FOMC Minutes

Minutes of the Federal Open Market Committee

December 11, 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, December 11, 2007, at 8:00 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,

Sellon, 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

Ms. Liang and Mr. Wascher, Associate Directors,

Division of Research and Statistics, Board of

Governors

Mr. Blanchard, Assistant to the Board, Office of

Board Members, Board of Governors

Mr. Meyer, Visiting Reserve Bank Officer, Division

of Monetary Affairs, Board of Governors

Mr. Small, Project Manager, Division of Monetary

Affairs, Board of Governors

Mr. Luecke, Senior Financial Analyst, Division of

Monetary Affairs, Board of Governors

Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors

Mr. Barron, First Vice President, Federal Reserve

Bank of Atlanta

Mr. Rosenblum, Executive Vice President, Federal

Reserve Bank of Dallas

Mr. Altig, Ms. Perelmuter, Messrs. Rolnick,

Weinberg, and Williams, Senior Vice

Presidents, Federal Reserve Banks of Atlanta,

New York, Minneapolis, Richmond, and San

Francisco, respectively

Messrs. Bryan and Yi, Vice Presidents, Federal

Reserve Banks of Cleveland and Philadelphia,

respectively

Mr. McCarthy, Research Officer, Federal Reserve

Bank of New York

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 Committee approved a foreign currency swap

arrangement with the Swiss National Bank that

paralleled

the arrangement with the European Central Bank

approved during the Committee’s conference call on

December 6, 2007. With Mr. Poole dissenting, the

Committee voted to direct the Federal Reserve Bank

of

New York to establish and maintain a reciprocal

currency (swap) arrangement for the System Open

Market

Account with the Swiss National Bank in an amount

not to exceed $4 billion. The Committee authorized

associated draws of up to the full amount of $4 billion,

and the arrangement itself was authorized for a period

of up to 180 days unless extended by the FOMC. Mr.

Poole dissented because he viewed the swap agreement

as unnecessary in light of the size of the Swiss National

Bank’s dollar-denominated foreign exchange reserves.

The information reviewed at the December meeting

indicated that, after the robust gains of the summer,

economic activity decelerated significantly in the

fourth

quarter. Consumption growth slowed, and survey

measures of sentiment dropped further. Many readings

from the business sector were also softer: Industrial

production fell in October, as did orders and shipments

of capital goods. Employment gains stepped down

during the four months ending in November from

their pace earlier in the year. Headline consumer price

inflation moved higher in September and October as

energy prices increased significantly; core inflation also

rose but remained moderate.

The slowing in private employment gains was due in

large part to the ongoing weakness in the housing

market. Employment in residential construction

posted its

fourth month of sizable declines in November, and

employment in housing-related sectors such as finance,

real estate, and building-material and garden-supply

retailers continued to trend down. Elsewhere, factory

jobs declined again, while employment in most service

producing industries continued to move up. Aggregate

hours of production or nonsupervisory workers edged

up in October and November. Some indicators from

the household survey also suggested softening in the

labor market, but the unemployment rate held steady at

4.7 percent through November.

Industrial production fell in October after small

increases in the previous two months. The index

for motor vehicles and parts fell for the third

consecutive month, and the index for construction

supplies moved

decelerationdown for the fourth straight month. Materials output

also declined in October, with production likely curbed

by weak demand from the construction and motor

vehicle sectors. Production in high-tech industries,

however, increased modestly, and commercial aircraft

production registered another solid gain. In November,

output appeared to have edged up in manufacturing

sectors (with the exception of the motor vehicles

sector) for which weekly physical product data were

available.

After posting notable gains in the summer, real

consumer spending was nearly flat in September and

October. Spending on goods excluding motor

vehicles was little changed on net over that period.

Spending

on services edged down, reflecting an extraordinarily

large drop in securities commissions in September.

The most recent readings on weekly chain store sales as

well as industry reports and surveys suggested subdued

gains in November and an uneven start to the holiday

shopping season. Sales of light motor vehicles in

November remained close to the pace that had

prevailed since the second quarter. Real disposable

income was

about unchanged in September and October. The

Reuters/University of Michigan index of consumer

sentiment ticked down further in early December as

respondents took a more pessimistic view of the

outlook for their personal finances and for business

conditions in the year ahead.

In the housing market, new home sales were below

their third-quarter pace, and sales of existing homes

were flat in October following sharp declines in August

and September. These declines likely were exacerbated

by the deterioration in nonprime mortgage markets and

by the higher interest rates and tighter lending

conditions for jumbo loans. Single-family housing

starts stepped down again in October after substantial

declines in the June-September period. Yet, because of

sagging sales, builders made only limited progress in

paring down their substantial inventories. Single-family

permit issuance continued along the steep downward

trajectory that had begun two years earlier, which

pointed toward further slowing in homebuilding over

the near term. Multifamily starts rebounded in

October from an unusually low reading in September,

and

the level of multifamily starts was near the midpoint of

the range in which this series had fluctuated over the

past ten years.

Real spending on equipment and software posted a

solid increase in the third quarter. In October,

however, orders and shipments of nondefense capital

goods excluding aircraft declined, suggesting that some

in spending was under way in the fourth

quarter. The October decline in orders and shipments

was led by weakness in the high-tech sector: Shipments

of computers and peripheral equipment declined while

the industrial production index for computers was flat;

orders and shipments for communications equipment

plunged. Some of that weakness may have been

attributable to temporary production disruptions

stemming from the wildfires in Southern California;

cutbacks in

demand from large financial institutions affected by

market turmoil may have contributed as well. In the

transportation equipment category, purchases of

medium and heavy trucks changed little, and orders

data suggested that sales would remain near their

current levels in the coming months. Orders for

equipment outside high-tech and transportation rose

in October,

but shipments were about flat, pointing to a weaker

fourth quarter for business spending after two quarters

of brisk increases. Some prominent surveys of

business conditions remained consistent with modest

gains in spending on equipment and software during

the fourth quarter, but other surveys were less sanguine.

In addition, although the cost of capital was little changed

for borrowers in the investment-grade corporate bond

market, costs for borrowers in the high-yield corporate

bond market were up significantly. In the third quarter,

corporate cash flows appeared to have dropped off,

leaving firms with diminished internally generated

funds for financing investment. Data available through

October suggested that nonresidential building activity

remained vigorous.

Real nonfarm inventory investment excluding motor

vehicles increased slightly faster in the third quarter

than in the second quarter. Outside of motor vehicles,

the ratio of book-value inventories to sales had ticked

up slightly in September but remained near the low end

of its range in recent years. Book-value estimates of

the inventory investment of manufacturers--the only

inventory data available beyond the third quarter-were up in October at about the third-quarter pace.

The U.S. international trade deficit narrowed slightly in

September as an increase in exports more than offset

higher imports. The September gain in exports

primarily reflected higher exports of goods; services

exports recorded moderate growth. Exports of

agricultural products exhibited particularly robust

growth, with

both higher prices and greater volumes. Exports of

industrial supplies and consumer goods also moved up

smartly in September. Automotive products exports, in

constructioncontrast, were flat, and capital goods exports fell, led by

a decline in aircraft. The increase in imports primarily

reflected higher imports of capital goods, with imports

of computers showing particularly strong growth.

Imports of automotive products, consumer goods, and

services also increased. Imports of petroleum,

however, were flat, and imports of industrial supplies

fell.

Output growth in the advanced foreign economies

picked up in the third quarter. In Japan, real output

rebounded, led by exports. In the euro area, GDP

growth returned to a solid pace in the third quarter on

the back of a strong recovery in investment. In Canada

and the United Kingdom, output growth moderated

but remained robust, as vigorous domestic demand was

partly offset by rapid growth of imports. Indicators of

fourth-quarter activity in the advanced foreign

economies were less robust on net. Confidence

indicators had deteriorated in most major economies in

the wake

of the financial turmoil and remained relatively weak.

In November, the euro-area and U.K. purchasing

managers indexes for services were well below their

level over the first half of the year; nevertheless they

pointed to moderate expansion. Labor market conditions

generally remained relatively strong in recent months.

Incoming data on emerging-market economies were

positive on balance. Overall, growth in emerging Asia

moderated somewhat in the third quarter from its

double-digit pace in the second quarter, but remained

strong. Economic growth was also solid in Latin

America, largely reflecting stronger-than-expected

activity in Mexico.

In the United States, headline consumer price inflation

increased in September and October from its low rates

in the summer as the surge in crude oil prices began to

be reflected in retail energy prices. In addition, though

the rise in food prices in October was slower than in

August and September, it remained above that of core

consumer prices. Excluding food and energy, inflation

was moderate, although it was up from its low rates in

the spring. The pickup in core consumer inflation over

this period reflected an acceleration in some prices that

were unusually soft last spring, such as those for

apparel, prescription drugs, and medical services, as well

as nonmarket prices. On a twelve-month-change basis,

core consumer price inflation was down noticeably

from a year earlier. In October, the producer price

index for core intermediate materials moved up only

slightly for a second month, and the twelve-month

increase in these prices was considerably below that of

the year-earlier period. This pattern reflected, in part, a

deceleration in the prices of a wide variety of

materials, such as cement and gypsum, and in the

prices of some metal products. In response to rising

energy prices, household survey measures of

expectations for year-ahead inflation picked up in

November and then edged higher in December.

Households’ longer-term inflation expectations also

dged up in both November and December. Average

hourly

earnings increased faster in November than in the

previous

two months. Over the twelve months that ended in

November, however, this wage measure rose a bit

more

slowly than over the previous twelve months.

At its October meeting, the FOMC lowered its target

for the federal funds rate 25 basis points, to 4½

percent. The Board of Governors also approved a 25

basis point decrease in the discount rate, to 5 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 was solid in the third quarter and strains in

financial

markets had eased somewhat on balance, the pace of

economic expansion would likely slow in the near

term,

partly reflecting the intensification of the housing

correction. The Committee indicated that its 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 should promote

moderate growth over time. Readings on core inflation

had improved modestly during the year, but the

statement noted that recent increases in energy and

commodity prices, among other factors, may put

renewed

upward pressure on inflation. In this context, the

Committee judged that some inflation risks remained

and indicated that it would continue to monitor

inflation developments carefully. The Committee also

judged that, after this action, the upside risks to

inflation roughly balanced the downside risks to

growth.

The Committee said that it would continue to assess

the effects of financial and other developments on

economic prospects and would act as needed to foster

price stability and sustainable economic growth.

The Committee’s action at its October meeting was

largely expected by market participants, although the

assessment that the upside risks to inflation balanced

the downside risks to growth was not fully anticipated

and apparently led investors to revise up slightly the

continued expected path for policy. During the intermeeting

period, the release of the FOMC minutes and associated

summary of economic projections, as well as various

data releases, elicited only modest market reaction. In

contrast, markets were buffeted by concerns about

the potential adverse effects on credit availability and

economic growth of sizable losses at large financial

institutions and of financial market strains in general.

Market participants marked down their expected path

for

policy substantially, and by the time of the December

meeting, investors were virtually certain of a rate cut.

Two-year Treasury yields fell on net over the

intermeeting period by an amount about in line with

revisions to

policy expectations. Ten-year Treasury yields also

declined, but less than shorter-term yields. The

steepening of the yield curve was due mostly to sharply

lower

short- and intermediate-term forward rates, consistent

with investors’ apparently more pessimistic outlook for

economic growth. TIPS yields fell less than their

nominal counterparts, implying modest declines in

inflation compensation both at the five-year and longer

horizons.

After showing some signs of improvement in late

September and October, conditions in financial

markets worsened over the intermeeting period.

Heightened worries about counterparty credit risk,

balance sheet

constraints, and liquidity pressures affected interbank

funding markets and commercial paper markets, where

spreads over risk-free rates rose to levels that were, in

some cases, higher than those seen in August. Strains

in those markets were exacerbated by concerns related

to year-end pressures. In longer-term corporate

markets, both investment- and speculative-grade credit

spreads widened considerably; issuance slowed but

remained strong. In housing finance, subprime mortgage

markets stayed virtually shut, and spreads on jumbo

loans apparently widened further. Spreads on

conforming mortgage products also widened after

reports of losses and reduced capital ratios at the

housing-related government-sponsored enterprises.

Broad-based equity indexes were volatile and ended the

period down noticeably. Financial stocks were especially

hard hit, dropping substantially more than the broad

indexes. Similar stresses were evident in the financial

markets of major foreign economies. The

trade-weighted foreign exchange value of the dollar

against major currencies moved up, on balance, over the

intermeeting period.

Debt in the domestic nonfinancial sector was estimated

to be increasing somewhat more slowly in the fourth

quarter than in the third quarter. Nonfinancial business

debt continued to expand strongly, supported by solid

bond issuance and by a small rebound in the issuance

of commercial paper. Bank loans outstanding also

to rise rapidly. Household mortgage debt

was expected to expand at a reduced rate in the fourth

quarter, reflecting softer home prices and declining

home sales, as well as a tightening in credit conditions

for some borrowers. Nonmortgage consumer credit in

the fourth quarter appeared to be expanding at a

moderate pace. In November, M2 growth picked up

slightly from its October rate. While liquid deposits

continued to grow slowly, heightened demand for

safety and liquidity appeared to boost holdings of retail

money market mutual funds. Small time deposits

continued to expand, likely in part due to high rates

offered by some depository institutions to attract

retail depos

its. Currency outstanding was about flat in November.

In the forecast prepared for this meeting, the staff

revised down its estimate of growth in aggregate

economic activity in the fourth quarter. Although thirdquarter real GDP was revised up sharply, most

available indicators of activity in the fourth quarter

were

more downbeat than had previously been expected.

Faster inventory investment contributed importantly to

the upward revision to third-quarter real GDP, but part

of that upswing was expected to be unwound in the

fourth quarter. The available data for domestic final

sales also suggested a weaker fourth quarter than had

been anticipated. In particular, real personal

consumption expenditures had been about unchanged

in

September and October, and the contraction in singlefamily construction had intensified. Providing a bit of

an offset to these factors, however, was further

improvement in the external sector. The staff also

marked down its projection for the rise in real GDP

over the remainder of the forecast period. Real GDP

was anticipated to increase at a rate noticeably below its

potential in 2008. Conditions in financial markets had

deteriorated over the intermeeting period and were

expected to impose more restraint on residential

construction as well as consumer and business spending

in 2008 than previously expected. In addition,

compared

with the previous forecast, higher oil prices and lower

real income were expected to weigh on the pace of real

activity throughout 2008 and 2009. By 2009, however,

the staff projected that the drag from those factors

would lessen and that an improvement in mortgage

credit availability would lead to a gradual recovery in

the housing market. Accordingly, economic activity

was expected to increase at its potential rate in 2009.

The external sector was projected to continue to

support domestic economic activity throughout the

forecast period. Reflecting upward revisions to

previously published data, the forecast for core PCE

price inflation

for 2007 was a bit higher than in the preceding

forecast; core inflation was projected to hold steady

during 2008 as the indirect effects of higher energy

prices on prices of core consumer goods and services

were offset by the slight easing of resource pressures

and the expected deceleration in the prices of nonfuel

imported goods. The forecast for headline PCE

inflation anticipated that retail energy prices would

rise

sharply in the first quarter of 2008 and that food price

inflation would outpace core price inflation in the

beginning of the year. As pressures from these sources

lessened over the remainder of 2008 and in 2009, both

core and headline price inflation were projected to edge

down, and headline inflation was expected to moderate

to a pace slightly below core inflation.

In their discussion of the economic situation and

outlook, participants generally noted that incoming

information pointed to a somewhat weaker outlook

for spending than at the time of the October meeting.

The decline in housing had steepened, and consumer

outlays appeared to be softening more than anticipated,

perhaps indicating some spillover from the housing

correction to other components of spending. These

developments, together with renewed strains in

financial markets, suggested that growth in late 2007

and during 2008 was likely to be somewhat more

sluggish than participants had indicated in their October

projections. Still, looking further ahead, participants

continued to expect that, aided by an easing in the

stance

of monetary policy, economic growth would gradually

recover as weakness in the housing sector abated and

financial conditions improved, allowing the economy to

expand at about its trend rate in 2009. Participants

thought that recent increases in energy prices likely

would boost headline inflation temporarily, but with

futures prices pointing to a gradual decline in oil prices

and with pressures on resource utilization seen as likely

to ease a bit, most participants continued to anticipate

some moderation in core and especially headline

inflation over the next few years.

Participants discussed in detail the resurgence of

stresses in financial markets in November. The

renewed stresses reflected evidence that the

performance of mortgage-related assets was deteriorating

further, potentially increasing the losses that were being

borne in part by a number of major financial firms,

including money-center banks, housing-related

government-sponsored enterprises, investment banks,

and financial

guarantors. Moreover, participants recognized that

some lenders might be exposed to additional losses:

Delinquency rates on credit card loans, auto loans,

and other forms of consumer credit, while still

moderate, had increased somewhat, particularly in

areas hard hit

by house price declines and mortgage defaults. Past

and prospective losses appeared to be spurring lenders

to tighten further the terms on new extensions of

credit, not just in the troubled markets for

nonconforming mortgages but, in some cases, for

other forms

of credit as well. In addition, participants noted that

some intermediaries were facing balance sheet

pressures and could become constrained by concerns

about rating-agency or regulatory capital

requirements. Among other factors, banks were

experiencing

unanticipated growth in loans as a result of continuing

illiquidity in the market for leveraged loans,

persisting problems in the commercial paper market

that had

sparked draws on back-up lines of credit, and more

recently, consolidation of assets of off-balancesheet affiliates onto banks’ balance sheets.

Concerns about credit risk and the pressures on banks’

balance sheet capacity appeared to be contributing to

diminished liquidity in interbank markets and to a

pro nounced widening in term spreads for periods

extending through year-end. A number of participants

noted some potential for the Federal Reserve’s new

Term Auction Facility and accompanying actions by

other central banks to ameliorate pressures in term

funding markets. Participants recognized, however,

that

uncertainties about values of mortgage-related assets

and related losses, and consequently strains in financial

markets, could persist for quite some time.

Some participants cited more-positive aspects of recent

financial developments. A number of large financial

intermediaries had been able to raise substantial

amounts of new capital. Moreover, credit losses and

asset write-downs at regional and community banks

had generally been modest; these institutions typically

were not facing balance sheet pressures and reportedly

had not tightened lending standards appreciably, except

for those on real estate loans. And, although spreads

on corporate bonds had widened over the intermeeting

period, especially for speculative-grade issues, the cost

of credit to most nonfinancial firms remained relatively

low; nonfinancial firms outside of the real estate and

construction sectors generally reported that credit

conditions, while somewhat tighter, were not

restricting

planned investment spending; and consumer credit

remained readily available for most households.

Nonetheless, participants agreed that heightened

financial stress posed increased downside risks to

growth and

made the outlook for the economy considerably

more uncertain.

Participants noted the marked deceleration in

consumer spending in the national data. Real

personal consumption expenditures had shown

essentially

no growth in September and October, suggesting

that tighter credit conditions, higher gasoline prices,

and

the continuing housing correction might be restraining

growth in real consumer spending. Retailers reported

weaker results in many regions of the country, but in

some, retailers saw solid growth. Job growth

rebounded somewhat in October and November,

and participants expected continuing gains in

employment and income to support rising consumer

spending, though they anticipated slower growth of

jobs, income,

and spending than in recent years. However, consumer

confidence recently had dropped by a sizable amount,

leading some participants to voice concerns that

household spending might increase less than currently

anticipated.

Recent data and anecdotal information indicated

that the housing sector was weaker than participants

had expected at the time of the Committee’s previous

meeting. In light of elevated inventories of unsold

homes and the higher cost and reduced availability of

nonconforming mortgage loans, participants agreed

that the

housing correction was likely to be both deeper and

more prolonged than they had anticipated in October.

Moreover, rising foreclosures and the resulting increase

in the supply of homes for sale could put additional

downward pressure on prices, leading to a greater

decline in household wealth and potentially to

further disruptions in the financial markets.

Indicators of capital investment for the nation as a

whole suggested solid but appreciably less rapid growth

in business fixed investment during the fourth quarter

than the third. Participants reported that firms in some

regions and industries had indicated they would scale

back capital spending, while contacts in other parts of

the country or industries reported no such change.

Similarly, business sentiment had deteriorated in many

parts of the country, but in other areas firms remained

cautiously optimistic. Anecdotal evidence generally

suggested that inventories were not out of line with

desired levels. Even so, participants expected that

inventory accumulation would slow from its elevated

third-quarter pace. Several participants remarked that,

unlike residential real estate, commercial and industrial

real estate activity remained solid in their Districts. But

participants also noted the deterioration in the

secondary market for commercial real estate loans

and the

possible effects of that development, should it persist,

on building activity.

The available data showed strong growth abroad and

solid gains in U.S. exports. Participants noted that

rising foreign demand was benefiting U.S. producers

of manufactured goods and agricultural products, in

particular. Exports were unlikely to continue growing

at the robust rate reported for the third quarter, but

participants anticipated that the combination of the

weaker dollar and still-strong, though perhaps lessrapid, growth abroad would mean continued firm

growth in

U.S. exports. Several participants observed, however,

that strong growth in foreign economies and U.S.

exports might not persist if global financial

conditions were to deteriorate further.

Recent readings on inflation generally were seen

as slightly less favorable than in earlier months, partly

due to upward revisions to previously published

data. Moreover, earlier increases in energy and food

prices likely would imply higher headline inflation in the

next few months, and past declines in the dollar would

put upward pressure on import prices. Some

participants said that higher input costs and rising prices

of imports

were leading more firms to seek price increases for

goods and services. However, few business contacts

had reported unusually large wage increases.

Downward revisions to earlier compensation data,

along with

the latest readings on compensation and productivity,

indicated only moderate pressure on unit labor costs.

With futures prices pointing to a gradual decline in oil

prices and with an anticipation of some easing of

pressures on resource utilization, participants generally

continued to see core PCE inflation as likely to trend

down a bit over the next few years, as in their October

projections, and headline inflation as likely to slow more

substantially from its currently elevated level.

Nonetheless, participants remained concerned about

upside risks to inflation stemming from elevated prices

of

energy and non-energy commodities; some also cited

the weaker dollar. Participants agreed that continued

stable inflation expectations would be essential to

achieving and sustaining a downward trend to inflation,

that wellanchored expectations couldn’t be taken for granted,

and that policymakers would need to continue to watch

inflation expectations closely.

In the Committee’s discussion of monetary policy for

the intermeeting period, members judged that the

softening in the outlook for economic growth

warranted an easing of the stance of policy at this

meeting. In

view of the further tightening of credit and

deterioration of financial market conditions, the stance

of

monetary policy now appeared to be somewhat

restrictive. Moreover, the downside risks to the

expansion,

resulting particularly from the weakening of the

housing

sector and the deterioration in credit market conditions,

had risen. In these circumstances, policy easing would

help foster maximum sustainable growth and provide

some additional insurance against risks. At the same

time, members noted that policy had already been

eased by 75 basis points and that the effects of those

actions on the real economy would be evident only

with a lag. And some data, including readings on the

labor market, suggested that the economy retained

forward momentum. Members generally saw overall

inflation as likely to be lower next year, and core

inflation

as likely to be stable, even if policy were eased

somewhat at this meeting; but they judged that some

inflation pressures and risks remained, including

pressures from

elevated commodity and energy prices and the

possibility of upward drift in the public’s expectations of

inflation. Weighing these considerations, nearly all

members judged that a 25 basis point reduction in the

Committee’s target for the federal funds rate would be

appropriate at this meeting. Although members agreed

that the stance of policy should be eased, they also

recognized that the situation was quite fluid and the

economic outlook unusually uncertain. Financial

stresses could increase further, intensifying the

contraction in

housing markets and restraining other forms of

spending. Some members noted the risk of an

unfavorable feedback loop in which credit market

conditions

restrained economic growth further, leading to

additional tightening of credit; such an adverse

development could require a substantial further easing

of policy.

Members also recognized that financial market

conditions might improve more rapidly than members

expected, in which case a reversal of some of the rate

cuts might become appropriate.

The Committee agreed that the statement to be

released after this meeting should indicate that

economic growth appeared to be slowing, reflecting the

intensification of the housing correction and some

softening in

business and consumer spending, and that strains in

financial markets had increased. The characterization

of the inflation situation could be largely unchanged

fromincreased

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agreed

Given the

heightened uncertainty, the Committee decided to

refrain from providing an explicit assessment of the

balance of risks. The Committee agreed on the need

to remain exceptionally alert to economic and

financial developments and their effects on the

outlook, and

members would be prepared to adjust the stance of

monetary policy if prospects for economic growth or

inflation were to worsen.

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 4¼ 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 4¼ percent.

Incoming information suggests that economic

growth is slowing, reflecting the intensification

of the housing correction and some softening in

business and consumer spending. Moreover,

strains in financial markets have increased in

recent weeks. Today’s action, combined with the

policy actions taken earlier, should help promote

moderate growth over time.

Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward

pressure on inflation. In this context, the

Committee judges that some inflation risks remain, and it will continue to monitor inflation

developments carefully.

Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook

for economic growth and inflation. 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, Hoenig, Kohn, Kroszner,

Mishkin, Poole, and Warsh.

Votes against this action: Mr. Rosengren.

Mr. Rosengren dissented because he regarded

the weakness in the incoming economic data and in

the outlook for the economy as warranting a more

aggressive policy response. In his view, the

combination of a

deteriorating housing sector, slowing consumer and

business spending, high energy prices, and

ill-functioning financial markets suggested heightened

risk of continued economic weakness. In light of that

possibility, a more decisive policy response was

called

for to minimize that risk. In any case, he felt that

well-anchored inflation expectations and the

Committee’s ability to reverse course on policy would

limit the

inflation risks of a larger easing move, should the

economy instead prove significantly stronger than

anticipated.

It was agreed that the next meeting of the Committee

would be held on Tuesday-Wednesday, January 29-30,

2008.

The meeting adjourned at 1:15 p.m.

Notation Vote

By notation vote completed on November 19, 2007,

the Committee unanimously approved the minutes of

the FOMC meeting held on October 30-31, 2007.

Conference Call

On December 6, 2007, in a joint session of the

Federal Open Market Committee and the Board of

Governors, Board members and Reserve Bank

presidents reviewed

conditions in domestic and foreign financial markets

and discussed two proposals aimed at improving

market functioning. The first proposal was for the

establishment of a temporary Term Auction Facility

(TAF), which would provide term funding to eligible

depository institutions through an auction mechanism

beginning in mid-December. Meeting participants

recognized that a TAF would not address all of the

factors giving rise to stresses in money and credit

markets,

notably the ongoing concerns about credit quality

and balance sheet pressures. Nonetheless, most

participants viewed the TAF, which would provide

liquidity to more counterparties and against a broader

range of

collateral than used for open market operations, as a

potentially useful tool. Some mentioned that a TAF

could help alleviate year-end pressures in money

markets. A few participants, however, questioned the

need for and the likely efficacy of the proposal,

expressed

concerns about the longer-run incentive effects of a

TAF, and felt that the possible drawbacks could well

outweigh any benefits.* Participants generally regarded

the second proposal, to set up a foreign exchange

swap arrangement with the European Central Bank,

as a

positive step in international cooperation to address

elevated pressures in short-term dollar funding

markets.

At the conclusion of the discussion, with Mr. Poole

dissenting, the Committee voted to direct the Federal

* Secretary’s Note: The Board of Governors approved the

TAF via notation vote on December 10, 2007 after the staff

finalized its proposal for specifications of the TAF.

Reserve Bank of New York to establish and maintain

a reciprocal currency (swap) arrangement for the

System Open Market Account with the European

Central Bank in an amount not to exceed $20 billion.

Within that aggregate limit, draws of up to $10 billion

were authorized, and the arrangement itself was

authorized for a period of up to 180 days, unless

extended by the

FOMC. Mr. Poole dissented because he viewed the

swap agreement as unnecessary in light of the size of

the European Central Bank’s dollar-denominated

foreign exchange reserves.

Brian F. Madigan

Secretary