FOMC Minutes

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Minutes of the Federal Open Market Committee

January 29-30, 2008

A meeting of the Federal Open Market Committee was

held in the offices of the Board of Governors of the

Federal Reserve System in Washington, D.C., on Tuesday, January 29, 2008 at 2:00 p.m. and continued on

Wednesday, January 30, 2008 at 9:00 a.m.

Mr. Parkinson,2 Deputy Director, Division of Research and Statistics, Board of Governors

PRESENT:

Mr. Bernanke, Chairman

Mr. Geithner, Vice Chairman

Mr. Fisher

Mr. Kohn

Mr. Kroszner

Mr. Mishkin

Ms. Pianalto

Mr. Plosser

Mr. Stern

Mr. Warsh

Ms. Liang and Messrs. Reifschneider and Wascher,

Associate Directors, Division of Research and

Statistics, Board of Governors

Mr. Clouse, Senior Associate Director, Division of

Monetary Affairs, Board of Governors

Ms. Barger2 and Mr. Greenlee,2 Associate Directors, Division of Banking Supervision and

Regulation, Board of Governors

Mr. Gibson,2 Deputy Associate Director, Division

of Research and Statistics, Board of Governors

Mr. Dale, Senior Adviser, Division of Monetary

Affairs, Board of Governors

Messrs. Evans, Lacker, and Lockhart, and Ms.

Yellen, Alternate Members of the Federal

Open Market Committee

Mr. Oliner, Senior Adviser, Division of Research

and Statistics, Board of Governors

Messrs. Hoenig, Poole, and Rosengren, Presidents

of the Federal Reserve Banks of Kansas City,

St. Louis, and Boston, respectively

Messrs. Durham and Perli, Assistant Directors, Division of Monetary Affairs, Board of Governors

Mr. Madigan, Secretary and Economist

Ms. Danker, Deputy Secretary

Mr. Skidmore, Assistant Secretary

Ms. Smith, Assistant Secretary

Mr. Alvarez, General Counsel

Mr. Baxter, Deputy General Counsel

Mr. Sheets, Economist

Mr. Stockton, Economist

Mr. Small, Project Manager, Division of Monetary

Affairs, Board of Governors

Mr. Bassett,3 Senior Economist, Division of Monetary Affairs, Board of Governors

Messrs. Connors, English, and Kamin, Ms. Mester,

Messrs. Rosenblum, Slifman, Sniderman,

Tracy, and Wilcox, Associate Economists

Mr. Doyle,3 Senior Economist, Division of International Finance, Board of Governors

Mr. Dudley, Manager, System Open Market Account

Ms. Kusko,3 Senior Economist, Division of Research and Statistics, Board of Governors

Mr. Struckmeyer,1 Deputy Staff Director, Office of

Staff Director for Management, Board of

Governors

Attended Wednesday’s session.

1

Mr. Blanchard, Assistant to the Board, Office of

Board Members, Board of Governors

Attended portion of the meeting relating to the analysis of policy issues raised by financial market developments.

3

Attended portion of the meeting relating to the economic outlook and monetary policy decision.

2

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Federal Open Market Committee

Mr. Luecke, Senior Financial Analyst, Division of

Monetary Affairs, Board of Governors

Mr. Driscoll, Economist, Division of Monetary Affairs, Board of Governors

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

Ms. Green, First Vice President, Federal Reserve

Bank of Richmond

Messrs. Fuhrer and Judd, Executive Vice Presidents, Federal Reserve Banks of Boston and

San Francisco, respectively

Messrs. Altig and Angulo,2 Mses. Hirtle2 and

Mosser, Messrs. Peters 2 and Rasche, Senior

Vice Presidents, Federal Reserve Banks of Atlanta, New York, New York, New York, New

York, and St. Louis, respectively

Mr. Hakkio, Senior Adviser, Federal Reserve Bank

of Kansas City

Mr. Krane, Vice President, Federal Reserve Bank

of Chicago

Mr. Weber, Senior Research Officer, Federal Reserve Bank of Minneapolis

In the agenda for this meeting, it was reported that advices of the election of the following members and alternate members of the Federal Open Market Committee for a term beginning January 29, 2008 had been

received and that these individuals had executed their

oaths of office.

The elected members and alternate members were as

follows:

Timothy F. Geithner, President of the Federal Reserve

Bank of New York, with Christine M. Cumming, First

Vice President of the Federal Reserve Bank of New

York, as alternate.

Charles I. Plosser, President of the Federal Reserve

Bank of Philadelphia, with Jeffrey M. Lacker, President

of the Federal Reserve Bank of Richmond, as alternate.

_

Sandra Pianalto, President of the Federal Reserve Bank

of Cleveland, with Charles L. Evans, President of the

Federal Reserve Bank of Chicago, as alternate.

Richard W. Fisher, President of the Federal Reserve

Bank of Dallas, with Dennis P. Lockhart, President of

the Federal Reserve Bank of Atlanta, as alternate.

Gary H. Stern, President of the Federal Reserve Bank

of Minneapolis, with Janet L. Yellen, President of the

Federal Reserve Bank of San Francisco, as alternate.

By unanimous vote, the following officers of the Federal Open Market Committee were selected to serve

until the selection of their successors at the first regularly scheduled meeting of the Committee in 2009:

Ben S. Bernanke

Timothy F. Geithner

Brian F. Madigan

Deborah J. Danker

David W. Skidmore

Michelle A. Smith

Scott G. Alvarez

Thomas C. Baxter, Jr.

Richard M. Ashton

D. Nathan Sheets

David J. Stockton

Chairman

Vice Chairman

Secretary and Economist

Deputy Secretary

Assistant Secretary

Assistant Secretary

General Counsel

Deputy General Counsel

Assistant General

Counsel

Economist

Economist

Thomas A. Connors

William B. English

Steven B. Kamin

Loretta J. Mester

Arthur J. Rolnick

Harvey Rosenblum

Lawrence Slifman

Mark S. Sniderman

Joseph S. Tracy

David W. Wilcox

Associate Economists

By unanimous vote, the Committee made a few

amendments to its rules and to the Program for Security of FOMC Information. The amendments primarily

addressed the Committee’s practice of approving the

minutes via notation vote, attendance at Committee

meetings, and access to Committee information by System employees.

By unanimous vote, the Federal Reserve Bank of New

York was selected to execute transactions for the System Open Market Account.

Minutes of the Meeting of January 29-30, 2008

By unanimous vote, William C. Dudley was selected to

serve at the pleasure of the Committee as Manager,

System Open Market Account, on the understanding

that his selection was subject to being satisfactory to

the Federal Reserve Bank of New York.

By unanimous vote, the Authorization for Domestic

Open Market Operations was reaffirmed in the form

shown below:

AUTHORIZATION FOR DOMESTIC OPEN

MARKET OPERATIONS

(Reaffirmed January 29, 2008)

1. The Federal Open Market Committee authorizes

and directs the Federal Reserve Bank of New York, to

the extent necessary to carry out the most recent domestic policy directive adopted at a meeting of the

Committee:

(a) To buy or sell U.S. Government securities, including securities of the Federal Financing Bank, and

securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the

United States in the open market, from or to securities

dealers and foreign and international accounts maintained at the Federal Reserve Bank of New York, on a

cash, regular, or deferred delivery basis, for the System

Open Market Account at market prices, and, for such

Account, to exchange maturing U.S. Government and

Federal agency securities with the Treasury or the individual agencies or to allow them to mature without replacement;

(b) To buy U.S. Government securities, obligations

that are direct obligations of, or fully guaranteed as to

principal and interest by, any agency of the United

States, from dealers for the account of the System

Open Market Account under agreements for repurchase of such securities or obligations in 65 business

days or less, at rates that, unless otherwise expressly

authorized by the Committee, shall be determined by

competitive bidding, after applying reasonable limitations on the volume of agreements with individual

dealers.

(c) To sell U.S. Government securities and obligations that are direct obligations of, or fully guaranteed

as to principal and interest by, any agency of the United

States to dealers for System Open Market Account under agreements for the resale by dealers of such securities or obligations in 65 business days or less, at rates

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that, unless otherwise expressly authorized by the

Committee, shall be determined by competitive bidding, after applying reasonable limitations on the volume of agreements with individual dealers.

2. In order to ensure the effective conduct of open

market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York

to lend on an overnight basis U.S. Government securities held in the System Open Market Account to dealers at rates that shall be determined by competitive

bidding. The Federal Reserve Bank of New York shall

set a minimum lending fee consistent with the objectives of the program and apply reasonable limitations

on the total amount of a specific issue that may be auctioned and on the amount of securities that each dealer

may borrow. The Federal Reserve Bank of New York

may reject bids which could facilitate a dealer's ability

to control a single issue as determined solely by the

Federal Reserve Bank of New York.

3. In order to ensure the effective conduct of open

market operations, while assisting in the provision of

short-term investments for foreign and international

accounts maintained at the Federal Reserve Bank of

New York and accounts maintained at the Federal Reserve Bank of New York as fiscal agent of the United

States pursuant to Section 15 of the Federal Reserve

Act, the Federal Open Market Committee authorizes

and directs the Federal Reserve Bank of New York (a)

for System Open Market Account, to sell U.S. Government securities to such accounts on the bases set

forth in paragraph l(a) under agreements providing for

the resale by such accounts of those securities in 65

business days or less on terms comparable to those

available on such transactions in the market; and (b) for

New York Bank account, when appropriate, to undertake with dealers, subject to the conditions imposed on

purchases and sales of securities in paragraph l(b), repurchase agreements in U.S. Government and agency

securities, and to arrange corresponding sale and repurchase agreements between its own account and such

foreign, international, and fiscal agency accounts maintained at the Bank. Transactions undertaken with such

accounts under the provisions of this paragraph may

provide for a service fee when appropriate.

4. In the execution of the Committee’s decision regarding policy during any intermeeting period, the

Committee authorizes and directs the Federal Reserve

Bank of New York, upon the instruction of the Chairman of the Committee, to adjust somewhat in excep-

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Federal Open Market Committee

tional circumstances the degree of pressure on reserve

positions and hence the intended federal funds rate.

Any such adjustment shall be made in the context of

the Committee’s discussion and decision at its most

recent meeting and the Committee’s long-run objectives for price stability and sustainable economic

growth, and shall be based on economic, financial, and

monetary developments during the intermeeting period. Consistent with Committee practice, the Chairman, if feasible, will consult with the Committee before

making any adjustment.

By unanimous vote, the Committee approved the Authorization for Foreign Currency Operations with an

amendment to paragraph 1.D. regarding the maximum

open position in all foreign currencies. Accordingly,

the Authorization for Foreign Currency Operations

was adopted, as shown below:

AUTHORIZATION FOR FOREIGN CURRENCY

OPERATIONS

(Amended January 29, 2008)

1. The Federal Open Market Committee authorizes

and directs the Federal Reserve Bank of New York, for

System Open Market Account, to the extent necessary

to carry out the Committee's foreign currency directive

and express authorizations by the Committee pursuant

thereto, and in conformity with such procedural instructions as the Committee may issue from time to

time:

A. To purchase and sell the following foreign currencies in the form of cable transfers through spot or

forward transactions on the open market at home and

abroad, including transactions with the U.S. Treasury,

with the U.S. Exchange Stabilization Fund established

by Section 10 of the Gold Reserve Act of 1934, with

foreign monetary authorities, with the Bank for International Settlements, and with other international financial institutions:

Canadian dollars

Danish kroner

Euro

Pounds sterling

Japanese yen

Mexican pesos

Norwegian kroner

Swedish kronor

Swiss francs

_

B. To hold balances of, and to have outstanding

forward contracts to receive or to deliver, the foreign

currencies listed in paragraph A above.

C. To draw foreign currencies and to permit foreign

banks to draw dollars under the reciprocal currency

arrangements listed in paragraph 2 below, provided that

drawings by either party to any such arrangement shall

be fully liquidated within 12 months after any amount

outstanding at that time was first drawn, unless the

Committee, because of exceptional circumstances, specifically authorizes a delay.

D. To maintain an overall open position in all foreign currencies not exceeding $25.0 billion. For this

purpose, the overall open position in all foreign currencies is defined as the sum (disregarding signs) of net

positions in individual currencies, excluding changes in

dollar value due to foreign exchange rate movements

and interest accruals. The net position in a single foreign currency is defined as holdings of balances in that

currency, plus outstanding contracts for future receipt,

minus outstanding contracts for future delivery of that

currency, i.e., as the sum of these elements with due

regard to sign.

2. The Federal Open Market Committee directs the

Federal Reserve Bank of New York to maintain reciprocal currency arrangements ("swap" arrangements) for

the System Open Market Account for periods up to a

maximum of 12 months with the following foreign

banks, which are among those designated by the Board

of Governors of the Federal Reserve System under

Section 214.5 of Regulation N, Relations with Foreign

Banks and Bankers, and with the approval of the

Committee to renew such arrangements on maturity:

Foreign bank

Bank of Canada

Bank of Mexico

Amount of arrangement

(millions of dollars equivalent)

2,000

3,000

Any changes in the terms of existing swap arrangements, and the proposed terms of any new arrangements that may be authorized, shall be referred for review and approval to the Committee.

3. All transactions in foreign currencies undertaken

under paragraph 1.A. above shall, unless otherwise ex-

Minutes of the Meeting of January 29-30, 2008

pressly authorized by the Committee, be at prevailing

market rates. For the purpose of providing an investment return on System holdings of foreign currencies

or for the purpose of adjusting interest rates paid or

received in connection with swap drawings, transactions with foreign central banks may be undertaken at

non-market exchange rates.

4. It shall be the normal practice to arrange with foreign central banks for the coordination of foreign currency transactions. In making operating arrangements

with foreign central banks on System holdings of foreign currencies, the Federal Reserve Bank of New York

shall not commit itself to maintain any specific balance,

unless authorized by the Federal Open Market Committee. Any agreements or understandings concerning

the administration of the accounts maintained by the

Federal Reserve Bank of New York with the foreign

banks designated by the Board of Governors under

Section 214.5 of Regulation N shall be referred for review and approval to the Committee.

5. Foreign currency holdings shall be invested to ensure that adequate liquidity is maintained to meet anticipated needs and so that each currency portfolio shall

generally have an average duration of no more than 18

months (calculated as Macaulay duration). Such investments may include buying or selling outright obligations of, or fully guaranteed as to principal and interest by, a foreign government or agency thereof; buying

such securities under agreements for repurchase of

such securities; selling such securities under agreements

for the resale of such securities; and holding various

time and other deposit accounts at foreign institutions.

In addition, when appropriate in connection with arrangements to provide investment facilities for foreign

currency holdings, U.S. Government securities may be

purchased from foreign central banks under agreements for repurchase of such securities within 30 calendar days.

6. All operations undertaken pursuant to the preceding paragraphs shall be reported promptly to the Foreign Currency Subcommittee and the Committee. The

Foreign Currency Subcommittee consists of the

Chairman and Vice Chairman of the Committee, the

Vice Chairman of the Board of Governors, and such

other member of the Board as the Chairman may designate (or in the absence of members of the Board

serving on the Subcommittee, other Board members

designated by the Chairman as alternates, and in the

absence of the Vice Chairman of the Committee, his

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alternate). Meetings of the Subcommittee shall be

called at the request of any member, or at the request

of the Manager, System Open Market Account ("Manager"), for the purposes of reviewing recent or contemplated operations and of consulting with the Manager on other matters relating to his responsibilities. At

the request of any member of the Subcommittee, questions arising from such reviews and consultations shall

be referred for determination to the Federal Open

Market Committee.

7. The Chairman is authorized:

A. With the approval of the Committee, to enter

into any needed agreement or understanding with the

Secretary of the Treasury about the division of responsibility for foreign currency operations between the

System and the Treasury;

B. To keep the Secretary of the Treasury fully advised concerning System foreign currency operations,

and to consult with the Secretary on policy matters relating to foreign currency operations;

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

8. Staff officers of the Committee are authorized to

transmit pertinent information on System foreign currency operations to appropriate officials of the Treasury Department.

9. All Federal Reserve Banks shall participate in the

foreign currency operations for System Account in accordance with paragraph 3G(1) of the Board of Governors' Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks dated

January 1, 1944.

By unanimous vote, the Foreign Currency Directive

was reaffirmed in the form shown below:

FOREIGN CURRENCY DIRECTIVE

(Reaffirmed January 29, 2008)

1. System operations in foreign currencies shall generally be directed at countering disorderly market conditions, provided that market exchange rates for the U.S.

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Federal Open Market Committee

dollar reflect actions and behavior consistent with IMF

Article IV, Section 1.

2. To achieve this end the System shall:

A. Undertake spot and forward purchases and sales

of foreign exchange.

B. Maintain reciprocal currency ("swap") arrangements with selected foreign central banks.

C. Cooperate in other respects with central banks

of other countries and with international monetary institutions.

3. Transactions may also be undertaken:

A. To adjust System balances in light of probable

future needs for currencies.

B. To provide means for meeting System and

Treasury commitments in particular currencies, and to

facilitate operations of the Exchange Stabilization

Fund.

C. For such other purposes as may be expressly

authorized by the Committee.

4. System foreign currency operations shall be conducted:

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

B. In cooperation, as appropriate, with foreign

monetary authorities; and

C. In a manner consistent with the obligations of

the United States in the International Monetary Fund

regarding exchange arrangements under IMF Article

IV.

By unanimous vote, the Procedural Instructions with

Respect to Foreign Currency Operations were reaffirmed in the form shown below:

PROCEDURAL INSTRUCTIONS WITH RESPECT

TO FOREIGN CURRENCY OPERATIONS

(Reaffirmed January 29, 2008)

_

In conducting operations pursuant to the authorization

and direction of the Federal Open Market Committee

as set forth in the Authorization for Foreign Currency

Operations and the Foreign Currency Directive, the

Federal Reserve Bank of New York, through the Manager, System Open Market Account ("Manager"), shall

be guided by the following procedural understandings

with respect to consultations and clearances with the

Committee, the Foreign Currency Subcommittee, and

the Chairman of the Committee. All operations undertaken pursuant to such clearances shall be reported

promptly to the Committee.

1. The Manager shall clear with the Subcommittee (or

with the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the

time available):

A. Any operation that would result in a change in

the System's overall open position in foreign

currencies exceeding $300 million on any day

or $600 million since the most recent regular

meeting of the Committee.

B. Any operation that would result in a change on

any day in the System's net position in a single

foreign currency exceeding $150 million, or

$300 million when the operation is associated

with repayment of swap drawings.

C. Any operation that might generate a substantial

volume of trading in a particular currency by

the System, even though the change in the System's net position in that currency might be

less than the limits specified in 1.B.

D. Any swap drawing proposed by a foreign bank

not exceeding the larger of (i) $200 million or

(ii) 15 percent of the size of the swap arrangement.

2. The Manager shall clear with the Committee (or

with the Subcommittee, if the Subcommittee believes

that consultation with the full Committee is not feasible

in the time available, or with the Chairman, if the

Chairman believes that consultation with the Subcommittee is not feasible in the time available):

A. Any operation that would result in a change in

the System's overall open position in foreign

currencies exceeding $1.5 billion since the

most recent regular meeting of the Committee.

Minutes of the Meeting of January 29-30, 2008

B. Any swap drawing proposed by a foreign bank

exceeding the larger of (i) $200 million or (ii)

15 percent of the size of the swap arrangement.

3. The Manager shall also consult with the Subcommittee or the Chairman about proposed swap drawings

by the System and about any operations that are not of

a routine character.

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 reviewed at the January meeting,

which included the advance data on the national income and product accounts for the fourth quarter, indicated that economic activity had decelerated sharply

in recent months. The contraction in homebuilding

intensified in the fourth quarter, the growth in consumer spending slowed, and survey measures of both

consumer and business sentiment were at low levels.

In addition, industrial production contracted in the

fourth quarter. Conditions in the labor market deteriorated noticeably, with private payroll employment posting a small decline in December and the unemployment

rate rising. Readings on both headline and core inflation increased in recent months, although the twelvemonth change in prices of core personal consumption

expenditures in December was about the same as its

year-earlier value.

On average, private nonfarm payroll employment in

November and December rose at only about half of

the average pace seen from July to October. Over

2007 as a whole, the deterioration in labor demand was

most pronounced in the construction and financial activities industries, which had been hardest hit by the

difficulties in the housing and mortgage markets.

Manufacturing employment declined yet again in December, while the decrease in employment in retail

trade nearly reversed the sizable increase in that sector

recorded in November. Aggregate hours of production

or nonsupervisory workers were unchanged in December. The unemployment rate rose to 5.0 percent in

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December after having been at or near 4.7 percent

since September.

Industrial production declined in the fourth quarter, as

a drag from motor vehicles and construction-related

industries more than offset a positive contribution

from other industries. Output in high-tech industries

moderated in the fourth quarter, largely because of a

deceleration in production of computers and semiconductors. Utilities output climbed for a second consecutive quarter, and mining output was boosted by increases in natural gas extraction and in crude oil.

The rise in real consumer spending moderated in the

fourth quarter, with outlays on non-auto consumer

goods increasing weakly. Spending on services rose

solidly in November (the most recent month available),

led by energy services and commissions paid to stockbrokers, but warmer-than-usual temperatures in December likely damped expenditures for energy services

in that month. Sales of light motor vehicles were moderate during the fourth quarter. Real disposable personal income was little changed in the fourth quarter,

held down by higher consumer energy prices. Also, the

wealth-to-income ratio ticked down in the third quarter, and appeared likely to decline again in the fourth

quarter, as equity prices had fallen since the end of the

third quarter and available indicators pointed to continued declines in house prices in the fourth quarter. In

December, readings on consumer sentiment remained

at relatively low levels by historical standards.

Both single-family housing starts and permit issuance

fell in December. Meanwhile, multifamily housing

starts plunged in December, but permit issuance

pointed to a rebound in multifamily starts in the near

term. New home sales dropped in November and December after having held relatively steady since August,

keeping inventories of unsold homes at elevated levels.

Sales of existing homes also moved down in December

but, on balance, had declined less in recent months

than sales of new homes. Demand for housing

through the end of 2007 likely continued to be restrained by tight financing conditions for jumbo and

nonprime mortgages.

Real spending on equipment and software rose at a

sluggish rate in the fourth quarter after having posted a

solid increase in the third quarter. Sales of medium and

heavy trucks edged up after falling to a four-year low.

Spending on high-tech capital goods increased at a

moderate pace over the second half of last year. Out-

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Federal Open Market Committee

side of the transportation and high-tech sectors, spending on equipment appeared to have declined last quarter after having posted sizable gains over the summer.

Orders and shipments rose somewhat in the fourth

quarter, but imports in the first two months of the

quarter were below their average in the third quarter.

Nonresidential construction remained vigorous in the

fourth quarter. However, indicators of future spending

in this sector pointed to a slowdown in coming

months, with a decline in architectural billings, a rise in

retail-sector vacancy rates, and survey reports that contractors were experiencing more difficulty in obtaining

funding. More generally, surveys of business conditions and sentiment deteriorated and suggested that

capital spending would be reduced in the near term.

Real nonfarm inventory investment excluding motor

vehicles appeared to have stepped up from its average

rate over the first three quarters of 2007. In November, the ratio of manufacturing and trade book-value

inventories (excluding motor vehicles) to sales ticked

down.

The U.S. international trade deficit widened slightly in

October and then more substantially in November, as

increases in imports in both months more than offset

increases in exports. The increases in imports almost

entirely reflected a jump in the value of imported oil.

Non-oil goods imports were boosted by a large increase in imports of consumer goods and small increases in several other categories, which more than

offset a steep decline in imports of non-oil industrial

supplies. Imports of automotive products and capital

goods recorded modest gains, with the increase in capital goods primarily reflecting a jump in imports of telecommunications equipment. Imports of services grew

strongly. Exports in both months were boosted by

higher exports of services. Exports of industrial supplies also recorded a strong gain, aided by a large increase in exports of fuels in November. Higher exports of semiconductors, aircraft, and machinery

pushed up exports of capital goods, while exports of

agricultural goods increased only slightly following a

large jump in the third quarter. In contrast, exports of

consumer goods fell from their third-quarter level.

Economic growth in the advanced foreign economies

appeared to have slowed in the fourth quarter, with

recent data on household expenditures and retail sales

weakening on balance and consumers and businesses

considerably less upbeat about growth prospects. In

Japan, the estimate of real GDP growth in the third

_

quarter was revised down, and business sentiment declined in December amidst concerns about high oil

prices. In the euro area, retail sales growth declined in

October and November, and consumer and business

surveys in November and December pointed to economic weakness. In the United Kingdom, although

real GDP grew solidly in the fourth quarter, the estimate of third-quarter real GDP growth was revised

down. In Canada, indicators suggested that growth in

economic activity moderated in the fourth quarter.

Private employment shrank in December after having

posted very strong growth in November. Incoming

data on emerging-market economies pointed, on balance, to a slowing of growth in the fourth quarter.

Overall, growth in emerging Asia appeared to have

moderated somewhat in the fourth quarter, with trade

balances declining in several countries as exports

slowed. Readings on economic activity in Latin America were more mixed. Incoming data suggested that

growth slowed in Mexico in the fourth quarter. In Brazil, third-quarter growth was solid, but indicators for

the fourth quarter were mixed. Economic activity appeared to be strong in Argentina in both the third and

fourth quarters.

In the United States, headline consumer price inflation

stepped up noticeably in November and December

from the low rates posted in the summer. Part of the

increase reflected the rapid rise in energy prices, but

prices of core personal consumption expenditures

(PCE) also moved up faster in those months than they

had earlier in the year. The pickup in core PCE inflation over the second half of 2007 reflected an acceleration in prices that had been unusually soft earlier in the

year, such as prices for apparel, prescription drugs, and

nonmarket services. For the year as a whole, core PCE

prices increased at about the same rate as they had in

2006. Household survey measures of expectations for

year-ahead inflation picked up in November and remained at that level in December and January. Households’ longer-term inflation expectations rose in December but ticked down in January. Average hourly

earnings increased faster in November and December

than they had in October, although over the twelve

months that ended in December, this wage measure

rose a bit more slowly than the elevated pace posted in

2006.

At its December meeting, the FOMC lowered its target

for the federal funds rate 25 basis points, to 4¼ percent. In addition, the Board of Governors approved a

decrease of 25 basis points in the discount rate, to 4¾

Minutes of the Meeting of January 29-30, 2008

percent, leaving the gap between the federal funds rate

target and the discount rate at 50 basis points. The

Committee’s statement noted that incoming information suggested that economic growth was slowing, reflecting the intensification of the housing correction

and some softening in business and consumer spending. Moreover, strains in financial markets had increased in recent weeks. The Committee indicated that

its action, combined with the policy actions taken earlier, should help promote moderate growth over time.

Readings on core inflation had improved modestly during the year, but elevated energy and commodity prices,

among other factors, might put upward pressure on

inflation. In this context, the Committee judged that

some inflation risk remained and said that it would

continue to monitor inflation developments carefully.

Recent developments, including the deterioration in

financial market conditions, had increased the uncertainty surrounding the outlook for economic growth

and inflation. The Committee stated 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.

Over the intermeeting period, the expected path of

monetary policy over the next year as measured by

money market futures rates tilted down sharply, primarily in response to softer-than-expected economic

data releases. The Committee’s action at its December

meeting was largely anticipated by market participants,

although some investors were surprised by the absence

of any indication of accompanying measures to address

strains in term funding markets. Some of that surprise

was reversed the next day, following the announcement

of a Term Auction Facility (TAF) and associated swap

lines with the European Central Bank and the Swiss

National Bank. The subsequent release of the minutes

of the meeting elicited little market reaction. However,

investors did mark down the expected path of policy in

response to speeches by Federal Reserve officials; the

speeches were interpreted as suggesting that signs of

broader economic weakness and additional financial

strains would likely require an easier stance of policy.

The Committee’s decision to reduce the target federal

funds rate 75 basis points on January 22 surprised market participants and led investors to mark down further

the path of policy over the next few months. Consistent with the shift in the economic outlook, the revision in policy expectations, and the reduction in the

target federal funds rate, yields on nominal Treasury

coupon securities declined substantially over the period

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since the December FOMC meeting. The yield curve

steepened somewhat further, with the two-year yield

dropping more than the ten-year yield. Near-term inflation compensation increased in early January amid

rising oil prices, but it retreated in later weeks, along

with oil prices, and declined, on net, over the period.

Conditions in short-term funding markets improved

notably over the intermeeting period, but strains remained. Spreads of rates on securities in interbank

funding markets over risk-free rates narrowed somewhat following the announcement of the TAF on December 12 and eased considerably after year-end, although they remained at somewhat elevated levels.

Spreads of rates on asset-backed commercial paper

over risk-free rates also fell, on net, and the level of

such paper outstanding increased in the first two weeks

of January for the first time since August. In longerterm corporate markets, yields on investment-grade

corporate bonds fell less than those on comparablematurity Treasury securities, while yields on speculative-grade bonds rose considerably. As a result, corporate bond spreads climbed to their highest levels since

early 2003, apparently reflecting increased concern

among investors about the outlook for corporate credit

quality over the next few years. Nonetheless, gross

bond issuance in December remained strong. Commercial bank credit expanded briskly in December,

supported by robust growth in business loans and in

nonmortgage loans to households, and in the face of

survey reports of tighter lending conditions. Over the

intermeeting period, spreads on conforming mortgages

over comparable-maturity Treasury securities remained

about flat, as did spreads on jumbo mortgages, although credit availability for jumbo-mortgage borrowers continued to be tight. Broad stock price indexes

fell over the intermeeting period on perceptions of a

deteriorating economic outlook and additional writedowns by financial institutions. Similar stresses were

again evident in the financial markets of major foreign

economies. The trade-weighted foreign exchange value

of the dollar against major currencies declined slightly,

on balance, over the intermeeting period.

Debt in the domestic nonfinancial sector was estimated

to have increased somewhat more slowly in the fourth

quarter than in the third. The rate of increase of nonfinancial business debt decelerated in the fourth quarter

from its rapid third-quarter pace despite robust bond

issuance as the rise in commercial and industrial lending moderated. Household mortgage debt expanded at

a slow rate in the fourth quarter, reflecting continued

Page 10

Federal Open Market Committee

weakness in home prices, declining home sales, and

tighter credit conditions for some borrowers. Nonmortgage consumer credit appeared to expand at a

moderate pace. In December, the increase in M2 was

up slightly from its November pace, boosted primarily

by inflows into the relative safety and liquidity of

money market mutual funds. The rise in small time

deposits moderated but remained elevated, as several

thrift institutions offered attractive deposit rates to secure funding. In contrast, liquid deposits continued to

increase weakly and currency contracted noticeably, the

latter apparently reflecting an ongoing trend in overseas

demand away from U.S. dollar bank notes and towards

the euro and other currencies.

In the forecast prepared for this meeting, the staff revised up slightly its estimated increase in aggregate economic activity in the fourth quarter of 2007 but revised

down its projected increase for the first half of 2008.

Although data on consumer spending and nonresidential construction activity for the fourth quarter had

come in above the staff’s expectations, most of the information received over the intermeeting period was

weaker than had been previously expected. The drop

in housing activity continued to intensify, conditions in

labor markets appeared to have deteriorated noticeably

near year-end, and factory output had weakened. Consumer confidence remained low, and indicators of

business sentiment had worsened. Equity prices had

also fallen sharply so far in 2008, and, while the functioning of money markets had improved, conditions in

some other financial markets had become more restrictive. The staff projection showed the weakness in

spending dissipating over the second half of 2008 and

2009, in response to the cumulative easing of monetary

policy since August, the abatement of housing weakness, a lessening drag from high oil prices, and the

prospect of fiscal stimulus. Still, projected resource

utilization was lower over the next two years than in

the previous forecast. The projection for core PCE

price inflation in 2008 was raised slightly in response to

elevated readings in recent months. The forecast for

headline PCE price inflation also incorporated a somewhat higher rate of increase for energy prices for the

first half of 2008; as a result, headline PCE price inflation was now expected to exceed core PCE price inflation slightly for that year. The forecasts for both headline and core PCE price inflation for 2009 were unchanged, with both receding from their 2008 levels.

In conjunction with the FOMC meeting in January, all

meeting participants (Federal Reserve Board members

_

and Reserve Bank presidents) provided annual projections for economic growth, unemployment, and inflation for the period 2008 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 situation and outlook, and in the projections that they had submitted for

this meeting, participants noted that information received since the December meeting had been decidedly

downbeat on balance. In particular, the drop in housing activity had intensified, factory output had weakened, news on business investment had been soft, and

conditions in labor markets appeared to have deteriorated. In addition, consumer confidence had remained

low and business confidence appeared to have worsened. Although the functioning of money markets had

improved notably, strains remained evident in a number of other financial markets, and credit conditions

had become generally more restrictive. Against this

backdrop, participants expected economic growth to

remain weak in the first half of this year before picking

up in the second half, aided in part by a more accommodative stance of monetary policy and by likely fiscal

stimulus. Further ahead, participants judged that economic growth would continue to pick up gradually in

2009 and 2010. Nonetheless, with housing activity and

house prices still declining and with financial conditions

for businesses and households tightening further, significant uncertainties surrounded this outlook and the

risks to economic growth in the near term appeared to

be weighted to the downside. Indeed, several participants noted that the risks of a downturn in the economy were significant. Inflation data had been disappointing in recent months, and a few participants cited

anecdotal reports that some firms were able to pass on

costs to consumers. However, with inflation expectations anticipated to remain reasonably well anchored,

energy and other commodity prices expected to flatten

out, and pressures on resources likely to ease, participants generally expected inflation to moderate somewhat in coming quarters.

Meeting participants observed that conditions in shortterm funding markets had improved considerably since

the December meeting, reflecting the easing of pressures related to funding around the turn of the year as

well as the implementation of the TAF. However,

broader financial conditions had tightened significantly,

on balance, in the weeks leading up to the meeting, as

evidence of further deterioration in housing markets

Minutes of the Meeting of January 29-30, 2008

and investors’ more pessimistic view of the economic

outlook adversely affected a range of financial markets.

Many participants were concerned that the drop in equity prices, coupled with the ongoing decline in house

prices, implied reductions in household wealth that

would likely damp consumer spending. Moreover, elevated volatility in financial markets likely reflected increased uncertainty about the economic outlook, and

that greater uncertainty could lead firms and households to limit spending. The availability of credit to

consumers and businesses appeared to be tightening,

likely adding to restraint on economic growth. Participants discussed the risks to financial markets and institutions posed by possible further deterioration in the

condition of financial guarantors, and many perceived a

possibility that additional downgrades in these firms’

credit ratings could put increased strains on financial

markets. To be sure, some positive financial developments were evident. Banks appeared to be making

some progress in strengthening their balance sheets,

with several financial institutions able to raise significant amounts of capital to offset the large losses they

had suffered in recent quarters. Nevertheless, participants generally viewed financial markets as still vulnerable to additional economic and credit weakness. Some

noted the especially worrisome possibility of an adverse

feedback loop, that is, a situation in which a tightening

of credit conditions could depress investment and consumer spending, which, in turn, could feed back to a

further tightening of credit conditions.

In their discussion of individual sectors of the economy, meeting participants emphasized that activity in

housing markets had continued to deteriorate sharply.

With single-family permits and starts still falling, sales

of new homes dropping precipitously, sales of existing

homes flat, and inventories of unsold homes remaining

elevated even in the face of falling house prices, several

participants noted the absence of signs of stabilization

in the sector. Of further concern were the reduced

availability of nonconforming loans and the apparent

tightening by banks of credit standards on mortgages,

both of which had the potential for intensifying the

housing contraction. The recent declines in interest

rates had spurred a surge in applications for mortgage

refinancing and would limit the upward resets on the

rates on outstanding adjustable-rate mortgages, both of

which would tend to improve some households’ finances. Nonetheless, participants viewed the housing

situation and its potential further effect on employment, income, and wealth as one of the major sources

of downside risk to the economic outlook.

Page 11

Recent data as well as anecdotal information indicated

that consumer spending had decelerated considerably,

perhaps partly reflecting a spillover from the weakness

in the housing sector. Participants remarked that declining house prices and sales appeared to be depressing consumer sentiment and that the contraction in

wealth associated with decreases in home and equity

prices probably was restraining spending. In addition,

consumption expenditures were being damped by

slower growth in real disposable income induced by

high energy prices and possibly by a softening of the

labor market. The December employment report

showed that job growth had slowed appreciably, and

other indicators also pointed to emerging weakness in

the labor market in the intermeeting period. And

spending in the future could be affected by an ongoing

tightening in the availability of consumer credit amid

signs that lenders were becoming increasingly cautious

in view of some deterioration of credit performance on

consumer loans and widening expectations of slower

income growth. Some participants, however, cited evidence that workers in some sectors were still in short

supply and saw signs that the labor market remained

resilient.

The outlook for business investment had turned

weaker as well since the time of the December meeting.

Several participants reported that firms in their districts

were reducing capital expenditures in anticipation of a

slowing in sales. Manufacturing activity appeared to

have slowed or contracted in many districts. Although

a few participants reported more upbeat attitudes

among firms in the technology and energy sectors,

business sentiment overall appeared to be declining.

Moreover, a number of indicators pointed to a tightening in credit availability to businesses. For example, the

Senior Loan Officer Opinion Survey on Bank Lending

Practices indicated that banks had tightened lending

standards and pricing terms on business loans. Lending standards had been raised especially sharply on

commercial real estate loans. While real outlays for

nonresidential construction apparently continued to

rise through the fourth quarter, anecdotal evidence

pointed to a weakening of commercial real estate

spending in several districts, with some projects being

canceled or scaled back.

Most participants anticipated that a fiscal stimulus

package, including tax rebates for households and bonus depreciation allowances for businesses, would be

enacted before long and would support economic

growth in the second half of the year. Some pointed

Page 12

Federal Open Market Committee

out, however, that the fiscal stimulus package might

not help in the near term, when the risks of a downturn

in economic activity appeared largest. In addition, the

effects of the proposed package would likely be temporary, with the stimulus reversing in 2009.

With regard to the external sector, some participants

noted that growth abroad had recently been strong and

that increasing U.S. exports had been a significant

source of strength for the U.S. economy of late. However, available data suggested that economic activity

outside the United States appeared to be decelerating

somewhat. Although slowing foreign growth would

reduce a source of support for the U.S. economy at the

same time that domestic spending was slackening, it

could also damp commodity prices and help reduce

global price pressures.

Participants agreed that the inflation data that were

received since the December meeting had been disappointing. But many believed that the slow growth in

economic activity anticipated for the first half of this

year and the associated slack in resource utilization

would contribute to an easing of price pressures.

Moreover, a leveling-off of energy and commodity

prices such as that embedded in futures markets would

also help moderate inflation pressures. However, some

participants cautioned that commodity prices had remained stubbornly high for quite some time and that

inferences drawn in the past from futures markets

about likely trends in such prices had often proven inaccurate. Participants also related anecdotal evidence

of firms facing increasing input cost pressures and in

some cases being able to pass on those costs to consumers. Moreover, headline inflation had been generally above 2 percent over the past four years, and participants noted that such persistently elevated readings

could ultimately affect inflation expectations. Some

survey measures of inflation expectations had edged up

in recent months, and longer-term financial market

gauges of inflation compensation had climbed. The

latter probably reflected at least in part increased uncertainty—inflation risk—rather than greater inflation expectations; increases in nominal wages did not appear

to be incorporating higher inflation expectations. On

balance, expectations seemed to remain fairly well anchored, but participants agreed that continued stability

of inflation expectations was essential.

In the discussion of monetary policy for the intermeeting period, most members believed that a further significant easing in policy was warranted at this meeting

_

to address the considerable worsening of the economic

outlook since December as well as increased downside

risks. As had been the case in some previous cyclical

episodes, a relatively low real federal funds rate now

appeared appropriate for a time to counter the factors

that were restraining economic growth, including the

slide in housing activity and prices, the tightening of

credit availability, and the drop in equity prices. Members judged that a 50 basis point reduction in the federal funds rate, together with the Committee’s previous

policy actions, would bring the real short-term rate to a

level that was likely to help the economy expand at a

moderate pace over time. Still, with no signs of stabilization in the housing sector and with financial conditions not yet stabilized, the Committee agreed that

downside risks to growth would remain even after this

action. Members were also mindful of the need for

policy to promote price stability, and some noted that,

when prospects for growth had improved, a reversal of

a portion of the recent easing actions, possibly even a

rapid reversal, might be appropriate. However, most

members agreed that a 50 basis point easing at this

meeting would likely not contribute to an increase in

inflation pressures given the actual and expected weakness in economic growth and the consequent reduction

in pressures on resources. Rather, members agreed

that inflation was likely to moderate in coming quarters,

but they also concurred that it would be necessary to

continue to monitor inflation developments carefully.

The Committee agreed that the statement to be released after the meeting should indicate that financial

markets remained under considerable stress, that credit

had tightened further for some businesses and households, and that recent information pointed to a deepening of the housing contraction as well as to some softening in labor markets. The Committee again viewed

it as appropriate to indicate that it expected inflation to

moderate in coming quarters but also to emphasize that

it would be necessary to monitor inflation developments carefully. The action taken at the meeting, combined with the cumulative policy easing already in

place, should help to promote moderate growth over

time and to mitigate the risks to economic activity.

However, members concurred that downside risks to

growth remained, and that the Committee would continue to assess the effects of financial and other developments on economic prospects and would act in a

timely manner as needed to address those risks.

At the conclusion of the discussion, the Committee

voted to authorize and direct the Federal Reserve Bank

Minutes of the Meeting of January 29-30, 2008

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 3 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 50 basis points to 3 percent.

Financial markets remain under considerable

stress, and credit has tightened further for some

businesses and households. Moreover, recent

information indicates a deepening of the housing

contraction as well as some softening in labor

markets.

The Committee expects inflation to moderate in

coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Today’s policy action, combined with those

taken earlier, should help to promote moderate

growth over time and to mitigate the risks to

economic activity. However, downside risks to

growth remain. The Committee will continue to

assess the effects of financial and other developments on economic prospects and will act in a

timely manner as needed to address those risks.”

Votes for this action: Messrs. Bernanke, Geithner,

Kohn, Kroszner, and Mishkin, Ms. Pianalto, Messrs.

Plosser, Stern, and Warsh.

Votes against this action: Mr. Fisher.

Mr. Fisher dissented because he preferred to leave the

federal funds rate unchanged. The rate had been lowered by 75 basis points just one week earlier in a decision he supported, which brought the funds rate down

175 basis points since September. Given these actions,

he felt that monetary policy was already quite stimulative, while headline inflation was too high at more than

Page 13

3 percent over the last year. Demand-pull inflation

pressures from emerging-market economies abroad

appeared to be continuing, and anecdotal reports from

business contacts suggested greater willingness domestically to pass rising costs through to prices. Moreover,

Mr. Fisher was concerned that inflation expectations

could become unanchored if the perception of negative

real rates of interest were to become pervasive. At the

same time, the economy appeared to be still growing,

albeit at a substantially weakened pace. Given the policy tradeoffs confronting the FOMC at this time, Mr.

Fisher saw the upside risks to inflation as being greater

than the downside risks to longer-term economic

growth, especially in light of the recent, aggressive easing of monetary policy and the lag before it would have

its full effect on the economy.

The Committee then turned to a discussion of selected

longer-term regulatory and structural issues raised by

recent financial market developments. A staff presentation began by noting that the difficulties in financial

markets started with unexpectedly heavy losses on subprime mortgages and related structured securities,

which led investors to question the valuations of complex structured instruments more generally and to pull

back from such investments. The resulting effects in

markets put pressure on some large banking organizations, particularly through losses on subprimemortgage-related securities and other assets, and

through the unplanned expansion of balance sheets

triggered by the disruption of various markets in which

assets were securitized. The remainder of the presentation, and the discussion by meeting participants, focused on two issues: first, the important role of credit

ratings in the securitization process, including the

methods used to set ratings and the way investors use

ratings in making their investment decisions; and second, how weaknesses in risk management practices at

some large global financial services organizations appear to have led to outsized losses at those institutions,

and the reasons that such weaknesses may have

emerged at some firms and not at others.

It was agreed that the next meeting of the Committee

would be held on Tuesday, March 18, 2008.

The meeting adjourned at 1:15 p.m.

Notation Vote

By notation vote completed on December 31, 2007, the

Committee unanimously approved the minutes of the

FOMC meeting held on December 11, 2007.

Page 14

Federal Open Market Committee

Conference Calls

On January 9, 2008, the Committee reviewed recent

economic data and financial market developments.

The available information suggested that the downside

risks to growth had increased significantly since the

time of the December FOMC meeting. Participants

discussed the possibility that the slowing in economic

growth and associated softening in labor markets might

exacerbate the tightening in credit conditions and the

correction in housing market activity and prices, which

could in turn weigh further on economic activity. Participants emphasized the risks that such adverse dynamics could pose to economic and financial stability.

Participants noted that core price inflation had edged

up in recent months, boosted in part by the passthrough of higher energy costs to the prices of core

consumer goods and services. Inflation was expected

to edge lower this year as energy prices leveled off and

pressures on resources eased. However, this slowing in

inflation was dependent on inflation expectations remaining well anchored, and participants noted that

considerable uncertainty surrounded the inflation outlook.

Most participants were of the view that substantial additional policy easing in the near term might well be

necessary to promote moderate economic growth over

time and to reduce the downside risks to growth, and

participants discussed the possible timing of such policy actions.

On January 21, 2008, the Committee again met by conference call. Incoming information since the conference call on January 9 had reinforced the view that the

outlook for economic activity was weakening. Among

other developments, strains in some financial markets

had intensified, as it appeared that investors were becoming increasingly concerned about the economic

outlook and the downside risks to activity. Participants

discussed the possibility that these developments could

lead to an excessive pull-back in credit availability and

in investment. Although inflation was expected to

moderate from recent elevated levels, participants

stressed that this outlook relied upon inflation expectations remaining well anchored and that the inflation

situation should continue to be monitored carefully.

All members judged that a substantial easing in policy

in the near term was appropriate to foster moderate

economic growth and reduce the downside risks to

economic activity. Most members judged that an im-

_

mediate reduction in the federal funds rate was called

for to begin aligning the real policy rate with a weakening economic situation. Such an action, by demonstrating the Committee’s commitment to act decisively to

support economic activity, might reduce concerns

about economic prospects that seemed to be contributing to the deteriorating conditions in financial markets,

which could feed back on the economy. However,

some concern was expressed that an immediate policy

action could be misinterpreted as directed at recent

declines in stock prices, rather than the broader economic outlook, and one member believed it preferable

to delay policy action until the scheduled FOMC meeting on January 29-30. Some members also noted that

were policy to become very stimulative it would be important for the Committee to be decisive in reversing

the course of interest rates once the economy had

strengthened and downside risks had abated.

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 3½ percent."

The vote encompassed approval of the text below for

inclusion in the statement to be released at 8:30 a.m. on

Tuesday, January 22:

“The Federal Open Market Committee has decided to lower its target for the federal funds

rate 75 basis points to 3½ percent.

The Committee took this action in view of a

weakening of the economic outlook and increasing downside risks to growth. While strains in

short-term funding markets have eased somewhat, broader financial market conditions have

continued to deteriorate and credit has tightened

further for some businesses and households.

Moreover, incoming information indicates a

deepening of the housing contraction as well as

some softening in labor markets.

Minutes of the Meeting of January 29-30, 2008

The Committee expects inflation to moderate in

coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Appreciable downside risks to growth remain.

The Committee will continue to assess the effects of financial and other developments on

economic prospects and will act in a timely

manner as needed to address those risks.”

Votes for this action: Messrs. Bernanke, Geithner,

Evans, Hoenig, Kohn, Kroszner, Rosengren, and

Warsh.

Page 15

Votes against this action: Mr. Poole

Absent and not voting: Mr. Mishkin

Mr. Poole dissented because he did not believe that

current conditions justified policy action before the

regularly scheduled meeting the following week.

_____________________________

Brian F. Madigan

Secretary

Page 1

Summary of Economic Projections

In conjunction with the January 2008 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 2008, 2009, and 2010. Projections were

based on information available through the conclusion

of the January meeting, on each participant’s assumptions regarding a range of factors likely to affect economic outcomes, and on his or her assessment of appropriate monetary policy. “Appropriate monetary

policy” is defined as the future policy that, based on

current information, is deemed 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

output would grow at a pace appreciably below its

trend rate in 2008, owing primarily to a deepening of

the housing contraction and a tightening in the availability of household and business credit, and that the

unemployment rate would increase somewhat. Given

the substantial reductions in the target federal funds

rate through the January FOMC meeting as well as the

assumption of appropriate policy going forward, output

growth further ahead was projected to pick up to a

pace around or a bit above its long-run trend by 2010.

Inflation was expected to decline in 2008 and 2009

from its recent elevated levels as energy prices leveled

out and economic slack contained cost and price increases. Most participants judged that considerable

uncertainty surrounded their projections for output

growth and viewed the risks to their forecasts as

weighted to the downside. A majority of participants

viewed the risks to the inflation outlook as broadly balanced, but a number of participants saw the risks to

inflation as skewed to the upside.

The Outlook

The central tendency of participants’ projections for

real GDP growth in 2008, at 1.3 to 2.0 percent, was

considerably lower than the central tendency of the

projections provided in conjunction with the October

FOMC meeting, which was 1.8 to 2.5 percent. These

downward revisions to the 2008 outlook stemmed

from a number of factors, including a further intensification of the housing market correction, tighter credit

conditions amid increased concerns about credit quality

and ongoing turmoil in financial markets, and higher oil

prices. However, some participants noted that a fiscal

stimulus package would likely provide a temporary

boost to domestic demand in the second half of this

year. Beyond 2008, a number of factors were projected

to buoy economic growth, including a gradual turnaround in housing markets, lower interest rates associated with the substantial easing of monetary policy to

date and appropriate adjustments to policy going forward, and an anticipated reduction in financial market

strains. Real GDP was expected to accelerate somewhat in 2009 and by 2010 to expand at or a little above

participants’ estimates of the rate of trend growth.

With output growth running below trend over the next

year or so, most participants expected that the unemployment rate would edge higher. The central tendency

of participants’ projections for the average rate of unemployment in the fourth quarter of 2008 was 5.2 to

5.3 percent, above the 4.8 to 4.9 percent unemployment rate forecasted in October and broadly suggestive

of some slack in labor markets. The unemployment

rate was generally expected to change relatively little in

2009 and then to edge lower in 2010 as output growth

picks up, although in both years the unemployment

rate was projected to be a little higher than had been

anticipated in October.

The higher-than-expected rates of overall and core inflation since October, which were driven in part by the

steep run-up in oil prices, had caused participants to

revise up somewhat their projections for inflation in

the near term. The central tendency of participants’

projections for core PCE inflation in 2008 was 2.0 to

2.2 percent, up from the 1.7 to 1.9 percent central tendency in October. However, core inflation was expected to moderate over the next two years, reflecting

muted pressures on resources and fairly well-anchored

inflation expectations. Overall PCE inflation was projected to decline from its current elevated rate over the

coming year, largely reflecting the assumption that energy and food prices would flatten out. Thereafter,

overall PCE inflation was projected to move largely in

step with core PCE inflation.

Participants’ projections for 2010 were importantly

influenced by their judgments about the measured rates

of inflation consistent with the Federal 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

Page 2

Federal Open Market Committee

conditions. Many participants judged that, given the

recent adverse shocks to both aggregate demand and

inflation, policy would be able to foster only a gradual

return of key macroeconomic variables to their longerrun sustainable or optimal levels. Consequently, the

rate of unemployment was projected by some partici-

_

pants to remain slightly above its longer-run sustainable

level even in 2010, and inflation was judged likely still

to be a bit above levels that some participants judged

would be consistent with the Federal Reserve’s dual

mandate.

Table 1: Economic Projections of Federal Reserve Governors

and Reserve Bank Presidents

(Percent)

2008

2009

2010

1.3 to 2.0

1.8 to 2.5

2.1 to 2.7

2.3 to 2.7

2.5 to 3.0

2.5 to 2.6

Unemployment rate

October projections

5.2 to 5.3

4.8 to 4.9

5.0 to 5.3

4.8 to 4.9

4.9 to 5.1

4.7 to 4.9

PCE inflation

October projections

2.1 to 2.4

1.8 to 2.1

1.7 to 2.0

1.7 to 2.0

1.7 to 2.0

1.6 to 1.9

Core PCE inflation

October projections

2.0 to 2.2

1.7 to 1.9

1.7 to 2.0

1.7 to 1.9

1.7 to 1.9

1.6 to 1.9

Range2

Growth of real GDP

October projections

1.0 to 2.2

1.6 to 2.6

1.8 to 3.2

2.0 to 2.8

2.2 to 3.2

2.2 to 2.7

Unemployment rate

October projections

5.0 to 5.5

4.6 to 5.0

4.9 to 5.7

4.6 to 5.0

4.7 to 5.4

4.6 to 5.0

PCE inflation

October projections

2.0 to 2.8

1.7 to 2.3

1.7 to 2.3

1.5 to 2.2

1.5 to 2.0

1.5 to 2.0

Core PCE inflation

October projections

1.9 to 2.3

1.7 to 2.0

1.7 to 2.2

1.5 to 2.0

1.4 to 2.0

1.5 to 2.0

Central Tendency1

Growth of real GDP

October projections

Note: Projections of the growth of real GDP, of PCE inflation, and of core PCE inflation are percent changes from the fourth quarter of the previous year to the fourth

quarter of the year indicated. PCE inflation and core PCE inflation are the percentage

rates of change in, respectively, the price index for personal consumption expenditures

and the price index for personal consumption expenditures excluding food and energy.

Projections for the unemployment rate are for the average civilian unemployment rate

in the fourth quarter of the year indicated. Each participant's projections are based on

his or her assessment of appropriate monetary policy.

1. The central tendency excludes the three highest and three lowest projections for

each variable in each year.

2. The range for a variable in a given year includes all participants' projections, from

lowest to highest, for that variable in that year.

Summary of Economic Projections for the Meeting of January 29-30, 2008

Page 3

Chart 1: Central Tendencies and Ranges of Economic Projections*

Real GDP Growth

Percent

6

Central Tendency of Projections

Range of Projections

•

4

•

•

•

•

2004

2005

2006

2007

2

0

2003

2008

2009

Unemployment Rate

2010

Percent

8

7

•

•

6

•

•

5

•

4

3

2003

2004

2005

2006

2007

2008

2009

PCE Inflation

2010

Percent

5

•

•

4

•

•

3

•

2

1

0

2003

2004

2005

2006

2007

2008

2009

Core PCE Inflation

2010

Percent

5

4

•

•

•

•

3

•

2

1

0

2003

2004

2005

* See notes to Table 1 for variable definitions.

2006

2007

2008

2009

2010

Page 4

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. The possibility that house prices could decline more steeply than anticipated, further reducing

households’ wealth and access to credit, was perceived

as a significant risk to the central outlook for economic

growth and employment. In addition, despite some

recovery in money markets after the turn of the year,

financial market conditions continued to be strained—

stock prices had declined sharply since the December

meeting, concerns about further potential losses at major financial institutions had mounted amid worries

about the condition of financial guarantors, and credit

conditions had tightened in general for both households and firms. The potential for adverse interactions,

in which weaker economic activity could lead to a

worsening of financial conditions and a reduced availability of credit, which in turn could further damp economic growth, was viewed as an especially worrisome

possibility.

Regarding risks to the inflation outlook, several participants pointed to the possibility that real activity could

rebound less vigorously than projected, leading to more

downward pressure on costs and prices than anticipated. However, participants also saw a number of

upside risks to inflation. In particular, the pass-through

of recent increases in energy and commodity prices as

well as of past dollar depreciation to consumer prices

could be greater than expected. In addition, participants recognized a risk that inflation expectations could

become less firmly anchored if the current elevated

rates of inflation persisted for longer than anticipated

or if the recent substantial easing in monetary policy

was misinterpreted as reflecting less resolve among

Committee members to maintain low and stable inflation. On balance, a larger number of participants than

in October viewed the risks to their inflation forecasts

as broadly balanced, although several participants continued to indicate that their inflation projections were

skewed to the upside.

The ongoing financial market turbulence and tightening

of credit conditions had increased participants’ uncertainty about the outlook for economic activity. Most

participants judged that the uncertainty attending their

January projections for real GDP growth and for the

unemployment rate was above typical levels seen in the

past. (Table 2 provides an estimate of average ranges

of forecast uncertainty for GDP growth, unemploy-

_

ment, and inflation over the past twenty years.1) In

contrast, the uncertainty 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 inflation was higher than normal.

Table 2: Average Historical Projection Error

Ranges

(Percentage Points)

Real GDP1

Unemployment

rate2

Total consumer

prices3

2008

2009

2010

±1.2

±1.4

±1.4

±0.5

±0.8

±1.0

±1.0

±1.0

±0.9

Note: Error ranges shown are measured as plus or minus the root mean squared error of projections that were

released in the winter from 1986 through 2006 for the current and following two years by various private and government forecasters. As described in the box “Forecast Uncertainty,” under certain assumptions, there is about a 70 percent probability that actual outcomes for real GDP, unemployment, and consumer prices will be in ranges implied by

the average size of projection errors made in the past. Further information is in David Reifschneider and Peter Tulip

(2007), “Gauging the Uncertainty of the Economic Outlook

from Historical Forecasting Errors,” Finance and Economics Discussion Series #2007-60 (November).

1. Projection is percent change, fourth quarter of the

previous year to fourth quarter of the year indicated.

2. Projection is the fourth quarter average of the civilian

unemployment rate (percent).

3. Measure is the overall consumer price index, the price

measure that has been most widely used in government and

private economic forecasts. Projection is percent change,

fourth quarter of the previous year to the fourth quarter of

the year indicated. The slightly narrower estimated width of

the confidence interval for inflation in the third year compared with those for the second and third years is likely the

result of using a limited sample period for computing these

statistics.

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 was markedly

wider than in the forecasts submitted in October,

which in turn were considerably more diverse than

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

Summary of Economic Projections for the Meeting of January 29-30, 2008

those submitted in conjunction with the June FOMC

meeting and included in the Board’s Monetary Policy Report to the Congress in July. Mirroring the increase in diversity of views on real GDP growth, the dispersion of

participants’ projections for the rate of unemployment

also widened notably, particularly for 2009 and 2010.

The dispersion of projections for output and employment seemed largely to reflect differing assessments of

the effect of financial market conditions on real activity, the speed with which credit conditions might improve, and the depth and duration of the housing market contraction. The dispersion of participants’ longerterm projections was also affected to some degree by

differences in their judgments about the economy’s

trend growth rate and the unemployment rate that

would be consistent over time with maximum em-

Page 5

ployment. Views also differed about the pace at which

output and employment would recover toward those

levels over the forecast horizon and beyond, given appropriate monetary policy. The dispersion of the projections for PCE inflation in the near term partly reflected different views on the extent to which recent

increases in energy and other commodity prices would

pass through into higher consumer prices and on the

influence that inflation expectations would exert on

inflation over the short and medium run. Participants’

inflation projections further out were influenced by

their views of the rate of inflation consistent with the

Federal Reserve’s dual objectives and the time it would

take to achieve these goals given current economic

conditions and appropriate policy.

Page 6

Federal Open Market Committee

_

Chart 2(a): Distribution of Participants’ Projections (percent)

Real GDP

2008

Unemployment Rate

2008

Number of Participants

January Projections

October Projections

16

14

12

10

8

6

4

2

0

1.0 - 1.2 - 1.4 - 1.6 - 1.8 - 2.0 - 2.2 - 2.4 - 2.6 - 2.8 - 3.0 - 3.2 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3

2009

Number of Participants

January Projections

October Projections

4.6 4.7

4.8 4.9

5.0 5.1

5.2 5.3

2009

Number of Participants

5.4 5.5

5.6 5.7

Number of Participants

16

14

12

10

8

6

4

2

0

1.0 - 1.2 - 1.4 - 1.6 - 1.8 - 2.0 - 2.2 - 2.4 - 2.6 - 2.8 - 3.0 - 3.2 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3

2010

16

14

12

10

8

6

4

2

0

4.6 4.7

4.8 4.9

5.0 5.1

5.2 5.3

2010

Number of Participants

5.4 5.5

5.6 5.7

Number of Participants

16

14

12

10

8

6

4

2

0

1.0 - 1.2 - 1.4 - 1.6 - 1.8 - 2.0 - 2.2 - 2.4 - 2.6 - 2.8 - 3.0 - 3.2 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3

16

14

12

10

8

6

4

2

0

16

14

12

10

8

6

4

2

0

4.6 4.7

4.8 4.9

5.0 5.1

5.2 5.3

5.4 5.5

5.6 5.7

Summary of Economic Projections for the Meeting of January 29-30, 2008

Page 7

Chart 2(b): Distribution of Participants’ Projections (percent)

PCE Inflation

2008

Core PCE Inflation

Number of Participants

January Projections

October Projections

1.5 1.6

2008

1.7 1.8

1.9 2.0

2.1 2.2

2.3 2.4

2009

2.5 2.6

16

14

12

10

8

6

4

2

0

2.7 2.8

Number of Participants

16

14

12

10

8

6

4

2

0

January Projections

October Projections

1.3 1.4

1.5 1.6

1.7 1.8

1.9 2.0

2009

Number of Participants

2.1 2.2

2.3 2.4

Number of Participants

16

14

12

10

8

6

4

2

0

1.5 1.6

1.7 1.8

1.9 2.0

2.1 2.2

2.3 2.4

2010

2.5 2.6

2.7 2.8

16

14

12

10

8

6

4

2

0

1.3 1.4

1.5 1.6

1.7 1.8

1.9 2.0

2010

Number of Participants

2.1 2.2

2.3 2.4

Number of Participants

16

14

12

10

8

6

4

2

0

1.5 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

16

14

12

10

8

6

4

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

Page 8

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

between 1.8 percent to 4.2 percent in the current year, and 1.6 percent to 4.4 percent in

the second and third years. The corresponding 70 percent confidence intervals for overall inflation would be 1 percent to 3 percent in the current and second years, and 1.1

percent to 2.9 percent in the third year.

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.

_