fomc minutes · October 28, 2008

FOMC Minutes

Page 1

Minutes of the Federal Open Market Committee

October 28-29, 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, October 28, 2008 at 2:00 p.m. and continued on

Wednesday, October 29, 2008 at 9:00 a.m.

Mr. Struckmeyer,1 Deputy Staff Director, Office of

Staff Director for Management, Board of

Governors

Mr. Blanchard, Assistant to the Board, Office of

Board Members, Board of Governors

PRESENT:

Mr. Bernanke, Chairman

Mr. Geithner, Vice Chairman

Ms. Duke

Mr. Fisher

Mr. Kohn

Mr. Kroszner

Ms. Pianalto

Mr. Plosser

Mr. Stern

Mr. Warsh

Messrs. Reifschneider and Wascher, Associate Directors, Division of Research and Statistics,

Board of Governors

Messrs. Levin and Nelson, Associate Directors,

Division of Monetary Affairs, Board of Governors

Ms. Kole, Assistant Director, Division of International Finance, Board of Governors

Ms. Cumming, Messrs. Evans, Lacker, and Lockhart, and Ms. Yellen, Alternate Members of the

Federal Open Market Committee

Mr. McCarthy, Visiting Reserve Bank Officer, Division of Monetary Affairs, Board of Governors

Messrs. Bullard, Hoenig, and Rosengren, Presidents of the Federal Reserve Banks of St.

Louis, Kansas City, and Boston, respectively

Mr. Oliner, Senior Adviser, Division of Research

and Statistics, Board of Governors

Mr. Small, Project Manager, 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

Messrs. Bassett and Luecke, Section Chiefs, Division of Monetary Affairs, Board of Governors

Mr. Morin, Senior Economist, Division of Research and Statistics, Board of Governors

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

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

Messrs. Rosenblum, Slifman, Sniderman, and

Wilcox, Associate Economists

Mr. Moore, First Vice President, Federal Reserve

Bank of Cleveland

Mr. Dudley, Manager, System Open Market Account

Mr. Fuhrer, Executive Vice President, Federal Reserve Bank of Boston

Ms. Bailey, Deputy Director, Division of Banking

Supervision and Regulation, Board of Governors

Mr. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors

Messrs. Altig and McAndrews, Ms. Mosser,

Messrs. Rasche, Sullivan, and Williams, Senior

Vice Presidents, Federal Reserve Banks of At1

Attended Wednesday’s session only.

Page 2

Federal Open Market Committee

lanta, New York, New York, St. Louis, Chicago, and San Francisco, respectively

Messrs. Clark and Hornstein, Vice Presidents, Federal Reserve Banks of Kansas City and Richmond, respectively

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

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.

In the discussion of System open market operations

over the period, it was noted that reserve management

had become more complex as a result of the large provision of reserves associated with the recent expansion

of the Federal Reserve’s liquidity facilities; in particular,

the effective federal funds rate had been persistently

below the FOMC’s target. While the payment of interest on reserves seemed to be helpful in mitigating

downward pressure on the funds rate, a number of institutions evidently were willing to sell funds at interest

rates below that paid on excess reserve balances. Anecdotal reports suggested that this was particularly the

case for those institutions that are not eligible to receive

interest on the balances they maintain at the Federal

Reserve. Going forward, however, the interest rate on

excess reserve balances could be adjusted, and it might

establish a more effective floor on the federal funds

rate over time as more depository institutions revise

their strategies in the federal funds market in light of

the payment of interest on reserves.

In view of a further widening in financial market strains

internationally, the Committee considered proposals to

establish temporary reciprocal currency (“swap”) arrangements with several additional foreign central

banks. Members unanimously approved the following

resolution, which effectively permitted the Foreign

Currency Subcommittee to establish a swap line with

the Reserve Bank of New Zealand.

“The FOMC amends paragraph 1.A. of the Authorization for Foreign Currency Operations to

include the New Zealand dollar in the list of foreign currencies in which the Federal Reserve

Bank of New York may transact for the System

Open Market Account.”

Meeting participants also discussed a proposal to set up

temporary liquidity-related swap arrangements with the

central banks of Mexico, Brazil, Korea, and Singapore.

In their remarks, participants focused on the outlook

for complementarity between these swaps and the new

short-term liquidity facility that the International Monetary Fund was considering; on the governance and

structure of the swap lines; and on the particular countries included. Several participants pointed to the international reserves held by the countries and the importance of ensuring that these temporary swap lines,

like the others that had been established during this

period, be used only for the purposes intended. On

balance, the Committee concluded that in current circumstances the swap arrangements with these four

large and systemically important economies were appropriate, and it unanimously approved the following

resolutions.

“The FOMC directs the Federal Reserve Bank

of New York to establish and maintain a reciprocal currency arrangement (“swap arrangement”) for the System Open Market Account

with each of (i) the Banco Central do Brasil, (ii)

the Bank of Korea, (ii) the Banco de Mexico,

and (iv) the Monetary Authority of Singapore.

Each such swap arrangement would be for an

aggregate amount not to exceed $30 billion.

Drawings under the arrangement require approval. Unless extended by the Committee, each

such swap arrangement shall expire on April 30,

2009.

The FOMC amends paragraph 1.A. of the Authorization for Foreign Currency Operations to

include the Brazilian real, the Korean won, and

the Singapore dollar in the list of foreign currencies in which the Federal Reserve Bank of New

York may transact for the System Open Market

Account.

The FOMC delegates to the Foreign Currency

Subcommittee the authority to approve individual drawing requests of up to $5 billion under

each of the aforementioned swap arrangements

with the Banco Central do Brasil, the Bank of

Minutes of the Meeting of October 28-29, 2008

Page 3

Korea, the Banco de Mexico, and the Monetary

Authority of Singapore.”

declined in September, and weekly unemployment insurance claims continued to rise in October.

A number of adverse financial developments influenced economic and financial market conditions over

the intermeeting period. Lehman Brothers Holdings

had filed for bankruptcy the day before the meeting of

the Committee in September. In large part because of

losses on Lehman debt, the net asset value of a major

money market mutual fund fell below $1 per share,

spurring a substantial outflow from money market mutual funds and straining their liquidity. The rapid deterioration of American International Group, Inc. (AIG),

and Wachovia Corporation, along with the closing of

Washington Mutual, led to intensified market concerns

about the condition of financial institutions. In this

environment, investors pulled back from risk-taking,

funding markets for terms beyond overnight largely

ceased to function at times, credit risk spreads rose

sharply, and equity prices registered steep declines.

Industrial production dropped sharply in September.

Although much of the decline was due to the effects of

the recent hurricanes and a strike at an aircraft manufacturer, most major industries experienced slow or

declining output in recent months. Motor vehicle assemblies were unchanged in the third quarter at a low

level. The pace of high-tech equipment production

slowed in the third quarter relative to its rate in the first

half of the year, reportedly in part because tight credit

conditions were restraining demand. Available information suggested that demand and production in this

sector were likely to remain relatively subdued over the

coming months. The output of other manufacturing

sectors declined in the third quarter. While standard

indicators of near-term production suggested factory

output would decline further over the next few

months, the recovery of production in industries affected by the hurricanes was expected to offset these

declines to a degree. The factory utilization rate fell in

September to well below its long-run average.

The information reviewed at the October meeting indicated that economic conditions deteriorated in recent

months. The labor market weakened further in September as private payrolls fell at a faster pace than earlier in the year and the unemployment rate remained

above 6 percent. Industrial production fell in September, although much of the drop was related to effects

of recent hurricanes and a strike at an aircraft manufacturer. Consumer spending declined, reflecting stagnant

real income, tighter credit, declining wealth, and concerns about economic conditions. The housing market

remained weak, with construction activity, new home

sales, and home prices falling further. Business spending on equipment and software appeared to have declined again in the third quarter, and indicators of investment in structures weakened. Economic activity in

many foreign economies slowed in recent months.

Headline consumer inflation measures, pulled down by

declines in consumer energy prices, moderated in August and September. Core consumer inflation measures also eased somewhat in these two months.

The labor market continued to weaken. According to

the September labor market report, the unemployment

rate remained at 6.1 percent, but private payroll employment fell faster than the average pace earlier in the

year. Most major industry groups shed jobs. The

manufacturing, construction, and temporary help industries continued to experience sizable losses in employment; meanwhile, retail trade and financial services

registered larger declines than earlier in the year. Nonbusiness services added jobs, but at the slowest rate of

the year. The average workweek and aggregate hours

Real personal consumption expenditures (PCE) apparently declined in September for the fourth consecutive

month. Motor vehicle sales fell back to their very low

July pace, and preliminary reports indicated that the

slump continued into October, as tighter credit conditions were restraining demand. Purchases of goods

other than motor vehicles were estimated to have fallen

noticeably. Real outlays on services other than energy

increased only modestly in July and August. Real disposable income, excluding the effects of tax rebates

and the emergency unemployment benefits, was little

changed in July and August from the second-quarter

average. Measures of consumer sentiment dropped in

October to near or below their low levels of midyear,

with the Conference Board measure exceptionally low.

Residential construction activity continued to decline

steeply through the third quarter. In September, both

single-family housing starts and permit issuance fell. In

the multifamily sector, starts edged up in September

but remained toward the lower end of their two-year

range. New home sales in August and September were

at a pace well below that of the first half of the year.

Although the cutbacks in homebuilding had reduced

the inventory of unsold houses, the slower rate of sales

kept the months’ supply of new homes very elevated

relative to the level that had prevailed before the downturn in the housing market. Sales of existing singlefamily homes in September were somewhat higher than

they had been earlier in the year, likely supported by

Page 4

Federal Open Market Committee

increases in foreclosure-related sales. Tight conditions

in mortgage markets continued to restrain housing demand, especially for borrowers needing nonconforming

mortgages. Several indexes indicated that house prices

declined substantially over the 12 months through August.

In the business sector, investment in equipment and

software appeared to weaken further in the third quarter. Nominal shipments of nondefense capital goods

excluding aircraft were flat in the third quarter, while

orders for those goods declined. Demand for hightech equipment appeared to have softened considerably, and spending on non-high-tech, non-transportation

equipment was estimated to have fallen. Transportation equipment investment was held down in the third

quarter by falling sales for medium and heavy trucks

and by a strike-induced drop in aircraft deliveries in

September. Nominal expenditures on nonresidential

structures declined for the second consecutive month

in August. Forward-looking indicators turned more

downbeat: Vacancy rates for commercial properties

rose further, property values declined, and the architectural billings index fell in September. Furthermore, the

latest Senior Loan Officer Opinion Survey on Bank

Lending Practices indicated that banks tightened lending standards for commercial real estate loans over the

past three months.

The book-value data for manufacturing and trade inventories suggested that the real value of inventories

continued to decline over the summer through August,

but a number of indicators suggested that stocks in

some industries remained above desired levels. The

days’ supply of light motor vehicles at dealers had risen,

on balance, through the year and was rather high in

September. The ratio of book-value inventories to

sales in the manufacturing and trade sectors, excluding

motor vehicles, rose in August, particularly in a number

of durable goods sectors. In addition, the index of customers’ inventories in the Institute of Supply Management’s manufacturing survey indicated that inventories

remained above desired levels.

The U.S. international trade deficit narrowed in August,

with a decline in the value of imports more than offsetting a fall in the value of exports of goods and services.

A drop in the value of petroleum imports, which reflected both lower volumes and a decrease in prices,

exceeded an increase in non-oil imports that was driven

by a rise in imports of consumer goods and industrial

supplies. Exports of automotive products fell sharply

in August after a surge in July, and exports of consumer goods, industrial supplies, and services moved

down after strong increases in previous months. Aircraft exports surged, but sales of other capital goods

declined.

The data for the advanced foreign economies during

the intermeeting period generally suggested that economic activity was weakening further, and confidence

indicators in these areas declined as the financial crisis

worsened. Labor market conditions deteriorated in

these economies, with the exception of Canada. Real

gross domestic product (GDP) fell in the United Kingdom in the third quarter. Headline inflation continued

to be elevated in many economies, but the most recent

consumer price indexes for Japan and for the euro area

suggested some deceleration in prices.

In emerging market economies, data received over the

intermeeting period showed a continued slowing of real

activity. Real GDP growth in China moved down in

the third quarter. Industrial production contracted in

recent months for many countries. External balances

deteriorated significantly in many emerging market

economies as exports to advanced economies slowed.

Headline inflation in emerging market economies

eased, reflecting falling oil and food prices.

Headline consumer prices in the United States were

estimated to have risen only modestly in September,

extending the recent moderation of overall inflation

following the rapid increases earlier in the year. Consumer energy prices fell for the second consecutive

month, while retail food prices continued to climb at a

rapid pace, boosted by the substantial run-up in farm

commodity prices through midyear. Core consumer

price inflation rose somewhat during the third quarter,

reflecting the pass-through of previous increases in the

costs of energy and materials and import prices. Those

upward price pressures diminished recently: Prices of

oil and other commodities fell sharply over the intermeeting period, and non-oil import prices as well as

producer prices of intermediate materials excluding

food and energy declined in September. Some survey

measures of inflation expectations declined during the

period. Available measures of hourly labor compensation increased at about the same moderate pace as over

the past several years.

At its September meeting, the Federal Open Market

Committee (FOMC) kept the target federal funds rate

unchanged at 2 percent. The Committee’s statement

noted that strains in financial markets had increased

significantly and that labor markets had weakened further. Economic growth appeared to have slowed recently, which partly reflected a softening of household

Minutes of the Meeting of October 28-29, 2008

spending. Tight credit conditions, the ongoing housing

contraction, and some slowing in export growth were

likely to weigh on economic growth over the next few

quarters. The Committee stated that, over time, the

substantial easing of monetary policy, combined with

ongoing measures to foster market liquidity, should

help promote moderate economic growth. Inflation

had been high, spurred by the earlier increases in the

prices of energy and some other commodities. The

Committee expected inflation to moderate later this

year and next year, but the inflation outlook remained

highly uncertain. The downside risks to growth and

the upside risks to inflation were both of significant

concern to the Committee. The Committee indicated

that it would continue to monitor economic and financial developments carefully and would act as needed to

promote sustainable economic growth and price stability.

Over the intermeeting period, market participants

marked down their expectations for the path of the

federal funds rate for the next two years. The Committee’s decision to leave the target federal funds rate unchanged at the September FOMC meeting led some

investors to scale back expectations for policy easing

over the next year. Subsequently, however, market

expectations reversed in response to the heightened

financial turmoil and to generally weaker-than-expected

economic data. The Committee’s decision to reduce

the target federal funds rate 50 basis points as part of a

coordinated action with other central banks on October 8, along with the accompanying statement, led investors to mark down further the expected path for the

federal funds rate. Yields on short-term nominal

Treasury coupon securities declined over the intermeeting period, reportedly as a result of substantial flight-toquality flows and heightened demand for liquidity. In

contrast, higher term premiums and expectations of

increases in the supply of Treasury securities associated

with the Emergency Economic Stabilization Act and

other initiatives seemed to put upward pressure on

longer-term nominal Treasury yields. Yields on longerterm inflation-indexed Treasury securities, which are

relatively illiquid, rose more sharply than did those on

nominal securities. Measures of inflation compensation

based on differences between nominal and inflationindexed Treasury yields were quite volatile over the

intermeeting period and, because of shifting liquidity

premiums, likely provided less information than usual

concerning inflation expectations or inflation uncertainty.

Page 5

In the wake of the failures or near failures of several

large financial institutions, short-term funding markets

came under significant additional pressure over the intermeeting period, and the Federal Reserve and other

central banks took a number of actions to provide liquidity and improve market functioning. In the overnight federal funds market, financial institutions became more selective about the counterparties with

whom they were willing to trade. The overnight London interbank offered rate (Libor) rose substantially,

and the spread of term Libor rates over comparablematurity overnight index swap (OIS) rates rose sharply

from already-high levels. The demand for commercial

paper declined as prime money market mutual funds

experienced large net outflows after the net asset value

of one such fund fell below $1 per share. As a consequence, risk spreads on commercial paper rose considerably and were very volatile. Amid strong flows into

government-only money market mutual funds, the demand for short-dated Treasury bills rose, and these

securities traded with very low yields despite sizable

new issuance during the period. The market for repurchase agreements (repos) also experienced significant

dislocations during the intermeeting period. Partly because of high demand for Treasury securities, the overnight repo rate for Treasury general collateral was near

zero for much of the period, and failures to deliver

Treasury securities reached record highs. Repo rates

on agency collateral also were volatile, and liquidity in

non-Treasury, non-agency repo markets was poor.

Conditions in short-term funding markets improved

somewhat following the announcements of a U.S. government guarantee of certain liabilities of U.S. banking

organizations and similar actions by foreign authorities,

the expansion of swap arrangements between the Federal Reserve and other central banks, and a number of

initiatives by the Federal Reserve and the Treasury to

address the pressures on money market mutual funds

and the commercial paper market.

In longer-term credit markets, yields and spreads on

investment-grade and speculative-grade corporate

bonds increased, while indexes of credit default swap

(CDS) spreads for investment-grade financial and nonfinancial firms reached unprecedented levels. Liquidity

in the corporate bond and CDS markets was strained.

Issuance of investment-grade corporate bonds was

moderate in September and October, while there was

little issuance of speculative-grade bonds. Commercial

and industrial loans continued to expand rapidly in

early October, as firms drew on existing bank lines of

credit. However, conditions deteriorated in the secon-

Page 6

Federal Open Market Committee

dary market for syndicated leveraged loans, with prices

falling to new lows and bid-asked spreads widening

notably. Broad equity price indexes declined sharply

over the intermeeting period, and option-implied volatility on the S&P 500 index rose well above its previous

record high. The Senior Loan Officer Opinion Survey

pointed to further tightening of terms and standards

for consumer loans. Consumer credit increased at its

slowest pace in more than 15 years during the three

months ending in August. Conditions in the municipal

bond market were also poor over much of the intermeeting period.

The strains from the banking and credit crisis intensified and took on a more global aspect over the intermeeting period. This development and the related erosion of the economic outlook and reduction in inflationary pressures led many central banks to reduce their

policy rates, including in the internationally coordinated

action announced on October 8. Liquidity conditions

in the money markets of major foreign economies deteriorated further. Spreads between term Libor and OIS

rates in euros and sterling rose from already-elevated

levels, although by less than in dollars. Sovereign bond

yields in the advanced foreign economies were volatile;

nominal yield curves in many countries steepened on

net. Equity market indexes fell sharply in the advanced

economies as well as in emerging market economies,

which until recently had not been hit as hard by the

financial turmoil. The dollar appreciated against most

currencies, with the prominent exception of the Japanese yen.

In the United States, M2 accelerated sharply in September, and it appeared to be on pace for another large

increase in October, apparently reflecting a heightened

preference by households and firms for safe assets.

Liquid deposits expanded strongly in September, but

leveled off in early October. Small time deposits increased briskly in September and early October as

banks and thrifts reportedly continued to bid aggressively for these deposits. Retail money funds, which

were little changed in September, experienced significant net inflows in early October. In contrast, institutional money funds, which are not included in M2, experienced substantial outflows during this period.

In response to the extraordinary stresses in financial

markets, the Federal Reserve together with other U.S.

government agencies and many foreign central banks

and governments implemented a number of unprecedented policy initiatives during the intermeeting period.

Early in the period, the condition of AIG, a large complex financial institution, deteriorated rapidly. In view

of the likely systemic implications and the potential for

significant adverse effects on the economy of a disorderly failure of AIG, the Federal Reserve Board on

September 16, with the support of the Treasury, authorized the Federal Reserve Bank of New York to

lend up to $85 billion to the firm to assist it in meeting

its obligations and to facilitate the orderly sale of some

of its businesses. On October 8, the Federal Reserve

announced a supplemental liquidity arrangement for

AIG.

The Federal Reserve Board also approved a number of

new facilities to address strains in short-term funding

markets. On September 19, it announced the AssetBacked Commercial Paper Money Market Mutual Fund

Liquidity Facility (AMLF), which extends nonrecourse

loans at the primary credit rate to U.S. depository institutions and bank holding companies to finance the purchase of high-quality asset-backed commercial paper

(ABCP) from money market mutual funds. On October 7, the Board announced the creation of the Commercial Paper Funding Facility (CPFF), which provides

a liquidity backstop to U.S. issuers of highly rated

commercial paper through a special-purpose vehicle

that purchases three-month unsecured commercial paper and ABCP directly from eligible issuers. On October 21, it publicized the creation of the Money Market

Investor Funding Facility (MMIFF), under which the

Federal Reserve Bank of New York will provide funding to a series of special-purpose vehicles to facilitate

an industry-supported initiative to finance the purchase

of certain highly rated certificates of deposit, bank

notes, and commercial paper from U.S. money market

mutual funds. The AMLF, CPFF, and MMIFF were

intended to improve the liquidity in short-term debt

markets and ease the strains in credit markets more

broadly.

In addition, to address the sizable demand for dollar

funding in foreign jurisdictions, the FOMC authorized

the expansion of its existing swap lines with the European Central Bank and Swiss National Bank; by the end

of the intermeeting period, the formal quantity limits

on these lines had been eliminated. The quantity limits

were also lifted on new swap lines set up with the Bank

of Japan and the Bank of England. The FOMC authorized new swap lines with five other central banks

during the period. In domestic markets, the Federal

Reserve raised the regular auction amounts of the 28and 84-day maturity Term Auction Facility (TAF) auctions to $150 billion each. Also, the Federal Reserve

announced two forward TAF auctions for $150 billion

each, to be conducted in November to provide funding

Minutes of the Meeting of October 28-29, 2008

over year-end. In total, up to $900 billion of TAF

credit over year-end was authorized.

Despite the substantial provision of liquidity by the

Federal Reserve and other central banks, functioning in

many credit markets remained very poor, a situation

that reflected market participants’ uncertainty about

their liquidity needs and their future access to funding

as well as concerns about the health of many financial

institutions. To strengthen confidence in U.S. financial

institutions, the Treasury, the Federal Reserve, and the

Federal Deposit Insurance Corporation (FDIC) issued

a joint statement on October 14, which included several elements. First, the Treasury announced a voluntary capital purchase plan under which eligible financial

institutions could sell preferred shares to the U.S. government. Second, the FDIC provided a temporary

guarantee of the senior unsecured debt of all FDICinsured institutions and their holding companies, as

well as all balances in non-interest-bearing transaction

deposit accounts. The statement included notice that

nine major financial institutions had agreed to participate in both the capital purchase program and the

FDIC guarantee program. Third, the Federal Reserve

announced details of the CPFF, which was scheduled

to begin on October 27. After this joint statement and

the announcements of similar programs in a number of

other countries, financial market pressures appeared to

ease somewhat, though conditions remained strained.

The expansion of existing liquidity facilities as well as

the creation of new facilities contributed to a notable

increase in the size of the Federal Reserve’s balance

sheet. The amount of primary credit outstanding rose

considerably over the intermeeting period, with both

foreign and domestic depository institutions making

use of the discount window. TAF credit outstanding

more than doubled over the period. Credit extended

through the Primary Dealer Credit Facility rose rapidly

ahead of quarter-end; although it subsided subsequently, the amount of credit outstanding remained

well above the levels seen before mid-September. The

Term Securities Lending Facility (TSLF) auctions conducted over the intermeeting period had very high demand; in addition, dealers exercised most of the options for TSLF loans spanning the September quarterend.

Two initiatives were introduced over the intermeeting

period to help manage the expansion of the balance

sheet and promote control of the federal funds rate.

First, on September 17, the Treasury announced a temporary Supplementary Financing Program at the request of the Federal Reserve. Under this program, the

Page 7

Treasury issued short-term bills over and above its

regular borrowing program, with the proceeds deposited at the Federal Reserve. This facility helped offset

the provision of reserves to the banking system

through the various liquidity facilities. Second, employing authority granted under the Emergency Economic

Stabilization Act, the Federal Reserve Board announced on October 6 that it would pay interest on

required and excess reserve balances beginning on October 9. The payment of interest on excess reserve

balances was intended to assist in maintaining the federal funds rate close to the target set by the Committee.

Initially, the interest rate on required reserves was set at

the average target federal funds rate over each reserve

maintenance period less 10 basis points, while the rate

on excess reserves was set at the lowest target federal

funds rate over each reserve maintenance period less 75

basis points. On October 22, the rate on excess reserves was adjusted to be the lowest target federal

funds rate during the maintenance period less 35 basis

points.

In the forecast prepared for the meeting, the staff lowered its projection for economic activity in the second

half of 2008 as well as in 2009 and 2010. Real GDP

appeared to have declined in the third quarter, and the

few available indicators that reflected conditions following the intensification of the financial market turmoil in mid-September pointed to another decline in

the fourth quarter. The declines in stock-market

wealth, low levels of consumer sentiment, weakened

household balance sheets, and restrictive credit conditions were likely to hinder household spending over the

near term. Business expenditures also probably would

be held back by a weaker sales outlook and tighter

credit conditions. The staff expected that real GDP

would continue to contract somewhat in the first half

of 2009 and then rise in the second half, with the result

that real GDP would be about unchanged for the year.

Although futures markets pointed to a lower trajectory

for oil prices than at the time of the September meeting, real activity was expected to be restrained by further contraction in residential investment, reduced

household wealth, continued tight credit conditions,

and a deterioration of foreign economic performance.

In 2010, real GDP growth was expected to pick up to

near the rate of potential growth, as the restraints on

household and business spending from the financial

market tensions were anticipated to begin to ease and

the contraction in the housing market to come to an

end. With growth below its potential rate for an extended period, the unemployment rate was expected to

Page 8

Federal Open Market Committee

rise significantly through early 2010. The staff reduced

its forecast for both core and overall PCE inflation, as

the disinflationary effects of the receding cost pressures

of energy, materials, and import prices and of resource

slack were expected to be greater than at the time of

the September FOMC meeting. Core inflation was

projected to slow considerably in 2009 and then to

edge down further in 2010.

In conjunction with this FOMC meeting, all participants—that is, Federal Reserve Board members and

Reserve Bank presidents—provided annual projections

for economic growth, the unemployment rate, and inflation for the period 2008 through 2011. 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, FOMC meeting participants indicated that the

worsening financial situation, the slowdown in growth

abroad, and incoming information on economic activity

had led them to mark down significantly their outlook

for growth. While economic activity had evidently already been slowing over the summer, the turmoil in

recent weeks had apparently resulted in tighter financial

conditions and greater uncertainty among businesses

and households about economic prospects, further limiting their ability and willingness to make significant

spending commitments. Recent measures of business

and consumer sentiment had fallen to historical lows.

Participants generally expected the economy to contract moderately in the second half of 2008 and the first

half of 2009, and agreed that the downside risks to

growth had increased. While some expected an improving financial situation to contribute to a recovery

in growth by mid-2009, others judged that the period

of economic weakness could persist for some time.

Several participants indicated that they expected some

fiscal stimulus in coming quarters, but they were uncertain about the extent and duration of the resulting support to economic activity. Participants agreed that in

coming quarters inflation was likely to move down to

levels consistent with price stability, reflecting the recent declines in the prices of energy and other commodities, the appreciation of the dollar, and the expected widening of margins of resource slack. Indeed,

some saw a risk that over time inflation could fall below levels consistent with the Federal Reserve’s dual

objectives of price stability and maximum employment.

Participants noted that financial conditions had worsened significantly over the intermeeting period. The

failure or near failure of a number of major financial

institutions had deepened market concerns about counterparty credit risk and liquidity risk. As a result, financial intermediaries had cut back on lending to some

counterparties, particularly for terms beyond overnight,

and in general were conserving liquidity and capital.

Moreover, risk aversion of investors increased, driving

credit spreads sharply higher. Survey results and anecdotal information also suggested that credit conditions

had tightened significantly further for businesses and

households. Equity prices had varied widely and were

substantially lower, on net. Participants saw the potential for financial strains to intensify if some investors,

such as hedge funds, found it necessary to sell assets

and as lending institutions built reserves against losses.

Participants were concerned that the negative spiral in

which financial strains lead to weaker spending, which

in turn leads to higher loan losses and a further deterioration in financial conditions, could persist for a while

longer. While the global efforts to recapitalize banks

and guarantee deposits had helped stabilize the situation, risk spreads remained higher, asset prices lower,

and credit conditions tighter than prior to the recent

disruptions. Moreover, some participants noted that

the specifics and effectiveness of some government

programs to support financial markets and institutions

remained unclear.

Participants indicated that the increase in financial turmoil had already had an impact on business decisions.

Reports from contacts in many parts of the country

suggested that the weaker and less certain economic

outlook was leading businesses to cancel capital and

other discretionary expenditures and lay off workers.

Several participants noted that even businesses that had

previously been largely unaffected by the financial turbulence were now experiencing difficulties obtaining

new credit, and some businesses were said to be drawing down lines of credit preemptively rather than risk

the lines becoming unavailable. Contacts indicated that

fewer commercial real estate construction projects were

being undertaken. Residential construction activity

remained extremely subdued, with the stock of unsold

homes still very elevated.

Meeting participants noted that real consumer spending

had been weakening through the summer, responding

to lower employment and tighter credit. Moreover,

households, like businesses, were reportedly reacting to

the shifting economic circumstances in recent weeks by

cutting expenditures further. Spending on consumer

durables, such as automobiles, and discretionary items

had been particularly hard hit, and retailers anticipated

very weak holiday spending.

Minutes of the Meeting of October 28-29, 2008

Participants noted that the financial turmoil had increasingly become an international phenomenon, leading to a marked deterioration in global growth prospects. While advanced foreign economies had already

shown signs of slowing, they had been significantly

affected by the worsening of financial strains over the

intermeeting period. Moreover, a number of emerging

market economies, which had heretofore been less influenced by the financial developments in industrial

countries, had in recent weeks been significantly affected, as the increasing strains in financial markets led

global investors to pull back from exposures to such

economies. As a result, interest rates on emerging

market debt had shot up and prices of emerging market

equity had dropped sharply. Participants saw the

stronger dollar and weaker growth abroad as likely to

restrain future growth in U.S. exports.

Participants agreed that inflation was likely to diminish

materially in coming quarters. Commodity prices had

fallen sharply, the dollar had strengthened notably, and

considerable economic slack was anticipated. Moreover, some survey measures of inflation expectations

had declined as had those derived from inflation-linked

Treasury securities, although recent movements in the

latter measures were likely influenced in part by increases in the premiums required to hold the relatively

illiquid inflation-indexed securities. Some participants

indicated that their business contacts had reported reduced pricing power and lower markups. Against this

backdrop, participants generally expected inflation to

decline to levels consistent with price stability. A few

participants noted that disruptions to the credit intermediation process and the inefficiencies associated with

shifts of resources among economic sectors could be

expected to reduce aggregate supply as well as restrain

aggregate demand; as a consequence, such factors

could limit the effect of slower output growth on rates

of resource slack and inflation. Others, though, saw a

risk that if resource utilization remained weak for some

time, inflation could fall below levels consistent with

the Federal Reserve’s dual mandate for promoting price

stability and maximum employment, a development

that would pose important policy challenges in light of

the already-low level of the Committee’s federal funds

rate target.

Participants discussed a number of issues relating to

broader monetary policy strategy. Over the past year,

the Federal Reserve’s response to the financial turbulence had encompassed substantial monetary policy

easing, the provision of large volumes of liquidity

through standard and extraordinary means, and facili-

Page 9

tating the resolution of troubled, systemically important

financial institutions. Participants judged that the policy actions had been helpful and well calibrated to their

assessment of the developing situation. Several participants observed that it would be crucial for such policy

actions to be unwound appropriately as the financial

situation normalized. However, participants also observed that unfolding economic developments could

require the FOMC to further lower its target for the

federal funds rate in the future and to review the adequacy of its liquidity facilities.

In the discussion of monetary policy for the intermeeting period, Committee members agreed that significant

easing in policy was warranted at this meeting in view

of the marked deterioration in the economic outlook

and anticipated reduction in inflation pressures. The

recent substantial tightening in financial conditions, the

sharp downshift in spending here and abroad, and the

rapid abatement of upside inflation risks all suggested

that a forceful policy response would be appropriate.

Some members were concerned that the effectiveness

of cuts in the target federal funds rate may have been

diminished by the financial dislocations, suggesting that

further policy action might have limited efficacy in promoting a recovery in economic growth. And some also

noted that the Committee had limited room to lower its

federal funds rate target further and should therefore

consider moving slowly. However, others maintained

that the possibility of reduced policy effectiveness and

the limited scope for reducing the target further were

reasons for a more aggressive policy adjustment; an

easing of policy should contribute to a beneficial reduction in some borrowing costs, even if a given rate reduction currently would elicit a smaller effect than in

more typical circumstances, and more aggressive easing

should reduce the odds of a deflationary outcome.

Members also saw the substantial downside risks to

growth as supporting a relatively large policy move at

this meeting, though even after today’s 50 basis point

action, the Committee judged that downside risks to

growth would remain. Members anticipated that economic data over the upcoming intermeeting period

would show significant weakness in economic activity,

and some suggested that additional policy easing could

well be appropriate at future meetings. In any event,

the Committee agreed that it would take whatever steps

were necessary to support the recovery of the economy.

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 exe-

Page 10

Federal Open Market Committee

cute 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 1 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 1 percent.

The pace of economic activity appears to have

slowed markedly, owing importantly to a decline

in consumer expenditures. Business equipment

spending and industrial production have weakened in recent months, and slowing economic

activity in many foreign economies is damping

the prospects for U.S. exports. Moreover, the

intensification of financial market turmoil is

likely to exert additional restraint on spending,

partly by further reducing the ability of households and businesses to obtain credit.

In light of the declines in the prices of energy

and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters

to levels consistent with price stability.

Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central

banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should

help over time to improve credit conditions and

promote a return to moderate economic growth.

Nevertheless, downside risks to growth remain.

The Committee will monitor economic and financial developments carefully and will act as

needed to promote sustainable economic growth

and price stability.”

Votes for this action: Messrs. Bernanke and Geithner, Ms. Duke, Messrs. Fisher, Kohn, and Kroszner,

Ms. Pianalto, Messrs. Plosser, Stern, and Warsh.

Votes against this action: None.

It was agreed that the next meeting of the Committee

would be held on Tuesday, December 16, 2008.

The meeting adjourned at 11:45 a.m.

Conference Calls

On September 29, 2008, the Committee met by conference call to review recent developments and to consider changes to swap arrangements with foreign central banks. Amid signs of growing strains in money

markets, the discussion focused on recent Federal Reserve actions and on potential expansions in official

liquidity facilities. In light of severe pressures in dollar

funding markets abroad, the Committee unanimously

approved both extending the liquidity-related swap arrangements with foreign central banks an additional

three months, through April 30, 2009, and increasing

substantially the sizes of those existing arrangements.

The enlarged facilities would support the provision of

U.S. dollar liquidity in amounts of up to $30 billion by

the Bank of Canada, $80 billion by the Bank of England, $120 billion by the Bank of Japan, $15 billion by

Danmarks Nationalbank, $240 billion by the European

Central Bank, $15 billion by the Norges Bank, $30 billion by the Reserve Bank of Australia, $30 billion by

Sveriges Riksbank, and $60 billion by the Swiss National Bank. In addition, the Committee was briefed

on plans for implementation of a provision in pending

legislation that would allow the Federal Reserve to begin immediately to pay interest on reserves held by depository institutions, and on the proposed acquisition

of Wachovia by Citigroup.

On October 7, 2008, the Committee again met by conference call. Stresses in financial markets had continued to increase: Interest-rate spreads in interbank

funding markets had widened markedly, corporate and

municipal bond yields had risen, and equity prices had

dropped sharply. For the first time in many years, the

net asset value of a major money market fund had

fallen below $1 per share; this event sparked a flight

out of prime money market funds and caused a severe

impairment of the functioning of the commercial paper

market. Since the September 16 FOMC meeting, indicators of economic activity in both the United States

and in major foreign countries had come in weaker

than expected. In the United States, automobile sales,

capital goods shipments, and private payrolls had fallen

notably. Elsewhere, indicators of economic activity

and sentiment had deteriorated in a broad range of important foreign economies. Prices of crude oil and

other commodities had dropped substantially, and

some measures of inflation expectations had declined.

Participants agreed that downside risks to economic

growth had increased and upside risks to inflation had

diminished. Participants discussed the considerable

Minutes of the Meeting of October 28-29, 2008

expansion of Federal Reserve liquidity in recent

months. Most agreed that these actions to provide liquidity had had a beneficial impact. Nonetheless, financial conditions were exerting considerable restraint

on economic activity.

All members judged that a significant easing in policy at

this time was appropriate to foster moderate economic

growth and to reduce the downside risks to economic

activity. Members also welcomed the opportunity to

coordinate this policy action with similar measures by

the Bank of Canada, the Bank of England, the European Central Bank, Sveriges Riksbank, and the Swiss

National Bank. By showing that policymakers around

the globe were working closely together, had a similar

view of global economic conditions, and were willing

to take strong actions to address those conditions, coordinated action could help to bolster consumer and

business confidence and so yield greater economic

benefits than unilateral action.

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 1½ percent.”

The vote encompassed approval of the statement below:

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

rate 50 basis points to 1½ percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a

reduction in inflationary pressures.

Incoming economic data suggest that the pace

of economic activity has slowed markedly in recent months. Moreover, the intensification of

financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses

to obtain credit. Inflation has been high, but the

Committee believes that the decline in energy

and other commodity prices and the weaker

Page 11

prospects for economic activity have reduced

the upside risks to inflation.

The Committee will monitor economic and financial developments carefully and will act as

needed to promote sustainable economic growth

and price stability.”

Votes for this action: Messrs. Bernanke and Geithner, Ms. Duke, Messrs. Fisher, Kohn, and Kroszner,

Ms. Pianalto, Messrs. Plosser, Stern, and Warsh.

Votes against this action: None.

Notation Votes

By notation vote completed September 21, 2008 the

Committee unanimously approved the following resolution:

“The FOMC amends paragraph 1.A. of the Authorization for Foreign Currency Operations to

include Australian dollars in the list of foreign

currencies in which the Federal Reserve Bank of

New York may transact for the System Open

Market Account.”

By notation vote completed on October 6, 2008, the

Committee unanimously approved the minutes of the

FOMC meeting held on September 16, 2008.

By notation vote completed October 11, 2008 the

Committee unanimously approved the following resolution:

“The Federal Open Market Committee authorizes the Federal Reserve Bank of New York

(FRBNY) to increase the amounts available

from the System Open Market Account under

the existing reciprocal currency arrangements

(“swap” arrangements) with the Bank of England, the European Central Bank, the Bank of

Japan, and the Swiss National Bank to meet the

amounts requested by those central banks in

connection with their fixed-rate tender auctions.

The FRBNY must report to the Committee each

time the aggregate draws by one of these central

banks increases the level outstanding for that

bank by an increment of $200 billion over the

level outstanding on October 10, 2008.”

_____________________________

Brian F. Madigan

Secretary

Page 1

Summary of Economic Projections

In conjunction with the October 28-29, 2008 FOMC

meeting, the members of the Board of Governors and

the presidents of the Federal Reserve Banks, all of

whom participate in deliberations of the FOMC,

provided projections for economic growth,

unemployment, and inflation in 2008, 2009, 2010, and

2011. Projections were based on information available

through the conclusion of the 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.

Table 1. Economic projections of Federal Reserve Governors

and Reserve Bank presidents, October 2008

Given the recent intensification and broadening of the

global financial crisis, FOMC participants viewed the

outlook for economic growth and employment as

having worsened significantly since June. As indicated

in Table 1 and depicted in Figure 1, participants

expected that real GDP growth would remain very

weak next year and that the subsequent pace of

recovery would be quite slow; they also anticipated that

the unemployment rate would increase substantially

further. In view of the recent sharp declines in the

prices of energy and other commodities and the

widening slack in resource utilization, participants

expected that inflation would drop markedly in coming

quarters. Participants generally judged that the degree

of uncertainty surrounding their projections for both

economic activity and inflation was greater than

historical norms. Most participants viewed the risks to

the growth outlook as skewed to the downside, and

nearly all of them saw the risks to the inflation outlook

as either balanced or tilted to the downside.

PCE inflation. . . . . . 2.7 to 3.6 1.0 to 2.2 1.1 to 1.9 0.8 to 1.8

June projection. . . 3.4 to 4.6 1.7 to 3.0 1.6 to 2.1

n/a

The Outlook

Participants’ projections for real GDP growth in 2008

had a central tendency of 0 to 0.3 percent, compared

with the central tendency of 1 to 1.6 percent for the

growth projections that were made last June. The

downward revisions in their growth forecasts for the

year as a whole were due almost entirely to substantial

shifts in their views of second-half growth. A number

of participants noted that incoming data on consumer

spending and employment had been weaker than

expected during the summer, even prior to the

Percent

Variable

2008

2009

2010

2011

Central tendency1

Change in real GDP 0.0 to 0.3 -0.2 to 1.1 2.3 to 3.2 2.8 to 3.6

June projection. . . 1.0 to 1.6 2.0 to 2.8 2.5 to 3.0 n/a

Unemployment rate 6.3 to 6.5 7.1 to 7.6 6.5 to 7.3 5.5 to 6.6

June projection. . . 5.5 to 5.7 5.3 to 5.8 5.0 to 5.6 n/a

PCE inflation. . . . . . 2.8 to 3.1 1.3 to 2.0 1.4 to 1.8 1.4 to 1.7

June projection. . . 3.8 to 4.2 2.0 to 2.3 1.8 to 2.0 n/a

Core PCE inflation. . 2.3 to 2.5 1.5 to 2.0 1.3 to 1.8 1.3 to 1.7

June projection. . . 2.2 to 2.4 2.0 to 2.2 1.8 to 2.0 n/a

Range2

Change in real GDP -0.3 to 0.5 -1.0 to 1.8 1.5 to 4.5 2.0 to 5.0

June projection. . . 0.9 to 1.8 1.9 to 3.0 2.0 to 3.5

n/a

Unemployment rate 6.3 to 6.6 6.6 to 8.0 5.5 to 8.0 4.9 to 7.3

June projection. . . 5.5 to 5.8 5.2 to 6.1 5.0 to 5.8

n/a

Core PCE inflation. 2.1 to 2.5 1.3 to 2.1 1.1 to 1.9 0.8 to 1.8

June projection. . . 2.0 to 2.5 1.8 to 2.3 1.5 to 2.0

n/a

NOTE: Projections of change in real gross domestic product (GDP)

and of inflation are 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 (PCE) and the price

index for PCE 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.

intensification of the financial crisis. Many participants

highlighted the recent decline in consumer confidence

and the extent to which households were swiftly

curbing their outlays in response to large losses in

stock-market and housing wealth and deterioration in

labor market conditions. Severe dislocations in credit

markets were also seen as weighing heavily on

consumer spending and business investment.

Participants’ growth projections had a central tendency

of -0.2 to 1.1 percent for 2009, 2.3 to 3.2 percent for

2010, and 2.8 to 3.6 percent for 2011, as most

participants expected that the near-term weakness in

economic activity would continue into next year and

that the subsequent recovery would be relatively

gradual. Growth in 2009 was likely to be restrained by

persistent credit market strains and ongoing

Page 2

Federal Open Market Committee

Figure 1. Central tendencies and ranges of economic projections, 2008–11

Percent

Change in real GDP

Central tendency of projections

Range of projections

Actual

2003

2004

2005

2006

2007

2008

2009

2010

2011

Percent

Unemployment rate

2003

2004

2005

2006

2007

2008

2009

2010

2011

Percent

PCE inflation

2003

2004

2005

2006

2007

2008

2009

2010

2011

Percent

Core PCE inflation

2003

2004

2005

2006

2007

2008

2009

2010

NOTE: Definitions of variables are in the notes to table 1. The data for the actual values of the variables are annual.

2011

Summary of Economic Projections for the Meeting of October 28-29, 2008

adjustments in the housing sector, as well as by weak

fundamentals for household and business spending.

Indeed, many participants anticipated that financial

market stresses would recede only slowly,

notwithstanding the extraordinary measures that had

been taken to enhance liquidity and stabilize financial

markets and institutions. Participants also noted that

demand for exports was likely to be damped in coming

quarters by the significantly weaker economic outlook

for many U.S. trading partners. Participants expected

that more robust economic expansion would resume in

2010, and most anticipated that growth would rise

further in 2011 to a pace that would temporarily exceed

its longer-run sustainable rate and hence would help

reduce the degree of slack in resource utilization.

Participants anticipated that labor market conditions

would continue to deteriorate over the coming year.

Their projections for the unemployment rate during the

fourth quarter of this year had a central tendency of 6.3

to 6.5 percent, an upward shift of more than ½

percentage point from their June projections and a

further rise from September’s unemployment rate of

6.1 percent—which was the latest available figure at the

time of the FOMC meeting. Looking further ahead,

the central tendency of participants’ unemployment

rate projections was 7.1 to 7.6 percent for 2009, 6.5 to

7.3 percent for 2010, and 5.5 to 6.6 percent for 2011.

Most participants judged that the unemployment rate in

2011 would still be above its longer-run sustainable

level and hence would be likely to decline further in the

period beyond the forecast horizon.

The central tendency of participants’ projections for

total PCE inflation in 2008 declined to 2.8 to 3.1

percent, about a percentage point lower than the

central tendency of their projections last June.

Participants noted that this downward revision in the

near-term inflation outlook mainly reflected the recent

sharp decline in the prices of energy and other

commodities, apparently triggered by the global

slowdown in economic activity. Most participants also

marked down their forecasts for inflation beyond 2008,

reflecting their expectations of widening resource slack

over coming quarters as well as gradual pass-through of

the drop in the prices of energy and raw materials. The

central tendency of participants’ projections for total

PCE inflation was 1.3 to 2 percent for 2009, 1.4 to 1.8

percent for 2010, and 1.4 to 1.7 percent for 2011.

Participants generally projected that inflation at the end

of the projection period would be close to or a bit

below their assessments of the measured rates of

inflation consistent with the Federal Reserve’s dual

Page 3

mandate for promoting price stability and maximum

employment.

Risks to the Outlook

Participants continued to view uncertainty about the

outlook for economic activity as higher than normal.1

The risks to their projections for GDP growth were

judged as being skewed to the downside and the

associated risks to their projections for the

unemployment rate were tilted to the upside.

Participants emphasized the considerable degree of

uncertainty about the future course of the financial

crisis and its impact on the real economy. Previous

episodes of financial market turmoil might not provide

much information about the likely trajectory going

forward, given the severity of the current crisis and the

extraordinary government measures that had been

taken. Several participants highlighted the risk of a

persistent negative feedback loop between credit

markets and economic activity, while others referred to

the possibility that financial market functioning might

normalize more rapidly and hence that the adverse

effects of the crisis might be somewhat smaller than

anticipated in their modal outlook. Some participants

noted that further monetary policy easing could

eventually become constrained by the lower bound of

zero on nominal interest rates, in which case an

elevated degree of uncertainty might be associated with

gauging the magnitude and stimulative effects of other

policy tools such as quantitative easing.

As in June, most participants continued to view the

uncertainty surrounding their inflation projections as

higher than historical norms.

The majority of

participants judged the risks to the inflation outlook as

roughly balanced, and a number of others viewed these

risks as skewed to the downside—a marked shift from

June, when the risks to inflation were generally seen as

tilted to the upside. Many participants noted that their

assessments regarding the downside risks to inflation

were linked to their judgments regarding the magnitude

of downside risks to economic activity.

Some

participants also noted that heightened volatility of

prices for energy and other commodities was

contributing to the elevated degree of uncertainty

regarding the inflation outlook.

Table 2 provides estimates of forecast uncertainty since

1987 for the change in real GDP, the unemployment rate,

and total consumer price inflation. At the end of this

summary, the box “Forecast Uncertainty” discusses the

sources and interpretation of uncertainty in economic

forecasts and explains the approach used to assess the

uncertainty and risks attending participants’ projections.

Page 4

Federal Open Market Committee

Table 2. Average historical projection error ranges

Percentage points

Variable

2008

2009

2010

2011

Change in real GDP1 . . . . . . .

±0.6

±1.3

±1.4

Unemployment rate1 . . . . . . . . ±0.2

±0.6

±0.9

±1.0

Total consumer prices2 . . . . . . ±0.3

±1.0

NOTE: Error ranges shown are measured as plus or minus the root

mean squared error of projections that were released in the autumn

from 1987 through 2007 for the current and following three 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 (Board of Governors of the

Federal Reserve System, November).

1. For definitions, refer to general note in table 1.

2. 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.

Diversity of Views

Figures 2.A and 2.B provide further detail on the

diversity of participants’ views regarding likely

outcomes for real GDP growth and the unemployment

rate, respectively. For both variables, the dispersion of

participants’ projections for 2008 was noticeably

narrower than in the forecasts provided in June, mainly

due to the accumulation of incoming data regarding the

performance of the economy to date. In contrast,

participants’ projections for 2009 and 2010 exhibited

substantially greater dispersion than in June, mainly

reflecting the diversity of views regarding the duration

of the financial crisis and the magnitude and

persistence of its impact on the real economy. The

dispersion in participants’ projections was also affected

to some degree by differences in their estimates of the

longer-run rates of output growth and unemployment

to which the economy would converge under

appropriate policy and in the absence of any further

shocks.

Figures 2.C and 2.D provide corresponding

information regarding the diversity of participants’

views regarding the inflation outlook. The dispersion

in participants’ projections for 2009 and 2010 was

substantially greater than in June, primarily reflecting

differences in their views about how much slack in

resource utilization was likely to develop and about the

extent to which that slack would place downward

pressure on increases in wages and prices. Some

participants indicated that their inflation projections for

2011 were roughly in line with their assessments of the

measured rate of inflation consistent with the Federal

Reserve’s dual mandate for promoting price stability

and maximum employment; other participants

anticipated that inflation in 2011 would be a bit below

their assessments of the mandate-consistent inflation

rate, mainly reflecting the lagged effects of weak

economic activity and the relatively sluggish pace of

recovery.

Summary of Economic Projections for the Meeting of October 28-29, 2008

Page 5

Figure 2.A. Distribution of participants’ projections for the change in real GDP, 2008–11

Number of participants

2008

October projections

June projections

-1.0- -0.8- -0.6- -0.4- -0.2- 0.0- 0.2- 0.4- 0.6- 0.8- 1.0- 1.2- 1.4- 1.6- 1.8- 2.0- 2.2- 2.4- 2.6- 2.8- 3.0- 3.2- 3.4- 3.6- 3.8- 4.0- 4.2- 4.4- 4.6- 4.8- 5.0-0.9 -0.7 -0.5 -0.3 -0.1 0.1 0.3 0.5 0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5 4.7 4.9 5.1

Percent range

Number of participants

2009

Percent range

Number of participants

2010

Percent range

Number of participants

2011

Percent range

NOTE: Definitions of variables are in the general note to table 1.

Page 6

Federal Open Market Committee

Figure 2.B. Distribution of participants’ projections for the unemployment rate, 2008–11

Number of participants

2008

October projections

June projections

4.84.9

5.05.1

5.25.3

5.45.5

5.65.7

5.85.9

6.06.1

6.26.46.3

6.5

Percent range

6.66.7

6.86.9

7.07.1

7.27.3

7.47.5

7.67.7

7.87.9

8.08.1

Number of participants

2009

4.84.9

5.05.1

5.25.3

5.45.5

5.65.7

5.85.9

6.06.1

6.26.46.3

6.5

Percent range

6.66.7

6.86.9

7.07.1

7.27.3

7.47.5

7.67.7

7.87.9

8.08.1

Number of participants

2010

4.84.9

5.05.1

5.25.3

5.45.5

5.65.7

5.85.9

6.06.1

6.26.46.3

6.5

Percent range

6.66.7

6.86.9

7.07.1

7.27.3

7.47.5

7.67.7

7.87.9

8.08.1

Number of participants

2011

4.84.9

5.05.1

5.25.3

5.45.5

5.65.7

5.85.9

6.06.1

6.26.46.3

6.5

Percent range

NOTE: Definitions of variables are in the general note to table 1.

6.66.7

6.86.9

7.07.1

7.27.3

7.47.5

7.67.7

7.87.9

8.08.1

Summary of Economic Projections for the Meeting of October 28-29, 2008

Page 7

Figure 2.C. Distribution of participants’ projections for PCE inflation, 2008–11

Number of participants

2008

October projections

June projections

0.70.8

0.91.0

1.11.2

1.31.4

1.51.6

1.71.8

1.92.0

2.12.2

2.32.4

2.52.6

2.72.8

2.93.0

3.13.2

3.33.4

3.53.6

3.73.8

3.94.0

4.14.2

4.34.4

4.54.6

Percent range

Number of participants

2009

0.70.8

0.91.0

1.11.2

1.31.4

1.51.6

1.71.8

1.92.0

2.12.2

2.32.4

2.52.6

2.72.8

2.93.0

3.13.2

3.33.4

3.53.6

3.73.8

3.94.0

4.14.2

4.34.4

4.54.6

Percent range

Number of participants

2010

0.70.8

0.91.0

1.11.2

1.31.4

1.51.6

1.71.8

1.92.0

2.12.2

2.32.4

2.52.6

2.72.8

2.93.0

3.13.2

3.33.4

3.53.6

3.73.8

3.94.0

4.14.2

4.34.4

4.54.6

Percent range

Number of participants

2011

0.70.8

0.91.0

1.11.2

1.31.4

1.51.6

1.71.8

1.92.0

2.12.2

2.32.4

2.52.6

2.72.8

Percent range

NOTE: Definitions of variables are in the general note to table 1.

2.93.0

3.13.2

3.33.4

3.53.6

3.73.8

3.94.0

4.14.2

4.34.4

4.54.6

Page 8

Federal Open Market Committee

Figure 2.D. Distribution of participants’ projections for core PCE inflation, 2008–11

Number of participants

2008

October projections

June projections

0.70.8

0.91.0

1.11.2

1.31.4

1.51.6

1.71.8

1.92.0

2.12.2

2.32.4

2.52.6

Percent range

Number of participants

2009

0.70.8

0.91.0

1.11.2

1.31.4

1.51.6

1.71.8

1.92.0

2.12.2

2.32.4

2.52.6

Percent range

Number of participants

2010

0.70.8

0.91.0

1.11.2

1.31.4

1.51.6

1.71.8

1.92.0

2.12.2

2.32.4

2.52.6

Percent range

Number of participants

2011

0.70.8

0.91.0

1.11.2

1.31.4

1.51.6

Percent range

NOTE: Definitions of variables are in the general note to table 1.

1.71.8

1.92.0

2.12.2

2.32.4

2.52.6

Summary of Economic Projections for the Meeting of October 28-29, 2008

Forecast Uncertainty

The economic projections provided by

the members of the Board of Governors and

the presidents of the Federal Reserve Banks

inform discussions of monetary policy among

policymakers

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 would imply a

probability of about 70 percent that actual

GDP would expand between 2.4 percent to 3.6

percent in the current year, 1.7 percent to 4.3

percent in the second year, and 1.6 percent to

4.4 percent in the third and fourth years. The

corresponding 70 percent confidence intervals

for overall inflation would be 1.7 percent to 2.3

percent in the current year and 1.0 percent to

3.0 percent in the second, third, and fourth

years.

Because current conditions may differ

from those that prevailed on average over

history, participants provide judgments as to

whether the uncertainty attached to their

projections of each variable is greater than,

smaller than, or broadly similar to typical levels

of forecast uncertainty in the past as shown in

table 2. Participants also provide judgments as

to whether the risks to their projections are

weighted to the upside, downside, or are

broadly balanced. That is, participants judge

whether each variable is more likely to be

above or below their projections of the most

likely outcome. These judgments about the

uncertainty and the risks attending each

participant’s projections are distinct from the

diversity of participants’ views about the most

likely outcomes.

Forecast uncertainty is

concerned with the risks associated with a

particular projection, rather than with

divergences across a number of different

projections.

Page 9

Cite this document

APA

Federal Reserve (2008, October 28). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_20081029

BibTeX

@misc{wtfs_fomc_minutes_20081029,
  author = {Federal Reserve},
  title = {FOMC Minutes},
  year = {2008},
  month = {Oct},
  howpublished = {Fomc Minutes, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/fomc_minutes_20081029},
  note = {Retrieved via When the Fed Speaks corpus}
}