecke, Assistant Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Thomas C. Baxter, Deputy General Counsel
Richard M. Ashton, Assistant General Counsel
Nathan Sheets, Economist

James A. Clouse, Thomas A. Connors, Steven B. Kamin, Lawrence Slifman, Mark S. Sniderman, and David W. Wilcox, Associate Economists

Brian Sack, Manager, System Open Market Account

Jennifer J. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors

Patrick M. Parkinson, Director, Division of Bank Supervision and Regulation, Board of Governors

Robert deV. Frierson, Deputy Secretary, Office of the Secretary, Board of Governors

Charles S. Struckmeyer, Deputy Staff Director, Office of the Staff Director for Management, Board of Governors

William Nelson, Deputy Director, Division of Monetary Affairs, Board of Governors

Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors

Seth B. Carpenter, Senior Associate Director, Division of Monetary Affairs, Board of Governors; David Reifschneider and William Wascher, Senior Associate Directors, Division of Research and Statistics, Board of Governors

Stephen A. Meyer, Senior Adviser, Division of Monetary Affairs, Board of Governors; Stephen D. Oliner, Senior Adviser, Division of Research and Statistics, Board of Governors

Brian J. Gross, Special Assistant to the Board, Office of Board Members, Board of Governors

Eric M. Engen, Assistant Director, Division of Research and Statistics, Board of Governors

David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors

John C. Driscoll and Jennifer E. Roush, Senior Economists, Division of Monetary Affairs, Board of Governors

Penelope A. Beattie, Assistant to the Secretary, Office of the Secretary, Board of Governors

Kimberley E. Braun, Records Project Manager, Division of Monetary Affairs, Board of Governors

Randall A. Williams, Records Management Analyst, Division of Monetary Affairs, Board of Governors

David Sapenero, First Vice President, Federal Reserve Bank of St. Louis

Loretta J. Mester and Robert H. Rasche, Executive Vice Presidents, Federal Reserve Banks of Philadelphia and St. Louis, respectively

David Altig, Ron Feldman, Craig S. Hakkio, Glenn D. Rudebusch, Daniel G. Sullivan, and Geoff Tootell, Senior Vice Presidents, Federal Reserve Banks of Atlanta, Minneapolis, Kansas City, San Francisco, Chicago, and Boston, respectively

Linda Goldberg, Vice President, Federal Reserve Bank of New York

Annmarie S. Rowe-Straker, Assistant Vice President, Federal Reserve Bank of New York

Pia Orrenius, Research Officer, Federal Reserve Bank of Dallas

Robert L. Hetzel, Senior Economist, Federal Reserve Bank of Richmond

Developments in Financial Markets and the Federal Reserve’s Balance Sheet
The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Committee met on June 22-23, 2010. He also reported on System open market operations during the intermeeting period, noting that the Desk at the Federal Reserve Bank of New York had engaged in coupon swap transactions in agency mortgage-backed securities (MBS) to substantially reduce the number of the Committee’s earlier agency MBS purchases that remained to be settled. In addition, the Manager briefed the Committee on the System’s progress in developing tools for possible future reserve draining operations. The Federal Reserve successfully conducted two more small-value auctions of term deposits to confirm operational readiness for such auctions at the Federal Reserve and at the depository institutions that chose to participate. The Manager noted that the staff was developing plans for additional small-value tests of the Term Deposit Facility. In early August, the Federal Reserve successfully executed a few small-value term reverse repurchase operations, including the first the Federal Reserve conducted using agency MBS as collateral, to ensure operational readiness for such transactions at the Federal Reserve, the clearing banks, and the primary dealers. There were no open market operations in foreign currencies for the System’s account over the intermeeting period. By unanimous vote, the Committee ratified the Desk’s transactions over the intermeeting period.

The Manager also noted the staff’s projection that, if mortgage rates were to remain near their levels at the time of the meeting, repayments of principal on the agency MBS held in the SOMA likely would reduce the face value of those holdings by roughly $340 billion from August 2010 through the end of 2011. The level of repayments would be expected to increase further if mortgage rates were to decline from those levels. In addition, about $55 billion of agency debt held in the SOMA portfolio would mature over the same time frame.

Staff Review of the Economic Situation
The information reviewed at the August 10 meeting indicated that the pace of the economic recovery slowed in recent months and that inflation remained subdued. In addition, revised data for 2007 through 2009 from the Bureau of Economic Analysis showed that the recent recession was deeper than previously thought, and, as a result, the level of real gross domestic product (GDP) at the end of 2009 was noticeably lower than estimated earlier. Private employment increased slowly in June and July, and industrial production was little changed in June after a large increase in May. Consumer spending continued to rise at a modest rate in June, and business outlays for equipment and software moved up further. However, housing activity dropped back, and nonresidential construction remained weak. Additionally, the trade deficit widened sharply in May. A further decline in energy prices and unchanged prices for core goods and services led to a fall in headline consumer prices in June.

Private nonfarm employment expanded slowly in recent months. The average monthly gain in private payroll employment during the three months ending in July was small, considerably less than the average increase over the preceding three months. However, average weekly hours of all employees continued to recover. The net addition of jobs in manufacturing and related industries, and in nonbusiness services such as health and education, continued to contribute importantly to the net increase in private employment. Employment in construction and financial activities fell further. The unemployment rate moved down in June from its level earlier in the year, and was unchanged in July, as declining civilian employment was accompanied by decreases in labor force participation. Initial claims for unemployment insurance remained at an elevated level over the intermeeting period.

Industrial production was little changed in June after three months of strong increases. The output of utilities was boosted by unseasonably hot weather while manufacturing production declined. The drop in manufacturing output included a reduction in motor vehicle assemblies, but they were scheduled to increase noticeably in July. The June decrease in factory output also reflected weaker production in industries producing non-automotive consumer goods and construction and business supplies. The output of high-technology items and other business equipment continued to rise. Capacity utilization in manufacturing in June stood well above its mid-2009 low, but it was still substantially short of its longer-run average.

Revised data indicated that consumer spending fell more sharply in 2008 and in the first half of 2009, and subsequently recovered more slowly, than previously estimated. Real personal consumption expenditures (PCE) rose gradually during the second quarter. Sales of light motor vehicles continued to move up, on balance, with the level of sales in July slightly higher than the second-quarter average. Real disposable personal income increased at a noticeably stronger pace than spending in recent months, and the personal saving rate moved up further from the upwardly revised level reported in the revisions to the national income and product accounts. Indicators of household net worth–such as stock prices and house prices–were little changed, on net, over the intermeeting period. Consumer confidence fell back in July, with households expressing greater concern about their personal finances and the outlook for the recovery.

The housing market, which had been supported earlier in the year by activity associated with the homebuyer tax credits, was quite soft for a second consecutive month in June. Sales of new single-family homes rebounded some in June after their sharp drop in May, but they remained at a depressed level. Sales of existing homes fell for a second month in June, and the index of pending home sales suggested another decline in July. Starts of new single-family houses, which had dropped steeply in May, edged down in June to the lowest level since the spring of 2009. The low number of new permits issued in June appeared to signal that little improvement in new homebuilding was likely in July. House prices were largely stable, on balance, in recent months. The interest rate on 30-year fixed-rate conforming mortgages fell further during July, reaching a record low for the 39-year history of the series.

Real business spending on equipment and software rose strongly again in the second quarter, with increases widespread across the categories of spending. New orders for nondefense capital goods excluding aircraft remained on a solid uptrend, although their three-month change for the period ending in June was less rapid than earlier in the year. Survey indicators of business conditions and sentiment softened in July but remained consistent with further gains in production and capital spending in the near term. Business investment in nonresidential structures turned up in the second quarter, with spending boosted by the rise in outlays for drilling and mining structures. The decline in spending for other types of nonresidential buildings appeared to be slowing, and there were a few signs that financial conditions in commercial real estate markets, though still difficult, were stabilizing. In the second quarter, businesses appeared to add to inventories at a faster rate. However, ratios of inventories to sales for most industries did not point to any sizable overhangs.

Inflation remained subdued in recent months. Headline consumer prices declined in May and June because of sizable drops in consumer energy prices. At the same time, the core PCE price index moved up only slightly, and the year-over-year increase in the index in June was lower than earlier in the year. In recent months, prices of core consumer goods continued to decline while prices of non-energy services rose moderately. At earlier stages of production, producer prices of core intermediate materials fell back in June; in contrast, most indexes of spot commodity prices moved up during July. Inflation compensation based on Treasury inflation-protected securities moved down further over the intermeeting period, partly in response to softer-than-expected data on economic activity, but survey measures of short- and long-term inflation expectations were largely stable.

Nominal hourly labor compensation–as measured by compensation per hour in the nonfarm business sector and the employment cost index–rose modestly during the year ending in the second quarter. Average hourly earnings of all employees rose slowly over the 12 months ending in July. Output per hour in the nonfarm business sector declined in the second quarter after rising rapidly in the preceding three quarters. On net, unit labor costs remained well below their level one year earlier.

The U.S. international trade deficit widened sharply in May, as a significant increase in exports was more than offset by a surge in imports. The corresponding decline in real net exports made a significant negative contribution to U.S. GDP growth in the second quarter. The increase in exports was broadly based, with particular strength in exports of capital equipment. Imports of capital goods also were strong, as were imports of consumer goods and automotive products. In contrast, imports of petroleum products fell in May, held back by both lower prices and reduced volumes.

Available data suggested that aggregate GDP growth in foreign economies remained strong in the second quarter. Recent indicators of economic activity for the euro area showed little imprint of the fiscal stresses that emerged in the spring. Industrial production continued to grow in May, with particularly solid gains in Germany and France, and purchasing managers indexes and economic sentiment turned up in July. In Japan, exports continued to support economic growth, even as indicators of household spending remained weak. Machinery orders declined in May, however, and industrial production moved down in June, suggesting some deceleration in economic activity. In the emerging market economies (EMEs), incoming data generally pointed to a moderation of economic growth, albeit to a still-solid pace, with a notable slowing in China in the second quarter. In other EMEs, purchasing managers indexes generally still pointed to expansions in manufacturing activity, though industrial production in many countries began to decelerate. In contrast, Mexican indicators suggested that economic activity rebounded in the second quarter after contracting in the first quarter. Headline inflation rates generally declined abroad, reflecting prior declines in oil and other commodity prices.

Staff Review of the Financial Situation
The decision taken by the Federal Open Market Committee (FOMC) at its June meeting to maintain the 0 to 1/4 percent target range for the federal funds rate was about in line with investor expectations and elicited little market reaction; the same was true of the wording of the accompanying statement. Over the intermeeting period, investors appeared to mark down the path for monetary policy in response to weaker-than-expected economic data releases and Federal Reserve communications that were read as suggesting that policymakers’ concerns about the economic outlook had increased.

Reflecting the same factors, yields on nominal Treasury coupon securities fell noticeably on net. Treasury auctions were generally well received, with bid-to-cover ratios mostly exceeding historical averages. Yields on investment- and speculative-grade corporate bonds decreased, and their spreads relative to yields on comparable-maturity Treasury securities declined moderately. Secondary-market bid prices on syndicated leveraged loans rose a bit, while bid-asked spreads in that market edged down.

Conditions in short-term funding markets improved somewhat over the intermeeting period. Spreads of term London interbank offered rates (Libor) over rates on overnight index swaps moved down at most horizons, and liquidity in term funding markets reportedly increased. Spreads on unsecured commercial paper were little changed. In secured funding markets, spreads on asset-backed commercial paper moved down, while rates and haircuts on collateral for repurchase agreements involving Treasury and agency collateral held steady.

Broad U.S. equity price indexes increased slightly, on net, as generally positive corporate earnings news and an easing of investors’ worries about the potential effects of fiscal strains in Europe were partly offset by concerns about the strength of the economic recovery. Most firms in the S&P 500 reported second-quarter earnings that exceeded analysts’ forecasts. Option-implied volatility on the S&P 500 index declined but remained somewhat elevated by historical standards. The spread between the staff’s estimate of the expected real return on equities over the next 10 years and an estimate of the expected real return on a 10-year Treasury note–a rough measure of the equity risk premium–was little changed at an elevated level. Financial stock prices moved about in line with broader indexes, and credit default swap spreads for large financial institutions narrowed moderately.

Gross bond issuance by U.S. investment-grade nonfinancial corporations rebounded in July from relatively subdued levels in May and June. Nonfinancial commercial paper outstanding also increased. Issuance of syndicated leveraged loans rose in the second quarter, but terms on such deals reportedly tightened somewhat. Measures of the credit quality of nonfinancial firms remained solid. Gross equity issuance was moderate in June and July.

Prices of commercial real estate appeared to have increased in the second quarter, though the number of transactions was small. Nonetheless, commercial real estate markets remained under pressure. Delinquency rates for securitized commercial mortgages continued to rise in June, and commercial mortgage debt was estimated to have contracted by a sizable amount again in the second quarter. However, investor demand for high-quality commercial mortgage-backed securities (CMBS) reportedly was robust, although issuance of CMBS remained muted.

Consumer credit contracted again in the second quarter, as revolving credit continued to decline and nonrevolving credit edged down. Issuance of consumer asset-backed securities slowed a bit in July, reflecting, in part, typical seasonal patterns. Consumer credit quality continued to show improvement. Delinquency and charge-off rates for most types of consumer loans moved down in recent months, although these rates remained elevated. Spreads of credit card interest rates over those on Treasury securities stayed elevated in May, while interest rate spreads on auto loans remained near their average level over the past decade.

Commercial banks’ core loans–the sum of commercial and industrial (C&I), real estate, and consumer loans–continued to contract in June and July. However, the recent runoff in core loans was appreciably smaller than the declines posted earlier in the year, reflecting a more modest contraction in C&I loans. The July Senior Loan Officer Opinion Survey on Bank Lending Practices showed, for the second straight quarter, that a small net fraction of respondents had eased standards for C&I loans over the previous three months. Commercial real estate loans continued to decline steeply in June and July, and residential real estate loans also decreased. Consumer loans at commercial banks were about flat, on balance, as reductions in credit card loans about offset an increase in nonrevolving consumer loans. Securities holdings by banks increased substantially in recent weeks.

M2 was little changed in July after expanding slightly in the second quarter. Its subdued growth in recent months likely reflected a continued unwinding of earlier safe-haven flows as well as the very low rates of return on some components of M2, particularly small time deposits and retail money market mutual funds.

In foreign exchange markets, the value of the dollar declined on balance over the intermeeting period, likely reflecting some reversal of flight-to-safety flows, better-than-expected European economic data, and the softer economic outlook for the United States. The release of the results of the European Union stress-test exercise, including data on European banks’ exposures to sovereign debt, appeared to ease concerns about the potential for severe financial dislocations in Europe. Investors also seemed to take comfort from several oversubscribed auctions of government debt by Spain, Portugal, Ireland, and Greece. Accordingly, risk spreads on these governments’ bonds, though elevated, generally declined, and European banks’ access to dollar funding improved somewhat. The lack of any disruption to market functioning following the expiration, on July 1, of the European Central Bank’s first one-year refinancing operation also supported investor sentiment. Market indicators of expectations for future overnight rates in the euro area shifted up during the period. No changes were made to policy interest rates in the euro area, the United Kingdom, or Japan. The Bank of Canada tightened policy a step further during the period, raising its target for the overnight rate 25 basis points to 3/4 percent.

Notwithstanding the improved investor sentiment toward Europe, data releases pointing to lower-than-expected growth in economic activity in the United States and China may have weighed on global sovereign bond yields, which declined on net in Canada, Germany, the United Kingdom, and Japan. Equity prices, while up in Europe over the intermeeting period, were little changed in Canada and down in Japan. By contrast, share prices rose in emerging markets and flows into emerging market equity funds continued to be strong. The central banks of a number of EMEs, including Brazil, Chile, India, Malaysia, South Korea, Taiwan, and Thailand, increased policy interest rates.

Staff Economic Outlook
In the economic forecast prepared for the August FOMC meeting, the staff lowered its projection for the increase in real economic activity during the second half of 2010 but continued to anticipate a moderate strengthening of the expansion in 2011. The softer tone of incoming economic data suggested that the pace of the expansion would be slower over the near term than previously projected. Financial conditions, however, became somewhat more supportive of economic growth. Interest rates on Treasury securities, corporate bonds, and mortgages moved down further over the intermeeting period; the dollar reversed its April to June appreciation; and equity prices edged higher. Over the medium term, the recovery in economic activity was expected to receive support from accommodative monetary policy, further improvement in financial conditions, and greater household and business confidence. Over the forecast period, the increase in real GDP was projected to be sufficient to slowly reduce economic slack, although resource slack was still anticipated to remain quite elevated at the end of 2011.

Overall inflation was projected to remain subdued over the next year and a half. The staff’s forecasts for headline and core inflation in 2010 were revised up slightly in response to the higher prices of oil and other commodities and the depreciation of the dollar. Even so, the wide margin of economic slack was projected to contribute to some slowing in core inflation in 2011, though the extent of that slowing would be tempered by stable inflation expectations.

Participants’ Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and outlook, meeting participants generally characterized the economic information received during the intermeeting period as indicating a slowing in the pace of recovery in output and employment in recent months. Real GDP growth was noticeably weaker in the second quarter of 2010 than most had anticipated, and monthly data suggested that the pace of recovery remained sluggish going into the third quarter. Private payrolls and consumer spending had risen less than expected. Business spending on equipment and software had increased strongly but reportedly was concentrated in replacements and upgrades that had been postponed during the economic downturn. Investment in nonresidential structures continued to be weak. Housing starts and sales remained at depressed levels, falling back after the expiration of the temporary homebuyer tax credits. The incoming data suggested that economic growth abroad had been somewhat stronger than anticipated and remained solid, boosting U.S. exports and supporting a pickup in U.S. manufacturing output and employment, though a surprising surge in imports in the second quarter widened the U.S. trade deficit. Conditions in financial markets had become somewhat more supportive of growth over the intermeeting period, in part reflecting perceptions of diminished risk of financial dislocations in Europe: Medium- and longer-term interest rates had fallen, some risk spreads had narrowed, and the decline in equity prices that had occurred in the months before the Committee’s June meeting had been partly reversed. Moreover, participants saw some indications that credit conditions for households and smaller businesses were beginning to improve, albeit gradually. Thus, while they saw growth as likely to be more modest in the near term, participants continued to anticipate that growth would pick up in 2011.

Revised national income and product account data showed that the contraction in aggregate output during the recent recession had been larger than previously reported. In particular, consumer spending had contracted more over the course of 2008 and the first half of 2009, and recovered less rapidly, than previously estimated, even as households’ after-tax incomes had increased more than shown by the earlier data. In combination, these revisions indicated that the personal saving rate had been higher and had risen somewhat more during the past three years than previously thought. Participants recognized that the implications of these new data for the outlook were unclear. On the one hand, the revised data might indicate that households have made greater progress in repairing their balance sheets than had been realized, potentially allowing stronger growth in consumer spending as the recovery proceeds. On the other hand, the revised data might signify that households are seeking to raise their net worth more substantially than previously understood, or to build greater precautionary balances in what they perceive to be a more uncertain economic environment, with the result that growth in consumer spending could remain restrained for some time.

Many participants noted that the protracted downturn in house prices and in residential investment seemed to have ended, although ups and downs in housing starts and home sales associated with the temporary tax credit for homebuyers made it difficult to be certain. A few commented that home sales and prices appeared to be edging up in their Districts. While recognizing that the housing sector likely had bottomed out, participants observed that large inventories of vacant and unsold homes, along with continuing foreclosures that would increase the number of houses for sale, likely would continue to damp residential construction, indicating that a sustained upturn from very low levels was not imminent.

Business investment in equipment and software had grown at a robust pace, but growth in new orders for nondefense capital goods, though volatile from month to month, appeared to have stepped down. Many participants noted that capital investment was heavily concentrated in replacement investment and upgrades that firms had postponed during the economic downturn. A number of participants reported that business contacts again indicated that their uncertainty about the fiscal and regulatory environment made them reluctant to expand capacity. Other participants cited business surveys and reports from business contacts indicating that slow growth in sales and uncertainty about the strength and durability of the recovery likely were more important factors. Except in the extractive industries (drilling and mining), investment in nonresidential structures had continued to decline. The near-term outlook for commercial real estate investment remained weak despite a decline in vacancy rates in some markets.

Participants agreed that credit conditions did not appear to be an important restraint on investment spending by larger firms that have access to the capital markets. Such firms were able to borrow readily and at relatively low rates; moreover, many businesses held substantial cash balances. In addition, survey results suggested that a sizable fraction of banks had eased loan terms, and a few had eased lending standards, on C&I loans. Some participants observed that small businesses continued to find credit hard to obtain. However, several participants noted recent survey evidence indicating that most small firms that requested credit were able to borrow, and that relatively few small firms thought that access to credit was their most important problem. Standards for commercial real estate loans and residential mortgages remained very tight, and banks did not appear to be easing standards on such loans. Some limited easing of lending standards was noted for consumer loans, but credit availability remained a constraint and consumer credit continued to contract. However, several participants noted that with credit quality improving, some bankers were more actively seeking loan growth, though the same bankers also indicated that the demand for loans remained weak.

Many participants noted that European countries’ efforts to address their fiscal imbalances, and the release of the results of the stress test of European banks along with information about their exposures to sovereign debt, had reduced investor concern about downside risks in Europe. These factors appeared to have supported improvements in financial markets both here and abroad. Moreover, growth in Europe and Asia apparently remained solid, boosting U.S. exports. Nonetheless, a continuation of strong foreign growth would require a pickup in private demand abroad to offset a decline in policy stimulus and a smaller boost from inventory investment. Several participants noted that the same shift in the sources of demand would need to take place in the United States: Waning fiscal stimulus on the part of the federal government and continuing retrenchment in spending by state and local governments would weigh on the economic recovery, and recent data raised questions as to whether private demand would strengthen enough to increase resource utilization.

The incoming data on the labor market were weaker than meeting participants had anticipated. Private-sector payrolls grew sluggishly in recent months. The unemployment rate declined a bit, but that reflected a decrease in labor force participation rather than an increase in employment. Policymakers discussed a variety of factors that appeared to be contributing to the slow pace of job growth. A number of participants reported that business contacts again indicated that uncertainty about future taxes, regulations, and health-care costs made them reluctant to expand their workforces. Instead, businesses had continued to meet growth in demand for their products largely through productivity gains and by increasing existing employees’ hours. Several participants suggested that structural factors such as mismatches between unemployed workers’ skills and the needs of employers with job openings, or unemployed workers’ inability to move to a new locale, were contributing to the elevated level and long average duration of unemployment. Other participants, while agreeing that such factors could restrain job growth and contribute to high rates of unemployment, noted that employment was lower than a year earlier and that job openings were only slightly above their lowest level in 10 years, indicating that few firms saw a need to add employees. Most participants viewed weak demand for firms’ outputs as the primary problem; they saw substantial scope for stronger aggregate demand for goods and services to spur employment in a wide range of industries.

Weighing the available information, participants again expected the recovery to continue and to gather strength in 2011. Nonetheless, most saw the incoming data as indicating that the economy was operating farther below its potential than they had thought, that the pace of recovery had slowed in recent months, and that growth would be more modest during the second half of 2010 than they had anticipated at the time of the Committee’s June meeting. Some policymakers whose forecasts for growth had been in the low end of the range of participants’ earlier projections viewed the recent data as consistent with their earlier forecasts for a weak recovery. A few participants, observing that month-to-month data releases are noisy and subject to revision, did not see the recent data as clearly indicating a change in the outlook. Many policymakers judged that downside risks to the U.S. recovery had become somewhat larger; a few saw the incoming data as suggesting a greater risk that private demand for goods and services might not grow enough to offset waning fiscal stimulus and a smaller impetus from inventory restocking. In contrast, most saw a reduced risk of financial turmoil in Europe and attendant spillovers to U.S. financial markets.

Policymakers generally saw the inflation outlook as little changed. They observed that a range of measures continued to indicate subdued underlying inflation and that growth in wages and compensation remained quite moderate. Many said they expected underlying inflation to stay, for some time, below levels they judged most consistent with the dual mandate to promote maximum employment and price stability. Participants viewed the risk of deflation as quite small, but a number judged that the risk of further disinflation had increased somewhat despite the stability of longer-run inflation expectations. One noted that survey measures of longer-run inflation expectations had remained positive in Japan throughout that country’s bout of deflation. A few saw the continuation of exceptionally accommodative monetary policy in the United States as posing some upside risk to inflation expectations and actual inflation in the medium run.

Committee Policy Action
In their discussion of monetary policy for the period ahead, Committee members agreed that it would be appropriate to maintain the target range of 0 to 1/4 percent for the federal funds rate. Members still saw the economic expansion continuing, and most believed that inflation was likely to stabilize near recent low readings in coming quarters and then gradually rise toward levels they consider more consistent with the Committee’s dual mandate for maximum employment and price stability. Nonetheless, members generally judged that the economic outlook had softened somewhat more than they had anticipated, particularly for the near term, and some saw increased downside risks to the outlook for both growth and inflation. Some members expressed a concern that in this context any further adverse shocks could have disproportionate effects, resulting in a significant slowing in growth going forward. While no member saw an appreciable risk of deflation, some judged that the risk of further near-term disinflation had increased somewhat. More broadly, members generally saw both employment and inflation as likely to fall short of levels consistent with the dual mandate for longer than had been anticipated.

Against this backdrop, the Committee discussed the implications for financial conditions and the economic outlook of continuing its policy of not reinvesting principal repayments received on MBS or maturing agency debt. The decline in mortgage rates since spring was generating increased mortgage refinancing activity that would accelerate repayments of principal on MBS held in the SOMA. Private investors would have to hold more longer-term securities as the Federal Reserve’s holdings ran off, making longer-term interest rates somewhat higher than they would be otherwise. Most members thought that the resulting tightening of financial conditions would be inappropriate, given the economic outlook. However, members noted that the magnitude of the tightening was uncertain, and a few thought that the economic effects of reinvesting principal from agency debt and MBS likely would be quite small. Most members judged, in light of current conditions in the MBS market and the Committee’s desire to normalize the composition of the Federal Reserve’s portfolio, that it would be better to reinvest in longer-term Treasury securities than in MBS. While reinvesting in Treasury securities was seen as preferable given current market conditions, reinvesting in MBS might become desirable if conditions were to change. A few members worried that reinvesting principal from agency debt and MBS in Treasury securities could send an inappropriate signal to investors about the Committee’s readiness to resume large-scale asset purchases. Another member argued that reinvesting repayments of principal from agency debt and MBS, thereby postponing a reduction in the size of the Federal Reserve’s balance sheet, was likely to complicate the eventual exit from the period of exceptionally accommodative monetary policy and could have adverse macroeconomic consequences in future years.

All but one member concluded that it would be appropriate to begin reinvesting principal received from agency debt and MBS held in the SOMA by purchasing longer-term Treasury securities in order to keep constant the face value of securities held in the SOMA and thus avoid the upward pressure on longer-term interest rates that might result if those holdings were allowed to decline. Several members emphasized that in addition to continuing to develop and test instruments to facilitate an eventual exit from the period of unusually accommodative monetary policy, the Committee would need to consider steps it could take to provide additional policy stimulus if the outlook were to weaken appreciably further. Given the softer tone of recent data and the more modest near-term outlook, members agreed that some changes to the statement’s characterization of the economic and financial situation were necessary. All members but one judged that it was appropriate to reiterate the expectation that economic conditions–including low levels of resource utilization, subdued inflation trends, and stable inflation expectations–were likely to warrant exceptionally low levels of the federal funds rate for an extended period. One member argued that the recovery was proceeding about as outlined earlier this year and that starting a gradual process of removing policy accommodation fairly soon would better foster the Committee’s long-run objectives of maximum employment and price stability.

At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive:

“The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to maintain the total face value of domestic securities held in the System Open Market Account at approximately $2 trillion by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System’s balance sheet that could affect the attainment over time of the Committee’s objectives of maximum employment and price stability.”

The vote encompassed approval of the statement below to be released at 2:15 p.m.:

“Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.

Measures of underlying inflation have trended lower in recent quarters and, with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

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, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.1 The Committee will continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.



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31/08/2010 15:02:08

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A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, June 22, 2010, at 2:00 p.m. and continued on Wednesday, June 23, 2010, at 9:00 a.m.

PRESENT:
Ben Bernanke, Chairman
William C. Dudley, Vice Chairman
James Bullard
Elizabeth Duke
Thomas M. Hoenig
Donald L. Kohn
Sandra Pianalto
Eric Rosengren
Daniel K. Tarullo
Kevin Warsh

Charles L. Evans, Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, Alternate Members of the Federal Open Market Committee

Jeffrey M. Lacker, Dennis P. Lockhart, and Janet L. Yellen, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively

Brian F. Madigan, Secretary and Economist
Matthew M. Luecke, Assistant Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Thomas Baxter, Deputy General Counsel
Richard M. Ashton, Assistant General Counsel
Nathan Sheets, Economist
David J. Stockton, Economist

Thomas A. Connors, William B. English, Jeff Fuhrer, Steven B. Kamin, Simon Potter, Lawrence Slifman, Christopher J. Waller, and David W. Wilcox, Associate Economists

Brian Sack, Manager, System Open Market Account

Jennifer J. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors

Patrick M. Parkinson, Director, Division of Bank Supervision and Regulation, Board of Governors

Robert deV. Frierson,1 Deputy Secretary, Office of the Secretary, Board of Governors

Charles S. Struckmeyer, Deputy Staff Director, Office of the Staff Director for Management, Board of Governors

James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors

Linda Robertson,2 Assistant to the Board, Office of Board Members, Board of Governors

Nellie Liang, David Reifschneider, and William Wascher, Senior Associate Directors, Division of Research and Statistics, Board of Governors; William Nelson, Senior Associate Director, Division of Monetary Affairs, Board of Governors

Seth B. Carpenter, Associate Director, Division of Monetary Affairs, Board of Governors

Christopher J. Erceg, Deputy Associate Director, Division of International Finance, Board of Governors; Michael G. Palumbo and Joyce K. Zickler, Deputy Associate Directors, Division of Research and Statistics, Board of Governors

Brian J. Gross, Special Assistant to the Board, Office of Board Members, Board of Governors

Fabio M. Natalucci, Assistant Director, Division of Monetary Affairs, Board of Governors

David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors

Beth Anne Wilson, Section Chief, Division of International Finance, Board of Governors

John C. Driscoll and Jennifer E. Roush, Senior Economists, Division of Monetary Affairs, Board of Governors; Andrea L. Kusko, Senior Economist, Division of Research and Statistics, Board of Governors; John W. Schindler, Senior Economist, Division of International Finance, Board of Governors 

Penelope A. Beattie, Assistant to the Secretary, Office of the Secretary, Board of Governors 

Valerie Hinojosa and Randall A. Williams, Records Management Analysts, Division of Monetary Affairs, Board of Governors 

Patrick K. Barron and John F. Moore, First Vice Presidents, Federal Reserve Banks of Atlanta and San Francisco, respectively 

Loretta J. Mester, Harvey Rosenblum, and John C. Williams, Executive Vice Presidents, Federal Reserve Banks of Philadelphia, Dallas, and San Francisco, respectively 

David Altig, Richard P. Dzina, Arthur Rolnick, and Mark E. Schweitzer, Senior Vice Presidents, Federal Reserve Banks of Atlanta, New York, Minneapolis, and Cleveland, respectively 

Daniel Aaronson, Todd E. Clark, and Andreas L. Hornstein, Vice Presidents, Federal Reserve Banks of Chicago, Kansas City, and Richmond, respectively 

Joshua L. Frost, Assistant Vice President, Federal Reserve Bank of New York 

Developments in Financial Markets and the Federal Reserve’s Balance Sheet
The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Committee met on April 27-28, 2010. He also briefed the Committee on the System’s progress in developing tools for managing the supply of reserves, including reverse repurchase agreements and the Term Deposit Facility. In preparation for possible future reserve draining operations, in June the Federal Reserve conducted the first of several small-value auctions to test the Term Deposit Facility. In addition, the Manager reported on System open market operations during the intermeeting period. By unanimous vote, the Committee ratified those transactions. There were no open market operations in foreign currencies for the System’s account over the intermeeting period.

In his presentation to the Committee, the Manager noted that “fails to deliver” in the mortgage-backed securities (MBS) market had reached very high levels in recent months. Under these conditions, dealers had experienced difficulty in arranging delivery of a small amount–including about $9 billion of securities with 5.5 percent coupons issued by Fannie Mae–of the $1.25 trillion of MBS that the Desk at the Federal Reserve Bank of New York had purchased between January 2009 and March 2010. The Desk had postponed settlement of some of these transactions through the use of dollar rolls. The Manager discussed alternative methods of settling the outstanding transactions and recommended that the Committee authorize the Desk to engage in coupon swap transactions to facilitate the settlement of these purchases. The Manager noted that a coupon swap is a common transaction in the market for MBS in which the two counterparties exchange securities at market prices. By engaging in a coupon swap, the Federal Reserve would effectively sell the scarce securities that it had not yet received and purchase instead securities that are more readily available in the market. After discussing various approaches, meeting participants agreed that coupon swaps were an appropriate method to achieve settlement of outstanding transactions.

As background for the Committee’s continuing consideration of its portfolio management policies, the Manager gave a presentation on alternative strategies for reinvesting the proceeds from maturing Treasury securities. Under current practice, the Desk reinvests the proceeds of maturing Treasury coupon securities in new Treasury securities that are issued on the date the older securities mature, allocating the investments across the new securities in proportion to the issuance amounts. The Manager presented two alternatives to the status quo. First, the Committee could consider halting all reinvestment of the proceeds of maturing securities. Such a strategy would shrink the size of the Federal Reserve’s balance sheet and reduce the quantity of reserve balances in the banking system gradually over time. Second, the Committee could reinvest the proceeds of maturing securities only in new issues of Treasury securities with relatively short maturities–bills only, or bills as well as coupon issues with terms of three years or less. This strategy would maintain the size of the Federal Reserve’s balance sheet but would reduce somewhat the average maturity of the portfolio and increase its liquidity. One participant favored halting all reinvestment, and many saw benefits to eventually adopting an approach of reinvesting in bills and shorter-term coupon issues to shift the maturity composition of the portfolio toward the structure that had prevailed prior to the financial crisis. However, the Committee made no change to its reinvestment policy at this meeting.

Continuing a discussion from previous meetings, participants again addressed issues regarding asset sales. Participants continued to agree that gradual sales of MBS should be undertaken, at some point, to speed the return to a Treasury-securities-only portfolio. A few participants supported beginning such sales fairly soon; they noted that, given the evident demand in the market for safe, longer-term assets, modest sales of MBS might not put much, if any, upward pressure on long-term interest rates or be disruptive to the functioning of financial markets. However, many participants still saw asset sales as potentially tightening financial conditions to some extent. Most participants continued to judge it appropriate to defer asset sales for some time; several noted the modest weakening in the economic outlook since the Committee’s last meeting as an additional reason to do so. A majority of participants continued to anticipate that asset sales would start after the Committee had begun to firm policy by increasing short-term interest rates; such an approach would postpone asset sales until the economic recovery was well established and maintain short-term interest rates as the Committee’s key monetary policy tool. A few participants suggested selling MBS and using the proceeds to purchase Treasury securities of comparable duration, arguing that doing so would hasten the move toward a Treasury-securities-only portfolio without tightening financial conditions. Participants agreed that it would be important to maintain flexibility regarding the appropriate timing and pace of asset sales, given the uncertainties associated with the unprecedented size and composition of the Federal Reserve’s balance sheet and its effects on financial conditions. Overall, participants emphasized that any decision to engage in asset sales would need to be communicated well in advance of the initiation of such transactions, and that sales should be conducted at a gradual pace and potentially be adjusted in response to developments in economic and financial conditions.

Staff Review of the Economic Situation
The information reviewed at the June 22-23 meeting suggested that the economic recovery was proceeding at a moderate pace in the second quarter. Businesses continued to increase employment and lengthen workweeks in April and May, but the unemployment rate remained elevated. Industrial production registered strong and widespread gains, and business investment in equipment and software rose rapidly. Consumer spending appeared to have moved up further in April and May. However, housing starts dropped in May, and nonresidential construction remained depressed. Falling energy prices held down headline consumer prices in April and May while core consumer prices edged up.

Labor demand continued to firm in recent months. While the change in total nonfarm payroll employment in May was boosted significantly by the hiring of temporary workers for the decennial census, private employment posted only a small increase. This increase, however, followed sizable gains in March and April, and the average workweek of all private-sector employees increased over the March-to-May period. As a result, aggregate hours worked by employees on private nonfarm payrolls rose substantially through May. The unemployment rate moved up in April but dropped back in May to 9.7 percent, its first-quarter average. The labor force participation rate was, on average, higher in recent months than in the first quarter, as rising employment was accompanied by an increasing number of jobseekers. Although the number of workers who were employed part time for economic reasons leveled off in recent months, the proportion of unemployed workers who were jobless for more than 26 weeks continued to move up. Initial claims for unemployment insurance were little changed over the intermeeting period, remaining at a still-elevated level.

Industrial production rose at a robust rate in April and May, with production increases broadly based across industries. Firming domestic demand, rising exports, and business inventory restocking appeared to have provided upward impetus to factory production. In April and May, production in high-technology industries again rose strongly, with substantial gains in the output of semiconductors and further solid increases in the production of computers and communications equipment. The production of other types of business equipment continued to rebound, and the output of construction supplies advanced further. Production of light motor vehicles turned up in May; nonetheless, dealers’ inventories remained lean. Capacity utilization in manufacturing rose in May to a rate noticeably above the low reached in mid-2009, but it was still substantially below its longer-run average.

The rise in consumer spending slowed in recent months after a brisk increase in the first quarter. Although sales of light motor vehicles continued to trend higher, nominal sales of non-auto consumer goods and food services were little changed in April and May. The moderation in spending appeared, on balance, to be aligning the pace of consumption with recent trends in income, wealth, and consumer sentiment. Real disposable personal income moved up at a solid rate in March and April, reflecting increases in employment and hours worked as well as slightly higher real wages, but home values declined in recent months and equity prices moved down since the April meeting. Measures of consumer sentiment improved in May and early June but were still at relatively low levels.

The anticipated expiration of the homebuyer tax credit appeared to have pulled home sales forward, boosting their level in recent months. Sales of existing single-family homes rose strongly in April, and, although they moved down in May, these sales were still above their level earlier in the year. Purchases of new single-family homes also jumped in April, but then fell steeply in May. On net, the upswing in the volume of real estate transactions in recent months was likely to boost the brokers’ commissions component of residential investment in the second quarter. However, starts of new single-family homes, which had trended higher in the first four months of the year, declined sharply in May. In addition, the number of permits for new homes, which tends to lead starts, fell for a second month in May. House prices declined somewhat in recent months, reversing some of the modest increases that occurred in the spring and summer of 2009. After changing little on net during the preceding year, interest rates for 30-year fixed-rate conforming mortgages moved lower in May and June.

Real spending on equipment and software increased further early in the second quarter. Business outlays for computing equipment and software continued to rise at a brisk pace through April, and shipments of aircraft to domestic carriers rebounded. Orders and shipments of nondefense capital goods excluding transportation and high-tech equipment stayed on a noticeable uptrend, on net, in March and April, with the increases broadly based by type of equipment. The recovery in equipment and software spending was consistent with the relatively strong gains in production in recent months, improved financial conditions over the first part of the year, and the positive readings from surveys on business conditions and earnings reports for producers of capital goods. Business outlays for nonresidential construction appeared to be contracting further, on balance, in March and April, although the rate of decline seemed to be moderating. Outlays for new power plants and for manufacturing facilities firmed, and investment in drilling and mining structures continued to rise strongly. However, spending on office and commercial structures was still falling steeply through April, with the weakness likely related to high vacancy rates, falling property prices, and the light volume of sales.

Businesses appeared to have begun to restock their inventories. Real nonfarm inventory investment turned positive in the first quarter, and data for April pointed to further modest accumulation. Ratios of inventories to sales for most industries looked to be within comfortable ranges.

Consumer price inflation remained low in April and May. The core consumer price index rose only slightly over the period, and the year-over-year change in the index was lower than earlier this year. Core goods prices continued to decline, on net, and prices of non-energy services remained soft. The headline consumer price index edged down in both months, as the drop in the price of crude oil since April led consumer energy prices to retrace a portion of the run-up that occurred during the nine months ending in January. At earlier stages of processing, producer prices of core intermediate materials rose moderately in May after five months of large increases. Inflation compensation based on Treasury inflation-protected securities decreased recently in response to low readings on inflation and falling oil prices. Survey measures of both short- and long-term inflation expectations remained relatively stable.

Unit labor costs continued to be restrained by weakness in hourly compensation and further gains in productivity. Revised estimates of labor compensation indicated that hourly compensation in the nonfarm business sector was about flat, on net, during the fourth quarter of 2009 and the first quarter of 2010. The employment cost index showed a moderate rise over the period, boosted by a sizable increase in benefit costs in the first quarter. The year-over-year increase in average hourly earnings of all employees was also moderate through May. Output per hour in the nonfarm business sector, which rose rapidly in 2009, posted a more moderate but still-solid gain in the first quarter of 2010.

The U.S. international trade deficit widened slightly in April, as nominal exports fell a bit more than nominal imports. The April declines in both exports and imports followed robust increases in March. The April fall in exports reflected declines in exports of consumer goods, primarily due to a drop in pharmaceuticals, and in agricultural goods. Exports of industrial supplies moved up while exports of capital goods were flat after increasing strongly in March. Imports in April were pulled down by lower imports of consumer goods, which more than offset sharply higher imports of capital goods, particularly computing equipment. Imports of automotive products and non-oil industrial supplies declined slightly, and imports of petroleum products were flat following a large increase in March.

Incoming data suggested that economic activity abroad continued to expand at a strong pace in the first half of the year. Among the advanced foreign economies, growth of real gross domestic product (GDP) in the first quarter was particularly strong in Canada and Japan, and recent indicators for those countries pointed to continued solid increases in the second quarter. In contrast, the rise in economic activity in the euro area was subdued, as favorable readings for the manufacturing sector were counterbalanced by weakness in domestic demand. Since the time of the April meeting of the Federal Open Market Committee (FOMC), concerns about the fiscal situation of several euro-area countries intensified sharply. In response, European authorities announced a number of policy measures, including acceleration of fiscal consolidation plans in some countries, finalization of an International Monetary Fund (IMF) and European Union (EU) assistance package for Greece, and the introduction of a broader ?500 billion financial assistance program that could be complemented by bilateral IMF lending. The European Central Bank (ECB) also announced further measures to improve liquidity conditions in impaired markets, including a program to purchase sovereign and private debt.

Economic activity in emerging market economies continued to expand briskly in the first half of this year. Growth of economic activity was particularly robust in emerging Asia, driven in part by strong increases in industrial production and exports associated with solid gains in final demand as well as the turn in the inventory cycle. The rise of real GDP in Latin America appeared to have stalled in the first quarter, but this development reflected a contraction in Mexico that more-favorable monthly indicators suggested should prove temporary. In contrast, the increase in Brazilian real GDP was very strong. Consumer price inflation in the foreign economies in aggregate was buoyed by higher food and energy prices in the first quarter, while core inflation generally remained subdued. More recent information suggested some moderation in foreign inflation in the second quarter.

Staff Review of the Financial Situation
The FOMC’s decision at its April meeting to maintain the 0 to 1/4 percent target range for the federal funds rate and the wording of the accompanying statement were largely in line with expectations and prompted little market reaction. Economic data releases were mixed, on balance, over the intermeeting period, but market participants were especially attentive to incoming information on the labor market–most notably, the private payroll figures in the employment report for May, which were considerably weaker than investors expected. Those data, combined with heightened concerns about the global economic outlook stemming in part from Europe’s sovereign debt problems, contributed to a downward revision in the expected path of policy implied by money market futures rates.

In the market for Treasury coupon securities, 2- and 10-year nominal yields fell considerably over the intermeeting period. Market participants pointed to flight-to-quality flows and greater concern about the economic outlook as factors boosting the demand for Treasury securities. The drop in Treasury yields was accompanied by a small widening of swap spreads.

Conditions in short-term funding markets deteriorated somewhat, particularly for European financial institutions. Spreads of the term London interbank offered rate, or Libor, over rates on overnight index swaps widened noticeably, with the availability of funding at maturities longer than one week reportedly quite limited. Market participants also reduced holdings of commercial paper sponsored by entities thought to have exposures to peripheral European financial institutions and governments. Even so, spreads of high-grade unsecured financial commercial paper to nonfinancial commercial paper widened only modestly over the intermeeting period. In secured funding markets, spreads on asset-backed commercial paper also widened modestly, while rates on repurchase agreements involving Treasury and agency collateral changed little. In the inaugural Senior Credit Officer Opinion Survey on Dealer Financing Terms, which was conducted by the Federal Reserve between May 24 and June 4, dealers generally reported that the terms on which they provided credit remained tight relative to those at the end of 2006. However, they noted some loosening of terms for both securities financing and over-the-counter derivatives transactions, on net, over the previous three months for certain classes of clients–including hedge funds, institutional investors, and nonfinancial corporations–and intensified efforts by those clients to negotiate more-favorable terms. At the same time, they reported a pickup in demand for financing across several collateral types over the past three months.

Broad U.S. stock price indexes fell over the intermeeting period, in part reflecting deepening concerns about the European fiscal situation and its potential for adverse spillovers to global economic growth. Option-implied volatility on the S&P 500 index spiked in mid-May, to more than double its value at the time of the April FOMC meeting, but largely reversed its run-up by the time of the June meeting. The spread between the staff’s estimate of the expected real return on equities over the next 10 years and an estimate of the expected real return on a 10-year Treasury note–a measure of the equity risk premium–increased from its already elevated level.

Investors’ attitudes toward financial institutions deteriorated somewhat, as the equity of financial firms underperformed the broader market amid uncertainty about the implications of developments in Europe and the potential effects of financial regulatory reform. Yields on investment- and speculative-grade corporate bonds moved higher over the intermeeting period, and high-yield bond mutual funds recorded substantial net outflows. Spreads on corporate bonds widened, although they remained within the range prevailing since last summer. Secondary-market bid prices on syndicated leveraged loans fell, while bid-asked spreads in that market widened.

Net debt financing by nonfinancial corporations increased in April and May relative to its pace in the first quarter. Gross bond issuance by investment-grade nonfinancial corporations in the United States remained solid, on average, over those two months; nonfinancial commercial paper outstanding increased as well. High-yield corporate bond issuance in the United States briefly paused in May, reflecting the market’s pullback from risky assets, although speculative-grade U.S. firms continued to issue bonds abroad and a few placed issues domestically in the first half of June. Gross equity issuance fell a bit, on net, in April and May, likely due in part to recent declines in equity prices and elevated market volatility. Measures of the credit quality of nonfinancial firms generally continued to improve, and first-quarter profits for firms in the S&P 500 jumped substantially, primarily reflecting an upturn in financial sector profits from quite depressed levels. The outlook in commercial real estate markets stayed weak; prices of commercial properties fell a bit further in the first quarter, and the volume of commercial property sales remained light. The delinquency rate for securitized commercial mortgages continued to climb in May, and indexes of prices of credit default swaps on commercial mortgages declined, on net, over the intermeeting period.

Consumer credit contracted again in recent months, as revolving credit continued on a steep downtrend. Issuance of consumer credit asset-backed securities (ABS) increased in May, although the pace was still well below that observed before the onset of the financial crisis. Credit card ABS issuance remained subdued, partly reflecting regulatory changes that made financing credit card receivables via securitization less desirable. In primary markets, spreads of credit card interest rates over those on Treasury securities remained extremely high in April, while interest rate spreads on auto loans stayed near their average level of the past decade. Consumer credit quality improved further, with delinquency rates on credit cards and auto loans moving down a bit in April.

Bank credit declined, on average, in April and May at about the same pace as in the first quarter. Commercial and industrial loans, after dropping rapidly in April, decreased at a slower pace in May. While commercial real estate and home equity loans fell at a slightly faster rate than in recent quarters, the contraction in closed-end residential loans abated, partly because of a reduced pace of sales to Fannie Mae and Freddie Mac. Consumer loans declined again, on average, in April and May. The amount of Treasury and agency securities held by large domestic banks and foreign-related institutions declined in May, contributing to a sizable drop in banks’ securities holdings.

On a seasonally adjusted basis, M2 contracted in April but surged in May, with much of the month-to-month variation apparently associated with the effects of federal tax payments and refunds. Averaging across the two months, M2 expanded moderately after having been about unchanged in the first quarter; liquid deposits accounted for most of the net change.

The threat to global economic growth and financial stability posed by the fiscal situation in some European nations sparked widespread flight-to-quality flows over most of the intermeeting period. This retreat led to a broad appreciation of the dollar as well as declines in equity prices abroad and in yields on benchmark sovereign bonds. However, investor sentiment improved near the end of the period, leading to a partial reversal in some of these movements, despite Moody’s downgrade of Greece to below-investment-grade status in mid-June. On net, the dollar ended the intermeeting period up, most headline equity indexes fell, and benchmark government bond yields declined. Strains in euro-area bank funding markets reemerged during the period. In response, the ECB announced some changes to its liquidity operations that would provide greater market access to term funding in euros.3 Difficulties also appeared in corporate debt markets as both nonfinancial and financial corporate debt issuance dropped substantially in May. In addition, pressures in dollar funding markets reappeared for foreign financial institutions, especially those thought to have significant exposure to Greece and other peripheral euro-area countries. To help contain these pressures and to prevent their spread to other institutions and regions, the Federal Reserve reestablished dollar liquidity swap arrangements with the ECB, the Bank of England, the Bank of Japan, the Bank of Canada, and the Swiss National Bank.

Yields on the sovereign obligations of peripheral European countries declined noticeably following a May 10 announcement of a framework established by the EU for providing financial aid to euro-area governments and of the ECB’s intention to purchase euro-area sovereign debt. However, yields remained high even after these announcements and moved up subsequently, notwithstanding the ECB’s purchases of government debt. Amid a weakening outlook for economic growth in Europe, central banks in several emerging European economies began to decrease policy rates. By contrast, brighter economic prospects in Canada and China prompted the Bank of Canada to raise its target for the overnight rate to 50 basis points at its June meeting and Chinese authorities to raise banks’ reserve requirement further in May. In addition, the People’s Bank of China announced late in the period that it would allow the renminbi to move more flexibly, and the currency appreciated slightly immediately following the announcement.

Staff Economic Outlook
In the economic forecast prepared for the June FOMC meeting, the staff continued to anticipate a moderate recovery in economic activity through 2011, supported by accommodative monetary policy, an attenuation of financial stress, and strengthening consumer and business confidence. While the recent data on production and spending were broadly in line with the staff’s expectations, the pace of the expansion over the next year and a half was expected to be somewhat slower than previously predicted. The intensifying concerns among investors about the implications of the fiscal difficulties faced by some European countries contributed to an increase in the foreign exchange value of the dollar and a drop in equity prices, which seemed likely to damp somewhat the expansion of domestic demand. The implications of these less-favorable factors for U.S. economic activity appeared likely to be only partly offset by lower interest rates on Treasury securities, other highly rated securities, and mortgages, as well as by a lower price for crude oil. The staff still expected that the pace of economic activity through 2011 would be sufficient to reduce the existing margins of economic slack, although the anticipated decline in the unemployment rate was somewhat slower than in the previous projection.

The staff’s forecasts for headline and core inflation were also reduced slightly. The changes were a response to the lower prices of oil and other commodities, the appreciation of the dollar, and the greater amount of economic slack in the forecast. Despite these developments, inflation expectations had remained stable, likely limiting movements in inflation. On balance, core inflation was expected to continue at a subdued rate over the projection period. As in earlier forecasts, headline inflation was projected to move into line with the core rate by 2011.

Participants’ Views of Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, all meeting participants–the five members of the Board of Governors and the presidents of the 12 Federal Reserve Banks–provided projections of economic growth, the unemployment rate, and consumer price inflation for each year from 2010 through 2012 and over a longer horizon. Longer-run projections represent each participant’s assessment of the rate to which each variable would be expected to converge over time under appropriate monetary policy and in the absence of further shocks. Participants’ forecasts through 2012 and over the longer run are described in the Summary of Economic Projections, which is attached as an addendum to these minutes.

In their discussion of the economic situation and outlook, meeting participants generally saw the incoming data and information received from business contacts as consistent with a continued, moderate recovery in economic activity. Participants noted that the labor market was improving gradually, household spending was increasing, and business spending on equipment and software had risen significantly. With private final demand having strengthened, inventory adjustments and fiscal stimulus were no longer the main factors supporting economic expansion. In light of stable inflation expectations and incoming data indicating low rates of inflation, policymakers continued to anticipate that both overall and core inflation would remain subdued through 2012. However, financial markets were generally seen as recently having become less supportive of economic growth, largely reflecting international spillovers from European fiscal strains. In part as a result of the change in financial conditions, most participants revised down slightly their outlook for economic growth, and about one-half of the participants judged the balance of risks to growth as having moved to the downside. Most participants continued to see the risks to inflation as balanced. A number of participants expressed the view that, over the next several years, both employment and inflation would likely be below levels they consider to be consistent with their dual mandate, but they anticipated that, with appropriate monetary policy, both would rise over time to levels consistent with the Federal Reserve’s objectives.

Financial markets had become somewhat less supportive of economic growth since the April meeting, with the developments in Europe cited as a leading cause of greater global financial market tensions. Risk spreads for many corporate borrowers had widened noticeably, equity prices had fallen appreciably, and the dollar had risen in value against a broad basket of other currencies. Participants saw these changes as likely to weigh to some degree on household and business spending over coming quarters. Participants also noted ongoing difficulties in financing commercial real estate. Nonetheless, reports suggested that more-creditworthy business borrowers were still able to obtain funding in the open markets on fairly attractive terms, and a couple of participants noted that credit from the banking sector, which had been contracting for some time, was showing some tentative signs of stabilizing. Moreover, several participants observed that the decline in yields on Treasury securities resulting from the global flight to quality was positive for the domestic economy; in particular, the associated decline in mortgage rates was seen as potentially helpful in supporting the housing sector.

Supporting the view of a continued recovery, incoming data and anecdotal reports pointed to strength in a number of business sectors, particularly manufacturing and transportation. Policymakers noted that firms’ investment in equipment and software had advanced rapidly of late, and they anticipated that such spending would continue to rise, though perhaps at a somewhat slower pace. Business contacts suggested that investment spending had been supported by the replacement and upgrading of existing capital, making up for some spending that had been postponed in the downturn, and this component of investment demand was seen as unlikely to remain robust. In addition, inventory accumulation, which had been a significant contributor to recent gains in production, appeared likely to provide less impetus to growth in coming quarters. Participants also noted that several uncertainties, including those related to legislative changes and to developments in global financial markets, were generating a heightened level of caution that could lead some firms to delay hiring and planned investment outlays.

Participants commented that household spending continued to advance, with notable increases in auto sales and expenditures on other durable goods. Going forward, consumption spending was expected to continue to post moderate gains, with the effects of income growth and improved confidence as the economy recovers more than offsetting the effects of lower stock prices and housing wealth. However, continued labor market weakness could weigh on consumer sentiment, and households were still repairing their balance sheets; both factors could restrain consumer spending going forward. Although readings from the housing sector had been strong through mid-spring, participants noted that the strength likely reflected the effects of the temporary tax credits for homebuyers. Indeed, data for the most recent month suggested that, with the expiration of those provisions, home sales and starts had stepped down noticeably and could remain weak in the near term; with lower demand and a continuing supply of foreclosed houses coming to market, participants judged that house prices were likely to remain flat or decline somewhat further in the near term.

Meeting participants interpreted the data on the labor market as consistent with their outlook for gradual recovery. Employers were adding hours to the workweek and hiring temporary workers, suggesting a pickup in labor demand; however, the most recent data on employment had been disappointing, and new claims for unemployment insurance remained elevated. Reportedly, employers were still cautious about adding to payrolls, given uncertainties about the outlook for the economy and government policies. Participants expected the pace of hiring to remain low for some time. Indeed, the unemployment rate was generally expected to remain noticeably above its long-run sustainable level for several years, and participants expressed concern about the extended duration of unemployment spells for a large number of workers. Participants also noted a risk that continued rapid growth in productivity, though clearly beneficial in the longer term, could in the near term act to moderate growth in the demand for labor and thus slow the pace at which the unemployment rate normalizes.

A broad set of indicators suggested that underlying inflation remained subdued and was, on net, trending lower. The latest readings on core inflation–which excludes the relatively volatile prices of food and energy–had slowed, and other measures of the underlying trajectory of inflation, such as median and trimmed-mean measures, also had moved down this year. Crude oil prices declined somewhat over the intermeeting period, a factor that was likely to damp headline inflation at the consumer level in coming months. Other commodity prices were moderating, and nominal wages appeared to be rising only slowly. Some participants indicated that they viewed the substantial slack in labor and resource markets as likely to reduce inflation. The financial strains in Europe had led to an increase in the foreign exchange value of the dollar, and the resulting downward pressure on import prices also was expected to weigh on consumer prices for a time. However, inflation expectations were seen by most participants as well anchored, which would tend to curb any tendency for actual inflation to decline. On balance, meeting participants revised down modestly their outlook for inflation over the next couple of years; they generally expected inflation to be quite low in the near term and to trend slightly higher over time.

Some participants judged the risks to the outlook for inflation as tilted to the downside, particularly in the near term, in light of the large amount of resource slack already prevailing in the economy, the significant downside risks to the outlook for real activity, and the possibility that inflation expectations could begin to decline in response to low actual inflation. A few participants cited some risk of deflation. Other participants, however, thought that inflation was unlikely to fall appreciably further given the stability of inflation expectations in recent years and very accommodative monetary policy. Over the medium term, participants saw both upside and downside risks to inflation. Several participants noted that a continuation of lower-than-expected inflation and high unemployment could eventually lead to a downward movement in inflation expectations that would reinforce disinflationary pressures. By contrast, a few participants noted the possibility that a potentially unsustainable fiscal position and the size of the Federal Reserve’s balance sheet could boost inflation expectations and actual inflation over time.

Committee Policy Action
In their discussion of monetary policy for the period ahead, members agreed that it would be appropriate to maintain the target range of 0 to 1/4 percent for the federal funds rate. The economic outlook had softened somewhat and a number of members saw the risks to the outlook as having shifted to the downside. Nonetheless, all saw the economic expansion as likely to be strong enough to continue raising resource utilization, albeit more slowly than they had previously anticipated. In addition, they saw inflation as likely to stabilize near recent low readings in coming quarters and then gradually rise toward more desirable levels. In sum, the changes to the outlook were viewed as relatively modest and as not warranting policy accommodation beyond that already in place. However, members noted that in addition to continuing to develop and test instruments to exit from the period of unusually accommodative monetary policy, the Committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably. Given the slightly softer cast of recent data and the shift to less accommodative financial conditions, members agreed that some changes to the statement’s characterization of the economic and financial situation were necessary. Nearly all members judged that it was appropriate to reiterate the expectation that economic conditions–including low levels of resource utilization, subdued inflation trends, and stable inflation expectations–were likely to warrant exceptionally low levels of the federal funds rate for an extended period. One member, however, believed that continuing to communicate an expectation in the Committee’s statement that the federal funds rate would remain at an exceptionally low level for an extended period would create conditions that could lead to macroeconomic and financial imbalances.

At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: 

“The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System’s balance sheet that could affect the attainment over time of the Committee’s objectives of maximum employment and price stability.”

The vote encompassed approval of the statement below to be released at 2:15 p.m.: 

“Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually. Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time.

Prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

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, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.”

Voting for this action: Ben Bernanke, William C. Dudley, James Bullard, Elizabeth Duke, Donald L. Kohn, Sandra Pianalto, Eric Rosengren, Daniel K. Tarullo, and Kevin Warsh.

Voting against this action: Thomas M. Hoenig.

Mr. Hoenig dissented because he believed that, as the economy completed its first year of modest recovery, it was no longer advisable to indicate that economic and financial conditions were likely to warrant “exceptionally low levels of the federal funds rate for an extended period.” Although risks to the forecast remained, Mr. Hoenig was concerned that communicating such an expectation would limit the Committee’s flexibility to begin raising rates modestly in a timely fashion and could result in a buildup of future financial imbalances and increase the risks to longer-run macroeconomic and financial stability.

By unanimous vote, the Committee selected William B. English to serve as Secretary and Economist, and James A. Clouse to serve as Associate Economist, effective July 23, 2010, until the selection of their successors at the first regularly scheduled meeting of the Committee in 2011.

It was agreed that the next meeting of the Committee would be held on Tuesday, August 10, 2010. The meeting adjourned at 12:10 p.m. on June 23, 2010.

Conference Call
On May 9, 2010, the Committee met by conference call to discuss developments in global financial markets and possible policy responses. Over the previous several months, market concerns about the ability of Greece and some other euro-area countries to contain their sizable budget deficits and finance their debt had increased. By early May, financial strains had intensified, reflecting investors’ uncertainty about whether fiscally stronger euro-area governments would provide financial support to the weakest members, the extent of the drag on euro-area economies that could result from efforts at fiscal consolidation, and the degree of exposure of major European banks and financial institutions to vulnerable countries. Conditions in short-term funding markets in Europe had also deteriorated, and global financial markets more generally had been volatile and less supportive of economic growth.

The Chairman indicated that European authorities were considering a number of measures to promote fiscal sustainability and to provide increased liquidity and support to money markets and markets for European sovereign debt. In connection with the possible implementation of these measures, some major central banks had requested that dollar liquidity swap lines with the Federal Reserve be reestablished. These swap lines would enhance the ability of these central banks to provide support for dollar funding markets in their jurisdictions. The terms and conditions of the swap lines would generally be similar to those in place prior to their expiration earlier in the year.

The Committee discussed considerations surrounding the possible reestablishment of dollar liquidity swap lines. Participants agreed that such arrangements could be helpful in limiting the strains in dollar funding markets and the adverse implications of recent developments for the U.S. economy. Participants observed that, in current circumstances, the dollar swap lines should be made available to a smaller number of major foreign central banks than previously. In order to promote the transparency of these arrangements, participants agreed that it would be appropriate for the Federal Reserve to publish the swap contracts and to release on a weekly basis the amounts of draws under the swap lines by central bank counterparty. It was recognized that the Committee would need to consider the implications of swap lines for bank reserves and overall management of the Federal Reserve’s balance sheet. Participants noted the importance of appropriate consultation with U.S. government officials and emphasized that a reestablishment of the lines should be contingent on strong and effective actions by authorities in Europe to address fiscal sustainability and support financial markets.

At the conclusion of the discussion, the Committee voted unanimously to approve the following resolution: 

“The Committee authorizes the Chairman to agree to establish swap lines with the European Central Bank, the Bank of England, the Swiss National Bank, the Bank of Japan, and the Bank of Canada, as discussed by the Committee today.”

Secretary’s note: Later on May 9, 2010, the Federal Reserve, in coordination with the Bank of Canada, the Bank of England, the European Central Bank (ECB), and the Swiss National Bank, announced that U.S. dollar liquidity swap facilities had been reestablished with those central banks. The arrangements with the Bank of England, the ECB, and the Swiss National Bank provide these central banks with the capacity to conduct tenders of U.S. dollars in their local markets at fixed rates for full allotment, similar to arrangements that had been in place previously. The arrangement with the Bank of Canada would support drawings of up to $30 billion, as was the case previously. On May 10, the Federal Reserve and the Bank of Japan (BOJ) announced that a temporary U.S. dollar liquidity swap arrangement had been established that would provide the BOJ with the capacity to conduct tenders of U.S. dollars at fixed rates for full allotment.

Notation Vote
By notation vote completed on May 17, 2010, the Committee unanimously approved the minutes of the FOMC meeting held on April 27-28, 2010.



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Confira a ata do Fomc na íntegra (em inglês)

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, April 27, 2010, at 2:00 p.m. and continued on Wednesday, April 28, 2010, at 9:00 a.m.

PRESENT:
Ben Bernanke, Chairman
William C. Dudley, Vice Chairman
James Bullard
Elizabeth Duke
Thomas M. Hoenig
Donald L. Kohn
Sandra Pianalto
Eric Rosengren
Daniel K. Tarullo
Kevin Warsh

Christine Cumming, Charles L. Evans, Narayana Kocherlakota, and Charles I. Plosser, Alternate Members of the Federal Open Market Committee

Jeffrey M. Lacker, Dennis P. Lockhart, and Janet L. Yellen, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively

Helen E. Holcomb, First Vice President, Federal Reserve Bank of Dallas

Brian F. Madigan, Secretary and Economist
Matthew M. Luecke, Assistant Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Thomas C. Baxter, Deputy General Counsel
Nathan Sheets, Economist
David J. Stockton, Economist

Alan D. Barkema, Thomas A. Connors, William B. English, Jeff Fuhrer, Steven B. Kamin, Simon Potter, Lawrence Slifman, Mark S. Sniderman, Christopher J. Waller, and David W. Wilcox, Associate Economists

Brian Sack, Manager, System Open Market Account

Jennifer J. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors

Patrick M. Parkinson, Director, Division of Bank Supervision and Regulation, Board of Governors

Robert deV. Frierson,1 Deputy Secretary, Office of the Secretary, Board of Governors

Charles S. Struckmeyer, Deputy Staff Director, Office of the Staff Director for Management, Board of Governors

James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors

Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors

William Nelson, Senior Associate Director, Division of Monetary Affairs, Board of Governors; Nellie Liang, David Reifschneider, and William Wascher, Senior Associate Directors, Division of Research and Statistics, Board of Governors

Seth B. Carpenter, Associate Director, Division of Monetary Affairs, Board of Governors

Christopher J. Erceg, Deputy Associate Director, Division of International Finance, Board of Governors; Egon Zakrajsek, Deputy Associate Director, Division of Monetary Affairs, Board of Governors

Brian J. Gross, Special Assistant to the Board, Office of Board Members, Board of Governors

David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors

Jennifer E. Roush, Senior Economist, Division of Monetary Affairs, Board of Governors

Kurt F. Lewis, Economist, Division of Monetary Affairs, Board of Governors

Penelope A. Beattie, Assistant to the Secretary, Office of the Secretary, Board of Governors

Kimberley E. Braun, Records Project Manager, Division of Monetary Affairs, Board of Governors

Randall A. Williams, Records Management Analyst, Division of Monetary Affairs, Board of Governors

Esther L. George, First Vice President, Federal Reserve Bank of Kansas City

Loretta J. Mester, Harvey Rosenblum, and John C. Williams, Executive Vice Presidents, Federal Reserve Banks of Philadelphia, Dallas, and San Francisco, respectively

David Altig, Richard P. Dzina, Daniel G. Sullivan, and John A. Weinberg, Senior Vice Presidents, Federal Reserve Banks of Atlanta, New York, Chicago, and Richmond, respectively

Warren Weber, Senior Research Officer, Federal Reserve Bank of Minneapolis

Developments in Financial Markets and the Federal Reserve’s Balance Sheet
The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Committee met on March 16, 2010. The Manager also reported on System open market operations in Treasury securities and in agency debt and agency mortgage-backed securities (MBS) during the intermeeting period. By unanimous vote, the Committee ratified those transactions. There were no open market operations in foreign currencies for the System’s account over the intermeeting period.

By unanimous vote, the Committee decided to extend the reciprocal currency (“swap”) arrangements with the Bank of Canada and the Banco de Mexico for an additional year, beginning in mid-December 2010; these arrangements are associated with the Federal Reserve’s participation in the North American Framework Agreement of 1994. The arrangement with the Bank of Canada is in the amount of $2 billion equivalent, and the arrangement with the Banco de Mexico is in the amount of $3 billion equivalent. The vote to renew the System’s participation in these swap arrangements was taken at this meeting because of a provision in the arrangements that requires each party to provide six months’ prior notice of an intention to terminate its participation.

The staff also briefed the Committee on recent progress in the development of reserve draining tools. The Desk was preparing to conduct small-scale reverse repurchase operations to ensure its ability to use agency MBS collateral. It also continued to work toward expansion of the set of counterparties for reverse repurchase operations. The staff noted that the Board had recently approved changes to Regulation D that would be necessary for the establishment of a term deposit facility.

The staff next gave a presentation on potential longer-run strategies for managing the SOMA. At previous meetings, Committee participants had expressed support for steps to reduce the size of the Federal Reserve’s balance sheet over time and return the composition of the SOMA to only Treasury securities. The staff discussed the potential portfolio paths and macroeconomic consequences of a number of different strategies for accomplishing these objectives. To date, the Desk had been reinvesting the proceeds of all maturing Treasury securities in newly issued Treasury securities, but it had not been reinvesting principal and interest payments on maturing agency debt and agency MBS, nor had it been selling securities. One strategy considered in the staff presentation was a continuation of the current practice, which would normalize the balance sheet very gradually. In addition, the staff presented information on a number of other strategies that included sales of SOMA holdings of agency debt and MBS and under which the proceeds of maturing Treasury securities would not be reinvested; these strategies differed by the date and circumstances under which sales would be initiated, by the average pace of sales, and by the degree to which the timing and pace of such sales would be adjusted in response to financial and economic developments.

Meeting participants agreed broadly on key objectives of a longer-run strategy for asset sales and redemptions. The strategy should be consistent with the achievement of the Committee’s objectives of maximum employment and price stability. In addition, the strategy should normalize the size and composition of the balance sheet over time. Reducing the size of the balance sheet would decrease the associated reserve balances to amounts consistent with more normal operations of money markets and monetary policy. Returning the portfolio to its historical composition of essentially all Treasury securities would minimize the extent to which the Federal Reserve portfolio might be affecting the allocation of credit among private borrowers and sectors of the economy.

Most participants expressed a preference for strategies that would eventually entail sales of agency debt and MBS in order to return the size and composition of the Federal Reserve’s balance sheet to a more normal configuration more quickly than would be accomplished by simply letting MBS and agency securities run off. They agreed that sales of agency debt and MBS should be implemented in accordance with a framework communicated in advance and be conducted at a gradual pace that potentially could be adjusted in response to changes in economic and financial conditions.

Participants expressed a range of views on some of the details of a strategy for asset sales. Most participants favored deferring asset sales for some time. A majority preferred beginning asset sales some time after the first increase in the Federal Open Market Committee’s (FOMC) target for short-term interest rates. Such an approach would postpone any asset sales until the economic recovery was well established and would maintain short-term interest rates as the Committee’s key monetary policy tool. Other participants favored a strategy in which the Committee would soon announce a general schedule for future asset sales, with a date for the initiation of sales that would not necessarily be linked to the increase in the Committee’s interest rate target. A few preferred to begin sales relatively soon. Earlier sales would normalize the size and composition of the balance sheet sooner and would unwind at least part of the unconventional policy stimulus put in place during the crisis before conventional policy firming got under way. Some participants saw advantages to varying the FOMC’s holdings of longer-term assets system-atically in response to economic and financial developments. However, others thought that a pre-announced pace of sales that was unlikely to vary much would provide a high degree of certainty about sales, helping to limit disruptions in financial markets.

The views of participants also differed to some extent regarding the appropriate pace of asset sales. Most preferred that the agency debt and MBS held in the portfolio be sold at a gradual pace that would complete the sales about five years after they began. One possibility would be for the pace to be relatively slow initially but to increase over time, allowing markets to adjust gradually. A couple of participants thought faster sales, conducted over about three years, would be appropriate and felt that such a pace would not put undue strain on financial markets. In their view, a relatively brisk pace of sales would reduce the chance that the elevated size of the Federal Reserve’s balance sheet and the associated high level of reserve balances could raise inflation expectations and inflation beyond levels consistent with price stability or could generate excessive growth of credit when the economy and banking system recover more fully.

Participants saw both advantages and disadvantages to not rolling over Treasury securities as they mature. On the one hand, redeeming Treasury securities would contribute to a more expeditious normalization of the size of the balance sheet and the quantity of reserves. On the other hand, such redemptions could put upward pressure on interest rates and would tend to work against the objective of returning the SOMA to an all-Treasuries composition.

No decisions about the Committee’s longer-run strategy for asset sales and redemptions were made at this meeting. For the time being, participants agreed that the Desk should continue the interim approach of allowing all maturing agency debt and all prepayments of agency MBS to be redeemed without replacement while rolling over all maturing Treasury securities. Participants agreed to give further consideration to their longer-run strategy at a later date.

Staff Review of the Economic Situation
The information reviewed at the April 27-28 meeting suggested that, on balance, the economic recovery was proceeding at a moderate pace and that the deterioration in the labor market was likely coming to an end. Consumer spending continued to post solid gains in the first three months of the year, and business investment in equipment and software appeared to have increased significantly further in the first quarter. In addition, growth of manufacturing output remained brisk, and gains became more broadly based across industries. However, residential construction, while having edged up, was still depressed, construction of nonresidential buildings remained on a steep downward trajectory, and state and local governments continued to retrench. Consumer price inflation remained low.

The labor market showed signs of a nascent recovery in recent months. Private nonfarm payroll employment increased over the first quarter of 2010–the first quarterly increase since the onset of the recession. The average workweek also rose last quarter and data from the household survey pointed to a firming in labor market conditions. The unemployment rate held steady at 9.7 percent throughout the first quarter, and the labor force participation rate increased over the past few months following sharp declines over the second half of last year. The number of new job losers as a percentage of household employment continued to drop, and the fraction of workers on part-time schedules for economic reasons moved down since the end of last year. Nonetheless, finding a job remained very difficult, and the average duration of unemployment spells increased further.

Industrial production continued to expand at a brisk pace during the first quarter. Recent production gains remained broadly based across industries, as both foreign demand and a mild restocking of inventories contributed positively to output growth. Capacity utilization stood significantly above the trough recorded last June but was still well below its long-run average. Light motor vehicle production stepped up in March, and assemblies in the first quarter were above their fourth-quarter average as automakers cautiously began to rebuild dealers’ inventories. Production in high-tech industries increased solidly, and available indicators pointed toward further expansion in this sector in the near term. On balance, indicators of near-term manufacturing activity remained quite positive.

Consumer spending continued to rise at a solid pace through March, with recent gains pronounced for most non-auto goods and food services. Despite signs of improvement recently, the determinants of spending remained subdued. While wages and salaries picked up early this year, real disposable income was flat in February after a slight decline in January; housing wealth was still well below its level prior to the crisis. Furthermore, although banks indicated a somewhat greater willingness to lend to consumers in recent months, terms and standards on consumer loans remained restrictive. Additionally, consumer sentiment dropped back in early April and was little changed, on net, since the beginning of the year.

Starts of new single-family homes edged up, on net, over February and March, but much of this increase likely reflected delayed projects getting under way as weather conditions returned to normal. Home sales strengthened noticeably, as sales of new single-family homes jumped and sales of existing single-family homes rose as well. However, both new home sales and existing home sales were likely boosted, at least in part, by the anticipated expiration of the homebuyer tax credit. Interest rates for conforming 30-year fixed-rate mortgages changed little in recent months and remained at levels that were very low by historical standards.

Real spending on equipment and software continued to rebound in the first quarter. Investment in high-tech equipment and transportation advanced further, and real spending for equipment other than high-tech and transportation appeared to turn up sharply after falling for more than a year, suggesting that the recovery in equipment and software investment became more broadly based. The recovery in equipment and software spending was consistent with the strengthening in many indicators of business activity. In contrast, the nonresidential construction sector continued to contract. Real outlays on structures outside drilling and mining fell steeply last year, and recent data on nominal expenditures through February suggested a further decline in the first quarter. The weakness was widespread across categories and likely reflected elevated vacancy rates, low levels of property prices, and difficulties in obtaining financing for new projects. Real spending on drilling and mining structures picked up strongly over the second half of last year in response to the rebound in oil and natural gas prices.

Available data suggested that the pace of inventory liquidation moderated further in the first quarter after slowing sharply in the fourth quarter of last year. Inventories appeared to approach comfortable levels relative to sales in the aggregate, although inventory positions across industries varied. Months’ supply remained elevated for equipment, materials, and, to a lesser degree, construction supplies. By contrast, inventories of consumer goods, business supplies, and high-tech goods appeared low relative to demand.

Consumer price inflation was low in recent months; both headline and core personal consumption expenditures (PCE) prices were estimated to have risen slightly in March after remaining unchanged in February. On a 12-month change basis, core PCE prices slowed over the year ending in March, with deceleration widespread across categories of expenditures. In contrast, the corresponding change in the headline index moved up noticeably, as energy prices rebounded. Survey measures of long-term inflation expectations were fairly stable in recent months at levels slightly lower than those posted a year ago. Meanwhile, measures of inflation compensation based on Treasury inflation-protected securities (TIPS) edged up slightly. Cost pressures from rising commodity prices showed through to prices at early stages of processing, and the producer price index for core intermediate materials continued to rise rapidly through March. However, measures of labor costs decelerated sharply last year, as compensation per hour in the nonfarm business sector increased only slightly over the four quarters of 2009.

The U.S. international trade deficit widened in February, as a rise in nominal imports outpaced a small increase in exports. Increased exports of industrial supplies, capital goods, and automotive products were partly offset by declines in agricultural goods and consumer goods. The February rise in imports reversed a similarly sized decrease in January. Imports of oil accounted for more than one-third of the January decline, reflecting lower volumes, but they accounted for only about one-tenth of the February increase, as volumes rebounded but prices fell. Imports of capital goods rose as strong computer imports more than offset falling aircraft purchases, and imports of industrial supplies and consumer goods also moved up.

Recent indicators in the advanced foreign economies suggested a continued divergence in the pace of recovery, with a strong performance in Canada, a moderate expansion in Japan, and a more subdued rebound in Europe. Fiscal strains in Greece intensified during the intermeeting period, and in mid-April, euro-area member states announced a plan to provide financing aid to Greece in coordination with the International Monetary Fund. However, at the time of the April FOMC meeting, no official agreement had been reached concerning the scale, composition, and implementation of such an aid package. Economic activity in emerging markets continued to expand robustly in the first quarter. Despite the strength of exports, merchandise trade balances declined for some countries where strong domestic demand caused imports to outpace exports. In China, real gross domestic product (GDP) increased at a higher-than-expected annual rate in the first quarter as the economic recovery remained broad based, with industrial production, investment, and domestic demand continuing to grow briskly. In Latin America, indicators suggested that economic activity in Mexico and Brazil expanded further in the first quarter. Foreign inflation was boosted by increases in the prices of oil and other commodities, but core inflation generally remained subdued.

Staff Review of the Financial Situation
The decision by the FOMC at the March meeting to keep the target range for the federal funds rate unchanged and to retain the “extended period” language in the statement was largely anticipated by market participants. However, some market participants reportedly interpreted the retention of the “extended period” language as pointing to a longer period of low rates than previously expected, and Eurodollar futures rates temporarily declined a bit in response.

On balance over the intermeeting period, the expected path of policy edged down slightly. Yields on 2-year and 10-year nominal Treasury securities posted small mixed changes amid some volatility that reportedly reflected evolving views about the U.S. fiscal outlook, prospects for U.S. economic growth, and the fiscal situation in peripheral European countries. Inflation compensation–the difference between nominal Treasury yields and yields on TIPS–rose some over the period, but survey measures of longer-term inflation expectations were about unchanged.

Overall, conditions in short-term funding markets remained generally stable during the intermeeting period. Spreads between London interbank offered rates (Libor) and overnight index swap (OIS) rates were about unchanged at levels near those that prevailed in late 2007, although they began to edge up in the final days of the intermeeting period. Spreads in the commercial paper market were little changed. Equity indexes rose, on balance, over the intermeeting period, with bank shares outperforming the broader market. Stock prices were supported by somewhat better-than-expected macroeconomic data and a favorable response by investors to the initial batch of first-quarter earnings reports, especially those of banking institutions. Option-implied volatility on the S&P 500 index generally declined over the period but jumped at end of April on renewed concerns regarding the fiscal situation in Greece. The gap between the staff’s estimate of the expected real equity return over the next 10 years for S&P 500 firms and the real 10-year Treasury yield–a rough measure of the equity risk premium–remained well above its average over the past decade. Yields on investment-grade corporate bonds edged down, leaving their spreads to comparable-maturity Treasury securities a bit lower, at levels around those that prevailed in late 2007. Consistent with more-favorable investor sentiment toward risky assets, yields and spreads on speculative-grade corporate bonds declined, and secondary market prices of syndicated leveraged loans rose further.

Overall, net debt financing by nonfinancial firms was positive in March. Issuance of nonfinancial bonds surged, and net issuance of commercial paper rebounded appreciably. Net equity issuance by nonfinancial firms was negative again in the first quarter as the solid pace of gross public issuance was more than offset by equity retirements from both cash-financed mergers and share repurchases. Financial firms issued a significant volume of debt securities in the first quarter and also raised a moderate amount of gross funds in the equity market, a pattern that appeared to continue in the first half of April. Credit quality in the commercial real estate sector continued to deteriorate as the delinquency rate for securitized commercial mortgages increased again in March. The decline in outstanding commercial mortgage debt in the fourth quarter of last year was the largest on record. Nonetheless, indexes of prices for credit default swaps on commercial mortgage-backed securities ticked up noticeably over the period, in line with the overall reduction in financial market risk premiums.

The conclusion of purchases under the Federal Reserve’s agency MBS program had only a modest market effect. Over the intermeeting period, spreads on agency MBS retraced much of the increase seen around the time of the program’s conclusion, ending the period roughly unchanged. The factors contributing to the recent narrowing of MBS and mortgage spreads included the low level of mortgage originations, which damped the supply of new MBS, and Fannie Mae’s and Freddie Mac’s increased purchases of mortgages through their buyouts of delinquent loans. Consumer credit continued to trend lower in recent months, pushed down by a steep decline in revolving credit. Spreads on high-quality credit card and auto loan asset-backed securities (ABS) edged down over the period, with little upward pressure evident from the end of the portion of the Term Asset-Backed Securities Loan Facility supporting ABS. Nonetheless, fewer ABS were issued in the first quarter than in the fourth quarter, reflecting continued weakness in loan originations. Delinquency rates on consumer loans edged down further in February but remained very elevated. Spreads of interest rates on credit cards over yields on two-year Treasury securities continued to drift upward, while interest rates on new auto loans at dealerships and their spreads over yields on five-year Treasury securities extended their previous decline.

After adjusting to remove the effects of banks’ adoption of Financial Accounting Standards 166 and 167, bank credit contracted again in March, as both loans and securities holdings declined.2 The contraction in commercial and industrial loans remained pronounced. The drop in commercial real estate loans persisted, reflecting weak fundamentals that limited originations as well as charge-offs of existing loans. Residential real estate loans also decreased further in March, as did credit card loans and other consumer loans.

M2 fell in March, reflecting a slowing in the expansion of liquid deposits along with a further contraction in small time deposits and a steep runoff in retail money market mutual funds. Currency grew at a moderate pace, likely as a result of continued demand for U.S. banknotes from abroad coupled with solid domestic demand. The monetary base contracted as the effect on reserves of purchases under the Federal Reserve’s large-scale asset purchase programs was more than offset by a further contraction in credit outstanding under liquidity and credit facilities and an increase in the Treasury’s balances at the Federal Reserve.

Until the intensification of the Greek crisis near the end of the intermeeting period, equity indexes were higher in nearly all countries, and emerging-market risk spreads had generally declined. These moves appeared to reflect growing confidence that the global recovery was gaining momentum, particularly in emerging market economies. However, sovereign debt spreads in Greece, Portugal, and other peripheral European countries widened in the days leading up to the April FOMC meeting, as investor anxiety about the fiscal situation in those countries increased. Downgrades to the credit ratings of Greece and Portugal weighed on investor sentiment, and global markets retraced some of their earlier gains.

Over the intermeeting period, the Bank of Japan doubled the size of its three-month fixed-rate funds facility, the Bank of Canada dropped its conditional commitment to keeping rates steady through the first half of the year, and the Reserve Bank of Australia raised its policy rate. The trade-weighted value of the dollar changed little, on net; gains against the euro and yen were offset by declines against many emerging market currencies.

Staff Economic Outlook
The economic forecast prepared by the staff for the April FOMC meeting was similar to that developed for the March meeting. The staff continued to project that the accommodative stance of monetary policy, together with a further attenuation of financial stress, the waning of adverse effects of earlier declines in wealth, and improving household and business confidence, would support a moderate recovery in economic activity and a gradual decline in the unemployment rate over the next two years. The staff forecast for both real GDP growth and the unemployment rate through the end of 2011 was roughly in line with previous projections.

Recent data on core consumer prices led the staff to mark down slightly its forecast for core PCE inflation. The staff continued to anticipate that downward pressure on inflation from the substantial amount of projected resource slack would be tempered by stable inflation expectations. With energy price increases expected to slow next year, total PCE inflation was seen as likely to fall back in line with core inflation by the end of 2011, as in previous projections.

Participants’ Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, all meeting participants–the five members of the Board of Governors and the presidents of the 12 Federal Reserve Banks–provided projections of economic growth, the unemployment rate, and consumer price inflation for each year from 2010 through 2012 and over a longer horizon. Longer-run projections represent each participant’s assessment of the rate to which each variable would be expected to converge over time under appropriate monetary policy and in the absence of further shocks. Participants’ forecasts through 2012 and over the longer run are described in the Summary of Economic Projections, which is attached as an addendum to these minutes.

In their discussion of the economic situation and outlook, meeting participants agreed that the incoming data and information received from business contacts indicated that economic activity continued to strengthen and the labor market was beginning to improve. Although some of the recent data on economic activity had been better than anticipated, most participants saw the incoming information as broadly in line with their earlier projections for moderate growth; accordingly, their views on the economic outlook had not changed appreciably. Participants expected the economic recovery to continue, but, consistent with experience following previous financial crises, most anticipated that the pickup in output would be rather slow relative to past recoveries from deep recessions. A moderate pace of expansion, in turn, would imply only a modest improvement in the labor market this year, with the unemployment rate declining gradually. Most participants again projected that the economy would grow somewhat faster in 2011 and 2012, generating a more pronounced decline in the unemployment rate. In light of stable longer-term inflation expectations and the likely continuation of substantial resource slack, policymakers anticipated that both overall and core inflation would remain subdued through 2012, with measured inflation somewhat below rates that policymakers considered to be consistent over the longer run with the Federal Reserve’s dual mandate.

Participants expected that economic growth would continue: Recent data pointed to significant gains in retail sales, business spending on equipment and software had picked up substantially, and reports from business contacts and regional surveys indicated that production was increasing briskly in many sectors. Participants agreed that the growth in real GDP appeared to reflect a strengthening of private final demand and not just fiscal stimulus and a slower pace of inventory decumulation; this welcome development lessened policymakers’ concerns about the economy’s ability to maintain a self-sustaining recovery without government support. Businesses appeared to be gaining confidence in the economic recovery, and narrowing credit spreads in private debt markets were allowing low policy rates to be reflected more fully in the cost of capital. At the same time, rising stock prices and the apparent stabilization of house prices were helping to repair household balance sheets. As a result, consumers and firms were beginning to satisfy demands for durable goods and capital equipment that had been postponed during the economic downturn. Many participants noted that employment had increased in recent months, and that they expected a further firming of labor market conditions going forward. A stronger labor market could continue to boost consumer and business confidence and so contribute to further gains in spending.

Although these developments were positive, participants noted several factors that likely would continue to restrain expansion in economic activity and posed some downside risks. The recent increase in consumer spending appeared to be supported importantly by pent-up demands and possibly by other temporary factors, such as unusually large income tax refunds. With the personal saving rate having dropped back to a relatively low level, it seemed unlikely that consumer spending would be the major factor driving growth as the recovery progressed. Moreover, the recovery in the housing market appeared to have stalled in recent months despite various forms of government support. Although residential real estate values seemed to be stabilizing and in some areas had reportedly moved higher, housing sales and starts had leveled off in recent months at depressed levels. Some participants saw the possibility of elevated foreclosures adding to the already very large inventory of vacant homes as posing a downside risk to home prices, thereby limiting the extent of the pickup in residential investment for a while.

In the business sector, prospects for nonresidential construction outside the energy sector remained weak. Commercial real estate activity continued to fall in most parts of the country as a result of deteriorating fundamentals, including declining occupancy and rental rates and tight credit conditions. However, a number of participants noted that investment in equipment and software had been strengthening, and they relayed anecdotal information from their business contacts that suggested continued growth in orders for capital equipment.

Business investment was expected to be supported by improved conditions in financial markets. Large firms with access to capital markets appeared to be having little difficulty in obtaining credit, and in many cases they also had ample retained earnings with which to fund their operations and investment. However, many participants noted that while financial markets had improved, bank lending was still contracting and credit remained tight for many borrowers. Smaller firms in particular reportedly continued to face substantial difficulty in obtaining bank loans. Because such firms tend to be more dependent on commercial banks for financing, participants saw limited credit availability as a potential constraint on future investment and hiring by small businesses, which normally are a significant source of employment growth in recoveries. Some participants noted that many small and regional banks were vulnerable to deteriorating performance of commercial real estate loans.

Economic conditions abroad, especially in several emerging Asian economies, continued to strengthen in recent months, contributing to gains in U.S. exports. However, participants saw the escalation of fiscal strains in Greece and spreading concerns about other peripheral European countries as weighing on financial conditions and confidence in the euro area. If other European countries responded by intensifying their fiscal consolidation efforts, the result would likely be slower growth in Europe and potentially a weaker global economic recovery. Some participants expressed concern that a crisis in Greece or in some other peripheral European countries could have an adverse effect on U.S. financial markets, which could also slow the recovery in this country.

Developments in labor markets were positive over the intermeeting period. Nonfarm payrolls posted a modest gain in March, and the upturn in private employment was widespread across industries. Nevertheless, participants remained concerned about elevated unemployment, including high levels of long-term unemployment and permanent separations, which were seen as potentially leading to the loss of worker skills and greater needs for labor reallocation that could slow employment growth going forward. Moreover, information from business contacts generally underscored the degree to which firms’ reluctance to add to payrolls or start large capital projects reflected uncertainty about the economic outlook and future government policies. A number of participants pointed out that the economic recovery could eventually lose traction without a substantial pickup in job creation.

Participants cited a wide array of evidence as indications that underlying inflation remained subdued. The latest readings on core inflation–which exclude the relatively volatile prices of food and energy–were generally lower than they had anticipated. One participant noted that core inflation had been held down in recent quarters by unusually slow increases in the price index for shelter, and that the recent behavior of core inflation might be a misleading signal of the underlying inflation trend. However, a number of participants pointed out that the recent moderation in price changes was widespread across many categories of spending and was evident in measures that exclude the most extreme price movements in each period. In addition, survey measures of longer-term inflation expectations remained fairly stable, wage growth continued to be restrained, and unit labor costs were still falling; reports from business contacts also suggested that pricing power remained limited. Against this backdrop, most participants anticipated that substantial resource slack and stable longer-term inflation expectations would likely keep inflation subdued for some time.

Participants’ assessments of the risks to the inflation outlook were mixed. Some participants saw the risks to inflation as tilted to the downside in the near term, reflecting the quite elevated level of economic slack and the possibility that inflation expectations could begin to decline in response to the low level of actual inflation. Others, however, saw the balance of risks as pointing to potentially higher inflation and cited pressures on commodity and energy prices associated with expanding global economic activity as an upside inflation risk; some also noted the possibility that inflation expectations could rise as a result of the public’s concerns about the extraordinary size of the Federal Reserve’s balance sheet in a period of very large federal budget deficits. While survey measures of longer-term inflation expectations had been fairly stable, some market-based measures of inflation expectations and inflation risk suggested increased concern among market partici-pants about higher inflation. To keep inflation expectations well anchored, all participants agreed that it was important for policy to be responsive to changes in the economic outlook and for the Federal Reserve to continue to communicate clearly its ability and intent to begin withdrawing monetary policy accommodation at the appropriate time and pace.

Committee Policy Action
In the members’ discussion of monetary policy for the period ahead, they agreed that no changes to the Committee’s federal funds rate target range were warranted at this meeting. On balance, the economic outlook had changed little since the March meeting. Even though the recovery appeared to be continuing and was expected to strengthen gradually over time, most members projected that economic slack would continue to be quite elevated for some time, with inflation remaining below rates that would be consistent in the longer run with the Federal Reserve’s dual objectives. Based on this outlook, members agreed that it would be appropriate to maintain the target range of 0 to ¼ percent for the federal funds rate. In addition, nearly all members judged that it was appropriate to reiterate the expectation that economic conditions–including low levels of resource utilization, subdued inflation trends, and stable inflation expectations–were likely to warrant exceptionally low levels of the federal funds rate for an extended period. As at previous meetings, a few members noted that at the current juncture, the risks of an early start to policy tightening exceeded those associated with a later start, because the scope for more accommodative policy was limited by the effective lower bound on the federal funds rate, while the Committee could be flexible in adjusting the magnitude and pace of tightening in response to evolving economic circumstances. In light of the improved functioning of financial markets, Committee members agreed that it would be appropriate for the statement to be released following the meeting to indicate that the previously announced schedule for closing the Term Asset-Backed Securities Loan Facility was being maintained.

At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive:

“The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to ¼ percent. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve’s agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System’s balance sheet that could affect the attainment over time of the Committee’s objectives of maximum employment and price stability.”

The vote encompassed approval of the statement below to be released at 2:15 p.m.:

“Information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is beginning to improve. Growth in household spending has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures is declining and employers remain reluctant to add to payrolls. Housing starts have edged up but remain at a depressed level. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to ¼ percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

In light of improved functioning of financial markets, the Federal Reserve has closed all but one of the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities; it closed on March 31 for loans backed by all other types of collateral.”

Voting for this action: Ben Bernanke, William C. Dudley, James Bullard, Elizabeth Duke, Donald L. Kohn, Sandra Pianalto, Eric Rosengren, Daniel K. Tarullo, and Kevin Warsh.

Voting against this action: Thomas M. Hoenig.

Mr. Hoenig dissented because he believed it was no longer advisable to indicate that economic and financial conditions were likely to warrant “exceptionally low levels of the federal funds rate for an extended period.” Mr. Hoenig was concerned that communicating such an expectation could lead to the buildup of future financial imbalances and increase the risks to longer-run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly in the near term. Mr. Hoenig believed that the target for the federal funds rate should be increased toward 1 percent this summer, and that the Committee could then pause to further assess the economic outlook. He believed this approach would leave considerable policy accommodation in place to foster an expected gradual decline in unemployment in the quarters ahead and would reduce the risk of an increase in financial imbalances and inflation pressures in coming years. It would also mitigate the need to push the policy rate to higher levels later in the expansionary phase of the economic cycle.

It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, June 22-23, 2010. The meeting adjourned at 12:50 p.m. on April 28, 2010.

Notation Vote
By notation vote completed on April 5, 2010, the Committee unanimously approved the minutes of the FOMC meeting held on March 16, 2010.

_____________________________
Brian F. Madigan
Secretary



Fonte: Enfoque Informações
Financeiras
Ltda.


Recebido em:
19/05/2010 15:01:18

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Ricardo Eletro - Finance One
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