FOMC Minutes
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Minutes of the Federal Open Market Committee
October 30-31, 2007
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, October 30, 2007 at 2:00 p.m. and continued on
Wednesday, October 31, 2007 at 9:00 a.m.
PRESENT:
Mr. Bernanke, Chairman
Mr. Geithner, Vice Chairman
Mr. Evans
Mr. Hoenig
Mr. Kohn
Mr. Kroszner
Mr. Mishkin
Mr. Poole
Mr. Rosengren
Mr. Warsh
Ms. Cumming, Mr. Fisher, Ms. Pianalto, and
Messrs. Plosser and Stern, Alternate Members
of the Federal Open Market Committee
Messrs. Lacker and Lockhart, and Ms. Yellen,
Presidents of the Federal Reserve Banks of
Richmond, Atlanta, and San Francisco, respectively
Mr. Madigan, Secretary and Economist
Ms. Danker, Deputy Secretary
Ms. Smith, Assistant Secretary
Mr. Skidmore, Assistant Secretary
Mr. Alvarez, General Counsel
Mr. Baxter, Deputy General Counsel
Mr. Sheets, Economist
Mr. Stockton, Economist
Messrs. Clouse, Connors, Fuhrer, Kamin, Rasche,
Slifman, Sullivan, and Wilcox, Associate
Economists
Mr. Dudley, Manager, System Open Market Account
Mr. Struckmeyer, Deputy Staff Director, Office of
Staff Director for Management
Mr. English, Senior Associate Director, Division of
Monetary Affairs, Board of Governors
Messrs. Reifschneider 1/ and Wascher, Associate
Directors, Division of Research and Statistics,
Board of Governors
Mr. Wright, Deputy Associate Director, Division
of Monetary Affairs, Board of Governors
Mr. Zakrajšek, Assistant Director, Division of
Monetary Affairs, Board of Governors
Mr. Blanchard, Assistant to the Board, Office of
Board Members, Board of Governors
Ms. K. Johnson, Senior Adviser, Division of International Finance, Board of Governors
Mr. Oliner, Senior Adviser, Division of Research
and Statistics, Board of Governors
Mr. Dale, 1/ Senior Adviser, Division of Monetary
Affairs, Board of Governors
Mr. Gross,1/ Special Assistant to the Board, Office
of Board Members, Board of Governors
Mr. Small, Project Manager, Division of Monetary
Affairs, Board of Governors
Messrs. Kumasaka 2/ and Luecke, 3/ Senior Financial Analysts, Division of Monetary Affairs,
Board of Governors
Ms. Judson, Economist, Division of Monetary Affairs, Board of Governors
Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors
Mr. Lyon, First Vice President, Federal Reserve
Bank of Minneapolis
____________________
1/ Attended portion of meeting relating to the
discussion of communication issues.
2/ Attended Tuesday session.
3/ Attended Wednesday session.
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Federal Open Market Committee
Messrs. Judd and Sniderman, Executive Vice
Presidents, Federal Reserve Banks of San
Francisco and Cleveland, respectively
Mr. Altig and Ms. Mester, Senior Vice Presidents,
Federal Reserve Banks of Atlanta and Philadelphia, respectively
Mr. Hakkio, Special Adviser, Federal Reserve Bank
of Kansas City
Messrs. Hilton, Koenig, and Potter, Vice Presidents, Federal Reserve Banks of New York,
Dallas, and New York, respectively
Mr. Weber, Senior Research Officer, Federal Reserve Bank of Minneapolis
Mr. Hetzel, Senior Economist, Federal Reserve
Bank of Richmond
By unanimous vote, the Federal Open Market Committee selected D. Nathan Sheets to serve as Economist
until the selection of his successor at the first regularly
scheduled meeting of the Committee in 2008.
The Manager of the System Open Market Account
reported on recent developments in foreign exchange
markets. There were no open market operations in
foreign currencies for the System’s account in the period since the previous meeting. The Manager also
reported on developments in domestic financial markets and on System open market operations in government securities and federal agency obligations during the period since the previous meeting. By unanimous vote, the Committee ratified these transactions.
The information provided to the Committee on the
first day of the meeting, prior to the release of the advance estimates of the third-quarter national income
and product accounts, indicated that economic activity
expanded at a solid pace in the third quarter. Consumer spending rose more strongly after a tepid increase in the second quarter, and the pace of expansion
of business outlays for equipment and structures remained reasonably solid. Manufacturing posted a sizable gain for the third quarter as a whole. In contrast,
the slump in residential investment intensified during
the third quarter, at least partly because of ongoing disruptions in the markets for nonconforming mortgages.
The average monthly gain in private employment also
slowed significantly. Headline inflation eased during
the third quarter, reflecting a decline in energy prices;
core inflation continued to be moderate.
Employment increased more slowly in the third quarter
than in the first half of the year. Private payroll employment registered a considerably smaller average
monthly gain; employment in residential construction,
manufacturing, and industries related to mortgage lending continued to decline, but most service-producing
industries added jobs at a moderate pace. With gains in
employment smaller and the workweek flat, the growth
of aggregate hours of private production or nonsupervisory workers stepped down from its second-quarter
pace. The labor force participation rate was unchanged, on average, in the third quarter, and the unemployment rate ticked up to 4.7 percent in September.
Industrial production changed little in August and September after having posted solid advances in June and
July. Manufacturing output expanded in the third quarter overall at about the same pace as in the second
quarter but declined modestly on net in August and
September. During those two months, production was
damped by declines in the output of motor vehicles
and parts. In addition, output of construction supplies
and products fell, likely reflecting the ongoing decline
in residential investment. Meanwhile, production in the
high-tech sector rose at a moderate rate.
Consumer spending was well maintained in August and
September. Motor vehicle sales improved, and real
spending on other goods posted solid gains in both
months. Real outlays on consumer services were
strong in August because of a weather-induced jump in
energy services. Solid increases in nominal wages and
salaries and lower headline inflation led to robust gains
in real income over the summer. However, other factors affecting consumer spending were mixed. Shortterm interest rates dropped and stock prices rose, on
balance, after August. By contrast, house prices continued to decelerate, standards on consumer and mortgage credit tightened after mid-summer, and the turmoil in financial markets that started in the summer
likely exerted some restraint on consumer spending.
Moreover, measures of consumer confidence had declined in recent months.
The housing downturn deepened as sales of new and
existing single-family homes continued to fall. Deterioration in nonprime mortgage markets as well as higher
mortgage interest rates and tighter lending conditions
for prime jumbo loans since earlier in the year appeared
Minutes of the Meeting of October 30-31, 2007
to be restraining housing demand. Forward-looking
indicators, including an index of pending home sales
and adjusted single-family permit issuance, continued
to point to a further slowing in housing activity over
the near term. Single-family housing starts declined
significantly over August and September. Nonetheless,
with single-family home sales continuing to sag, inventories of unsold homes remained quite elevated. In the
multifamily sector, starts declined sharply in September;
however, the third-quarter reading remained within the
fairly narrow range observed over the past decade.
Orders and shipments of nondefense capital goods
excluding aircraft rose on average over August and
September. In the high-tech category, orders and
shipments of computers and peripherals posted robust
gains over the same period. Shipments of communication equipment also rose in August and September, but
orders were little changed on balance over the same
period. Outside the technology sector, shipments of
nondefense capital goods excluding aircraft increased at
a solid rate over August and September but orders declined in August and were flat in September. Sales of
medium and heavy trucks leveled off in the third quarter after a sharp drop in the first half of the year. Domestic outlays for aircraft likely stepped down somewhat in the third quarter. Nonresidential building activity remained vigorous through August after having
posted very strong gains in the second quarter; anecdotal evidence through early October indicated that the
recent turbulence in commercial credit markets had
done little to slow the pace of commercial construction.
More generally, surveys of business conditions continued to point to further near-term gains in spending,
although reports from business contacts indicated that
some firms had marked down their capital spending
plans.
Data on the book value of business inventories through
August suggested that real nonfarm inventory investment excluding motor vehicles moved down in the
third quarter after having risen at a moderate pace in
the second quarter. The ratio of book-value inventories to sales in the manufacturing and trade sector excluding motor vehicles, which was available through
August, remained well below the elevated values seen
around the turn of the year. Purchasing managers, on
average, viewed the level of their customers’ inventories as about right in September.
The U.S. international trade deficit narrowed in August
as exports increased and imports decreased. Goods
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exports were boosted by a jump in exports of agricultural products and of gold, which more than offset a
decline in exports of other goods. Exports of automotive products fell back sharply after a surge in July.
Exports of capital goods contracted slightly, led by a
drop in aircraft exports. Exports of semiconductors
declined, while exports of computers were about flat.
On the import side, the decline was concentrated in
goods; service imports were flat. Higher imports of oil
and of capital goods, particularly computers and semiconductors, were more than offset by lower imports of
automotive products, consumer goods, and industrial
supplies excluding oil.
Indicators of economic activity in the third quarter for
advanced foreign economies were solid on balance. In
the euro area, production and sales picked up in the
third quarter from their second-quarter levels. However, recent survey data, including the purchasing managers’ index for the service sector in the euro area,
pointed to a possible slowing in the pace of growth.
Likewise, notwithstanding a strong preliminary estimate
of third-quarter GDP growth in the United Kingdom,
more recent surveys pointed to some softening. Recent Canadian data were mixed, with relatively strong
employment growth and some weakness in retail sales.
In contrast, Japan’s retail sales and exports rebounded
in August, and the October Tankan survey seemed to
suggest that the second quarter’s sharp contraction in
investment was temporary.
In emerging-market economies, recent information,
mostly through August, gave no signs that the turmoil
in financial markets was having a significant negative
effect on real economic activity. In emerging Asia, activity appeared to have remained robust, although
growth slowed from its elevated second-quarter pace.
Economic indicators for Mexico pointed to moderate
growth in the third quarter. In South America, activity
was strong, boosted by high prices for commodities
and, in Argentina and Venezuela, by expansionary macroeconomic policies. Food prices continued to be a
major source of inflationary pressures in emergingmarket economies, and Chinese authorities took several
steps aimed at quelling rising prices.
After having risen rapidly in the first half of the year,
headline consumer prices decelerated considerably over
the summer, largely because of a fall in energy prices.
Over September and October, gasoline prices appeared
to have risen only moderately despite a jump in crude
oil costs. Consumer food prices posted further sizable
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Federal Open Market Committee
increases in August and September and continued to
run well above the change in core prices. Core consumer price inflation remained moderate in August and
September and, on a twelve-month change basis, was
down noticeably from a year earlier. Core goods prices
fell over the year ending in September after having
risen little over the preceding year; noticeable decelerations occurred in the prices of apparel, prescription
drugs, and motor vehicles. In addition, increases in
owners’ equivalent rent slowed noticeably, while rent
inflation remained about the same as a year earlier. The
producer price index for core intermediate materials
edged up in September. The twelve-month change in
that index stepped down considerably from last year, in
part because of softer prices for a variety of energyintensive and construction-related items. Household
surveys indicated that median year-ahead inflation expectations inched down in September and October to
about the level observed in the first quarter, and
longer-term inflation expectations slipped to their lowest level in two years. Average hourly earnings posted a
moderate increase over the twelve months ending in
September.
At its September meeting, the FOMC lowered its target
for the federal funds rate 50 basis points, to 4¾ percent. The Board of Governors also approved a 50 basis point decrease in the discount rate, to 5¼ percent,
leaving the gap between the federal funds rate target
and the discount rate at 50 basis points. The Committee’s statement noted that, while economic growth had
been moderate during the first half of the year, the
tightening of credit conditions had the potential to intensify the housing correction and to restrain economic
growth more generally. The Committee indicated that
its action was intended to help forestall some of the
adverse effects on the broader economy that could
otherwise arise from the disruptions in financial markets and to promote moderate growth over time.
Readings on core inflation had improved modestly during the year, but the Committee judged that some inflation risks remained, and the Committee planned to
continue to monitor inflation developments carefully.
The Committee further noted that developments in
financial markets since the last regular FOMC meeting
had increased the uncertainty surrounding the economic outlook. Accordingly, the Committee would
continue to assess the effects of these and other developments on economic prospects and remained ready to
act as needed to foster price stability and sustainable
economic growth.
The expected path for monetary policy as inferred from
futures markets declined in the wake of the September
policy action, as many investors were surprised by the
magnitude of the reduction in the target rate. Over the
intermeeting period, many investors came to expect
that the Committee would reduce the target federal
funds rate at its October meeting; in addition, the anticipated policy path further ahead moved down a bit
more, on net, over the remainder of the intermeeting
period, apparently in response to heightened concerns
among investors about economic growth.
Early in the intermeeting period, the functioning of
short-term funding markets improved somewhat, but
conditions in these markets remained strained. The
effective federal funds rate was very close to the target,
on average, but the average absolute daily deviation of
the effective rate from the target and the intraday standard deviation remained elevated. Credit spreads declined in the commercial paper and term interbank
funding markets but stayed well above longer-term
norms. Liquidity in the Treasury bill market was poor
at times. Corporate bond spreads narrowed somewhat,
leaving private yields a little lower. Nonfinancial bond
issuance was robust; speculative-grade offerings increased markedly. The credit quality of most households remained strong, but delinquency rates on subprime mortgages climbed further. Securitization of
nonconforming mortgages remained limited, and
spreads on jumbo mortgages relative to conforming
mortgages stayed high. Two-year Treasury yields declined roughly in line with the lower expected policy
path, while yields on ten-year Treasuries were little
changed, on net. TIPS-based inflation compensation
was about unchanged on balance over the intermeeting
period despite a sharp rise in spot oil prices. Stock
prices jumped early in the intermeeting period in response to the cut in the target federal funds rate and
some favorable economic news but later dropped back,
leaving broad indexes up only a bit on net. The foreign
exchange value of the dollar against other major currencies declined notably.
Debt of the domestic nonfinancial sectors was estimated to have expanded slightly more quickly in the
third quarter than in the previous quarter. Despite evidence that bank lending standards and terms had tightened over the previous three months, business debt
was still rising strongly, reflecting a continued surge in
commercial and industrial (C&I) lending by banks and
robust issuance of investment-grade bonds. The expansion of business loans was apparently due in part to
Minutes of the Meeting of October 30-31, 2007
financings for leveraged buyouts that underwriters
could not syndicate to institutional investors. Household mortgage borrowing was estimated to have decelerated again in the third quarter. M2 increased significantly more slowly in September and October than the
rapid pace observed in August, when the financial market turmoil apparently drove investors to the safety of
M2 assets. Inflows to retail money market funds and
small time deposits were especially strong in September
and October; small time deposits were apparently
boosted by the attractive rates that banks were offering
in order to help fund their expanding loan portfolios.
In the forecast prepared for this meeting, which was
formulated prior to the release of the advance estimates
of the third-quarter national income and product accounts, the staff revised up its estimate of aggregate
economic activity in the third quarter from its forecast
presented at the September meeting in light of available
indicators that suggested that consumer spending,
business investment, and exports were stronger than
previously expected. Nonetheless, the staff expected
real GDP growth to be considerably slower in the
fourth quarter, reflecting steepening declines in residential construction, reductions in the pace of motor vehicle production, and a smaller contribution from net
exports. Looking forward, the staff expected residential investment to remain weak in 2008 with modest
declines in house prices. In addition, the staff continued to expect the stress in credit markets and the appreciably higher oil prices indicated by futures markets
to restrain spending by businesses and consumers, although the lower foreign exchange value of the dollar
suggested some boost to net exports. On balance, real
GDP growth for 2008 was projected to slow to a pace
a bit below that of its potential, and unemployment was
expected to creep up slightly. For 2009, the forecast
called for real output growth to step up to a pace
slightly above potential as the drags on economic activity exerted by the contraction in residential investment
and financial strains were expected to abate. The staff’s
forecast for core PCE inflation was little changed from
that presented at the September meeting because favorable incoming figures on core PCE inflation were
offset by expectations for some limited feed-through
into retail prices of recent increases in energy prices
and for slightly less easing in resource utilization. The
forecast for headline inflation was in the same range as
that for core inflation in 2008 and 2009, reflecting expectations that energy prices would level off and then
turn down and that increases in food prices would slow
to a pace more in line with core inflation.
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The advance data on the national income and product
accounts for the third quarter, which were released on
the morning of the second day of the FOMC meeting,
indicated a stronger increase in real GDP than the staff
had forecast, mostly because inventory investment was
estimated to be higher than projected by the staff. The
staff interpreted this information as suggesting some
upward revision to its estimate of output growth in the
third quarter, a small downward revision to its forecast
of growth in the current quarter, and no significant
change to its forecast for coming quarters.
In conjunction with the FOMC meeting in October, all
meeting participants (Federal Reserve Board members
and Reserve Bank presidents) provided annual projections for economic growth, unemployment, and inflation for the period 2007 through 2010. The projections are described in the Summary of Economic Projections,
which is attached as an addendum to these minutes.
In their discussion of the economic outlook and situation, and in the projections that they had submitted for
this meeting, participants noted that economic activity
had expanded at a somewhat faster pace in the third
quarter than previously anticipated and that there was
scant evidence of negative spillovers from the ongoing
housing correction to other sectors of the economy.
Conditions in financial markets had improved since the
September FOMC meeting, but functioning in a number of markets remained strained. Even with some
further easing of monetary policy, participants expected
economic growth to slow over the next few quarters,
reflecting continued sharp declines in the housing sector and tighter lending standards and terms across a
broad range of credit products. The slowing of growth
was likely to produce a modest increase in the unemployment rate from its recent levels, leading to the
emergence of a little slack in labor markets. Looking
further ahead, participants noted that economic growth
should increase gradually to around its trend rate by
2009 as weakness in the housing sector abated and
stresses in financial markets subsided. With aggregate
demand showing somewhat greater than expected
strength in the third quarter and little evidence of significant spillovers from the housing sector to other
components of spending, participants viewed the
downside risks to growth as somewhat smaller than at
the time of the September meeting, but those risks
were still seen as significant. Participants generally expected that inflation would edge down over the next
few years, a projection consistent with the recent string
of encouraging releases on core consumer prices, fu-
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Federal Open Market Committee
tures prices pointing to a flattening of energy costs, and
the anticipated easing of pressures on resources.
Nonetheless, some upside risks to inflation remained,
reflecting in part the potential feed-through to inflation
expectations of increases in energy and import prices.
Financial market functioning was judged to have improved somewhat since the previous FOMC meeting,
but the situation in a number of markets remained
strained, and credit market conditions were thought
likely to weigh on economic growth over coming quarters. In light of some improvement in the commercial
paper and leveraged loan markets over the intermeeting
period, participants were somewhat less concerned that
banks would not have sufficient balance-sheet capacity
to absorb large volumes of assets. Conditions in corporate credit markets also had improved in recent
weeks, and most businesses were apparently having
little difficulty raising external funds, as evidenced by
strong issuance of investment-grade corporate bonds, a
pickup in speculative-grade issuance, and surging C&I
loans. Markets for nonconforming mortgages, by contrast, remained disrupted. Meeting participants also
mentioned that while financial market conditions had
improved, the functioning of some markets remained
somewhat impaired. Indeed, several participants noted
some relapse in financial conditions late in the intermeeting period. Moreover, unusual pressures in funding markets persisted. Participants generally viewed
financial markets as still fragile and were concerned that
an adverse shock—such as a sharp deterioration in
credit quality or disclosure of unusually large and unanticipated losses—could further dent investor confidence and significantly increase the downside risks to
the economy. Participants were also concerned about a
potential scenario in which unexpected economic
weakness could cause a further tightening of credit
conditions that could in turn reinforce weakness in aggregate demand.
In their discussion of individual sectors of the economy, participants noted that the recent declines in
housing activity—while substantial—had largely been
anticipated. Nonetheless, the potential for significant
further weakening in housing activity and home prices
represented a downside risk to the economic outlook.
Most participants pointed to the deterioration in nonprime mortgage markets as well as higher interest rates
and tighter credit standards for prime nonconforming
mortgages as factors that had exacerbated the deterioration in housing markets, and they noted that these
developments could further limit the availability of
mortgage credit and depress the demand for housing.
Some participants also pointed to downside risks to the
housing market stemming from the large volume of
substantial upward interest-rate resets that were likely
on subprime mortgages in coming quarters, which
could lead to a faster pace of foreclosures in the near
term, thereby intensifying the downward pressure on
house prices.
Participants generally agreed that the available data
suggested that consumer spending had been well maintained over the past several months and that spillovers
from the strains in the housing market had apparently
been quite limited to date. Nevertheless, a number of
participants cited notable declines in survey measures
of consumer confidence since the onset of financial
turbulence in mid-summer, along with sharply higher
oil prices, declines in house prices, and tighter underwriting standards for home equity loans and some types
of consumer loans, as factors likely to restrain consumer spending going forward. Moreover, anecdotal
reports by business contacts suggested a softening in
retail sales in some regions of the country. Participants
expressed a concern that larger-than-expected declines
in house prices could further sap consumer confidence
as well as net worth, causing a pullback in consumer
spending. All told, however, participants envisioned
that the most likely scenario was for consumer spending to continue to advance at a moderate rate in coming quarters, supported by the generally strong labor
market and further gains in real personal income.
Meeting participants noted that capital expenditures
had grown at a solid pace in recent months and that the
financial turmoil generally appeared to have had a limited effect on business capital spending plans to date.
Nevertheless, business sentiment appeared to have
eroded somewhat amid heightened economic and financial uncertainty, potentially restraining investment
outlays in some industries. However, participants
noted that conditions in corporate bond markets had
improved since the September FOMC meeting, and
that credit availability generally appeared to be ample,
albeit on somewhat tighter terms. Participants judged
that moderate growth of investment outlays going forward was the most likely outcome. A number of participants saw downside risk to the outlook for nonresidential building activity, reflecting elevated spreads on
commercial-mortgage-backed securities and a further
tightening of banks’ lending standards for commercial
real estate loans.
Minutes of the Meeting of October 30-31, 2007
Data on economic growth outside the United States
indicated that the global expansion, though likely to
slow somewhat in coming quarters, was nevertheless
on a firm footing. The continued strength of global
growth and the recent decline in the foreign exchange
value of the dollar were seen as likely to support U.S.
exports going forward.
Readings on core inflation received during the intermeeting period continued to be generally favorable, and
meeting participants agreed that the recent moderation
in core inflation would likely be sustained. The slower
pace of economic expansion anticipated for the next
few quarters would help ease inflationary pressures.
Nonetheless, participants expressed concern about the
upside risks to the outlook for inflation. The recent
increases in the prices of energy and other commodities, along with the significant decline in the foreign
exchange value of the dollar, were cited as factors that
could exert upward pressure on prices of some core
goods and services in the near term. Increases in unit
labor costs also could add to inflationary pressures.
Moreover, participants expressed concern that some
measures of inflation compensation calculated from
TIPS securities had risen this year, although they
viewed inflation expectations generally as remaining
contained. Participants were concerned that if headline
inflation remained above core measures for a sustained
period, then longer-term inflation expectations could
move higher, a development that could lead to greater
inflation pressures over the longer term and be costly
to reverse.
In the Committee’s discussion of policy for the intermeeting period, members discussed the relative merits
of lowering the target federal funds rate 25 basis points,
to 4½ percent, at this meeting or awaiting additional
information on prospects for economic activity and
inflation before assessing whether a further adjustment
in the stance of monetary policy was necessary. Many
members noted that this policy decision was a close
call. However, on balance, nearly all members supported a 25 basis point reduction in the target federal
funds rate. The stance of monetary policy appeared
still to be somewhat restrictive, partly because of the
effects of tighter credit conditions on aggregate demand. Moreover, most members saw substantial
downside risks to the economic outlook and judged
that a rate reduction at this meeting would provide
valuable additional insurance against an unexpectedly
severe weakening in economic activity. Many members
were concerned about the still-sensitive state of finan-
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cial markets and thought that an easing of policy would
help to support improvements in market functioning,
thereby mitigating some of the downside risks to economic growth. With real GDP likely to expand below
its potential over coming quarters, recent price trends
favorable, and inflation expectations appearing reasonably well anchored, the easing of policy at this meeting seemed unlikely to affect adversely the outlook for
inflation. A number of members noted that the recent
policy moves could readily be reversed if circumstances
evolved in a manner that would warrant such action.
The Committee agreed that the statement to be released at this meeting should indicate that economic
growth was solid in the third quarter and that strains in
financial markets had eased somewhat on balance.
Members also agreed that economic growth seemed
likely to slow over coming quarters, but that the easing
action taken at the meeting—combined with the 50
basis point cut in the target federal funds rate at the
September meeting—should help to promote moderate
growth over time, although some downside risks to
growth would remain. Members felt that it was appropriate to underscore the upside risks to inflation stemming from the recent increases in the prices of energy
and other commodities, even though recent readings
on core inflation had been favorable. While the Committee saw uncertainty regarding the economic outlook
as still elevated, it judged that, after this action, the upside risks to inflation roughly balanced the downside
risks to growth.
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 in the
immediate future seeks conditions in reserve markets
consistent with reducing the federal funds rate to an
average of around 4½ percent.”
The vote encompassed approval of the statement below to be released at 2:15 p.m.:
“The Federal Open Market Committee decided today
to lower its target for the Federal funds rate 25 basis
points to 4½ percent.
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Federal Open Market Committee
Economic growth was solid in the third quarter, and
strains in financial markets have eased somewhat on
balance. However, the pace of economic expansion
will likely slow in the near term, partly reflecting the
intensification of the housing correction. Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise
arise from the disruptions in financial markets and
promote moderate growth over time.
Readings on core inflation have improved modestly
this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the
Committee judges that some inflation risks remain,
and it will continue to monitor inflation developments carefully.
The Committee judges that, after this action, the upside risks to inflation roughly balance the downside
risks to growth. The Committee will continue to assess the effects of financial and other developments
on economic prospects and will act as needed to foster price stability and sustainable economic growth.”
Votes for this action: Messrs. Bernanke, Geithner, Evans, Kohn, Kroszner, Mishkin, Poole,
Rosengren, and Warsh.
The Committee then resumed its discussion of an enhanced role for the economic projections that are made
periodically by the members of the Board of Governors and the Reserve Bank presidents. At this meeting,
participants reached a consensus on increasing the frequency and expanding the content of the projections
that in the past have been released to the public in
summary form twice a year. They agreed to publish
with the minutes a summary of participants’ economic
projections made for this meeting and to release a press
statement describing the plan for the future. The release of more frequent forecasts covering longer time
spans and accompanied by explanations of those forecasts was seen as providing the public with more context for understanding the Committee’s monetary policy decisions.
It was agreed that the next meeting of the Committee
would be held on Tuesday, December 11, 2007.
The meeting adjourned at 12:00 noon.
Notation Vote
By notation vote completed on October 5, 2007, the
Committee unanimously approved the minutes of the
FOMC meeting held on September 18, 2007 and of the
conference calls on August 10, 2007 and August 16,
2007.
Votes against this action: Mr. Hoenig.
Mr. Hoenig dissented because he believed that policy
should remain unchanged at this meeting. Projections
for the U.S. and global economies suggested that
growth was likely to proceed at a reasonable pace over
the outlook period. To better assure that outcome, the
FOMC had moved rates down significantly at its September meeting. At this meeting, inflation risks appeared elevated and Mr. Hoenig felt that the target federal funds rate was currently close to neutral. In these
circumstances, he judged that policy needed to be
slightly firm to better hold inflation in check. Going
forward, if the data suggested the Committee needed to
ease further, it could do so. He also recognized that
liquidity remains a near-term challenge and that the
Federal Reserve would be prepared to act if needed.
Mr. Hoenig saw the risks to both economic growth and
inflation to be elevated and preferred to wait, watch,
and be ready to act depending on how events developed.
_____________________________
Brian F. Madigan
Secretary
Summary of Economic Projections for the Meeting of October 30-31, 2007
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Summary of Economic Projections
In conjunction with the October 2007 FOMC meeting,
the members of the Board of Governors and the presidents of the Federal Reserve Banks, all of whom participate in the deliberations of the FOMC, provided
projections for economic growth, unemployment, and
inflation in 2007, 2008, 2009, and 2010. Projections
were based on information available through the conclusion of the October meeting, on each participant’s
assumptions regarding a range of factors likely to affect
economic outcomes, and his or her assessment of appropriate monetary policy. “Appropriate monetary
policy” is defined as the future policy most likely to
foster outcomes for economic activity and inflation
that best satisfy the participant’s interpretation of the
Federal Reserve’s dual objectives of maximum employment and price stability.
The projections, which are summarized in table 1 and
chart 1, suggest that FOMC participants expected that,
in the near term, output will grow at a pace somewhat
below its trend rate and the unemployment rate will
edge higher, owing primarily to weakness in housing
markets and to the tightening in the availability of
credit resulting from recent strains in financial markets.
Further ahead, output was projected to expand at a
pace close to its long-run trend. Total inflation was
expected to be lower in 2008 than in 2007, and then to
edge down further in subsequent years.
The Outlook
Data available at the time of the October FOMC meeting indicated that economic growth had been solid during the second and third quarters, and evidence that the
contraction in the housing sector had begun to spill
over substantially to other sectors of the economy remained scant. Consequently, despite the recent financial market turmoil, the central tendency of participants’ projections for real GDP growth in 2007, at 2.4
to 2.5 percent, was little changed from the central tendency of the projections provided in conjunction with
the June FOMC meeting and included in the Board’s
Monetary Policy Report to the Congress in July. However,
the central tendency of participants’ projections for real
GDP growth in 2008 was revised down to 1.8 to 2.5
percent, notably below the 2½ to 2¾ percent central
tendency in June. These revisions to the 2008 outlook
since June stemmed from a number of factors, including the tightened terms and reduced availability of subprime and jumbo mortgages, weaker-than-expected
housing data, and rising oil prices. Partly in response to
declining housing wealth, the personal saving rate was
expected to rise over the next few years, contributing to
restraint on the growth of personal consumption expenditures. However, net exports were expected to
provide some support to growth. The subpar economic growth projected in the near term was not anticipated to persist. Growth was expected to pick up as
the adjustment in housing markets ran its course, financial markets gradually resumed more-normal functioning, and as the monetary policy easing at the September and October FOMC meetings provided support to aggregate demand. Economic activity was projected to expand at a pace broadly in line with participants’ estimates of the rate of expansion of the economy’s productive potential in 2009 and to continue at
much the same pace in 2010. Participants read last
summer’s benchmark revisions to the national income
and product accounts as suggesting a somewhat slower
rate of trend growth than previously thought.
Most participants expected that, with output growth
running somewhat below trend over the next year or
so, the unemployment rate would increase modestly.
The central tendency of participants’ projections for
the average rate of unemployment in the fourth quarter
of 2008 was 4.8 to 4.9 percent, slightly above the
4¾ percent unemployment rate forecasted in June;
these projections suggested the emergence of a little
slack in labor markets. The central tendency of participants’ projections was for the unemployment rate to
stabilize in 2009 and to fall back a bit in 2010 as output
and employment growth pick up.
Overall inflation was expected to edge down over the
next few years, fostered by an assumed flattening of
energy prices about in line with futures markets quotes,
a modest easing of pressures on resource utilization,
and fairly well anchored inflation expectations. Participants’ projections for core inflation this year and next
were marked down from those provided at the time of
the June FOMC meeting, partly in light of recent generally favorable core inflation data that pointed to some
reduction in underlying inflation pressures. The central
tendency of projections for core PCE inflation in 2007
was 1.8 to 1.9 percent, down from 2 to 2¼ percent in
June. The central tendency of core inflation projections for 2008 was 1.7 to 1.9 percent. Participants’ projections for PCE inflation in 2009 and 2010 were importantly influenced by their judgments about the
measured rates of inflation consistent with the Federal
Page 10
Federal Open Market Committee
Reserve’s dual mandate to promote maximum employment and price stability and about the time frame
over which policy should aim to attain those rates given
current economic conditions. The central tendency of
participants’ projections for both core and total inflation in 2010 ranged from 1.6 to 1.9 percent.
Table 1: Economic Projections of Federal Reserve Governors and Reserve
Bank Presidents1
2007
2008
2009
2010
2.4 to 2.5
2¼ to 2½
1.8 to 2.5
2½ to 2¾
2.3 to 2.7
2.5 to 2.6
Unemployment Rate
June Projections
4.7 to 4.8
4½ to 4¾
4.8 to 4.9
about 4¾
4.8 to 4.9
4.7 to 4.9
PCE Inflation
2.9 to 3.0
1.8 to 2.1
1.7 to 2.0
1.6 to 1.9
Core PCE Inflation
June Projections
1.8 to 1.9
2 to 2¼
1.7 to 1.9
1¾ to 2
1.7 to 1.9
1.6 to 1.9
Ranges
Real GDP Growth
June Projections
2.2 to 2.7
2 to 2¾
1.6 to 2.6
2½ to 3
2.0 to 2.8
2.2 to 2.7
Unemployment Rate
June Projections
4.7 to 4.8
4½ to 4¾
4.6 to 5.0
4½ to 5
4.6 to 5.0
4.6 to 5.0
PCE Inflation
2.7 to 3.2
1.7 to 2.3
1.5 to 2.2
1.5 to 2.0
Core PCE Inflation
June Projections
1.8 to 2.1
2 to 2¼
1.7 to 2.0
1¾ to 2
1.5 to 2.0
1.5 to 2.0
Central Tendencies
Real GDP Growth
June Projections
1. Projections of real GDP growth, PCE inflation, and core PCE inflation are fourth-quarter-tofourth-quarter growth rates, that is, percentage changes from the fourth quarter of the prior year to
the fourth quarter of the indicated year. PCE inflation and core PCE inflation are the percentage
rates of change in the price index for personal consumption expenditures and the price index for
personal consumption expenditures excluding food and energy, respectively. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of each year.
Each participant's projections are based on his or her assessment of appropriate monetary policy.
The range for each variable in a given year includes all participants' projections, from lowest to highest, for that variable in the given year; the central tendencies exclude the three highest and three
lowest projections for each variable in each year.
Summary of Economic Projections for the Meeting of October 30-31, 2007
Page 11
Chart 1: Central Tendencies and Ranges of Economic Projections*
Real GDP Growth
Percent
6
Central Tendency of Projections
Range of Projections
•
•
2002
•
7
5
4
•
3
•
2
1
2003
2004
2005
2006
2007
2008
2009
Unemployment Rate
2010
Percent
0
8
7
•
2002
•
2003
•
2004
6
•
2005
5
•
2006
4
2007
2008
2009
PCE Inflation
2010
Percent
3
5
4
•
•
•
•
3
•
2
1
2002
2003
2004
2005
2006
2007
2008
2009
Core PCE Inflation
2010
0
Percent
5
4
•
•
2002
2003
•
•
3
•
2
1
2004
* See notes to Table 1 for variable definitions.
2005
2006
2007
2008
2009
2010
0
Page 12
Federal Open Market Committee
Risks to the Outlook
Most participants viewed the risks to their GDP projections as weighted to the downside and the associated
risks to their projections of unemployment as tilted to
the upside. Financial market conditions had deteriorated sharply in August, and although there had been
some signs of improvement since then, markets remained strained. The possibilities that markets could
relapse or that current tighter credit conditions could
exert unexpectedly large restraint on household and
business spending were viewed as downside risks to
economic activity. Participants were concerned about
the possibility for adverse feedbacks in which economic
weakness could lead to further tightening in credit conditions, which could in turn slow the economy further.
The potential for a more severe contraction in the
housing sector and a substantial decline in house prices
was also perceived as a risk to the central outlook for
economic growth. But participants also noted that in
recent decades, the U.S. economy had proved quite
resilient to episodes of financial distress, suggesting
that the adverse effects of financial developments on
economic activity outside of the housing sector could
prove to be more modest than anticipated.
Participants were more persuaded than they had been
in June that the decline in core inflation readings this
year represented a sustained albeit modest step-down
rather than the effect of transitory influences. Nonetheless, participants saw some upside risks to their inflation projections. Recent increases in energy and
commodity prices and the pass-through of dollar depreciation into import prices would raise inflation over
the medium term. That increase could lead to an upward drift in inflation expectations that would add to
price pressures and could be costly to reverse.
The possibility that financial market turbulence could
have larger-than-anticipated adverse effects on household and business spending heightened participants’
uncertainty about the outlook for economic activity.
Most participants judged that the uncertainty attending
their October projections for real GDP growth was
above typical levels seen in the past. (Table 2 provides
an estimate of average ranges of forecast uncertainty
for GDP growth, unemployment, and inflation over
the past twenty years. 1 ) In contrast, the uncertainty
The box “Forecast Uncertainty” at the end of this summary discusses the sources and interpretation of uncertainty in economic
forecasts and explains the approach used to assess the uncertainty
and risks attending participants’ projections.
1
attached to participants’ inflation projections was generally viewed as being broadly in line with past experience, although several participants judged that the degree of uncertainty about total inflation was higher than
usual, reflecting the possibility that the recent volatility
in food and energy prices might persist.
Table 2: Average Historical Projection Error
Ranges1
Real GDP2
Unemployment
rate3
Total consumer
prices2
2007
2008
2009
2010
±0.6
±1.3
±1.4
±1.4
±0.2
±0.6
±0.9
±1.1
±0.3
±1.0
±1.0
±1.0
1. “Average historical projection error ranges” for the
years 2007 through 2010 are measured as plus or minus the
root mean squared error of projections that were released in
the autumn from 1986 through 2006 for the current and
following three years by various private and government
forecasters. As described in the forecast uncertainty box,
under certain assumptions, there is about a 70 percent probability that actual outcomes for real activity, unemployment,
and inflation will fall in ranges implied by the average size of
projection errors made in the past. For further information,
see David Reifschneider and Peter Tulip, “Gauging the
Uncertainty of the Economic Outlook from Historical
Forecast Errors,” Federal Reserve Board Financial and Economics Discussion Series #2007-60 (November 2007).
2. Overall consumer price index, as this is the price measure that has been most widely used in government and private economic forecasts. Percent change, fourth quarter of
year relative to fourth quarter of preceding year.
3. Percent, fourth-quarter average.
Summary of Economic Projections for the Meeting of October 30-31, 2007
Diversity of Participants’ Views
Charts 2(a) and 2(b) provide more detail on the diversity of participants’ views. The dispersion of participants’ projections for real GDP growth in 2008 was
markedly wider than in June. The dispersion of participants’ projections for growth next year seemed
largely to reflect differing assessments of the likely
depth and duration of the correction in the housing
market, the effect of financial market disruptions on
real activity outside of the housing sector, and the
speed with which financial markets will return to more
normal functioning. The dispersion of participants’
projections for the rate of unemployment over the next
year or so had changed little. Participants’ longer-term
projections for real GDP growth and for the rate of
Page 13
unemployment were more heavily influenced by their
views about, respectively, the economy’s trend growth
rate and the unemployment rate that would be consistent over time with maximum employment. The dispersion of the projections for PCE inflation in the near
term partly reflected different weights attached to the
various factors expected to foster a moderation of inflation. Some participants judged that the anticipated
modest easing in resource pressures was unlikely to
have a marked effect on inflation. Similarly, views differed about the influence that inflation expectations
would exert on inflation over the short and medium
run. Participants’ projections further out were also
influenced by their views about the rate of inflation
consistent with the Federal Reserve’s dual mandate.
Page 14
Federal Open Market Committee
Chart 2(a): Distribution of Participants’ Projections (percent)*
2007
Real GDP
2007
Unemployment Rate
Number of Participants
October Projections
June Projections
Number of Participants
16
October Projections
June Projections
12
16
12
8
8
4
4
0
1.6-1.7 1.8-1.9 2.0-2.1 2.2-2.3 2.4-2.5 2.6-2.7 2.8-2.9 3.0-3.1
0
4.4-4.5
2008
4.6-4.7
4.8-4.9
5.0-5.1
5.2-5.3
2008
Number of Participants
Number of Participants
16
16
12
12
8
8
4
4
0
1.6-1.7 1.8-1.9 2.0-2.1 2.2-2.3 2.4-2.5 2.6-2.7 2.8-2.9 3.0-3.1
0
4.4-4.5
2009
4.6-4.7
4.8-4.9
5.0-5.1
5.2-5.3
2009
Number of Participants
Number of Participants
16
16
12
12
8
8
4
4
0
1.6-1.7 1.8-1.9 2.0-2.1 2.2-2.3 2.4-2.5 2.6-2.7 2.8-2.9 3.0-3.1
0
4.4-4.5
2010
4.6-4.7
4.8-4.9
5.0-5.1
5.2-5.3
2010
Number of Participants
Number of Participants
16
16
12
12
8
8
4
4
0
1.6-1.7 1.8-1.9 2.0-2.1 2.2-2.3 2.4-2.5 2.6-2.7 2.8-2.9 3.0-3.1
0
4.4-4.5
4.6-4.7
4.8-4.9
5.0-5.1
5.2-5.3
* See notes to Table 1 for variable definitions. Those participants’ June projections that were provided in quarter points have been rounded to the nearest tenth
for the construction of these histograms.
Summary of Economic Projections for the Meeting of October 30-31, 2007
Page 15
Chart 2(b): Distribution of Participants’ Projections (percent)*
PCE Inflation
2007
2007
Core PCE Inflation
Number of Participants
Number of Participants
16
October Projections
12
16
October Projections
June Projections
12
8
8
4
4
0
1.51.6
1.71.8
1.92.0
2.12.2
2.32.4
2.52.6
2.72.8
2.93.0
3.13.2
0
1.3-1.4
2008
1.5-1.6
1.7-1.8
1.9-2.0
2.1-2.2
2.3-2.4
2008
Number of Participants
Number of Participants
16
16
12
12
8
8
4
4
0
1.51.6
1.71.8
1.92.0
2.12.2
2.32.4
2.52.6
2.72.8
2.93.0
3.13.2
0
1.3-1.4
2009
1.5-1.6
1.7-1.8
1.9-2.0
2.1-2.2
2.3-2.4
2009
Number of Participants
Number of Participants
16
16
12
12
8
8
4
4
0
1.51.6
1.71.8
1.92.0
2.12.2
2.32.4
2.52.6
2.72.8
2.93.0
3.13.2
0
1.3-1.4
2010
1.5-1.6
1.7-1.8
1.9-2.0
2.1-2.2
2.3-2.4
2010
Number of Participants
Number of Participants
16
16
12
12
8
8
4
4
0
1.51.6
1.71.8
1.92.0
2.12.2
2.32.4
2.52.6
2.72.8
2.93.0
3.13.2
0
1.3-1.4
1.5-1.6
1.7-1.8
1.9-2.0
2.1-2.2
2.3-2.4
* See notes to Table 1 for variable definitions. Those participants’ June projections that were provided in quarter points have been rounded to the nearest tenth
for the construction of these histograms.
Page 16
Federal Open Market Committee
Forecast Uncertainty
The economic projections provided by the members of the Board of Governors and the
presidents of the Federal Reserve Banks help shape monetary policy and can aid public
understanding of the basis for policy actions. Considerable uncertainty attends these
projections, however. The economic and statistical models and relationships used to
help produce economic forecasts are necessarily imperfect descriptions of the real world.
And the future path of the economy can be affected by myriad unforeseen developments and events. Thus, in setting the stance of monetary policy, participants consider
not only what appears to be the most likely economic outcome as embodied in their
projections, but also the range of alternative possibilities, the likelihood of their occurring, and the potential costs to the economy should they occur.
Table 2 summarizes the average historical accuracy of a range of forecasts, including
those reported in past Monetary Policy Reports and those prepared by Federal Reserve
Board staff in advance of meetings of the Federal Open Market Committee. The projection error ranges shown in the table illustrate the considerable uncertainty associated
with economic forecasts. For example, suppose a participant projects that real GDP
and total consumer prices will rise steadily at annual rates of, respectively, 3 percent and
2 percent. If the uncertainty attending those projections is similar to that experienced in
the past and the risks around the projections are broadly balanced, the numbers reported
in table 2 might imply a probability of about 70 percent that actual GDP would expand
2.4 percent to 3.6 percent in the current year, 1.7 percent to 4.3 percent next year, and
1.6 percent to 4.4 percent in the third and fourth years. The corresponding 70 percent
confidence intervals for overall inflation would be 1.7 percent to 2.3 percent in the current year and 1.0 percent to 3.0 percent in the second, third, and fourth years.
Because current conditions may differ from those that prevailed on average over history,
participants provide judgments as to whether the uncertainty attached to their projections of each variable is greater than, smaller than, or broadly similar to typical levels of
forecast uncertainty in the past as shown in table 2. Participants also provide judgments
as to whether the risks to their projections are weighted to the upside, downside, or are
broadly balanced. That is, participants judge whether each variable is more likely to be
above or below their projections of the most likely outcome. These judgments about
the uncertainty and the risks attending each participant’s projections are distinct from
the diversity of participants’ views about the most likely outcomes. Forecast uncertainty
is concerned with the risks associated with a particular projection, rather than with divergences across a number of different projections.
Cite this document
Federal Reserve (2007, October 30). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_20071031
@misc{wtfs_fomc_minutes_20071031,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {2007},
month = {Oct},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_20071031},
note = {Retrieved via When the Fed Speaks corpus}
}