FOMC Minutes
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Minutes of the Federal Open Market Committee
January 27-28, 2009
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 27, 2009, at 1:30 p.m. and continued on
Wednesday, January 28, 2009, at 9:00 a.m.
PRESENT:
Mr. Bernanke, Chairman
Mr. Dudley, Vice Chairman
Ms. Duke
Mr. Evans
Mr. Kohn
Mr. Lacker
Mr. Lockhart
Mr. Warsh
Ms. Yellen
Mr. Bullard, Ms. Cumming, Mr. Hoenig, Ms. Pianalto, and Mr. Rosengren, Alternate Members
of the Federal Open Market Committee
Messrs. Fisher, Plosser, and Stern, Presidents of
the Federal Reserve Banks of Dallas, Philadelphia, and Minneapolis, respectively
Mr. Madigan, Secretary and Economist
Ms. Danker, Deputy Secretary
Mr. Luecke, Assistant Secretary
Mr. Skidmore, Assistant Secretary
Ms. Smith, Assistant Secretary
Mr. Alvarez, General Counsel
Mr. Ashton,1 Assistant General Counsel
Mr. Sheets, Economist
Mr. Stockton, Economist
Messrs. Altig, Clouse, Connors, Kamin, Slifman,
Tracy, and Wilcox, Associate Economists
Ms. Mosser, Temporary Manager, System Open
Market Account
Ms. Johnson,2 Secretary of the Board, Office of the
Secretary, Board of Governors
Mr. Struckmeyer, Deputy Staff Director, Office of
Staff Director for Management, Board of
Governors
Ms. Bailey, Deputy Director, Division of Banking
Supervision and Regulation, Board of Governors
Mr. English, Deputy Director, Division of Monetary Affairs, Board of Governors
Mr. Blanchard, Assistant to the Board, Office of
Board Members, Board of Governors
Messrs. Reifschneider and Wascher, Associate Directors, Division of Research and Statistics,
Board of Governors
Mr. Levin, Associate Director, Division of Monetary Affairs, Board of Governors
Ms. Shanks,3 Associate Secretary, Office of the
Secretary, Board of Governors
Mr. Reeve, Deputy Associate Director, Division of
International Finance, Board of Governors
Mr. Sichel, Deputy Associate Director, Division of
Research and Statistics, Board of Governors
Mr. Meyer, Senior Adviser, Division of Monetary
Affairs, Board of Governors
Mr. Oliner, Senior Adviser, Division of Research
and Statistics, Board of Governors
Ms. Dynan, Assistant Director, Division of Research and Statistics, Board of Governors
Mr. Small, Project Manager, Division of Monetary
Affairs, Board of Governors
Attended Wednesday’s session only.
Attended portion of the meeting that was a joint
session of the Board and the FOMC.
3 Attended portion of the meeting on Tuesday that
was a joint session of the Board and the FOMC.
1
Mr. Frierson,2 Deputy Secretary, Office of the Secretary, Board of Governors
2
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Federal Open Market Committee
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Ms. Kusko, Senior Economist, Division of Research and Statistics, Board of Governors
Vice President of the Federal Reserve Bank of New
York, as alternate.
Mr. Gust, Senior Economist, Division of International Finance, Board of Governors
Jeffrey M. Lacker, President of the Federal Reserve
Bank of Richmond, with Eric C. Rosengren, President
of the Federal Reserve Bank of Boston, as alternate.
Messrs. Driscoll and King, Economists, Division
of Monetary Affairs, Board of Governors
Ms. Beattie,2 Assistant to the Secretary, Office of
the Secretary, 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, Rosenblum, and Sniderman, Executive Vice Presidents, Federal Reserve Banks
of Boston, Dallas, and Cleveland, respectively
Messrs. Hilton and Krane, Mses. Mester and
Perelmuter, Messrs. Rasche, Rudebusch, and
Sellon, Senior Vice Presidents, Federal Reserve
Banks of New York, Chicago, Philadelphia,
New York, St. Louis, San Francisco, and Kansas City, respectively
Mr. Weber, Senior Research Officer, Federal Reserve Bank of Minneapolis
Mr. Hetzel, Senior Economist, Federal Reserve
Bank of Richmond
2
Attended portion of the meeting that was a joint
session of the Board and the FOMC.
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 27, 2009, had been
received and that these individuals had executed their
oaths of office.
The elected members and alternate members were as
follows:
William C. Dudley, President of the Federal Reserve
Bank of New York, with Christine M. Cumming, First
Charles L. Evans, President of the Federal Reserve
Bank of Chicago, with Sandra Pianalto, President of the
Federal Reserve Bank of Cleveland, as alternate.
Dennis P. Lockhart, President of the Federal Reserve
Bank of Atlanta, with James B. Bullard, President of
the Federal Reserve Bank of St. Louis, as alternate.
Janet L. Yellen, President of the Federal Reserve Bank
of San Francisco, with Thomas M. Hoenig, President
of the Federal Reserve Bank of Kansas City, as alternate.
Annual Organizational Matters
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 2010:
Ben S. Bernanke
William C. Dudley
Brian F. Madigan
Deborah J. Danker
Matthew M. Luecke
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
Assistant Secretary
General Counsel
Deputy General Counsel
Assistant General
Counsel
Economist
Economist
David E. Altig
James A. Clouse
Thomas A. Connors
Steven B. Kamin
Lawrence Slifman
Daniel G. Sullivan
Joseph S. Tracy
John A. Weinberg
David W. Wilcox
John C. Williams
Associate Economists
Minutes of the Meeting of January 27-28, 2009
By unanimous vote, the Committee adopted several
minor amendments to its Program for Security of
FOMC Information.
By unanimous vote, the Federal Reserve Bank of New
York was selected to execute transactions for the System Open Market Account.
Secretary’s note: The Chairman reported that
prior to the meeting he had used his authority
under the Committee’s Rules of Organization
to appoint Ms. Mosser as Manager of the System Open Market Account until the Committee selects a replacement manager.
By unanimous vote, the Committee approved the Authorization for Foreign Currency Operations (shown
below) with a clerical amendment that combined the
list of currencies in 1.A approved at the January 2008
meeting with the five additional currencies that were
approved by the Committee in September and October
2008 in connection with temporary reciprocal currency
arrangements:
AUTHORIZATION FOR FOREIGN CURRENCY
OPERATIONS
(Amended January 27, 2009)
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:
Australian dollars
Brazilian reais
Canadian dollars
Danish kroner
euro
Japanese yen
Korean won
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Mexican pesos
New Zealand dollars
Norwegian kroner
Pounds sterling
Singapore dollars
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.
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Federal Open Market Committee
3. All transactions in foreign currencies undertaken
under paragraph 1.A. above shall, unless otherwise expressly 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, the
Vice Chairman’s alternate). Meetings of the Subcom-
_
mittee 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 the Manager’s 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 27, 2009)
1. System operations in foreign currencies shall generally be directed at countering disorderly market conditions, provided that market exchange rates for the
U.S. 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.
Minutes of the Meeting of January 27-28, 2009
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 Committee approved the Procedural Instructions with Respect to Foreign Currency
Operations, with the addition of the clarifying phrase
“unless otherwise directed by the Committee” in the
first sentence:
PROCEDURAL INSTRUCTIONS WITH RESPECT
TO FOREIGN CURRENCY OPERATIONS
(Amended January 27, 2009)
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, unless otherwise directed by 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 curren-
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cies 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.
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.
By unanimous vote, the Committee approved several
amendments to the Authorization for Domestic Open
Market Operations (shown below). The amendments
consolidate language authorizing repurchase agreements and reverse repurchase agreements into one paragraph, add a paragraph authorizing the use of agents
to execute transactions in certain mortgage-backed securities (MBS), and add language to the final paragraph
that reflects the Committee’s current focus on using
the composition and size of the Federal Reserve’s balance sheet as instruments of monetary policy. The final paragraph now specifies that decisions to make material changes in the composition and size of the portfolio of assets held in the System Open Market Account during the period between meetings of the Federal Open Market Committee will be made in the same
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Federal Open Market Committee
manner as decisions to change the intended level of the
federal funds rate during the intermeeting period:
AUTHORIZATION FOR
MARKET OPERATIONS
(Amended January 27, 2009)
DOMESTIC
OPEN
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 or sell in the open market U.S. Government securities, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, for the
System Open Market Account under agreements to
resell or repurchase such securities or obligations (including such transactions as are commonly referred
to as repo and reverse repo transactions) 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 counterparties.
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 use agents in agency MBS-related transactions.
3. 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.
4. 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 1.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.
5. 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 exceptional circumstances the degree of pressure on reserve
positions and hence the intended federal funds rate and
to take actions that result in material changes in the
composition and size of the assets in the System Open
Market Account other than those anticipated by the
Committee at its most recent meeting. 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.
In light of its program to purchase large quantities of
agency debt and mortgage-backed securities, the Com-
Minutes of the Meeting of January 27-28, 2009
mittee voted to suspend temporarily the Guidelines for
the Conduct of System Operations in Federal Agency
Issues (last amended January 28, 2003). Mr. Lacker
dissented, stating that he views targeted purchases of
agency debt and mortgage-backed securities as distorting credit markets and would prefer that the Desk instead purchase Treasury securities.
The remainder of the Committee’s meeting was conducted as a joint meeting with the Board of Governors
in order to facilitate policy discussion of developments
with regard to the System’s liquidity facilities and balance sheet during the intermeeting period and to consider the need for changes in the System’s approach to
using those tools.
Market Developments and Open Market Operations
The Manager of the System Open Market Account
reported on recent developments in domestic and foreign financial markets. The Manager also reported on
System open market operations in Treasury securities
and in agency debt and mortgage-backed securities during the period since the Committee’s December 15-16
meeting. By unanimous vote, the Committee ratified
these transactions. There were no open market operations in foreign currencies for the System’s account
during the period since the Committee’s December 1516 meeting.
Meeting participants discussed the potential benefits of
conducting open market purchases of a substantial
quantity of longer-term Treasury securities for the System Open Market Account. Participants generally
agreed that purchasing such securities could be a useful
adjunct to other monetary policy tools in some circumstances. One participant preferred to begin purchasing
Treasury securities immediately, as a way to increase
the monetary base, in lieu of expanding programs that
aim to support particular segments of the credit markets. Other participants were prepared to purchase
longer-term Treasury securities if evolving circumstances were to indicate that such transactions would
be particularly effective in improving conditions in private credit markets. However, they judged that purchases of longer-term Treasury securities would only
modestly improve conditions in private credit markets
at present, and that completing already-announced
plans to purchase large quantities of agency debt and
mortgage-backed securities and to support certain asset-backed securities markets was, in current circumstances, likely to be a more effective way to employ the
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Federal Reserve balance sheet to support credit flows
to, and spending by, households and businesses.
System Liquidity Programs and Balance Sheet
Staff reported on developments in System liquidity
programs and on changes in the System’s balance sheet
since the Committee’s December 15-16 meeting. As of
January 26, the System’s total assets and liabilities stood
at just under $2 trillion, about $300 billion less than on
December 17, 2008. The drop, which resulted primarily from a decline in foreign central bank drawings on
reciprocal currency arrangements and a reduction in
issuers’ sales of commercial paper to the Commercial
Paper Funding Facility (CPFF), seemed to reflect some
improvement in the functioning of global interbank
markets and the commercial paper market after the
year-end.
Most participants interpreted the evidence as indicating
that credit markets still were not working well, and that
the Federal Reserve’s lending programs, asset purchases, and currency swaps were providing muchneeded support to economic activity by reducing dislocations in financial markets, lowering the cost of credit,
and facilitating the flow of credit to businesses and
households. Several indicated that they expected the
soon-to-be-implemented Term Asset-Backed Securities
Loan Facility (TALF) to improve liquidity and reduce
disruptions in the markets for securities backed by student loans, credit card receivables, auto loans, and small
business loans guaranteed by the Small Business Administration; they also noted that it might become necessary to enhance or expand the TALF or other programs. However, in the view of one participant, financial markets—including those for asset-backed securities—were working reasonably well, given the current
high level of pessimism and uncertainty about economic prospects and asset values, and the System’s
lending and asset-purchase programs were resulting in
undesirable distortions in the allocation of credit. Others noted that such programs could have undesirable
consequences if expanded too far or continued too
long. Many participants agreed that it would be desirable for the System to develop additional measures of
the effects of its programs, and they encouraged additional research on analytical frameworks that could inform Federal Reserve policy actions with respect to the
size and composition of its balance sheet.
Several meeting participants noted that the expansion
of the Federal Reserve’s balance sheet along with continued growth of the money supply could help stabilize
longer-run inflation expectations in the face of increas-
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Federal Open Market Committee
ing economic slack and very low inflation in coming
quarters. Over a longer horizon, however, the Federal
Reserve will need to scale back its liquidity programs
and the size of its balance sheet as the economy recovers, to avoid the risk of an unwanted increase in expected inflation and a buildup of inflation pressures.
Participants observed that many of the Federal Reserve’s liquidity programs are priced so that they will
become unattractive to borrowers as conditions in financial markets improve; these programs will shrink
automatically. In other cases, the Federal Reserve
eventually may have to take a more active role in scaling back programs by adjusting their terms and conditions. More generally, the Federal Reserve may need to
develop additional tools to manage the size of its balance sheet and the level of the federal funds rate as the
economy recovers. As of late January, however, with
financial conditions strained and the economic outlook
weak, most participants agreed that the Committee
should continue to focus on supporting the functioning
of financial markets and stimulating the economy
through purchases of agency debt and mortgagebacked securities and other measures—including the
implementation of the TALF—that will keep the size
of the Federal Reserve’s balance sheet at a high level
for some time.
Participants also discussed the advisability of extending
the termination dates of a number of temporary liquidity facilities and reciprocal currency arrangements from
April 30 to October 30, 2009. Participants generally
were of the view that, despite modest improvements in
some sectors, conditions in credit markets overall remained severely disrupted. Most expressed support for
extending the termination dates in order to reassure
market participants that the facilities would remain in
place as a backstop to private-sector credit arrangements while financial conditions remained strained;
they were prepared to extend the facilities beyond yearend if conditions warrant. Participants also noted that
extending the termination date of these liquidity facilities to October 30 would not rule out the possibility of
closing particular facilities sooner if improvements in
financial conditions were to indicate they were no
longer needed to support credit markets and economic
activity and to help preserve price stability.
Following the discussion, the Committee voted unanimously to extend the termination dates of existing reciprocal currency arrangements and the Term Securities
Lending Facility (TSLF) to October 30, 2009. The
Board of Governors then voted unanimously to extend
the termination dates of the TSLF, the Primary Dealer
_
Credit Facility (PDCF), the Asset-Backed Commercial
Paper Money Market Mutual Fund Liquidity Facility
(AMLF), the CPFF, and the Money Market Investor
Funding Facility (MMIFF) to October 30, 2009.
Staff Review of the Economic and Financial Situation
The information reviewed at the meeting indicated a
continued sharp contraction in real economic activity.
Sales and starts of new homes remained on a steep
downward trend, consumer spending continued its significant decline, the deterioration in business equipment investment intensified, and foreign demand
weakened. Conditions in the labor market continued
to deteriorate rapidly in December: Private payroll
employment fell sharply, and the unemployment rate
rose. Industrial production dropped more severely
than in earlier months. Headline consumer prices fell
in November and December, reflecting declines in
consumer energy prices; core consumer prices were
about flat in those months. While conditions in some
financial markets showed limited improvement, extraordinary financial stresses remained apparent and
credit conditions became still tighter for households
and businesses.
Employment continued to contract. Private nonfarm
payrolls fell sharply in December, with substantial
losses over a wide range of industries. Indicators of job
vacancies and hiring declined further, and layoffs continued to mount. The unemployment rate increased to
7.2 percent in December, the share of individuals working part time for economic reasons surged, and the labor force participation rate edged down for a second
consecutive month.
In December, industrial production posted a sharp decline after falling substantially in November; the contraction was broad-based. The decrease in production
of consumer goods reflected cutbacks in motor vehicle
assemblies as well as in the output of consumer durable
goods such as appliances, furniture, and carpeting.
Output in high-tech sectors contracted in the fourth
quarter, reflecting reduced production of semiconductors, communications equipment, and computers. The
production of aircraft and parts recorded an increase in
December after being held down in the autumn by a
strike and by problems with some outsourced components. Available forward-looking indicators pointed to
a further contraction in manufacturing output in coming months.
Real consumer spending appeared to decline sharply
again in the fourth quarter, likely reflecting the com-
Minutes of the Meeting of January 27-28, 2009
bined effects of decreases in house and equity prices, a
weakening labor market, and tight credit conditions.
Real spending on goods excluding motor vehicles was
estimated to have fallen noticeably in December, more
than reversing an increase in November. Outlays on
motor vehicles edged down in November and December following a sharper decline in October. Early indicators of spending in January pointed to continued soft
demand. Readings on consumer sentiment remained at
very low levels by historical standards through the end
of 2008 and showed little improvement in early January.
Real residential construction contracted in November
and December. Single-family housing starts dropped at
a much faster rate in those months than they had in the
first 10 months of the year. Multifamily starts also fell
in those months, as did permit issuance for both categories. Housing demand remained very weak and, although the stock of unsold new single-family homes
continued to move down in November, inventories of
unsold homes remained elevated relative to the pace of
sales. Sales of existing single-family homes dropped
less than sales of new homes in November and turned
up in December, but the relative strength in sales of
existing homes appeared to be at least partly attributable to increases in foreclosure-related and other distressed sales. Although the interest rate on conforming
30-year fixed-rate mortgages declined markedly over
the intermeeting period, the Senior Loan Officer Opinion Survey on Bank Lending Practices that was conducted in January indicated that banks had tightened
lending standards on prime mortgage loans over the
preceding three months. The market for nonconforming loans remained severely impaired. Several indexes
indicated that house prices continued to decline rapidly.
In the business sector, investment in equipment and
software appeared to contract noticeably in the fourth
quarter, with decreases registered in all major spending
categories. In December, business purchases of autos
and trucks moved down. Spending on high-tech capital goods appeared to decline in the fourth quarter.
Orders and shipments for many types of equipment
declined in October and November, and imports of
capital goods dropped back in those months. Forwardlooking indicators of investment in equipment and
software pointed to likely further declines. Construction spending related to petroleum refining and power
generation and distribution continued to increase
briskly in the second half of 2008, responding to the
surge in energy prices in the first half of that year, but
real investment for many types of buildings stagnated
Page 9
or declined. Vacancy rates for office, retail, and industrial properties continued to move up in the fourth
quarter, and the results of the January Senior Loan Officer Opinion Survey indicated that financing for new
projects had become even more difficult to acquire.
Real nonfarm inventories (excluding motor vehicles)
appeared to have fallen in the last few months of 2008.
However, with sales declining even more sharply, the
ratio of book-value inventories to sales increased in
October and November.
The U.S. international trade deficit narrowed sharply in
November, as a steep decline in imports outweighed a
sizable drop in exports. Much of the fall in exports was
attributable to a decline in exports of fuels, chemicals,
and other industrial supplies, which in part reflected
lower prices for these goods. All other major categories of exports moved down as well. More than half of
the decline in imports was due to a decrease in imports
of oil that mostly reflected a dramatic decrease in prices
but also some reduction in volume. All other major
categories of imports also recorded sizable decreases.
Economic activity in the advanced foreign economies
appeared to contract sharply in the fourth quarter, as
the pace of job losses rose and measures of consumer
spending on durable goods and business spending on
investment goods showed declines. In Japan and
Europe, trade and industrial production dropped
steeply, and measures of consumer and business sentiment declined. In Canada, employment fell markedly
in November and December after edging up in October. Incoming data suggested that economic activity in
the emerging market economies slowed significantly in
the fourth quarter, with real gross domestic product
(GDP) plunging in several Asian economies and appearing little changed in China. Industrial production,
trade, and measures of consumer sentiment registered
declines across many other countries in both emerging
Asia and Latin America.
In the United States, overall personal consumption expenditure (PCE) prices were estimated to have fallen in
December, largely reflecting significant reductions in
energy prices. Increases in consumer food prices began
to moderate toward the end of 2008. Excluding food
and energy prices, PCE prices appeared to have decelerated over the final three months of the year. The
moderation in core PCE prices was widespread across
categories of goods and services. After rising rapidly
during the first nine months of the year, producer prices excluding food and energy fell sharply in the last
three months of 2008. Measures of longer-term infla-
Page 10
Federal Open Market Committee
tion expectations edged up in early January, but remained lower than they had been in all but the last few
weeks of 2008. In December, average hourly earnings
moved up moderately.
The decisions of the Federal Open Market Committee
(FOMC) at its December 15-16 meeting reportedly
were more aggressive than investors had been expecting. Market participants reportedly were somewhat
surprised both by the size of the reduction in the target
federal funds rate, to a range of 0 to ¼ percent, and by
the statements that policy rates would likely remain low
for some time and that the FOMC might engage in
additional nontraditional policy actions such as the purchase of longer-term Treasury securities. Over the intermeeting period, investors marked down their expectations for the path of the federal funds rate, as measured by money market futures rates. The path first
moved down immediately after the December FOMC
meeting. Later in the period, the policy path tilted lower in response to weaker-than-expected economic data
releases and increased concerns about the health of
some financial institutions. In contrast, yields on medium- and longer-term nominal Treasury coupon securities increased, on net, over the period. Yields
dropped sharply following the release of the FOMC
statement, reportedly in part because investors interpreted it as suggesting that the Federal Reserve might
increase its holdings of longer-term Treasury securities.
Those price movements were more than reversed after
the turn of the year, despite the worsening economic
outlook, apparently reflecting a waning of year-end
safe-haven demands and an anticipation of substantially
increased Treasury debt issuance to finance larger-thanexpected deficits associated with the new Administration’s economic stimulus plans. Although implied inflation compensation derived from Treasury InflationProtected Securities (TIPS) increased over the period,
this increase reportedly was largely attributable to improved trading conditions in the TIPS market rather
than upward revisions to inflation expectations.
Conditions in short-term funding markets showed
some signs of easing, although significant stresses remained. The spreads of London interbank offered
rates, or Libor, over comparable-maturity overnight
index swap rates declined across most maturities over
the period: The one-month spread fell to its lowest
level since August 2007; the three-month spread also
declined but remained elevated. Though depository
institutions continued to make substantial use of the
discount window, the amount of primary credit outstanding declined. Recent auctions of term funds un-
_
der the Federal Reserve’s Term Auction Facility were
undersubscribed, although one auction following the
year-end did see a relatively large number of bidders.
The TSLF auctions were also undersubscribed. Use of
the PDCF continued to fall significantly over the period.
Conditions in markets for repurchase agreements, or
repos, also showed some signs of improvement. With
the overnight Treasury general collateral repo rate near
zero for much of the period, market participants reportedly were reluctant to lend Treasury collateral out
of concern that counterparties might fail to return borrowed securities. However, the pace of delivery fails
continued to run well below the high rates of September and October, reflecting in part reductions in transaction volumes as well as industry efforts to mitigate
fails, including the January 5 recommendation of the
Treasury Market Practices Group to implement a financial charge on settlement fails. Conditions in the
market for repo transactions backed by agency debt
and mortgage-backed securities also improved somewhat, with average bid-asked spreads declining from
high levels.
The market for Treasury coupon securities showed
signs of increased impairment late in 2008, followed by
some improvement early in 2009. Trading volumes fell
to very low levels at the end of 2008, although they
recovered a bit after the end of the year. Bid-asked
spreads in the on-the-run market declined sharply at
the beginning of 2009 after having increased at the end
of 2008. The on-the-run premium for the 10-year nominal Treasury note was little changed at very elevated
levels over the intermeeting period. On balance, the
Treasury market remained much less liquid than normal.
Treasury- and government-only money market mutual
funds (MMMFs) faced pressures stemming from very
low short-term interest rates, and many such funds reportedly had waived management fees in an effort to
retain investors. By contrast, prime MMMFs had net
inflows over the intermeeting period. The MMIFF
continued to register no activity despite changes that
eased some of the terms of the program. Market participants nonetheless pointed to the MMIFF as a potentially important backup facility.
Conditions in the commercial paper (CP) market improved over the intermeeting period, likely reflecting
recent measures taken in support of this market, greater
demand from institutional investors, and the passing of
year-end. Yields and spreads on 30-day A1/P1 nonfi-
Minutes of the Meeting of January 27-28, 2009
nancial and financial CP as well as on asset-backed
commercial paper (ABCP) declined modestly and remained low. Yields and spreads on 30-day A2/P2 CP,
which is not eligible for purchase under the CPFF,
dropped sharply after the beginning of the year as some
institutional investors reportedly reentered the market.
The dollar amounts of outstanding unsecured financial
and nonfinancial CP and ABCP rose slightly, on net,
over the intermeeting period. This small change was
more than accounted for by the increase in CP held by
the CPFF. In contrast, credit extended under the
AMLF declined over the intermeeting period.
Liquidity in the corporate bond market improved over
the intermeeting period, with increases in trading volume for both investment- and speculative-grade bonds
and declines in bid-asked spreads for speculative-grade
bonds. Yields and spreads on corporate bonds decreased noticeably, particularly for speculative-grade
firms, but spreads remained high by historical standards. Gross issuance of bonds by nonfinancial investment-grade companies remained solid, but issuance
of speculative-grade bonds was limited. Conditions in
the leveraged loan market remained very poor and issuance of leveraged syndicated loans was also very weak.
Secondary market prices for leveraged loans stayed near
record lows and the average bid-asked spread in that
market continued to be very wide. The market for
commercial mortgage-backed securities (CMBS) continued to show signs of strain, with the CMBX index—
an index based on credit default swap (CDS) spreads
on AAA-rated CMBS—widening during the intermeeting period from already very elevated levels.
Broad equity market indexes fell over the intermeeting
period. After improving during the early part of the
intermeeting period, market sentiment toward financial
firms appeared to worsen later in the period. Those
firms substantially underperformed the broader market
as a number of large and regional banks reported sizable losses stemming from weak trading results, asset
write-downs, and additional increases in loan-loss provisions in anticipation of a further deterioration in
credit quality. CDS spreads for U.S. bank holding
companies rose sharply in mid-January to near their
historical highs, and equity prices for such companies
fell on net, ending the period below their November
lows. A number of banking organizations issued debt
through the FDIC’s Temporary Liquidity Guarantee
Program; spreads on such debt declined to levels close
to those on agency debt. The Treasury’s Troubled Asset Relief Program provided additional support to several banking institutions. In particular, to support fi-
Page 11
nancial market stability, the Treasury, the FDIC, and
the Federal Reserve announced on January 16 that they
had entered into an agreement with Bank of America
to provide a package of guarantees, liquidity access, and
capital. Developments at nonbank financial institutions
were mixed. Equity prices of insurance companies
edged down over the period, while their CDS spreads
declined from extremely high levels. Hedge funds
posted negative average returns in December.
Debt of the domestic nonfinancial sectors expanded at
a somewhat faster pace in the fourth quarter of 2008
than in the first three quarters of the year. Borrowing
by the federal government continued to surge, boosted
by programs aimed at reducing financial market strains.
Borrowing by state and local governments picked up as
the conditions in municipal bond market improved
somewhat. Household debt appeared to have contracted in the fourth quarter, with both mortgage and
consumer credit sharply curtailed due to weak household spending and tight credit conditions. Business
debt expanded only modestly, given the high cost of
borrowing, tighter lending terms, and the deterioration
in the macroeconomic environment.
Commercial bank credit fell for the second consecutive
month in December. Commercial and industrial loans
declined in November and December, likely reflecting
a combination of tighter credit supply and reduced loan
demand as well as some unwinding of the surge during
September and October. The Senior Loan Officer
Opinion Survey conducted in January indicated that
banks had continued to tighten credit standards and
terms on all major loan categories over the past three
months. Survey respondents also indicated that they
had reduced the size of credit lines for a wide range of
existing business and household customers.
M2 expanded at a considerably more rapid pace in December than in previous months. Flows into both demand deposits and savings deposits surged, possibly
reflecting a reallocation of wealth towards assets that
had government insurance or guarantees. Small time
deposits also increased strongly, as banks continued to
bid aggressively for these deposits. Currency continued
to grow briskly, apparently boosted by solid foreign
demand for U.S. banknotes. In December, retail
MMMF balances increased modestly after a decline in
November.
Conditions in foreign financial markets were relatively
calm over the intermeeting period, although concerns
about bank earnings and the stability of the global
banking system led to widespread declines in equity
Page 12
Federal Open Market Committee
prices later in the period. Governments in major foreign economies initiated several actions aimed at
strengthening the banking sector and easing credit
market strains. Sovereign bond yields in the advanced
foreign economies fell early in the period, likely reflecting declining inflation and expectations of lower policy
rates, but moved up subsequently, perhaps in response
to concerns about fiscal deficits. The dollar increased
on balance against the currencies of major U.S. trading
partners.
Staff Economic Outlook
In the forecast prepared for the meeting, the staff revised down its outlook for economic activity in the first
half of 2009, as the implications of weaker-thananticipated economic data releases more than offset an
upward revision to the staff’s assumption of the
amount of forthcoming fiscal stimulus. Conditions in
the labor market deteriorated sharply over the intermeeting period. Industrial production declined steeply,
and household and business spending fell more than
anticipated. Sales and starts of new homes remained
on a steep downtrend. Foreign demand also was
weaker than expected. Financial markets continued to
be strained overall, credit remained unusually tight for
both households and businesses, and equity prices had
fallen further. The staff’s projections of real GDP
growth in the second half of 2009 and in 2010 were
revised upward slightly, reflecting greater monetary and
fiscal stimulus as well as the effects of more moderate
oil prices and long-term interest rates, but they continued to show no more than a gradual economic recovery. The staff again expected that unemployment
would rise substantially through the beginning of 2010
before edging down over the remainder of that year.
Forecasts for core and overall PCE inflation in 2009
and 2010 were little changed, with growth in both core
and overall PCE prices expected to be unusually low
over the next few years in response to slack in resource
utilization and relatively flat prices anticipated for many
commodities and for imports.
Meeting Participants’ Views and Committee Policy Action
In conjunction with this FOMC meeting, all meeting
participants—the four members of the Board of Governors and the presidents of the twelve Federal Reserve
Banks—provided projections for economic growth, the
unemployment rate, and consumer price inflation for
each year from 2009 through 2011. To provide the
public with information about their views of likely
longer-term economic trends, and as additional context
for the Committee’s monetary policy discussions, par-
_
ticipants agreed to collect and publish, on a quarterly
basis, projections of the longer-run values to which
they expect these three variables to converge. Participants’ projections through 2011, and for the longerrun, are described in the Summary of Economic Projections that is attached as an addendum to these minutes.
In their discussion of the economic and financial situation and the outlook for the economy, participants
agreed that the economy had weakened further going
into 2009. The incoming data, as well as information
received from contacts in the business and banking
communities, indicated a sharp and widespread economic contraction both domestically and abroad, reflecting in large part the adverse effects of the intensification of the financial crisis and the interaction between deteriorating economic and financial conditions.
Participants generally saw credit conditions as extremely tight, with financial markets fragile and some
parts of the banking sector under substantial stress.
However, modest signs of improvement were evident
in some financial markets—particularly those that were
receiving support from Federal Reserve liquidity facilities and other government actions. Participants anticipated that a gradual recovery in U.S. economic activity
would begin during the third or fourth quarter of this
year as the economy begins to respond to fiscal stimulus, relatively low energy prices, and continuing efforts
to stabilize the financial sector and increase the availability of credit. Several participants noted that firms’
efforts to control inventories as sales declined had contributed to the rapid downturn in production and employment in recent quarters, but expected that the resulting absence of widespread inventory overhangs
might spur a prompt pickup in production in many
sectors later this year once sales begin to level out or
turn up. Headline inflation would pick up some as the
effects of previous declines in oil and other commodity
prices wore off. But in an environment of considerable
economic slack, little if any inflation pressure from energy or other import prices, and possible declines in
inflation expectations, headline and core inflation were
expected to be quite low for several years. Participants
were, however, quite uncertain about the outlook. All
but a few saw the risks to growth as tilted to the downside; in light of financial stresses and tight credit conditions, they saw a significant risk that the economic recovery would be both delayed and initially quite weak.
In particular, most participants saw the renewed deterioration in the banking sector’s financial condition as
posing a significant downside risk to the economic out-
Minutes of the Meeting of January 27-28, 2009
look absent additional initiatives to stabilize the banking system.
Participants noted that consumers were continuing to
cut back expenditures in response to sharply declining
employment, further declines in wealth, and tighter
credit conditions. Some participants mentioned that
business contacts had indicated that firms were reducing payrolls aggressively and also freezing wages and
salaries, further restricting growth in personal income
and thus probably damping consumer spending. Looking ahead, participants anticipated that tax cuts and
some other elements of the proposed fiscal stimulus
package would add to after-tax incomes and thus boost
consumer spending, though the magnitude of the impetus was far from clear. For example, unless the cuts
were clearly perceived to be permanent, the boost to
consumer spending might prove short-lived, as was the
case with the tax rebates distributed in the spring of
2008.
Participants saw no indication that the housing sector
was beginning to stabilize. Though sales of existing
homes appeared to have flattened out, a large fraction
of those transactions seemed to have resulted from
foreclosures or other forced sales; moreover, new
home sales, housing starts, and permits all continued to
decline steeply. Lower house prices and mortgage rates
had increased housing affordability, but concerns that
house prices may fall further appeared to be holding
back potential buyers.
The pace of commercial construction also had slowed.
A number of participants expressed concern that the
commercial real estate sector could deteriorate sharply
in the months ahead. They noted that a large number
of commercial real estate mortgages will come due at a
time when banks likely will still be facing balance-sheet
constraints, the ability to securitize commercial real
estate mortgages may remain severely restricted, and
vacancy rates in commercial properties could well be
climbing. Some participants worried that the outcome
could be an increase in defaults on commercial real
estate mortgages and forced sales of commercial properties, which could push prices down further and generate additional losses on banks’ commercial real estate
loan portfolios. However, the commercial real estate
sector had expanded more moderately during the recent expansion than during the expansion of the late
1980s, suggesting that the downturn in the current cycle could be milder than that seen in the early 1990s.
Participants also noted that other categories of business
investment were contracting; they expected the rapid
Page 13
contraction to continue in coming quarters. Equipment investment had declined particularly sharply, reflecting weak sales, tighter credit, and substantial uncertainty about future economic conditions and government policies. Lower energy and commodity prices,
while supporting consumer spending, had reduced investment in oil, gas, and mineral extraction. Outside of
the agricultural sector, business contacts had reported
sizable cutbacks in their planned capital expenditures
for 2009.
State and local government budgets had come under
significant pressure as the slowing economy led to declining revenues. Several participants noted that governments in their regions were responding by cutting
spending rather than supplementing revenues. The
fiscal stimulus bill, which was being considered by the
Congress as the Committee met, would support state
and local government spending as well as boost federal
spending, helping to buoy demands for goods and services. Participants generally thought that fiscal stimulus
was a necessary and important complement to the steps
the Federal Reserve and other agencies were taking,
and that it would help foster economic recovery, but
had questions about the details of the proposed legislation and the extent to which it would boost demands
for and production of goods and services.
Participants indicated they had been surprised by the
speed and magnitude of the slowdown in economic
growth abroad and the resulting drop in demand for
U.S. exports. It was noted that the surprisingly sharp
decline in both U.S. exports and imports might also
reflect tight credit conditions, including the reduced
availability of trade credit. Moreover, participants did
not expect foreign economies to rebound quickly, suggesting that net exports would not provide much support for U.S. economic activity in coming quarters.
Participants agreed that inflation pressures had diminished appreciably in recent quarters, and they expected
significantly lower headline and core inflation during
the next few years than during recent years. Indeed,
most anticipated that inflation will slow for a time to
rates somewhat lower than those they judge consistent
with the dual goals of price stability and maximum employment, initially reflecting the recent declines in the
prices of energy and other commodities and later responding to several years of substantial economic slack.
Many participants noted some risk of a protracted period of excessively low inflation, especially if inflation
expectations were to move down in response to lower
actual inflation and increasing economic slack, and a
Page 14
Federal Open Market Committee
few even saw some risk of deflation. Several others,
however, anticipated that longer-run inflation expectations would remain well anchored, supported in part by
the Federal Reserve’s aggressive expansion of its balance sheet and the resulting growth of the monetary
base, and therefore thought it unlikely that inflation
would decline below levels they saw as consistent with
the dual goals of price stability and maximum employment. Moreover, some noted a risk that expected inflation might actually increase to an undesirably high level
if the public does not understand that the Federal Reserve’s liquidity facilities will be wound down and its
balance sheet will shrink as economic and financial
conditions improve.
Several participants indicated that they thought the
FOMC should explore establishing quantitative guidelines or targets for a monetary aggregate, perhaps the
growth rate of the monetary base or M2; in their view
such guidelines would provide useful information to
the public and help anchor inflation expectations. Others were skeptical that a single quantitative measure
could adequately convey the Federal Reserve’s current
approach to monetary policy because the stimulative
effect of the Federal Reserve’s liquidity-providing and
asset-purchase programs depends not only on the scale
but also on the mix of lending programs and securities
purchases. In addition, a few participants noted that
the sizes of some Federal Reserve liquidity programs
are determined by banks’ and market participants’ need
to use those programs and thus will tend to increase
when financial conditions worsen and shrink when financial conditions improve; the size and composition
of the Federal Reserve’s balance sheet needs to be able
to adjust in response.
In their discussion of monetary policy for the intermeeting period, Committee members agreed that keeping the target range for the federal funds rate at 0 to ¼
percent would be appropriate. They also agreed to
continue using liquidity and asset-purchase programs to
support the functioning of financial markets and stimulate the economy. Members further agreed that these
programs were likely to maintain the size of the Federal
Reserve’s balance sheet at a high level. Members noted
that it may be necessary to expand these programs, but
had somewhat different views about the best way of
doing so. One member expressed the view that it
would be best to expand holdings of U.S. Treasury securities rather than to expand targeted liquidity programs. All other members indicated that they thought
it appropriate to continue the program of purchasing
agency debt and mortgage-backed securities. Several
_
expressed a willingness to expand the size and duration
of those purchases in the near future; others stood
ready to expand the program if conditions warrant but
noted that the program had only recently been implemented and preferred to wait for more information
about economic and financial developments and the
program’s effects before considering an expansion.
At the conclusion of the discussion, with Mr. Lacker
dissenting, 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 seeks conditions in reserve markets consistent with federal funds
trading in a range from 0 to ¼ percent. The
Committee directs the Desk to purchase GSE
debt and agency-guaranteed MBS during the intermeeting period with the aim of providing
support to the mortgage and housing markets.
The timing and pace of these purchases should
depend on conditions in the markets for such
securities and on a broader assessment of conditions in primary mortgage markets and the
housing sector. By the end of the second quarter of this year, the Desk is expected to purchase up to $100 billion in housing-related GSE
debt and up to $500 billion in agencyguaranteed MBS. The System Open Market
Account Manager and the Secretary will keep
the Committee informed of ongoing developments regarding the System’s balance sheet that
could affect the attainment over time of the
Committee’s objectives of maximum employment and price stability.”
The vote encompassed approval of the following
statement to be released at 2:15 p.m.:
“The Federal Open Market Committee decided
today to keep its target range for the federal
funds rate at 0 to ¼ percent. The Committee
continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
Minutes of the Meeting of January 27-28, 2009
Information received since the Committee met
in December suggests that the economy has
weakened further. Industrial production, housing starts, and employment have continued to
decline steeply, as consumers and businesses
have cut back spending. Furthermore, global
demand appears to be slowing significantly.
Conditions in some financial markets have improved, in part reflecting government efforts to
provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The
Committee anticipates that a gradual recovery in
economic activity will begin later this year, but
the downside risks to that outlook are significant.
In light of the declines in the prices of energy
and other commodities in recent months and
the prospects for considerable economic slack,
the Committee expects that inflation pressures
will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that
best foster economic growth and price stability
in the longer term.
The Federal Reserve will employ all available
tools to promote the resumption of sustainable
economic growth and to preserve price stability.
The focus of the Committee's policy is to support the functioning of financial markets and
stimulate the economy through open market
operations and other measures that are likely to
keep the size of the Federal Reserve's balance
sheet at a high level. The Federal Reserve continues to purchase large quantities of agency
debt and mortgage-backed securities to provide
support to the mortgage and housing markets,
and it stands ready to expand the quantity of
such purchases and the duration of the purchase
program as conditions warrant. The Committee
also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate
that such transactions would be particularly effective in improving conditions in private credit
markets. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan
Facility to facilitate the extension of credit to
households and small businesses. The Committee will continue to monitor carefully the size
and composition of the Federal Reserve's bal-
Page 15
ance sheet in light of evolving financial market
developments and to assess whether expansions
of or modifications to lending facilities would
serve to further support credit markets and economic activity and help to preserve price stability.”
Voting for this action: Messrs. Bernanke and Dudley,
Ms. Duke, Messrs. Evans, Kohn, Lockhart, and Warsh,
and Ms. Yellen.
Voting against this action: Mr. Lacker.
Mr. Lacker dissented because he preferred to expand
the monetary base by purchasing U.S. Treasury securities rather than through targeted credit programs. Mr.
Lacker was fully supportive of the significant expansion
of the Federal Reserve’s balance sheet and the intention
to maintain the size of the balance sheet at a high level.
However, while he recognized that spreads were elevated and volumes low in many credit markets, he saw
no evidence of market failures that made targeted credit
programs, including the forthcoming TALF, necessary.
Moreover, he was concerned that such programs channel credit away from other worthy borrowers, amount
to fiscal policy, would exacerbate moral hazard, and
might be hard to unwind. He supported, instead, maintaining the size of the balance sheet at a high level
through purchases of U.S. Treasury securities. In his
view, such purchases would limit distortions to private
credit flows, minimize adverse incentive effects, and
maintain a clear distinction between monetary and fiscal policies.
It was agreed that the next meeting of the Committee
would be held on Tuesday, March 17, 2009. The meeting adjourned at 1:05 p.m. on January 28, 2009.
Notation Vote
By notation vote completed on January 5, 2009, the
Committee unanimously approved the minutes of the
FOMC meeting held on December 15-16, 2008.
Conference Call
On January 16, 2009, the Committee met by conference call to discuss issues associated with establishing
an explicit numerical objective for inflation. The
Committee made no decisions on whether to establish
such an objective. Most meeting participants expressed
the view that an explicit numerical objective for longerrun inflation would be fully consistent with the Federal
Reserve’s dual mandate of promoting maximum employment and price stability and would not impede fostering the stability of the financial system. A number
of participants emphasized that additional clarity on the
Page 16
Federal Open Market Committee
longer-run inflation goal would further enhance Federal
Reserve communications but would not involve any
substantive change in monetary policy strategy. Many
participants agreed that establishing and maintaining a
transparent numerical inflation objective would be
helpful—at least to some degree—in anchoring inflation expectations and thereby improve the overall effectiveness of monetary policy; others judged that the
potential benefits of an explicit numerical inflation objective might be largely attained by extending the horizon of their regular projections for economic activity
and inflation. Some indicated that the establishment of
a numerical inflation objective could be particularly
helpful under present circumstances in forestalling an
unwelcome decline in longer-run inflation expectations—and hence in contributing to economic recovery—while also assuring the public that actions taken
to counter economic weakness will not lead to high
inflation over the longer-run. However, several participants expressed concern that an initiative to clarify
the Committee’s longer-run inflation objective could be
confusing to the public in the current context of economic weakness and financial market strains. Partici-
_
pants also discussed several technical issues related to
the implementation and communication of an explicit
numerical inflation objective. They expressed a range
of views about whether such an objective should be
expressed in terms of the consumer price index or the
PCE price deflator, the merits of a point value versus a
range, the length of time over which policy would aim
to achieve any such objective, and the frequency with
which the Committee would reevaluate this framework.
At this meeting, the staff also briefed the Committee
on the coordinated set of measures for supporting
Bank of America that had been taken by the Treasury,
the FDIC, and the Federal Reserve earlier that day.
_____________________________
Brian F. Madigan
Secretary
Page 1
Summary of Economic Projections
In conjunction with the January 27-28, 2009 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 2009, 2010, 2011, and over the
longer run. 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. Longer-run
projections represent each participant’s assessment of
the rate to which each variable would be expected to
converge over time under appropriate monetary policy
and in the absence of further shocks.
FOMC participants viewed the outlook for economic
activity and inflation as having weakened significantly
since last October, when their last projections were
made. As indicated in Table 1 and depicted in Figure 1,
participants projected that real GDP would contract
this year, that the unemployment rate would increase
substantially, and that consumer price inflation would
be significantly lower than in recent years. Given the
strength of the forces currently weighing on the economy, participants generally expected that the recovery
would be unusually gradual and prolonged: All participants anticipated that unemployment would remain
substantially above its longer-run sustainable rate at the
end of 2011, even absent further economic shocks; a
few indicated that more than five to six years would be
needed for the economy to converge to a longer-run
path characterized by sustainable rates of output
growth and unemployment and by an appropriate rate
of inflation. Participants generally judged that their
projections for both economic activity and inflation
were subject to a degree of uncertainty exceeding historical norms. Nearly all participants viewed the risks
to the growth outlook as skewed to the downside, and
all participants saw the risks to the inflation outlook as
either balanced or tilted to the downside.
The Outlook
Participants’ projections for the change in real GDP in
2009 had a central tendency of -1.3 to -0.5 percent,
compared with the central tendency of -0.2 to 1.1 percent for their projections last October. In explaining
these downward revisions, participants referred to the
further intensification of the financial crisis and its effect on credit and wealth, the waning of consumer and
business confidence, the marked deceleration in global
economic activity, and the weakness of incoming data
on spending and employment. Participants anticipated
a broad-based decline in aggregate output during the
first half of this year; they noted that consumer spending would likely be damped by the deterioration in labor markets, the tightness of credit conditions, the continuing decline in house prices, and the recent sharp
Table 1. Economic projections of Federal Reserve Governors and Reserve Bank presidents, January 2009
Percent
Variable
Central tendency1
Range2
2009
2010
2011
Longer Run
2009
2010
2011
Longer Run
Change in real GDP. . . . . .
October projection. . . .
-1.3 to -0.5
-0.2 to 1.1
2.5 to 3.3
2.3 to 3.2
3.8 to 5.0
2.8 to 3.6
2.5 to 2.7
n.a.
-2.5 to 0.2
-1.0 to 1.8
1.5 to 4.5
1.5 to 4.5
2.3 to 5.5
2.0 to 5.0
2.4 to 3.0
n.a.
Unemployment rate. . . . . .
October projection. . . .
8.5 to 8.8
7.1 to 7.6
8.0 to 8.3
6.5 to 7.3
6.7 to 7.5
5.5 to 6.6
4.8 to 5.0
n.a.
8.0 to 9.2
6.6 to 8.0
7.0 to 9.2
5.5 to 8.0
5.5 to 8.0
4.9 to 7.3
4.5 to 5.5
n.a.
PCE inflation. . . . . . . . . . .
October projection. . . .
0.3 to 1.0
1.3 to 2.0
1.0 to 1.5
1.4 to 1.8
0.9 to 1.7
1.4 to 1.7
1.7 to 2.0
n.a.
-0.5 to 1.5
1.0 to 2.2
0.7 to 1.8
1.1 to 1.9
0.2 to 2.1
0.8 to 1.8
1.5 to 2.0
n.a.
Core PCE inflation3. . . . . .
October projection. . . .
0.9 to 1.1
1.5 to 2.0
0.8 to 1.5
1.3 to 1.8
0.7 to 1.5
1.3 to 1.7
0.6 to 1.5
1.3 to 2.1
0.4 to 1.7
1.1 to 1.9
0.0 to 1.8
0.8 to 1.8
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. Longer-run projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the
absence of further shocks to the economy. The October projections were made in conjunction with the FOMC meeting on October 28-29, 2008.
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.
3. Longer-run projections for core PCE inflation are not collected.
Page 2
Federal Open Market Committee
_
Figure 1. Central tendencies and ranges of economic projections, 2009–11 and over the longer run
Percent
Change in real GDP
5
Central tendency of projections
Range of projections
4
3
Actual
2
1
+
0
_
1
2
2004
2005
2006
2007
2008
2009
2010
2011
Longer
Run
Percent
Unemployment rate
9
8
7
6
5
2004
2005
2006
2007
2008
2009
2010
2011
Longer
Run
Percent
PCE inflation
3
2
1
+
0
_
2004
2005
2006
2007
2008
2009
2010
2011
Longer
Run
Percent
Core PCE inflation
3
2
1
+
0
_
2004
2005
2006
2007
2008
2009
2010
2011
NOTE: Definitions of variables are in the notes to table 1. The data for the actual values of the variables are annual.
Summary of Economic Projections for the Meeting of January 27-28, 2009
reduction in stock market wealth, and they saw reductions in consumer demand contributing to further
weakness in business investment. However, participants expected that the economy would begin to recover—albeit gradually—during the second half of the
year, mainly reflecting the effects of fiscal stimulus and
of Federal Reserve measures providing support to
credit markets.
Looking further ahead, participants’ growth projections
had a central tendency of 2.5 to 3.3 percent for 2010
and 3.8 to 5.0 percent for 2011. Participants generally
expected that strains in financial markets would ebb
only slowly and hence that the pace of recovery in 2010
would be damped. Nonetheless, participants generally
anticipated that real GDP growth would gain further
momentum in 2011, reaching a pace that would temporarily exceed their estimates of the longer-run sustainable rate of economic growth and would thereby help
reduce the slack in resource utilization. Most participants expected that, absent further shocks, economic
growth would eventually converge to a rate of 2.5 to
2.7 percent, reflecting longer-term trends in the growth
of productivity and the labor force.
Participants anticipated that labor market conditions
would deteriorate substantially further over the course
of this year, and nearly all expected that unemployment
would still be well above its longer-run sustainable rate
at the end of 2011. Participants’ projections for the
average unemployment rate during the fourth quarter
of 2009 had a central tendency of 8.5 to 8.8 percent,
markedly higher than last December’s actual unemployment rate of 7.2 percent—the latest available figure
at the time of the January FOMC meeting. Nearly all
participants’ projections were more than a percentage
point higher than their previous forecasts made last
October, reflecting the sharp rise in actual unemployment that occurred during the final months of 2008 as
well as participants’ weaker outlook for economic activity this year. Most participants anticipated that output
growth in 2010 would not be substantially above its
longer-run trend rate and hence that unemployment
would decline only modestly next year. With economic
activity and job creation generally projected to accelerate in 2011, participants anticipated that joblessness
would decline more appreciably that year, as is evident
from the central tendency of 6.7 to 7.5 percent for their
unemployment rate projections. Participants expected
that the unemployment rate would decline further after
2011, and most saw it settling in at a rate of 4.8 to 5.0
percent over time.
Page 3
The central tendency of participants’ projections for
total PCE inflation this year was 0.3 to 1.0 percent,
about a percentage point lower than the central tendency of their projections last October. Many participants noted that recent readings on inflation had been
surprisingly low, and some anticipated that the unexpected declines in the prices of energy and other commodities that had occurred in the latter part of 2008
would continue to hold down inflation at the consumer
level in 2009. Participants also marked down their projections for core PCE inflation this year in light of their
views about the indirect effects of lower energy prices
and the influence of increased resource slack.
Looking beyond this year, participants’ projections for
total PCE inflation had a central tendency of 1.0 to 1.5
percent for 2010, 0.9 to 1.7 percent for 2011, and 1.7 to
2.0 percent over the longer run. Participants’ longerrun projections for total PCE inflation reflected their
individual assessments of the measured rates of inflation consistent with the Federal Reserve’s dual mandate
for promoting price stability and maximum employment. Most participants judged that a longer-run PCE
inflation rate of 2 percent would be consistent with the
dual mandate; others indicated that 1½ or 1¾ percent
inflation would be appropriate. Modestly positive
longer-run inflation would allow the Committee to
stimulate economic activity and support employment
by setting the federal funds rate temporarily below the
inflation rate when the economy is buffeted by a large
negative shock to demands for goods and services.
Participants generally expected that core and overall
inflation would converge over time, and that persistent
economic slack would continue to weigh on inflation
outcomes for the next few years and hence that total
PCE inflation in 2011 would still be below their assessments of the appropriate inflation rate for the
longer run.
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 real 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 high1
Table 2 provides estimates of forecast uncertainty for the
change in real GDP, the unemployment rate, and total consumer price inflation over the period from 1987 to 2007. 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
2009
2010
2011
Change in real GDP1 . . . . . . . . .
±1.2
±1.4
±1.4
±0.5
±0.8
±1.0
±0.9
±1.0
±0.9
Unemployment
rate1
.........
Total consumer
prices2
.......
NOTE: Error ranges shown are measured as plus or minus the root
mean squared error of projections that were released in the winter from
1987 through 2007 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 (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. The slightly narrower
estimated width of the confidence interval for inflation in the third year
compared with that for the second year is likely the result of using a limited sample period for computing these statistics.
lighted the considerable degree of uncertainty about the
future course of the financial crisis and its impact on
the real economy; for example, rising unemployment
and weaker growth could exacerbate delinquencies on
household and business loans, leading to higher losses
for financial firms and so to a further tightening of
credit conditions that would in turn put further downward pressure on spending to a greater degree than
currently foreseen. In addition, some participants
noted that a substantial degree of uncertainty was associated with gauging the stimulative effects of nontraditional monetary policy tools that are now being employed given that conventional policy easing was limited by the zero lower bound on nominal interest rates.
Others referred to uncertainties regarding the size,
composition, and effectiveness of the fiscal stimulus
package—which was still under consideration at the
time of the FOMC meeting—and of further measures
to stabilize the banking system.
As in October, most participants continued to view the
uncertainty surrounding their inflation projections as
higher than historical norms. A slight majority of participants judged the risks to the inflation outlook as
roughly balanced, while the rest viewed these risks as
skewed to the downside. Participants indicated that
elevated uncertainty about global growth was clouding
the outlook for prices of energy and other commodities
and hence contributing to greater uncertainty in their
inflation projections. Many participants stated that
their assessments regarding the level of uncertainty and
balance of risks to the inflation outlook were closely
_
linked to their judgments about the uncertainty and
risks to the outlook for economic activity. Some participants noted the risk that inflation expectations
might become unanchored and drift downward in response to persistently low inflation outcomes, while
others pointed to the possibility of an upward shift if
investors became concerned that stimulative policy
measures might not be unwound in a timely fashion
once the economy begins to recover.
Diversity of Views
Figures 2.A and 2.B provide further details on the diversity of participants’ views regarding likely outcomes
for real GDP growth and the unemployment rate, respectively. For 2009 to 2011, the dispersion in participants’ projections for each variable was roughly the
same as for their projections last October. This dispersion mainly indicated the diversity of participants’ assessments regarding the stimulative effects of fiscal
policy, the pace of recovery in financial markets, and
the evolution of households’ desired saving rates. The
dispersion in participants’ longer-run projections reflected differences in their estimates regarding the sustainable 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 total PCE inflation in 2009
was substantially greater than for their projections
made last October, due to increased diversity of participants’ views regarding the near-term evolution of
prices of energy and raw materials and the extent to
which changes in those prices would be likely to pass
through into overall inflation. The dispersion in participants’ projections for core PCE inflation in 2009
was noticeably lower than last October, but the dispersion in their projections for core inflation in 2010 and
2011 was markedly wider, reflecting varying assessments about the timing and pace of economic recovery,
the sensitivity of inflation to slack in resource utilization, the prevalence of downward nominal wage rigidity, and the likelihood that inflation expectations will
remain firmly anchored. A few participants anticipated
that inflation in 2011 would be close to their longer-run
projections. However, most participants’ projections
for total PCE inflation in 2011 were below their longerrun projections, primarily reflecting the anticipated effects of substantial slack over the next three years; this
inflation gap was about ¼ to ½ percentage point for
some participants but exceeded a full percentage point
for others.
Summary of Economic Projections for the Meeting of January 27-28, 2009
Page 5
Figure 2.A. Distribution of participants’ projections for the change in real GDP, 2009–11 and over the longer run
Number of participants
2009
12
January projections
October projections
10
8
6
4
2
-2.6--2.4--2.2--2.0--1.8--1.6--1.4--1.2--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- 4.2-4.4-4.6-4.8-5.0-5.2-5.4-2.5-2.3-2.1-1.9-1.7-1.5-1.3 -1.1-0.9-0.7-0.5-0.3-0.1 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 5.3 5.5
Percent range
Number of participants
2010
12
10
8
6
4
2
-2.6--2.4--2.2--2.0--1.8--1.6--1.4--1.2--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- 4.2-4.4-4.6-4.8-5.0-5.2-5.4-2.5-2.3-2.1-1.9-1.7-1.5-1.3 -1.1-0.9-0.7-0.5-0.3-0.1 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 5.3 5.5
Percent range
Number of participants
2011
12
10
8
6
4
2
-2.6--2.4--2.2--2.0--1.8--1.6--1.4--1.2--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- 4.2-4.4-4.6-4.8-5.0-5.2-5.4-2.5-2.3-2.1-1.9-1.7-1.5-1.3 -1.1-0.9-0.7-0.5-0.3-0.1 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 5.3 5.5
Percent range
Number of participants
Longer Run
12
10
8
6
4
2
-2.6--2.4--2.2--2.0--1.8--1.6--1.4--1.2--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- 4.2-4.4-4.6-4.8-5.0-5.2-5.4-2.5-2.3-2.1-1.9-1.7-1.5-1.3 -1.1-0.9-0.7-0.5-0.3-0.1 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 5.3 5.5
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, 2009–11 and over the longer run
Number of participants
2009
12
January projections
October projections
10
8
6
4
2
4.4- 4.6- 4.8- 5.0- 5.2- 5.4- 5.6- 5.8- 6.0- 6.2- 6.4- 6.6- 6.8- 7.0- 7.2- 7.4- 7.6- 7.8- 8.0- 8.2- 8.4- 8.6- 8.8- 9.0- 9.24.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7 6.9 7.1 7.3 7.5 7.7 7.9 8.1 8.3 8.5 8.7 8.9 9.1 9.3
Percent range
Number of participants
2010
12
10
8
6
4
2
4.4- 4.6- 4.8- 5.0- 5.2- 5.4- 5.6- 5.8- 6.0- 6.2- 6.4- 6.6- 6.8- 7.0- 7.2- 7.4- 7.6- 7.8- 8.0- 8.2- 8.4- 8.6- 8.8- 9.0- 9.24.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7 6.9 7.1 7.3 7.5 7.7 7.9 8.1 8.3 8.5 8.7 8.9 9.1 9.3
Percent range
Number of participants
2011
12
10
8
6
4
2
4.4- 4.6- 4.8- 5.0- 5.2- 5.4- 5.6- 5.8- 6.0- 6.2- 6.4- 6.6- 6.8- 7.0- 7.2- 7.4- 7.6- 7.8- 8.0- 8.2- 8.4- 8.6- 8.8- 9.0- 9.24.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7 6.9 7.1 7.3 7.5 7.7 7.9 8.1 8.3 8.5 8.7 8.9 9.1 9.3
Percent range
Number of participants
Longer Run
12
10
8
6
4
2
4.4- 4.6- 4.8- 5.0- 5.2- 5.4- 5.6- 5.8- 6.0- 6.2- 6.4- 6.6- 6.8- 7.0- 7.2- 7.4- 7.6- 7.8- 8.0- 8.2- 8.4- 8.6- 8.8- 9.0- 9.24.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7 6.9 7.1 7.3 7.5 7.7 7.9 8.1 8.3 8.5 8.7 8.9 9.1 9.3
Percent range
NOTE: Definitions of variables are in the general note to table 1.
Summary of Economic Projections for the Meeting of January 27-28, 2009
Page 7
Figure 2.C. Distribution of participants’ projections for PCE inflation, 2009–11 and over the longer run
Number of participants
2009
12
January projections
October projections
10
8
6
4
2
-0.5-0.4
-0.3-0.2
-0.10.0
0.10.2
0.30.4
0.50.6
0.70.8
0.91.0
1.11.2
1.31.4
1.51.6
1.71.8
1.92.0
2.12.2
Percent range
Number of participants
2010
12
10
8
6
4
2
-0.5-0.4
-0.3-0.2
-0.10.0
0.10.2
0.30.4
0.50.6
0.70.8
0.91.0
1.11.2
1.31.4
1.51.6
1.71.8
1.92.0
2.12.2
Percent range
Number of participants
2011
12
10
8
6
4
2
-0.5-0.4
-0.3-0.2
-0.10.0
0.10.2
0.30.4
0.50.6
0.70.8
0.91.0
1.11.2
1.31.4
1.51.6
1.71.8
1.92.0
2.12.2
Percent range
Number of participants
Longer Run
12
10
8
6
4
2
-0.5-0.4
-0.3-0.2
-0.10.0
0.10.2
0.30.4
0.50.6
0.70.8
Percent range
NOTE: Definitions of variables are in the general note to table 1.
0.91.0
1.11.2
1.31.4
1.51.6
1.71.8
1.92.0
2.12.2
Page 8
Federal Open Market Committee
_
Figure 2.D. Distribution of participants’ projections for core PCE inflation, 2009–11
Number of participants
2009
12
January projections
October projections
10
8
6
4
2
-0.10.0
0.10.2
0.30.4
0.50.6
0.70.8
0.91.0
1.11.2
1.31.4
1.51.6
1.71.8
1.92.0
2.12.2
Percent range
Number of participants
2010
12
10
8
6
4
2
-0.10.0
0.10.2
0.30.4
0.50.6
0.70.8
0.91.0
1.11.2
1.31.4
1.51.6
1.71.8
1.92.0
2.12.2
Percent range
Number of participants
2011
12
10
8
6
4
2
-0.10.0
0.10.2
0.30.4
0.50.6
0.70.8
0.91.0
Percent range
NOTE: Definitions of variables are in the general note to table 1.
1.11.2
1.31.4
1.51.6
1.71.8
1.92.0
2.12.2
Summary of Economic Projections for the Meeting of January 27-28, 2009
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 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 1.1 percent to 2.9 percent in the
current year, 1.0 percent to 3.0 percent in the
second year, 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.
Page 9
Cite this document
Federal Reserve (2009, January 28). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_20090129
@misc{wtfs_fomc_minutes_20090129,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {2009},
month = {Jan},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_20090129},
note = {Retrieved via When the Fed Speaks corpus}
}