- FOMC Minutes
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 9, 2011, at 8:00 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, Thomas M. Hoenig, and Eric Rosengren, Presidents of the Federal
Reserve Banks of St. Louis, Kansas City, and Boston, 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
Thomas A.
Connors, David Reifschneider, Daniel G. Sullivan, David W. Wilcox, 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
Robert
deV. Frierson, Deputy Secretary, Office of the Secretary, Board of Governors
Andreas
Lehnert, Deputy Director, Office of Financial Stability Policy and Research,
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; Michael Leahy, Senior Associate Director,
Division of International Finance, Board of Governors; Lawrence Slifman 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; Stephen A.
Meyer, Senior Adviser, Division of Monetary Affairs, Board of Governors
Joyce K. Zickler, Visiting Senior
Adviser, Division of Monetary Affairs, Board of Governors
David E.
Lebow, Associate Director, Division of Research and Statistics, Board of
Governors
Joshua
Gallin, Deputy Associate Director, Division of Research and Statistics, Board
of Governors; Fabio M. Natalucci, Deputy Associate Director, Division of
Monetary Affairs, Board of Governors
Beth Anne
Wilson, Assistant Director, Division of International Finance, Board of
Governors
Penelope
A. Beattie, Assistant to the Secretary, Office of the Secretary, Board of
Governors
John C.
Driscoll, Senior Economist, Division of Monetary Affairs, Board of Governors
Carol Low,
Open Market Secretariat Specialist, Division of Monetary Affairs, Board of
Governors
Randall A.
Williams, Records Management Analyst, Division of Monetary Affairs, Board of
Governors
David
Sapenaro, First Vice President, Federal Reserve Bank of St. Louis
Mark S.
Sniderman, Executive Vice President, Federal Reserve Bank of Cleveland
David
Altig, Alan D. Barkema, and Geoffrey Tootell, Senior Vice Presidents, Federal
Reserve Banks of Atlanta, Kansas City, and Boston, respectively
Chris
Burke, Fred Furlong, Tom Klitgaard, Evan F. Koenig, and Daniel L. Thornton,
Vice Presidents, Federal Reserve Banks of New York, San Francisco, New York,
Dallas, and St. Louis, respectively
Keith
Sill, Assistant Vice President, Federal Reserve Bank of Philadelphia
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 Federal Open Market Committee (FOMC) met on June 21–22, 2011. 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. By unanimous
vote, the Committee ratified the transactions by the Open Market Desk of the
Federal Reserve Bank of New York over the intermeeting period.
Staff Review of the Economic Situation
The
information reviewed at the August 9 meeting indicated that the pace of the
economic recovery remained slow in recent months and that labor market
conditions continued to be weak. In addition, revised data for 2008 through
2010 from the Bureau of Economic Analysis indicated that the recent recession
was deeper than previously thought and that the level of real gross domestic
product (GDP) had not yet attained its pre-recession peak by the second
quarter of 2011. Moreover, the downward revision to first-quarter GDP growth
and the slow growth reported for the second quarter indicated that the
recovery was quite sluggish in the first half of this year. Overall consumer
price inflation moderated in recent months, and survey measures of long-run
inflation expectations remained stable.
Private
nonfarm employment rose at a considerably slower pace in June and July than
earlier in the year, and employment in state and local governments continued
to trend lower. The unemployment rate edged up, on net, since the beginning of
the year, and long-duration unemployment remained very high. Meanwhile, the
labor force participation rate moved down further through July. Initial claims
for unemployment insurance stepped down some in recent weeks but remained
elevated, and indicators of hiring showed no improvement.
Manufacturing
production was unchanged in June. Supply chain disruptions associated with the
earthquake in Japan continued to hinder production at motor vehicle
manufacturers and the firms that supply them. Excluding motor vehicles and
parts, factory output posted only a modest increase. The manufacturing
capacity utilization rate held about flat in recent months. With auto
manufacturers expecting supply chain disruptions to ease, motor vehicle
assembly schedules called for a substantial step-up in production in the third
quarter, and initial estimates of production in June were consistent with such
a step-up. But broader indicators of near-term manufacturing activity, such as
the diffusion indexes of new orders from the national and regional manufacturing
surveys, softened to levels consistent with only small gains in production in
the coming months.
Real
consumer spending was nearly unchanged in the second quarter. Motor vehicle
purchases declined during the spring when the availability of some models was
limited, but rebounded somewhat in July as supplies improved. Consumer
spending on goods and services other than motor vehicles also appeared soft
through June. Labor earnings rose in the second quarter, but increases in
consumer prices offset much of the gain in nominal income. Consumer sentiment
weakened markedly in July, and the Thomson Reuters/University of Michigan
sentiment index fell to levels last seen in early 2009.
The
housing market remained depressed. Although single-family housing starts moved
up some in June, permit issuance stayed low. Similarly, sales of new and
existing single-family homes were subdued in recent months, and home prices
continued to trend lower. New construction remained constrained by the
overhang of foreclosed or distressed properties as well as by weak demand in
an environment of uncertainty about future home prices and tight underwriting
standards for mortgage loans.
Real
business spending on equipment and software rose at a modest pace in the
second quarter, reflecting strong increases in outlays for high-tech equipment
that more than offset declines in spending in many other equipment categories.
Nominal new orders for nondefense capital goods excluding aircraft continued
to rise through June, and orders remained well above shipments, suggesting
further gains in outlays for equipment and software in the near term. However,
indicators of business conditions and sentiment weakened in June and July.
Business investment in nonresidential structures appeared to have stabilized
at a low level in recent months, with vacancy rates elevated and construction
financing conditions still tight. Outlays for drilling and mining equipment
continued to increase. In the second quarter, businesses appeared to add to
inventories at a moderate rate, as a drawdown in motor vehicle inventories
associated with production disruptions was offset by higher accumulation
elsewhere. In most industries outside of the motor vehicle sector, inventories
seemed to be reasonably well aligned with sales.
Real
federal purchases turned up in the second quarter, as defense expenditures
rebounded after declining noticeably in the preceding quarter. At the state
and local level, real purchases continued to decline in response to budgetary
pressures; these governments continued to reduce payrolls, and their real
construction outlays fell sharply.
The U.S.
international trade deficit widened significantly in May in nominal terms, as
exports edged down and imports moved up strongly. Declines in exports were
concentrated in commodity-intensive categories such as industrial supplies and
agricultural goods; sales of capital goods and automotive products increased.
The rise in imports importantly reflected increases in spending on petroleum
products (mainly the result of higher prices rather than increased volumes)
and on capital goods, especially computers. For the second quarter as a whole,
the advance release of the National Income and Product Accounts (NIPA)
indicated that real exports of goods and services increased more than real
imports, with the result that net exports added significantly to real GDP
growth.
After
decelerating in the preceding two months, indexes of U.S. consumer prices
declined in June, reflecting a substantial drop in consumer energy prices.
However, survey data indicated some backup in gasoline prices in July. The
price index for personal consumption expenditures (PCE) excluding food and
energy posted a small increase in June, and the PCE price index for non-energy
services was essentially unchanged. In contrast, prices of nonfood, non-energy
goods were apparently boosted by upward pressure from earlier increases in
commodity and import prices, and motor vehicle prices rose further, reflecting
the extremely low levels of vehicle inventories. Near-term expected inflation
from the Thomson Reuters/University of Michigan Surveys of Consumers moved
down again in July from its elevated level in the spring, and longer-term
inflation expectations remained stable.
Nominal
hourly labor compensation, as measured both by compensation per hour in the
nonfarm business sector and by the employment cost index, increased at a
moderate rate over the year ending in the second quarter. Similarly, the
12-month change in average hourly earnings of all employees remained moderate
in July. Productivity in the nonfarm business sector rose only slightly over
the past four-quarter period, so unit labor costs posted a modest increase.
Foreign
economic growth appeared to have slowed significantly in recent months. Real
GDP growth declined sharply in the United Kingdom in the second quarter, and
industrial production data and purchasing managers surveys pointed to a
similar slowdown in Canada. Retail sales and business sentiment for the euro
area also weakened in recent months amid intensified concerns over the fiscal
situation of the peripheral euro-area countries. Economic performance in the
emerging market economies was somewhat better, but indicators for those
economies also suggested some cooling from the very rapid growth earlier this
year. By contrast, the Japanese economy has begun to recover from the March
disaster, with exports and production both retracing much of their substantial
losses. Foreign inflation dipped in the second quarter as the effects of
previous increases in food and energy prices began to dissipate.
Staff Review of the Financial Situation
Over the
intermeeting period, U.S. financial markets were strongly influenced by
developments regarding the fiscal situations in the United States and in
Europe and by generally weaker-than-expected readings on economic activity.
Throughout the period, waxing and waning concerns about the sovereign debt of
peripheral euro-area countries appeared to have an effect on investor appetite
for risk, leading to volatility in many asset markets. Late in the period,
investor focus appeared to turn to the U.S. debt ceiling and the potential for
delayed debt service payments by the Treasury Department, the possibility of a
downgrade of U.S. sovereign debt, and the prospects for significant long-term
fiscal consolidation. Liquidity and funding in money markets deteriorated in
the last week of July, and interest rates on a number of short-term funding
instruments increased markedly. The strains in these markets eased after
legislation to raise the debt ceiling and to cut the federal budget deficit
was signed into law on August 2. U.S. equity prices fell considerably in the
last week of July and the first week of August, reportedly reflecting recent
weaker-than-expected economic data releases, and they declined further after
the August 5 announcement by Standard & Poor's of its downgrade of
long-term U.S. sovereign debt.
The
decisions by the FOMC at its June meeting to complete its asset purchase
program and to maintain the 0 to 1/4 percent target range for the federal
funds rate were about in line with market expectations and elicited little
market reaction; the same was true of the accompanying statement and the
subsequent press briefing by the Chairman. Over the intermeeting period,
investors marked down the expected path for the federal funds rate
substantially, reflecting incoming economic data that were weaker than
expected and concomitant concerns about the prospects for global growth.
Yields on nominal Treasury securities also fell notably, on net, over the
intermeeting period. The Federal Reserve's Treasury purchase program was
completed on schedule on June 30.
Broad U.S.
stock price indexes fell sharply, on net, over the intermeeting period, as
increased concerns about economic growth appeared to overshadow generally
strong second-quarter corporate earnings reports. Option-implied volatility on
the S&P 500 index jumped late in the period. Yields on both investment-
and speculative-grade corporate bonds fell a little less than those on
comparable-maturity Treasury securities, leaving risk spreads wider. Financial
market indicators of inflation expectations were mixed over the intermeeting
period.
Net debt
financing by nonfinancial corporations was solid in July, although below the
elevated pace posted in the second quarter. Gross bond issuance fell, and the
outstanding amount of commercial and industrial (C&I) loans on banks'
books was about flat. Nonfinancial commercial paper (CP) posted a sizable
gain. The market for CP issued by financial firms experienced some strains
late in the period as institutional money market mutual funds reportedly
increased their cash positions and sought to decrease exposure to CP issued by
some entities perceived to be less creditworthy. Issuance of syndicated
leveraged loans remained strong in the second quarter. The pace of gross
public equity issuance by nonfinancial firms fell somewhat in July from its solid
pace in the second quarter. Most indicators of business credit quality
continued to improve.
Commercial
real estate markets remained weak. Available data for the second quarter
indicated that commercial mortgage debt contracted, prices of commercial
properties were generally depressed, and issuance of commercial
mortgage-backed securities (CMBS) slowed. However, the delinquency rate in
June for loans that back existing CMBS stayed below its recent peak, and
vacancy rates for commercial properties, while still high, generally continued
to edge lower.
Rates on
conforming fixed-rate residential mortgages declined, on net, over the
intermeeting period. Mortgage refinancing activity picked up but remained
relatively subdued. Outstanding residential mortgage debt is estimated to have
contracted further in the second quarter. Rates of serious mortgage
delinquency continued to moderate but remained high, while the rate of new
delinquencies on prime mortgages flattened out in recent months at an elevated
level.
Conditions
in consumer credit markets generally continued to improve. Total consumer
credit expanded at a moderate rate in May as both nonrevolving and revolving
credit posted gains. Issuance of consumer asset-backed securities remained
solid in July, although some deals later in the month were reportedly
postponed a few days while issuers awaited the outcome of the debt ceiling
deliberations. Delinquency rates for most types of consumer loans moved down
in recent months.
Core
commercial bank loans--the sum of C&I, real estate, and consumer
loans--were about flat over the months of June and July, as a slowdown in
lending to businesses was offset by a pickup in loans to households. The July
Senior Loan Officer Opinion Survey on Bank Lending Practices showed that
respondents again eased lending standards to some degree on all major loan
types other than residential real estate loans. Nonetheless, banks also
indicated that the current levels of their lending standards for all loan
types were between moderate and relatively tight when compared with the range
of standards that had prevailed since 2005. Nearly all second-quarter earnings
reports from large banking companies exceeded expectations.
M2
expanded rapidly in June and July. Liquid deposits, the largest component of
M2, increased robustly, likely reflecting safe-haven flows from riskier assets
along with temporary increases in the amount of deposits that money market
mutual funds held at their custodian banks. The rise in currency moderated
over those two months but remained robust.
Headline
equity indexes abroad and foreign benchmark sovereign yields declined over the
intermeeting period in apparent response to signs of a slowdown in the pace of
global economic activity and reduced demand for risky assets. At the same
time, concerns about fiscal deficits and debt sustainability drove yields on
the sovereign debt of Greece, Ireland, Portugal, Spain, and Italy to record
highs relative to yields on German bunds, although later in the period,
spreads fell back somewhat. Stock prices of European banks, which are
significant investors in sovereign bonds issued by the peripheral euro-area
countries, declined appreciably, and some of these banks reportedly faced
tighter funding conditions toward the end of the intermeeting period. The broad
nominal index of the U.S. dollar fluctuated over the period in response to
changes in investors' assessment of the outlook for the U.S. economy,
prospects for the lifting of the U.S. debt ceiling, and the situation in the
European economies. On net over the intermeeting period, the dollar rose
modestly after having depreciated earlier this year.
The
European Central Bank (ECB) boosted its policy rate in July, a move that was
widely anticipated. As indicated by money market futures quotes, however, the
expected pace of monetary policy tightening declined substantially for the ECB
as well as for other central banks in advanced foreign economies. Following
its August meeting, the ECB expanded and extended its offerings of term
liquidity and resumed purchases of sovereign debt in the secondary market.
Central banks in several emerging market economies, including China, continued
to tighten policy in response to inflationary pressures. Authorities in some
emerging market economies also took measures to limit capital inflows and
credit growth.
Staff Economic Outlook
The
information on economic activity received since the June FOMC meeting was
weaker than the staff had anticipated, and the projection for real GDP growth
in the second half of 2011 and in 2012 was marked down notably. Moreover, the
lower estimates of real GDP in recent years that were contained in the annual
revisions to the NIPA led the staff to lower its estimate of potential GDP
growth, both during recent years and over the forecast period, and to mark
down further the staff forecast. The staff continued to expect some rebound in
economic activity in the near term as the Japan-related supply chain
disruptions in the motor vehicle sector eased. More generally, the staff still
projected real GDP to accelerate gradually over the next year and a half,
supported by accommodative monetary policy, improved credit availability, and
a pickup in consumer and business sentiment. However, the increase in real GDP
was projected to be sufficient to reduce slack in the labor market only
slowly, and the unemployment rate was expected to remain elevated at the end
of 2012.
The staff
raised slightly its projection for inflation during the second half of this
year, as the upward pressure on consumer prices from earlier increases in
import and commodity prices was expected to persist a little longer than
previously anticipated. But these influences were still expected to dissipate
in coming quarters, as was the temporary upward pressure on motor vehicle
prices from low inventories. Moreover, the large increases in consumer energy
and food prices seen earlier this year were not expected to be repeated. With
long-run inflation expectations stable and substantial slack expected to
persist in labor and product markets, the staff continued to expect prices to
rise at a subdued pace in 2012.
Participants' Views on Current Conditions and the Economic Outlook
In their
discussion of the economic situation and outlook, meeting participants
regarded the information received during the intermeeting period as indicating
that economic growth so far this year was considerably slower than they had
expected. Participants noted a deterioration in labor market conditions,
slower household spending, a drop in consumer and business confidence, and
continued weakness in the housing sector. Manufacturing activity was reported
to be mixed. Participants judged that temporary factors affecting demand and
production, including the damping effect of higher energy and other commodity
prices and the supply disruptions from the Japanese earthquake, could account
for only some of the weakness in economic growth over the first half of the
year. While these effects appeared to be waning, the underlying strength of
the economic recovery remained uncertain. In addition, many participants
pointed to the recent downward revision to estimates of economic activity over
the past three years, and some to the financial market strains seen during the
intermeeting period, as contributing to a downgrade of the outlook for the
economy. More-over, many participants saw increased downside risks to the
outlook for economic growth.
Meeting
participants generally noted that overall labor market conditions had
deteriorated in recent months. While the employment report for July showed
that hiring was somewhat better than in previous months, the release was still
seen as indicating relatively weak conditions. A couple of participants
commented that the exceptionally high level of long-term unemployment could
lead to permanent negative effects on the skills and employment prospects of
those affected. Another participant, however, noted that it could instead
reflect a mismatch between the characteristics of the unemployed and the jobs
currently available. Participants also discussed the labor force participation
rate, and it was noted that extended unemployment benefits could be increasing
the measured unemployment rate by encouraging some workers to remain in the
labor force longer than they otherwise would have. Other participants remarked
that the declines in the unemployment rate that have occurred over the past
year appeared to reflect primarily declines in labor force participation
rather than significant gains in employment. Reports from business contacts
suggested that depressed business confidence as well as uncertainty regarding
the economic outlook, regulatory policy, and fiscal policy continued to
restrain hiring and also capital investment.
Inflation
had moderated in recent months after having been somewhat elevated earlier
this year. Transitory factors, including supply chain disruptions from the
earthquake in Japan and a surge in energy and other commodity prices, had
pushed up both headline and core measures of inflation for a time. More
recently, however, as prices of energy and some commodities have declined from
their earlier peaks, headline inflation has moderated. Participants generally
noted that, with apparently significant slack in labor and product markets,
slow wage growth, and little evidence of pricing power among firms, inflation
was likely to decline somewhat over time. Measures of inflation expectations
had remained stable. Nevertheless, a number of participants noted that core
inflation had moved up, on balance, since last fall. Some indicated that the
rise in inflation from very low levels reflected the Committee's accommodative
stance of monetary policy, which had helped address the deflation risks of a
year ago. A couple of others, however, suggested that the juxtaposition of
higher core inflation and somewhat lower unemployment could imply that the
level of potential output was lower than had been thought.
Most
meeting participants indicated that the weakness in consumer spending in
recent months was unexpected. The flattening out of consumer spending was seen
as reflecting, in part, the modest pace of gains in employment and labor
income. In addition, household spending on autos had been held back by low
inventories, and participants generally expected a pickup in sales of motor
vehicles in coming months as production rebounded. Nonetheless, low consumer
confidence, efforts to rebuild balance sheets, and heightened caution on the
part of households facing an uncertain economic environment were seen as
factors likely to continue to weigh on household spending going forward.
Several participants also pointed to financial constraints, particularly
depressed home prices and still-tight credit conditions, as further
restraining consumer spending for a time.
Business
outlays on equipment and software continued to advance, although at a slower
pace than earlier in the year. Business contacts in many parts of the country
reported that uncertainty about the pace of growth in coming quarters and a
general slump in business confidence had made some firms reluctant to expand
capacity. With home prices depressed, housing construction was quite subdued
and seen as likely to remain so, while investment in nonresidential structures
remained low.
The
weakness in household and business spending was accompanied by fiscal
consolidation at the state and local level. The shedding of state and local
government jobs contributed to the deterioration in overall labor market
conditions. Some policymakers noted that their outlooks for economic activity
were shaped in part by an expectation of fiscal restraint at all levels of
government.
Participants
generally saw the degree of uncertainty surrounding the outlook for economic
growth as having risen appreciably. A couple noted that the cyclical impetus
to economic expansion appeared to be weaker than it had been in past
recoveries, but that the reasons for the weakness were unclear, contributing
to greater uncertainty about the economic outlook. Many participants also saw
an increase in the downside risks to economic growth. While participants did
not anticipate a downturn in economic activity, several noted that, with the
recovery still somewhat tentative, the economy was vulnerable to adverse
shocks. Potential shocks included the possibility of a more protracted period
of weakness in household financial conditions, the chance of a larger-than-expected
near-term fiscal tightening, and potential financial and economic spillovers
if the situation in Europe were to deteriorate.
Participants
noted that financial markets were volatile over the intermeeting period, as
investors responded to news on the European fiscal situation and the
negotiations regarding the debt ceiling in the United States. However, the
broad declines in stock prices and interest rates over the intermeeting period
were seen as mostly reflecting the incoming data pointing to a weaker outlook
for growth both in the United States and globally as well as a reduced
willingness of investors to bear risk in light of the greater uncertainty
about the outlook. While conditions in funding markets had tightened, it was
noted that the condition of U.S. banks had strengthened in recent quarters and
that the credit quality of both businesses and households had continued to
improve.
Participants
discussed the range of policy tools available to promote a stronger economic
recovery should the Committee judge that providing additional monetary
accommodation was warranted. Reinforcing the Committee's forward guidance
about the likely path of monetary policy was seen as a possible way to reduce
interest rates and provide greater support to the economic expansion; a few
participants emphasized that guidance focusing solely on the state of the
economy would be preferable to guidance that named specific spans of time or
calendar dates. Some participants noted that additional asset purchases could
be used to provide more accommodation by lowering longer-term interest rates.
Others suggested that increasing the average maturity of the System's
portfolio--perhaps by selling securities with relatively short remaining
maturities and purchasing securities with relatively long remaining
maturities--could have a similar effect on longer-term interest rates. Such an
approach would not boost the size of the Federal Reserve's balance sheet and
the quantity of reserve balances. A few participants noted that a reduction in
the interest rate paid on excess reserve balances could also be helpful in
easing financial conditions. In contrast, some participants judged that none
of the tools available to the Committee would likely do much to promote a
faster economic recovery, either because the headwinds that the economy faced
would unwind only gradually and that process could not be accelerated with monetary
policy or because recent events had significantly lowered the path of
potential output. Consequently, these participants thought that providing
additional stimulus at this time would risk boosting inflation without
providing a significant gain in output or employment. Participants noted that
devoting additional time to discussion of the possible costs and benefits of
various potential tools would be useful, and they agreed that the September
meeting should be extended to two days in order to provide more time.
Committee Policy Action
In the
discussion of monetary policy for the period ahead, most members agreed that
the economic outlook had deteriorated by enough to warrant a Committee
response at this meeting. While all felt that monetary policy could not
completely address the various strains on the economy, most members thought
that it could contribute importantly to better outcomes in terms of the
Committee's dual mandate of maximum employment and price stability. In
particular, some members expressed the view that additional accommodation was
warranted because they expected the unemployment rate to remain well above,
and inflation to be at or below, levels consistent with the Committee's
mandate. Those viewing a shift toward more accommodative policy as appropriate
generally agreed that a strengthening of the Committee's forward guidance
regarding the federal funds rate, by being more explicit about the period over
which the Committee expected the federal funds rate to remain exceptionally
low, would be a measured response to the deterioration in the outlook over the
intermeeting period. A few members felt that recent economic developments
justified a more substantial move at this meeting, but they were willing to
accept the stronger forward guidance as a step in the direction of additional
accommodation. Three members dissented because they preferred to retain the
forward guidance language employed in the June statement.
The
Committee agreed to keep the target range for the federal funds rate at 0 to
1/4 percent and to state that economic conditions are likely to warrant
exceptionally low levels for the federal funds rate at least through mid-2013.
That anticipated path for the federal funds rate was viewed both as
appropriate in light of most members' outlook for the economy and as generally
consistent with some prescriptions for monetary policy based on historical and
model-based analysis. In choosing to phrase the outlook for policy in terms of
a time horizon, members also considered conditioning the outlook for the level
of the federal funds rate on explicit numerical values for the unemployment
rate or the inflation rate. Some members argued that doing so would establish
greater clarity regarding the Committee's intentions and its likely reaction
to future economic developments, while others raised questions about how an
appropriate numerical value might be chosen. No such references were included
in the statement for this meeting. One member expressed concern that the use
of a specific date in the forward guidance would be seen by the public as an
unconditional commitment, and it could undermine Committee credibility if a
change in timing subsequently became appropriate. Most members, however,
agreed that stating a conditional expectation for the level of the federal
funds rate through mid-2013 provided useful guidance to the public, with some
noting that such an indication did not remove the Committee's flexibility to
adjust the policy rate earlier or later if economic conditions do not evolve
as the Committee currently expects.
In the
statement to be released following the meeting, members generally agreed that
it was important to acknowledge that the recovery had been considerably slower
than the Committee had expected. Although some of the slowdown in the first
half of the year reflected transitory factors, most members now judged that
only part of that weakness could be attributed to those factors. The Committee
decided to note that the declines in energy and commodity prices from their
recent peaks had led to a moderation of inflation and that longer-term
inflation expectations remained stable. The Committee also characterized the
economic outlook in terms of its statutory mandate and indicated that it
expected the slower pace of economic expansion to result in an unemployment
rate that would decline only gradually toward levels consistent with its dual
mandate and that it saw the downside risks to the economic outlook as having
increased. Most members also anticipated that inflation would settle, over
coming quarters, at levels at or below those consistent with the Committee's
mandate. The Committee noted that it had discussed the range of policy tools
that were available to promote a stronger economic recovery in a context of
price stability, and to indicate that those tools, including adjustments to
the Committee's securities holdings, would be employed as appropriate.
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 also directs the Desk to maintain its
existing policy of reinvesting principal payments on all domestic securities
in the System Open Market Account in Treasury securities in order to maintain
the total face value of domestic securities at approximately $2.6 trillion.
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 economic growth so far this year has been
considerably slower than the Committee had expected. Indicators suggest a
deterioration in overall labor market conditions in recent months, and the
unemployment rate has moved up. Household spending has flattened out,
investment in nonresidential structures is still weak, and the housing sector
remains depressed. However, business investment in equipment and software continues
to expand. Temporary factors, including the damping effect of higher food and
energy prices on consumer purchasing power and spending as well as supply
chain disruptions associated with the tragic events in Japan, appear to
account for only some of the recent weakness in economic activity. Inflation
picked up earlier in the year, mainly reflecting higher prices for some
commodities and imported goods, as well as the supply chain disruptions. More
recently, inflation has moderated as prices of energy and some commodities
have declined from their earlier 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 now expects a
somewhat slower pace of recovery over coming quarters than it did at the time
of the previous meeting and anticipates that the unemployment rate will
decline only gradually toward levels that the Committee judges to be
consistent with its dual mandate. Moreover, downside risks to the economic
outlook have increased. 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 promote the ongoing economic recovery and to help ensure that
inflation, over time, is at levels consistent with its mandate, the Committee
decided today to keep the target range for the federal funds rate at 0 to 1/4
percent. The Committee 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 also
will maintain its existing policy of reinvesting principal payments from its
securities holdings. The Committee will regularly review the size and
composition of its securities holdings and is prepared to adjust those
holdings as appropriate.
The Committee discussed the range of policy tools available to
promote a stronger economic recovery in a context of price stability. It will
continue to assess the economic outlook in light of incoming information and
is prepared to employ these tools as appropriate."
Voting for this action: Ben Bernanke, William C. Dudley,
Elizabeth Duke, Charles L. Evans, Sarah Bloom Raskin, Daniel K. Tarullo, and
Janet L. Yellen.
Voting against this action: Richard W. Fisher, Narayana
Kocherlakota, and Charles I. Plosser.
Messrs.
Fisher, Kocherlakota, and Plosser dissented because they would have preferred
to continue to describe economic conditions as likely to warrant exceptionally
low levels for the federal funds rate for an "extended period,"
rather than characterizing that period as "at least through
mid-2013." Mr. Fisher discussed the fragility of the U.S. economy but
felt that it was chiefly nonmonetary factors, such as uncertainty about fiscal
and regulatory initiatives, that were restraining domestic capital
expenditures, job creation, and economic growth. He was concerned both that
the Committee did not have enough information to be specific on the time
interval over which it expected low rates to be maintained, and that, were it
to do so, the Committee risked appearing overly responsive to the recent
financial market volatility. Mr. Kocherlakota's perspective on the policy
decision was shaped by his view that in November 2010, the Committee had
chosen a level of accommodation that was well calibrated for the condition of
the economy. Since November, inflation had risen and unemployment had fallen,
and he did not believe that providing more monetary accommodation was the
appropriate response to those changes in the economy. Mr. Plosser felt that
the reference to 2013 might well be misinterpreted as suggesting that monetary
policy was no longer contingent on how the economic outlook evolved. Although
financial markets had been volatile and incoming information on growth and
employment had been weaker than anticipated, he believed the statement
conveyed an excessively negative assessment of the economy and that it was
premature to undertake, or be perceived to signal, further policy
accommodation. He also judged that the policy step would do little to improve
near-term growth prospects, given the ongoing structural adjustments and
external challenges faced by the U.S. economy.
It was agreed that the next meeting of the Committee would be held
on Tuesday–Wednesday,
September 20–21, 2011. The
meeting adjourned at 1:40 p.m. on August 9, 2011.
Videoconference Meeting of August 1
On August
1, 2011, the Committee met by videoconference to discuss issues associated
with contingencies in the event that the Treasury was temporarily unable to
meet its obligations because the statutory federal debt limit was not raised
or in the event of a downgrade of the U.S. sovereign credit rating. The staff
provided an update on the debt limit status, conditions in financial markets,
plans that the Federal Reserve and the Treasury had developed regarding the
processing of federal payments, potential implications for bank supervision
and regulatory policies, and possible actions that the Federal Reserve could
take if disruptions to market functioning posed a threat to the Federal
Reserve's economic objectives. Participants generally anticipated that there
would be no need to make changes to existing bank regulations, the operation
of the discount window, or the conduct of open market operations. A number of
participants emphasized that the Federal Reserve would continue to employ
market values of securities in its transactions. With respect to potential
policy actions, participants agreed that the appropriate response would depend
importantly on the actual conditions in markets and should generally consist
of standard operations. Some participants noted that such an approach would
maintain the traditional separation of the Federal Reserve's actions from the
Treasury's debt management decisions.
Notation Vote
By
notation vote completed on August 29, 2011, the Committee unanimously approved
the minutes of the FOMC meeting held on August 9, 2011.
_____________________________
William B. English
Secretary
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