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Minutes of the Federal Open Market CommitteeSeptember 21, 2010

A joint meeting of the Federal Open Market Commit-tee and the Board of Governors of the Federal Reserve

System was held in the offices of the Board of Gover-nors in Washington, D.C., on Tuesday, September 21,2010, at 8:00 a.m.

PRESENT:Ben Bernanke, ChairmanWilliam C. Dudley, Vice ChairmanJames BullardElizabeth DukeThomas M. HoenigSandra PianaltoEric RosengrenDaniel K. TarulloKevin Warsh

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

Jeffrey M. Lacker, Dennis P. Lockhart, and Janet L.Yellen, Presidents of the Federal ReserveBanks of Richmond, Atlanta, and San Francis-co, respectively

William B. English, Secretary and EconomistDeborah J. Danker, Deputy SecretaryMatthew M. Luecke, Assistant SecretaryDavid W. Skidmore, Assistant SecretaryMichelle A. Smith, Assistant SecretaryScott G. Alvarez, General CounselThomas C. Baxter, Deputy General CounselNathan Sheets, EconomistDavid J. Stockton, Economist

Alan D. Barkema, James A. Clouse, Thomas A.Connors, Jeff Fuhrer, Steven B. Kamin, Law-

rence Slifman, Mark S. Sniderman, ChristopherJ. Waller, and David W. Wilcox, AssociateEconomists

Brian Sack, Manager, System Open Market Ac-count

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

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

nors

Maryann F. Hunter, Deputy Director, Division ofBanking Supervision and Regulation, Board ofGovernors; William Nelson, Deputy Director,Division of Monetary Affairs, Board of Gov-ernors

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

David Reifschneider and William Wascher, SeniorAssociate Directors, Division of Research andStatistics, Board of Governors

Eric M. Engen and Michael G. Palumbo, DeputyAssociate Directors, Division of Research andStatistics, Board of Governors

Brian J. Gross, Special Assistant to the Board, Of-fice of Board Members, Board of Governors

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

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

Penelope A. Beattie, Assistant to the Secretary, Of-fice of the Secretary, Board of Governors

Randall A. Williams, Records Management Analyst,Division of Monetary Affairs, Board of Gov-ernors

Gordon Werkema, First Vice President, FederalReserve Bank of Chicago

Harvey Rosenblum and Daniel G. Sullivan, Execu-tive Vice Presidents, Federal Reserve Banks ofDallas and Chicago, respectively

David Altig, John A. Weinberg, and Kei-Mu Yi,Senior Vice Presidents, Federal Reserve Banksof Atlanta, Richmond, and Minneapolis, re-spectively

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Chris Burke, John Fernald, James M. Nason, VicePresidents, Federal Reserve Banks of NewYork, San Francisco, and Philadelphia, respec-tively

Gauti B. Eggertsson, Research Officer, Federal Re-

serve Bank of New York

By unanimous vote, the Committee selected Deborah J.Danker to serve as Deputy Secretary until the selectionof a successor at the first regularly scheduled meetingof the Committee in 2011.

Developments in Financial Markets and the Fed-eral Reserves Balance Sheet The Manager of the System Open Market Account(SOMA) reported on developments in domestic and

foreign financial markets during the period since theCommittee met on August 10, 2010. He also reportedon System open market operations during the inter-meeting period, including the implementation of theCommittees decision at the August meeting to reinvestprincipal payments on agency debt and agencymortgage-backed securities (MBS) in longer-term Trea-sury securities. Following the August meeting, theOpen Market Desk at the Federal Reserve Bank ofNew York announced that purchase operations wouldfollow a schedule that would be released in the middleof each month, with the amounts calibrated to offset

the amount of principal payments from agency debtand agency MBS expected to be received from themiddle of the month to the middle of the followingmonth. The Desk conducted 12 such operations overthe intermeeting period and purchased about $28 bil-lion of Treasury securities, with maturities concentratedin the 2- to 10-year sector of the nominal Treasurycurve, although purchases were made across both thenominal and inflation-protected Treasury coupon yieldcurves. The Manager also briefed the Committee onprogress in developing temporary reserve drainingtools. Over the intermeeting period, the Federal Re-serve announced a schedule for ongoing small-valueauctions of term deposits. The auctions, which will beheld about every other month, are intended to ensurethe operational readiness of the term deposit facilityand to increase the familiarity of eligible participants with the auction procedures. In addition, the Deskcontinued to conduct small-scale tri-party reverse re-purchase operations using MBS collateral with the pri-mary dealers, and it published a list of money market

mutual funds that have been accepted as counterpartiesfor reverse repurchase operations. The Manager alsodiscussed plans to publish a new set of criteria that would allow a broader set of money market funds tobecome eligible counterparties. There were no openmarket operations in foreign currencies for the Sys-

tems account over the intermeeting period. By unan-imous vote, the Committee ratified the Desks transac-tions over the intermeeting period.

Staff Review of the Economic SituationThe information reviewed at the September 21 meetingindicated that the pace of the economic expansionslowed in recent months and that inflation remainedlow. Private businesses increased employment modest-ly in August, but the length of the workweek was un-changed and the unemployment rate remained elevated.Industrial production advanced at a solid pace in Julyand rose further in August. Consumer spending con-

tinued to increase at a moderate rate in July and ap-peared to move up again in August. The rise in busi-ness outlays for equipment and software looked tohave moderated recently following outsized gains in thefirst half of the year. Housing activity weakened fur-ther, and nonresidential construction remained de-pressed. After falling in the previous three months,headline consumer prices rose in July and August asenergy prices retraced some of their earlier decline while prices for core goods and services edged upslightly.

The labor market situation continued to improve only

slowly. The average monthly increase in private payrollemployment over the three months ending in Augustwas small and was less than the average gain earlier inthe year. Moreover, average weekly hours of all em-ployees were little changed, on net, in recent monthsafter rising during the first half of the year. The unem-ployment rate ticked up in August and remained closeto the level that has prevailed since the beginning ofthis year. The labor force participation rate moved upa little in August but was still low. Initial claims forunemployment insurance remained at an elevated levelover the intermeeting period. In addition, other indica-

tors of labor demand, such as measures of hiring andjob vacancies, did not improve.

Industrial production increased solidly in July and thenrose more moderately in August. Manufacturing pro-duction was boosted in July by a pickup in motor ve-hicle assemblies as automakers replenished lean stocksat dealers. However, the production of motor vehicleswas pared back in August. More broadly, the output of

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high-technology items and other business equipmentexpanded at a solid pace in July and August. The out-put of utilities declined over the past two months afterit was boosted by unseasonably hot weather in the pre-ceding two months. Capacity utilization in manufactur-ing ticked up further in August from its mid-2009 low,

but it was still substantially below its longer-run aver-age.

Real personal consumption expenditures rose modestlyin July, similar to the average increase over the preced-ing two months. Data for retail sales and the sales oflight motor vehicles pointed to a moderate gain in realconsumer spending in August. Real disposable person-al income declined a bit in July after increasing at a sol-id pace in the second quarter. The personal saving rateedged down in July but remained near the high levelregistered in the second quarter. Indicators of house-hold net worth were mixed; home prices moved down

in July, while equity prices inched up, on balance, overthe intermeeting period. After falling back in July, con-sumer confidence remained downbeat in August andearly September, with households more pessimisticabout the outlook for their personal financial situationsand general economic conditions.

Housing activity, which had been supported earlier inthe year by the availability of homebuyer tax credits,softened further in July. Sales of new single-familyhomes remained at a depressed level. Sales of existinghomes fell substantially in July, and the index of pend-ing home sales suggested that sales were muted in Au-

gust. Starts of new single-family houses in July andAugust were below the low level seen in June, and thenumber of new permits issued in August appeared tosignal that little improvement in new homebuilding waslikely in September. House prices declined modestly inJuly after changing little, on net, in recent months. Theinterest rate for 30-year fixed-rate conforming mort-gages remained essentially unchanged over the inter-meeting period at a historically low level.

Real business spending on equipment and softwareappeared to have slowed in July after expanding rapidlyover the preceding three quarters. Both new ordersand shipments of nondefense capital goods excludingaircraft dipped in July. Moreover, survey indicators ofbusiness conditions softened further in August. In-coming construction data indicated that business investment in nonresidential structures decreased in thesecond quarter but at a slower pace than over the pre-ceding year. Increases in spending for drilling and min-ing structures were more than offset by continued de-

clines in outlays for other types of nonresidential build-ings. Despite some indications that the difficult finan-cial conditions in commercial real estate markets mightbe stabilizing, credit was still tight and vacancy rates foroffice and commercial space remained high. In thesecond quarter, businesses appeared to build their in-

ventories at a faster pace than earlier in the year, butratios of inventories to sales for most industries did notpoint to any sizable overhangs.

Inflation remained subdued in recent months. Head-line consumer prices rose in July and August as energyprices rebounded after their decline over the previousthree months. At the same time, prices for core goodsand services moved up slightly. At earlier stages ofproduction, producer prices of core intermediate mate-rials moved down, on net, during July and August whilemost indexes of spot commodity prices increased.Survey measures of short- and long-term inflation ex-

pectations were essentially unchanged.

Unit labor costs at the end of the second quarter re-mained below their level one year earlier, as labor com-pensation continued to increase only slowly and laborproductivity stayed near its recent high level. Hourlylabor compensationas measured by compensationper hour in the nonfarm business sector and the em-ployment cost indexrose modestly during the yearending in the second quarter. More recently, the year-over-year change in average hourly earnings of all em-ployees in July and August remained subdued. Whileoutput per hour in the nonfarm business sector de-

clined in the second quarter following large increases inthe preceding three quarters, productivity was still wellabove its level one year earlier.

The U.S. international trade deficit narrowed in Julyafter widening in June. The rise in exports in July morethan offset their decline in June, as overseas sales ofcapital goods rose sharply. Most other major categoriesof exports were little changed in July, although exportsof automotive products posted their first decline sinceMay 2009. The narrowing of the trade deficit in Julyalso reflected a broad-based decline in imports follow-ing their large increase in June. Imports of consumergoods fell substantially in July, while imports of indus-trial supplies, capital goods, and automotive productsalso moved down. In contrast, imports of petroleumproducts remained about flat in July.

Increases in foreign economic activity were robust, onaverage, in the second quarter. In particular, gross do-mestic product (GDP) grew strongly in the emergingmarket economies, even though gains in China appar-

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ently moderated. Among the advanced foreign econ-omies, Europe posted a notable rise in economic activi-ty in the second quarter; rapid expansion in Germanymore than offset weaker outcomes in other euro-areaeconomies, particularly those experiencing financialstress related to concerns about their fiscal situations

and potential vulnerabilities in their banking sectors. InCanada and Japan, the rise in real GDP slowed notice-ably in the second quarter. Recent indicators of foreigneconomic activity for the third quarter, including dataon exports, production, and purchasing managers in-dexes, generally pointed to a slowing in the pace of ex-pansion in economic activity abroad. Headline infla-tion rates in foreign economies generally were re-strained in the second quarter by a deceleration in foodand energy prices, but prices appeared to be rising a bitmore rapidly of late.

Staff Review of the Financial Situation

The decision by the Federal Open Market Committee(FOMC) at its August meeting to maintain the 0 to percent target range for the federal funds rate was widely anticipated, but Treasury yields declined as in-vestors reportedly focused on the indication in the ac-companying statement that principal payments fromagency debt and MBS in the Federal Reserves portfoliowould be reinvested in longer-term Treasury securitiesand also on the characterization of the economic out-look, which was seen as somewhat more downbeatthan expected. The expected path of the federal fundsrate moved down early in the intermeeting period in

response to weaker-than-expected economic data. TheChairmans Jackson Hole speech was reportedly viewedby market participants as more encouraging about eco-nomic prospects and as providing more clarity aboutthe policy options available to the FOMC, but it didnot have a sustained effect on policy expectations. Theexpected path of the federal funds rate rose for a timefollowing the more-positive-than-expected data onmanufacturing activity and the labor market released inearly September, but the path ended the intermeetingperiod down on balance.

Yields on nominal Treasury coupon securities were

volatile and ended the period somewhat lower, particu-larly for intermediate- and longer-term maturities. Inaddition to Federal Reserve communications and newsabout the economic outlook, market participantspointed to strong demand for long-duration assets byinstitutional investors and speculation about additionallarge-scale asset purchases by the Federal Reserve asfactors contributing to the drop in longer-term yields.Five-year inflation compensation based on Treasury

inflation-protected securities (TIPS) fell, while forwardinflation compensation 5 to 10 years ahead edged up,on net, over the intermeeting period but remained at alower level than in the spring. Treasury auctions overthe intermeeting period were generally well received.Yields on investment- and speculative-grade corporate

bonds moved roughly in line with those on compara-ble-maturity Treasury securities, leaving risk spreadslittle changed. Measures of liquidity in secondary mar-kets for corporate bonds remained stable. In the sec-ondary market for syndicated leveraged loans, the aver-age bid price moved up and bid-asked spreads edgeddown.

Conditions in short-term funding markets continued toimprove following the recent stresses related to con-cerns about financial stability in Europe. In dollarfunding markets, spreads of term London interbankoffered rates (or Libor) over those on overnight index

swaps fell further at most horizons over the intermeet-ing period. Spreads on unsecured financial commercialpaper were little changed at low levels. In securedfunding markets, spreads on asset-backed commercialpaper remained narrow, and rates on repurchaseagreements involving various types of collateral heldsteady. In the September Senior Credit Officer Opin-ion Survey on Dealer Financing Terms (SCOOS), deal-ers indicated, on net, that they loosened credit termsapplicable to several important classes of counterpartiesand types of collateral over the past three months amidincreased demand for funding for most types of securi-

ties covered in the survey.Broad U.S. stock price indexes edged up, on balance,over the intermeeting period, and option-implied vola-tility on the S&P 500 index was little changed on net.The spread between the staffs estimate of the expectedreal return on equities over the next 10 years and anestimate of the expected real return on a 10-year Trea-sury notea rough measure of the equity risk pre-miumremained at an elevated level. Bank stocksunderperformed the broader equity market and contin-ued to be more volatile, while credit default swapspreads for large banking organizations edged up. The

greater volatility in bank stocks reportedly reflected, inpart, the effects of domestic and international financialregulatory reform efforts.

Net debt financing by U.S. nonfinancial corporationsremained robust in August. Gross bond issuance wasstrong, a pattern that appeared to persist into the firstpart of September. Meanwhile, nonfinancial commer-cial paper outstanding contracted as very low yields on


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corporate bonds led to some substitution towardlonger-term debt. Measures of the credit quality ofnonfinancial corporations remained solid. The pace ofinitial public offerings and seasoned equity offerings bynonfinancial firms slowed in August, partly reflectingtypical seasonal patterns.

Commercial real estate markets continued to face diffi-cult financial conditions, although some further signsemerged that this sector might be stabilizing. The pric-es of commercial properties appeared to have edged upin the first half of the year, and the volume of commer-cial real estate sales rose again in August. A few smallcommercial mortgage-backed securities (CMBS) dealswere issued over the intermeeting period and were re-portedly well received by investors, consistent with aneasing of conditions and renewed interest in the CMBSmarket since the beginning of the year that was re-ported in the SCOOS. Nonetheless, the volume of

CMBS issuance in 2010 remained quite low compared with the levels seen before the onset of the financialcrisis, and total commercial mortgage debt continued tocontract amid further increases in delinquency rates oncommercial mortgages.

For households, record-low mortgage rates supported arelatively high level of refinancing activity, but manyborrowers reportedly remained unable to refinance be-cause of insufficient home equity or poor credit histo-ries. Consumer credit declined in the second quarterand appeared to contract further in July. Issuance ofconsumer asset-backed securities in August proceeded

at a moderate pace that was similar to that posted inJuly. Spreads of interest rates on consumer loans rela-tive to the yield on the two-year Treasury note werelittle changed on balance. The credit quality of con-sumer loans continued to improve; delinquency andcharge-off rates for most types of loans dropped fur-ther in recent months, although they remained elevated.

Bank credit expanded in August, reflecting significantpurchases of Treasury securities and agency MBS bylarge banks. Bank loans continued to contract, but thepace of contraction slowed noticeably from earlier inthe year. Commercial and industrial loans rose slightlyin July, the first increase on a monthly basis since late2008, and held steady in August. In addition, holdingsof closed-end residential mortgage loans expandedmoderately in August, reportedly spurred by refinanc-ing activity. However, both home equity loans andcommercial real estate loans contracted further in Au-gust, while consumer loans fell sharply.

On average over July and August, M2 expanded at arate slightly above its pace in the second quarter. Liq-uid deposits grew fairly rapidly over the two months,reflecting in part a compositional shift from otherlower-yielding M2 assets. Currency trended higher,while small time deposits and retail money market mu-

tual funds contracted further, as yields on these assetsremained at extremely low levels.

In foreign markets, concerns about the global econom-ic outlook prompted substantial drops in equity pricesand benchmark sovereign bond yields in many coun-tries in August, and the dollar appreciated broadly onsafe-haven demands. In September, however, as bettereconomic news led to some improvement in investorsentiment, equity prices and bond yields moved backup, and the dollar retraced its earlier appreciation.Yield spreads relative to German bunds on the 10-yearsovereign bonds of Greece, Ireland, and Portugal wi-

dened to near-record levels over the period. Moreover,euro-area bank stock prices fell on continued concernsabout the condition of some troubled institutions.

With the yen at a 15-year high against the dollar innominal terms, Japans Ministry of Finance intervenedin currency markets on September 15 to buy dollarsagainst yen, and the Bank of Japan (BOJ) noted that itwould continue to provide ample liquidity. In reaction,the yen depreciated about 3 percent against the dollar,essentially reversing its rise over the preceding part ofthe intermeeting period. The European Central Bank(ECB) said that it would continue to provide term li-

quidity by offering several more full-allotment three-month refinancing operations through the end of theyear. In contrast to the continued accommodativestance of the ECB and the BOJ, the Bank of Canadaincreased its target for the overnight rate by 25 basispoints to 1 percent, its third hike since June. Severalother central banks tightened monetary policy over theintermeeting period, including those of Chile, India,Indonesia, Sweden, and Thailand.

Staff Economic OutlookIn the economic forecast prepared for the SeptemberFOMC meeting, the staff lowered its projection for theincrease in real economic activity over the second halfof 2010. The staff also reduced slightly its forecast ofgrowth next year but continued to anticipate a mod-erate strengthening of the expansion in 2011 as well asa further pickup in economic growth in 2012. The sof-ter tone of incoming economic data suggested that theunderlying level of demand was weaker than projectedat the time of the August meeting. Moreover, the out-


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look for foreign economic activity also appeared a bitweaker. In the medium term, the recovery in economicactivity was expected to receive support from accom-modative monetary policy, further improvements infinancial conditions, and greater household and busi-ness confidence. Over the forecast period, the increase

in real GDP was projected to be sufficient to slowlyreduce economic slack, although resource slack wasanticipated to still remain elevated at the end of 2012.

Overall inflation was projected to remain subdued, withthe staffs forecasts for headline and core inflation littlechanged from the previous projection. The currentand projected wide margins of economic slack wereexpected to contribute to a small slowing in core infla-tion in 2011, which was anticipated to be tempered bystable inflation expectations. Inflation was projected tochange little in 2012, as considerable economic slackwas expected to remain even as economic activity was

anticipated to strengthen.

Participants Views on Current Conditions and theEconomic OutlookIn their discussion of the economic situation and out-look, meeting participants generally agreed that the in-coming data indicated that output and employment were increasing only slowly and at rates well belowthose recorded earlier in the year. Although partici-pants considered it unlikely that the economy wouldreenter a recession, many expressed concern that out-put growth, and the associated progress in reducing thelevel of unemployment, could be slow for some time.

Participants noted a number of factors that were re-straining growth, including low levels of household andbusiness confidence, heightened risk aversion, and thestill weak financial conditions of some households andsmall firms. A few participants noted that economicrecoveries were often uneven and were typically slowfollowing downturns triggered by financial crises. Anumber of participants observed that the sluggish paceof growth and continued high levels of slack left theeconomy exposed to potential negative shocks. Never-theless, participants judged the economic recovery tobe continuing and generally expected growth to pick up

gradually next year.

Indicators of spending by businesses and householdswere mixed. Several participants observed that data onretail sales had been a bit stronger than expected overthe intermeeting period, although business contactsindicated that shoppers remained very price sensitive.There were some reports of retailers cautiously boost-ing inventories ahead of the holiday season by some-

what more than they did a year ago. Households werecontinuing efforts to repair their balance sheets by sav-ing more and paying down debt. Participants notedthat elevated uncertainty about employment prospectscontinued to weigh on consumption spending. Manybusinesses had built up large reserves of cash, in part

by issuing long-term debt, but were refraining fromadding workers or expanding plants and equipment. Anumber of business contacts indicated that they wereholding back on hiring and spending plans because ofuncertainty about future fiscal and regulatory policies.However, businesses also indicated that concerns aboutactual and anticipated demand were important factorslimiting investment and hiring. Businesses reportedcontinued strong foreign demand for their products,particularly from Asia.

Participants noted that the housing sector, includingresidential construction and home sales, continued to

be very weak. Despite efforts aimed at mitigation,fore-closures continued to add to the elevated supplyof available homes, putting downward pressure onhome prices and housing construction.

Financial developments were mixed over the intermeet-ing period. Banks remained generally cautious and un-certain about the regulatory outlook, although investorsappeared confident that U.S. banks could meet the newinternational standards for bank capital and liquiditythat were announced over the intermeeting period.Improving household financial conditions were contri-buting to better consumer loan performance, and credit

problems more broadly appeared to have mostlypeaked, although banks continued to report elevatedlosses on commercial real estate loans, especially con-struction and land development loans. Credit remainedreadily available for larger corporations with access tofinancial markets, and there were some signs that creditconditions had begun to improve for smaller firms. Asset prices had been relatively sensitive to incomingeconomic data over the intermeeting period but gener-ally ended the period little changed on net. Stresses inEuropean financial markets remained broadly con-tained but bore watching going forward.

A number of participants noted that the current slug-gish pace of employment growth was insufficient toreduce unemployment at a satisfactory pace. Severalparticipants reported feedback from business contactswho were delaying hiring until the economic and regu-latory outlook became more certain. Participants dis-cussed the possible extent to which the unemploymentrate was being boosted by structural factors such as


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mismatches between the skills of the workers who hadlost their jobs and the skills needed in the sectors of theeconomy with vacancies, the inability of the unem-ployed to relocate because their homes were worth lessthan their mortgages, and the effects of extended un-employment benefits. Participants agreed that factors

like these were pushing the unemployment rate up, butthey differed in their assessments of the extent of sucheffects. Nevertheless, many participants saw evidencethat the current unemployment rate was considerablyabove levels that could be explained by structural fac-tors alone, pointing, for example, to declines in em-ployment across a wide range of industries during therecession, job vacancy rates that were relatively low,and reports that weak demand for goods and servicesremained a key reason why firms were adding em-ployees only slowly.

Inflation had declined since the start of the recession,

and most participants indicated that underlying infla-tion was at levels somewhat below those that theyjudged to be consistent with the Committees dualmandate for maximum employment and price stability. Although prices of some commodities and importedgoods had risen recently, many business contacts re-ported that they currently had little pricing power andthat they anticipated limited, if any, increases in laborcosts. Meeting participants noted that several measuresof inflation expectations had changed little, on net,over the intermeeting period and that analysis of thecomponents of price indexes suggested disinflation

might be abating. However, TIPS-based inflationcompensation had declined, on balance, in recent quar-ters. While underlying inflation remained subdued,participants saw only small odds of deflation.

Participants discussed the medium-term outlook formonetary policy and issues related to monetary policyimplementation. Many participants noted that if eco-nomic growth remained too slow to make satisfactoryprogress toward reducing the unemployment rate or ifinflation continued to come in below levels consistentwith the FOMCs dual mandate, it would be appropri-ate to provide additional monetary policy accommoda-

tion. However, others thought that additional accom-modation would be warranted only if the outlook wor-sened and the odds of deflation increased materially.Meeting participants discussed several possible ap-proaches to providing additional accommodation butfocused primarily on further purchases of longer-termTreasury securities and on possible steps to affect infla-tion expectations. Participants reviewed the likely ben-efits and costs associated with a program of purchasing

additional longer-term assetswith some noting thatthe economic benefits could be small in current cir-cumstancesas well as the best means to calibrate andimplement such purchases. A number of participantscommented on the important role of inflation expecta-tions for monetary policy: With short-term nominal

interest rates constrained by the zero bound, a declinein short-term inflation expectations increases short-term real interest rates (that is, the difference betweennominal interest rates and expected inflation), therebydamping aggregate demand. Conversely, in such cir-cumstances, an increase in inflation expectations lowersshort-term real interest rates, stimulating the economy.Participants noted a number of possible strategies foraffecting short-term inflation expectations, includingproviding more detailed information about the rates ofinflation the Committee considered consistent with itsdual mandate, targeting a path for the price level rather

than the rate of inflation, and targeting a path for thelevel of nominal GDP. As a general matter, partici-pants felt that any needed policy accommodationwould be most effective if enacted within a frameworkthat was clearly communicated to the public. The mi-nutes of FOMC meetings were seen as an importantchannel for communicating participants views aboutmonetary policy.

Committee Policy ActionIn their discussion of monetary policy for the periodimmediately ahead, nearly all of the Committee mem-bers agreed that it would be appropriate to maintain the

target range for the federal funds rate of 0 to percentand to leave unchanged the level of the combined hold-ings of Treasury, agency debt, and agency mortgage-backed securities in the SOMA. Although many mem-bers considered the recent and anticipated progresstoward meeting the Committees mandate of maximumemployment and price stability to be unsatisfactory,members observed that incoming data over the inter-meeting period indicated that the economic recovery was continuing, albeit slowly. Moreover, the data hadbeen mixed, with readings early in the period generallyweaker than anticipated but the more-recent data com-ing in on the strong side of expectations. In light ofthe considerable uncertainty about the current trajecto-ry for the economy, some members saw merit in accu-mulating further information before reaching a decisionabout providing additional monetary stimulus. In addi-tion, members wanted to consider further the mosteffective framework for calibrating and communicatingany additional steps to provide such stimulus. Severalmembers noted that unless the pace of economic re-


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covery strengthened or underlying inflation movedback toward a level consistent with the Committeesmandate, they would consider it appropriate to takeaction soon.

With respect to the statement to be released followingthe meeting, members agreed that it was appropriate toadjust the statement to make it clear that underlyinginflation had been running below levels that the Com-mittee judged to be consistent with its mandate formaximum employment and price stability, in part tohelp anchor inflation expectations. Nearly all membersagreed that the statement should reiterate the expecta-tion that economic conditions were likely to warrantexceptionally low levels of the federal funds rate for anextended period. One member, however, believed thatcontinuing to communicate that expectation in theCommittees statement would create conditions thatcould lead to macroeconomic and financial imbalances.

Members generally thought that the statement shouldnote that the Committee was prepared to provide addi-tional accommodation if needed to support the eco-nomic recovery and to return inflation, over time, tolevels consistent with its mandate. Such an indicationaccorded with the members sense that such accom-modation may be appropriate before long, but alsomade clear that any decisions would depend upon fu-ture information about the economic situation and out-look.

At the conclusion of the discussion, the Committeevoted to authorize and direct the Federal Reserve Bank

of New York, until it was instructed otherwise, to ex-ecute transactions in the System Account in accordancewith the following domestic policy directive:

The Federal Open Market Committee seeksmonetary and financial conditions that willfoster price stability and promote sustainablegrowth in output. To further its long-runobjectives, the Committee seeks conditionsin reserve markets consistent with federalfunds trading in a range from 0 to percent.The Committee directs the Desk to maintainthe total face value of domestic securitiesheld in the System Open Market Account atapproximately $2 trillion by reinvesting prin-cipal payments from agency debt and agencymortgage-backed securities in longer-term Treasury securities. The System Open Mar-ket Account Manager and the Secretary willkeep the Committee informed of ongoingdevelopments regarding the Systems balance

sheet that could affect the attainment overtime of the Committees objectives of maxi-mum employment and price stability.

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

Information received since the FederalOpen Market Committee met in August in-dicates that the pace of recovery in outputand employment has slowed in recentmonths. Household spending is increasinggradually, but remains constrained by highunemployment, modest income growth, low-er housing wealth, and tight credit. Businessspending on equipment and software is ris-ing, though less rapidly than earlier in theyear, while investment in nonresidentialstructures continues to be weak. Employers

remain reluctant to add to payrolls. Housingstarts are at a depressed level. Bank lendinghas continued to contract, but at a reducedrate in recent months. The Committee antic-ipates a gradual return to higher levels of re-source utilization in a context of price stabili-ty, although the pace of economic recovery islikely to be modest in the near term.

Measures of underlying inflation are current-ly at levels somewhat below those the Com-mittee judges most consistent, over the long-er run, with its mandate to promote maxi-

mum employment and price stability. Withsubstantial resource slack continuing to re-strain cost pressures and longer-term infla-tion expectations stable, inflation is likely toremain subdued for some time before risingto levels the Committee considers consistentwith its mandate.

The Committee will maintain the targetrange for the federal funds rate at 0 to percent and continues to anticipate thateconomic conditions, including low rates ofresource utilization, subdued inflation trends,

and stable inflation expectations, are likely towarrant exceptionally low levels for the fed-eral funds rate for an extended period. TheCommittee also will maintain its existing pol-icy of reinvesting principal payments from itssecurities holdings.

The Committee will continue to monitor theeconomic outlook and financial develop-


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