FOMC Minutes

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Minutes of the Federal Open Market Committee

March 17-18, 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, March 17, 2009, at 2:00 p.m. and continued on

Wednesday, March 18, 2009, at 9:00 a.m.

Mr. Struckmeyer, Deputy Staff Director, Office of

the Staff Director for Management, Board of

Governors

Ms. Bailey and Mr. English, Deputy Directors, Divisions of Banking Supervision and Regulation

and Monetary Affairs, respectively, Board of

Governors

PRESENT:

Mr. Bernanke, Chairman

Mr. Dudley, Vice Chairman

Ms. Duke

Mr. Evans

Mr. Kohn

Mr. Lacker

Mr. Lockhart

Mr. Tarullo

Mr. Warsh

Ms. Yellen

Mr. Blanchard, Assistant to the Board, Office of

Board Members, Board of Governors

Messrs. Leahy, Nelson, Reifschneider, and Wascher, 1 Associate Directors, Divisions of International Finance, Monetary Affairs, Research and

Statistics, and Research and Statistics, respectively, Board of Governors

Mr. Gagnon, Visiting Associate Director, Division

of Monetary Affairs, Board of Governors

Mr. Bullard, Ms. Cumming, Mr. Hoenig, Ms. Pianalto, and Mr. Rosengren, Alternate Members

of the Federal Open Market Committee

Mr. Oliner, Senior Adviser, Division of Research

and Statistics, Board of Governors

Messrs. Fisher, Plosser, and Stern, Presidents of

the Federal Reserve Banks of Dallas, Philadelphia, and Minneapolis, respectively

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

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. Baxter, Deputy General Counsel

Mr. Sheets, Economist

Mr. Stockton, Economist

Ms. Beattie,¹ Assistant to the Secretary, Office of

the Secretary, Board of Governors

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

Mr. Williams, Records Management Analyst, Division of Monetary Affairs, Board of Governors

Mr. Sapenaro, First Vice President, Federal Reserve

Bank of St. Louis

Messrs. Altig, Clouse, Connors, Kamin, Slifman,

Sullivan, Weinberg, Wilcox, and Williams, Associate Economists

Messrs. Fuhrer and Rosenblum, Executive Vice

Presidents, Federal Reserve Banks of Boston

and Dallas, respectively

Ms. Mosser, Temporary Manager, System Open

Market Account

Messrs. Hilton and Schweitzer, Senior Vice Presidents, Federal Reserve Banks of New York

and Cleveland, respectively

Ms. Johnson, Secretary of the Board, Office of the

Secretary, Board of Governors

Mr. Frierson, Deputy Secretary, Office of the Secretary, Board of Governors

1

Attended Tuesday’s session only.

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Federal Open Market Committee

Messrs. Clark, Gavin, Klitgaard, and Yi, Vice Presidents, Federal Reserve Banks of Kansas City,

St. Louis, New York, and Philadelphia, respectively

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

Developments in Financial Markets and the Federal Reserve’s Balance Sheet

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 agency mortgage-backed securities (MBS) during the period since the Committee’s

January 27-28 meeting. By unanimous vote, the Committee ratified those transactions. There were no open

market operations in foreign currencies for the System’s account during the period since the Committee’s

January 27-28 meeting.

Staff reported on recent developments in System liquidity programs and on changes in the System’s balance sheet. As of March 12, the System’s total assets

and liabilities were about $2 trillion, close to the level of

that just before the January 27-28 meeting. Holdings

of agency debt and agency MBS had increased, while

foreign central bank drawings on reciprocal currency

arrangements had declined. Credit extended by the

Commercial Paper Funding Facility also had declined,

as 90-day paper purchased in the early weeks of the

program matured and a large portion was not renewed

through the facility. Primary credit extended by the

Federal Reserve was about unchanged, and credit outstanding under the Term Auction Facility increased

somewhat over the period as the February auctions

experienced higher demand than previous auctions. In

contrast, credit extended under the Primary Dealer

Credit Facility declined somewhat over the intermeeting period, and credit extended under the Asset-Backed

Commercial Paper Money Market Mutual Fund Liquidity Facility edged down.

Most meeting 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

much-needed 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. Participants discussed the prospective

further increase in the Federal Reserve’s balance sheet,

with a focus on the Term Asset-Backed Securities Loan

Facility (TALF) and open market purchases of longerterm assets.

The launch of the TALF was announced on March 3.

In the initial phase of the program, the Federal Reserve

offered to provide up to $200 billion of three-year

loans, on a nonrecourse basis, against AAA-rated assetbacked securities (ABS) backed by newly and recently

originated auto loans, credit card loans, student loans,

loans guaranteed by the Small Business Administration,

and, potentially, certain other closely related types of

ABS. The Federal Reserve and the Treasury had previously announced their expectation that the program

would be expanded to accept other types of ABS. The

demand for TALF funding appeared likely to be modest initially, and some participants saw a risk that private firms might be reluctant to borrow from the

TALF out of concern about potential future changes in

government policies that could affect TALF borrowers.

However, other participants anticipated that TALF

loans would increase over time as financial market institutions became more familiar with the program.

Most participants supported the expansion of the lending capacity of the TALF, subject to receiving additional capital from the Treasury, and the inclusion of additional categories of recently issued, highly rated ABS as

acceptable collateral. However, some participants expressed concern about the risks that might arise from

the possible extension of the TALF to include older

and lower-quality assets, noting, in particular, the greater uncertainty over the value of such assets.

The Federal Reserve’s programs to buy direct debt obligations of the federal housing agencies and agencyguaranteed MBS were on track to reach their initial targets of $100 billion and $500 billion, respectively, by

the end of June. Participants agreed that the asset purchase programs were helping to reduce mortgage interest rates and improve market functioning, thereby providing support to economic activity. Some participants

stated a preference for communicating the Committee’s

intention regarding such purchases in terms of the

growth rate of Federal Reserve holdings rather than a

dollar target for total purchases. However, others

noted that the pace of MBS issuance was likely to be

especially brisk over the next few months, in part because of the Administration’s new Making Home Affordable program, and observed that it could be advantageous to be able to front-load purchases to accommodate the pattern of mortgage refinancing. Partici-

Minutes of the Meeting of March 17-18, 2009

pants also discussed the relative merits of increasing the

Federal Reserve’s purchases of agency MBS versus initiating purchases of longer-term Treasury securities.

Some participants remarked that experience suggested

that purchases of Treasury securities would have effects

across a variety of long-term debt markets and should

ease financial conditions generally while minimizing the

Federal Reserve’s influence on the allocation of credit.

However, purchases of agency securities could have a

more direct effect on mortgage rates, thus providing

greater benefits to the housing sector, and on private

borrowing rates more generally. Also, some participants were concerned that Federal Reserve purchases

of longer-term Treasury securities might be seen as an

indication that the Federal Reserve was responding to a

fiscal objective rather than its statutory mandate, thus

reducing the Federal Reserve’s credibility regarding

long-run price stability. Most participants, however,

saw this risk as low so long as the Federal Reserve was

clear about the importance of its long-term price stability objective and demonstrated a commitment to take

the necessary steps in the future to achieve its objectives.

In light of the economic and financial conditions, meeting participants viewed the expansion of the Federal

Reserve’s balance sheet that might be associated with

these and other programs as appropriate in order to

foster the dual objectives of maximum employment

and price stability. It was noted that the Treasury and

the Federal Reserve will seek legislation to give the

Federal Reserve tools in addition to interest on reserves

to manage the federal funds rate while providing the

funding necessary for the TALF and other key crediteasing programs.

The Committee also took up a proposal to augment the

existing network of central bank liquidity swap lines by

adding several temporary swap lines that could provide

foreign currency liquidity to U.S. institutions, analogous

to the arrangements that currently provide U.S. dollar

liquidity abroad. There was no evidence that these institutions were encountering difficulty in meeting foreign currency obligations at this time, but these facilities would be available should pressures develop in the

future. The Committee unanimously approved the

following resolution:

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

enter into additional temporary reciprocal currency arrangements (swap lines) with the Bank

of England, the European Central Bank

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(ECB), the Bank of Japan, and the Swiss National Bank to support the provision of liquidity in British pounds, euros, Japanese yen, and

Swiss francs. The swap arrangements with

each foreign central bank shall be subject to

the following limits: an aggregate amount of

up to £30 billion with the Bank of England; an

aggregate amount of up to €80 billion with the

ECB; an aggregate amount of up to ¥10 trillion with the Bank of Japan; and an aggregate

amount of up to SwF 40 billion with the Swiss

National Bank. These arrangements shall terminate no later than October 30, 2009, unless

extended by mutual agreement of the Committee and the respective foreign central banks.

The Committee also authorizes the Federal Reserve Bank of New York to provide the foreign currencies obtained under the arrangements to U.S. financial institutions by means of

swap transactions to assist such institutions in

meeting short-term liquidity needs in their foreign operations. Requests for drawings on the

central bank swap lines and distribution of the

foreign currency proceeds to U.S. financial institutions shall be initiated by the appropriate

Reserve Bank and approved by the Foreign

Currency Subcommittee.”

Staff Review of the Economic and Financial Situation

The information reviewed at the March 17-18 meeting

indicated that economic activity had fallen sharply in

recent months. The contraction was reflected in widespread declines in payroll employment and industrial

production. Consumer spending appeared to remain at

a low level after changing little, on balance, in recent

months. The housing market weakened further, and

nonresidential construction fell. Business spending on

equipment and software continued to fall across a

broad range of categories. Despite the cutbacks in

production, inventory overhangs appeared to worsen in

a number of areas. Both headline and core consumer

prices edged up in January and February.

Labor market conditions continued to deteriorate. Private payroll employment dropped considerably over

the three months ending in February. Employment

losses remained widespread across industries, with the

notable exception of health care. Meanwhile, the average workweek of production and nonsupervisory

workers on private payrolls continued to be low in February, and the number of aggregate hours worked for

this group was markedly below the fourth-quarter aver-

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Federal Open Market Committee

age. The civilian unemployment rate climbed ½ percentage point in February, to 8.1 percent. The labor

force participation rate declined in January and February, on balance, likely in response to weakened labor

demand. The four-week moving average of initial

claims for unemployment insurance continued to move

up through early March, and the level of insured unemployed rose further.

Industrial production fell in January and February, with

cutbacks again widespread, and capacity utilization in

manufacturing declined to a very low level. Although

production of light motor vehicles turned up in February, it remained well below the pace of the fourth quarter as manufacturers responded to the significant deterioration in demand over the past few months. The

output of high-tech products declined as production of

computers and semiconductors extended the sharp

declines that began in the fourth quarter of 2008. The

production of other consumer durables and business

equipment weakened further, and broad indicators of

near-term manufacturing activity suggested that factory

output would continue to contract over the next few

months.

The available data suggested that real consumer spending held steady, on balance, in the first two months of

this year after having fallen sharply over the second half

of last year. Real spending on goods excluding motor

vehicles was estimated to have edged up, on balance, in

January and February. In contrast, real outlays on motor vehicles contracted further in February after a decline in January. The financial strain on households

intensified over the previous several months; by the

end of the fourth quarter, household net worth for the

first time since 1995 had fallen to less than five times

disposable income, and substantial declines in equity

and house prices continued early this year. Consumer

sentiment declined further in February as households

voiced greater concerns about income and job prospects. The Reuters/University of Michigan index in

early March stood only slightly above its 29-year low

reached in November, and the Conference Board index, which includes questions about employment conditions, fell in February to a new low.

Housing activity continued to be subdued. Singlefamily starts ticked up in February, and adjusted permit

issuance in this sector moved up to a level slightly

above starts. Multifamily starts jumped in February

from the very low level in January, and the level of multifamily starts was close to where it had been at the end

of the third quarter of 2008. Housing demand re-

_

mained very weak, however. Although the stock of

unsold new single-family homes fell in January to its

lowest level since 2003, inventories continued to move

up relative to the slow pace of sales. Sales of existing

single-family homes fell in January, reversing the uptick

seen in December. Over the previous 12 months, the

pace of existing home sales declined much less than

that of new home sales, reflecting in part increases in

foreclosure-related and other distressed sales. The

weakness in home sales persisted despite historically

low mortgage rates for borrowers eligible for conforming loans. After having fallen significantly late last year,

rates for conforming 30-year fixed-rate mortgages fluctuated in a relatively narrow range during the intermeeting period. In contrast, the market for nonconforming

loans remained severely impaired. House prices continued to decline.

Business spending on transportation equipment continued to fall from already low levels, and demand both

for high-tech equipment and software and for equipment other than high-tech and transportation dropped

sharply in the fourth quarter. In January, nominal

shipments of nondefense capital goods excluding aircraft declined, and new orders fell significantly further.

The fundamental determinants of equipment and software spending worsened appreciably: Business output

dropped, and rising corporate bond yields boosted the

user cost of capital in the fourth quarter. After holding

up surprisingly well through most of last year, outlays

on nonresidential structures began to show declines

consistent with the weak fundamentals for this sector.

In real terms, investment declined for most types of

buildings over the previous few months. Census data

on book-value inventory investment for January suggested that firms had further pared their stocks; however, sales continued to fall more quickly than inventories, apparently exacerbating the overhangs that developed in the second half of 2008.

The U.S. international trade deficit narrowed in December and January, as a steep fall in imports more

than offset a decline in exports. All major categories of

exports decreased, especially sales of industrial supplies,

machinery, and automotive products. All major categories of imports decreased as well, with large declines

in imports of oil, automotive products, and industrial

supplies. The drop in the value of oil imports reflected

a lower price. Imports of automotive products declined as automakers made significant production cutbacks throughout North America.

Minutes of the Meeting of March 17-18, 2009

Output in the advanced foreign economies contracted

in the fourth quarter, with large reductions in real gross

domestic product (GDP) in all the major economies

and a double-digit rate of decline in Japan. Trade and

investment in those countries were particularly weak.

Indicators of economic activity, especially industrial

production, suggested that the pace of contraction accelerated late in the fourth quarter and into the first

quarter. Economic activity in emerging market economies also weakened significantly in the fourth quarter.

Exports, industrial production, and confidence indicators dropped notably in both Latin America and emerging Asia. Incoming data for January and February suggested a further significant decline in the first quarter.

In the United States, overall consumer prices increased

in January and February, led by an increase in energy

prices, after posting sizable declines late last year. Excluding the categories of food and energy, consumer

prices edged higher in January and February after three

months of no change. The producer price index for

core intermediate materials dropped for a fifth month

in February, reflecting, in part, weaker global demand

and steep declines in the prices of a wide variety of

energy-intensive goods, such as chemicals and plastics.

Low readings on overall and core consumer price inflation in recent months, as well as the weakened economic outlook, kept near-term inflation expectations

reported in surveys well below their high levels in mid2008. In contrast, measures of longer-term expectations remained close to their averages over the past

couple of years. Hourly earnings continued to increase

at a moderate rate in February.

The Federal Open Market Committee’s decision at the

January meeting to leave the target range for the federal

funds rate unchanged was widely anticipated by investors and had little impact on short-term money markets. Over the intermeeting period, the path for the

federal funds rate implied by futures rates shifted down

somewhat, on net, mostly on incoming news about the

financial sector and the economic outlook. Yields on

nominal Treasury coupon securities increased over the

period, reportedly because market participants had assigned some probability to the possibility that the Federal Reserve would establish a purchase program for

longer-term Treasury securities that was not, in fact,

forthcoming; yields were also reported to have responded to concerns over the federal deficit and the

growing supply of Treasury securities. Yields on longer-term inflation-indexed Treasury securities increased

more than those on their nominal counterparts, leaving

longer-term inflation compensation lower over the pe-

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riod, and inflation compensation at shorter horizons

was little changed. Poor liquidity in the market for

Treasury inflation-protected securities continued to

make these readings difficult to interpret.

Conditions in short-term funding markets were mixed

over the intermeeting period. In unsecured interbank

funding markets, spreads of dollar London interbank

offered rates (Libor) over comparable-maturity overnight index swap rates trended higher, on net, especially

at longer maturities, and forward spreads increased,

evidently on renewed concerns about the financial

condition of some large banks. Conditions in the

commercial paper (CP) market continued to improve,

on balance, over the intermeeting period. Spreads on

30-day A2/P2-rated CP trended down further, and

those on AA-rated asset-backed commercial paper remained at the lower end of the range recorded over the

past year. Conditions in repurchase agreement markets

for most collateral types improved over the period, but

volumes remained low.

Trading conditions in the secondary market for nominal Treasury coupon securities showed some limited

signs of improvement. Average bid-asked spreads for

on-the-run nominal Treasury notes were relatively stable near their pre-crisis levels. Daily trading volumes

for on-the-run securities, however, inched lower, and

spreads between the yields of on- and off-the-run 10year Treasury notes remained very high.

Broad equity price indexes dropped significantly, on

balance, over the intermeeting period amid continued

concerns about the health of the financial sector, uncertainty regarding the efficacy of government support

to the sector, and a further weakening of the economic

outlook. Bank stock prices were particularly hard hit,

and the credit default swap (CDS) spreads of many

banks rose above the peaks recorded last fall on anxieties about the financial conditions of the largest banking firms. Stock prices of insurance companies

dropped sharply over the period, reflecting concerns

about the adequacy of their capital positions. On

March 2, American International Group, Inc. (AIG),

reported losses of more than $60 billion for the fourth

quarter of last year, and the Treasury and the Federal

Reserve announced a restructuring of the government

assistance to AIG to enhance the company’s capital

and liquidity to facilitate the orderly completion of its

global divestiture program.

Measures of liquidity in the secondary market for speculative-grade corporate bonds worsened somewhat

over the period but remained significantly better than

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Federal Open Market Committee

in the fall of 2008. Spreads of yields on both BBBrated and speculative-grade bonds relative to those on

comparable-maturity Treasury securities were little

changed on net. The investment- and speculativegrade CDS indexes widened significantly, on net, over

the intermeeting period. Gross bond issuance by nonfinancial firms was very strong in January and February,

as investment-grade issuance more than doubled from

its already solid pace in the fourth quarter; speculativegrade issuance, however, remained sluggish. Trading

conditions in the leveraged syndicated loan market improved slightly, but issuance continued to be very weak.

The market for commercial mortgage-backed securities

(CMBS) also remained under heavy stress. Indexes of

CDS spreads on AAA-rated CMBS widened to record

levels, as Moody’s downgraded a large portion of the

2006 and 2007 vintages after a reevaluation of its rating

criteria.

The debt of the domestic private nonfinancial sector,

which was about unchanged in the fourth quarter of

last year, was estimated to have remained about flat in

the first quarter. Household debt appeared to have

contracted in the first quarter for the second quarter in

a row, primarily as a result of declines in both consumer and home mortgage debt. Declines in consumer and

mortgage debt stemmed, in turn, from very weak

household spending, the continued drop in house prices, and tighter terms and standards for loans. Business

debt was projected to expand at a moderate pace in the

first quarter, largely because of a burst of corporate

bond issuance. Reflecting heavy borrowing by the

Treasury, total debt of the domestic nonfinancial sector

was projected to have continued to expand in the first

quarter, but at a pace below that recorded in the fourth

quarter of last year.

The rise in M2 slowed in February from the rapid pace

recorded over the previous few months. Liquid deposits, while decelerating, continued to expand briskly.

Savings deposits increased while demand deposits decreased. Retail money funds fell in February, reflecting

sizable outflows from Treasury-only funds, which generally provided low yields. Small time deposits also

contracted, as the institutions that had been bidding

aggressively for these retail funds stopped doing so.

The expansion in currency remained robust.

Bank credit continued to decline in January and February, and commercial and industrial (C&I) loans decreased over these months. The February Survey of

Terms of Business Lending indicated that C&I loan

rate spreads over comparable-maturity market instru-

_

ments rose modestly overall from the November survey. Commercial real estate loans outstanding also declined over the first part of 2009. In contrast, consumer loans on banks’ books jumped over the first two

months of the year because of sizable increases at a few

banks that purchased loans from their affiliated finance

companies. In addition, some banks brought consumer

loans that had previously been securitized back onto

their books. After 12 consecutive months of contraction, residential mortgage loans on banks’ books increased in February, likely a result of the pickup in refinancing activity. In contrast, the rise in home equity

loans slowed noticeably in January and February.

Among the advanced foreign economies, headline equity price indexes generally fell significantly over the period, with the sharpest drops in the banking sector. In

particular, European bank shares fell steeply as earnings

reports for the fourth quarter came in weaker than expected and fears about the exposure of many western

European banks to emerging Europe increased. The

major currencies index of the dollar rose, on net, over

the intermeeting period; foremost among the contributors to the rise was a significant appreciation of the

dollar against the yen. Financial conditions in emerging

markets also worsened, with their exchange rates and

equity prices generally falling and CDS premiums rising

a bit on balance.

Several foreign governments and central banks took

further steps to support their financial markets and

economies. The Bank of England announced its intention to purchase substantial quantities of government

and corporate bonds through its Asset Purchase Facility, after which yields on long-term British gilts fell significantly.

In addition, the British government

launched its Asset Protection Scheme, which insured

assets placed in the scheme by the Royal Bank of Scotland and Lloyds Bank. The Bank of Japan stated that it

would resume purchases of equities held on banks’ balance sheets, announced plans to purchase corporate

bonds, and began its previously announced purchases

of commercial paper. The Swiss National Bank announced that it would purchase both domestic corporate debt and foreign currency to increase liquidity.

Staff Economic Outlook

In the forecast prepared for the meeting, the staff revised down its outlook for economic activity. The deterioration in labor market conditions was rapid in recent months, with steep job losses across nearly all sectors. Industrial production continued to contract rapidly as firms responded to the falloff in demand and

Minutes of the Meeting of March 17-18, 2009

the buildup of some inventory overhangs. The incoming data on business spending suggested that business

investment in equipment and structures continued to

decline. Single-family housing starts had fallen to a

post–World War II low in January, and demand for

new homes remained weak. Both exports and imports

retreated significantly in the fourth quarter of last year

and appeared headed for comparable declines this

quarter. Consumer outlays showed some signs of stabilizing at a low level, with real outlays for goods outside of motor vehicles recording gains in January and

February. Financial conditions overall were even less

supportive of economic activity, with broad equity indexes down significantly amid continued concerns

about the health of the financial sector, the dollar

stronger, and long-term interest rates higher. The

staff’s projections for real GDP in the second half of

2009 and in 2010 were revised down, with real GDP

expected to flatten out gradually over the second half

of this year and then to expand slowly next year as the

stresses in financial markets ease, the effects of fiscal

stimulus take hold, inventory adjustments are worked

through, and the correction in housing activity comes

to an end. The weaker trajectory of real output resulted in the projected path of the unemployment rate

rising more steeply into early next year before flattening

out at a high level over the rest of the year. The staff

forecast for overall and core personal consumption

expenditures (PCE) inflation over the next two years

was revised down slightly. Both core and overall PCE

price inflation were expected to be damped by low

rates of resource utilization, falling import prices, and

easing cost pressures as a result of the sharp net declines in oil and other raw materials prices since last

summer.

Meeting Participants’ Views and Committee Policy Action

In the discussion of the economic situation and outlook, nearly all meeting participants said that conditions

had deteriorated relative to their expectations at the

time of the January meeting. The slowdown was widespread across sectors. Large declines in equity prices, a

further drop in house prices, and mounting job losses

threatened to further depress consumer spending, despite some firming in the recent retail sales data and

forthcoming tax reductions. Business capital spending

was weakening in an environment of uncertainty and

low business confidence. Of particular note was the

apparent sharp fall in foreign economic activity, which

was having a negative effect on U.S. exports. Credit

conditions remained very tight, and financial markets

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remained fragile and unsettled, with pressures on financial institutions generally intensifying this year. Overall,

participants expressed concern about downside risks to

an outlook for activity that was already weak. With

regard to the outlook for inflation, all participants

agreed that inflation pressures were likely to remain

subdued, and several expressed the view that inflation

was likely to persist below desirable levels.

District business contacts indicated that production

and sales were declining steeply. Some industries that

previously were less affected, such as agriculture and

energy, had begun to suffer the effects of the slowdown. Businesses reported that bank financing was

becoming more expensive and more difficult to obtain.

Expenditures were being cut substantially for a wide

range of capital equipment, and spending on nonresidential structures had recently turned down. Inventory

liquidation was continuing, but inventory-sales ratios

remained elevated as sales slowed. Against this backdrop, participants anticipated further employment cutbacks over coming months, though perhaps at a gradually diminishing rate.

Several participants said that the degree and pervasiveness of the decline in foreign economic activity was one

of the most notable developments since the January

meeting. In light of this development, it was widely

agreed that exports were not likely to be a source of

support for U.S. economic activity in the near term.

Participants did not interpret the uptick in housing

starts in February as the beginning of a new trend, but

some noted that there was only limited scope for housing activity to fall further. Nonetheless, large inventories of unsold homes relative to sales and the prospect

of a continued high level of distressed sales would continue to hold down residential investment in the near

term. Several participants noted the tentative signs of

stabilization in consumer spending in January and February. However, others suggested that strains on

household balance sheets from falling equity and house

prices, reduced credit availability, and the fear of unemployment could well lead to further increases in the

saving rate that would damp consumption growth in

the near term.

Overall, most participants viewed downside risks as

predominating in the near term, mainly owing to potential adverse feedback effects as reduced employment

and production weighed on consumer spending and

investment, and as the weakening economy boosted the

prospective losses of financial institutions, leading to a

further tightening of credit conditions.

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Federal Open Market Committee

Looking beyond the very near term, a number of market forces and policies now in place were seen as eventually leading to economic recovery. Notably, the low

level of mortgage interest rates, reduced house prices,

and the Administration’s new programs to encourage

mortgage refinancing and mitigate foreclosures ultimately could bring about a lower cost of homeownership, a sustained increase in home sales, and a stabilization of house prices. The household saving rate, which

had already risen considerably, would eventually level

out and cease to hold back consumption growth.

Business inventories would come into line with even a

low level of sales, and the pressure on production from

inventory drawdowns would diminish. Fiscal and

monetary policies were likely to contribute significantly

to aggregate demand in coming quarters. Participants

expressed a variety of views about the strength and

timing of the recovery, however. Some believed that

the natural resilience of market forces would become

evident later this year. Others, who saw recovery as

delayed and potentially weak, were concerned about a

possible further rise in the saving rate and a very slow

improvement in financial conditions. Some participants also cautioned that, because of the poor functioning of the financial system, capital and labor were

not being allocated to their most productive uses, and

this failure threatened to damp the recovery and reduce

the potential growth of the economy over the medium

term.

Participants saw little chance of a pickup in inflation

over the near term, as rising unemployment and falling

capacity utilization were holding down wages and prices and inflation expectations appeared subdued. Several expressed concern that inflation was likely to persist

below desired levels, with a few pointing to the risk of

deflation. Even without a continuation of outright

price declines, falling expectations of inflation would

raise the real rate of interest and thus increase the burden of debt and further restrain the economy.

Some indicators, including share prices and CDS

spreads of financial institutions, suggested a worsening

of financial market strains since January. However, for

the most part, participants viewed conditions in financial markets as little changed but remaining extraordinarily stressed. The large volume of issuance of investment-grade corporate bonds in recent weeks was a

notable bright spot. Participants shared comments

received from financial industry contacts on their experiences with and concerns about recent government

programs to stabilize the financial system. These contacts feared that uncertainties about future actions the

_

government might take and future regulations it might

impose were making it more difficult to plan and were

discouraging participation in government efforts to

stabilize the financial system. Participants agreed that a

credible and widely understood program to deal with

the troubles of the banking system could help restore

business and consumer confidence. Many viewed the

strengthening of the banking system as essential for a

sustained and robust recovery.

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

additional purchases of longer-term assets eligible for

open market operations would be appropriate. Such

purchases would provide further monetary stimulus to

help address the very weak economic outlook and reduce the risk that inflation could persist for a time below rates that best foster longer-term economic growth

and price stability. One member preferred to focus

additional purchases on longer-term Treasury securities, whereas another member preferred to focus on

agency MBS. However, both could support expanded

purchases across a range of assets, and several members noted that working across a range of assets and

instruments was appropriate when the effects of any

one tactic were uncertain. Members agreed that the

monetary base was likely to grow significantly as a consequence of additional asset purchases; one, in particular, stressed that sustained increases in the monetary

base were important to ensure that policy was consistently expansionary. Members expressed a range of

views as to the preferred size of the increase in purchases. Several members felt that the significant deterioration in the economic outlook merited a very substantial increase in purchases of longer-term assets. In

contrast, the potential for a large increase over time in

the size of the balance sheet from the TALF program

was seen as supporting a more modest, though still

substantial, increase in asset purchases. Ultimately,

members agreed to undertake additional purchases of

agency MBS of up to $750 billion and of agency debt

of up to $100 billion, and they also agreed to purchase

up to $300 billion of longer-term Treasury securities.

The Committee believed that purchases of these

amounts would help to promote a return to economic

growth and price stability. The period for conducting

the agency debt and MBS purchases was extended from

the next three months to the next nine months; members agreed to allow the Desk flexibility within this horizon to respond to market conditions. Treasury purchases were to be conducted over the next six months.

Members also noted the recent launch of the TALF,

Minutes of the Meeting of March 17-18, 2009

and they agreed to include in the Committee’s statement an indication that the range of assets accepted as

eligible collateral for the TALF was likely to be expanded. Committee members decided to keep the target range for the federal funds rate at 0 to ¼ percent

and to communicate to the public the Committee’s

view that the federal funds rate was likely to remain

exceptionally low for an extended period.

At the conclusion of the discussion, the Committee

voted to authorize and direct the Federal Reserve Bank

of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance

with the following domestic policy directive:

“The Federal Open Market Committee seeks

monetary and financial conditions that will

foster price stability and promote sustainable

growth in output. To further its long-run objectives, the Committee 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, GSE-guaranteed MBS, and longer-term

Treasury securities during the intermeeting

period with the aim of providing support to

private credit markets and economic activity.

The timing and pace of these purchases

should depend on conditions in the markets

for such securities and on a broader assessment of private credit market conditions. The

Committee anticipates that the combination

of outright purchases and various liquidity facilities outstanding will cause the size of the

Federal Reserve’s balance sheet to expand

significantly in coming months. The Desk is

expected to purchase up to $200 billion in

housing-related GSE debt by the end of this

year. The Desk is expected to purchase at

least $500 billion in GSE-guaranteed MBS by

the end of the second quarter of this year and

is expected to purchase up to $1.25 trillion of

these securities by the end of this year. The

Committee also directs the Desk to purchase

longer-term Treasury securities during the intermeeting period. Over the next six months,

the Desk is expected to purchase up to $300

billion of longer-term Treasury securities.

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

Page 9

objectives of maximum employment and price

stability.”

The vote encompassed approval of the statement below to be released at 2:15 p.m.:

“Information received since the Federal Open

Market Committee met in January indicates

that the economy continues to contract. Job

losses, declining equity and housing wealth,

and tight credit conditions have weighed on

consumer sentiment and spending. Weaker

sales prospects and difficulties in obtaining

credit have led businesses to cut back on inventories and fixed investment. U.S. exports

have slumped as a number of major trading

partners have also fallen into recession. Although the near-term economic outlook is

weak, the Committee anticipates that policy

actions to stabilize financial markets and institutions, together with fiscal and monetary

stimulus, will contribute to a gradual resumption of sustainable economic growth.

In light of increasing economic slack here and

abroad, the Committee expects that inflation

will remain subdued. 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.

In these circumstances, the Federal Reserve

will employ all available tools to promote

economic recovery and to preserve price stability. The Committee will maintain the target

range for the federal funds rate at 0 to ¼ percent and anticipates that economic conditions

are likely to warrant exceptionally low levels

of the federal funds rate for an extended period. To provide greater support to mortgage

lending and housing markets, the Committee

decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of

agency mortgage-backed securities, bringing

its total purchases of these securities to up to

$1.25 trillion this year, and to increase its purchases of agency debt this year by up to

$100 billion to a total of up to $200 billion.

Moreover, to help improve conditions in private credit markets, the Committee decided to

purchase up to $300 billion of longer-term

Treasury securities over the next six months.

Page 10

Federal Open Market Committee

The Federal Reserve has launched the Term

Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and

small businesses and anticipates that the range

of eligible collateral for this facility is likely to

be expanded to include other financial assets.

The Committee will continue to carefully

monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments.”

Voting for this action: Messrs. Bernanke and Dudley,

Ms. Duke, Messrs. Evans, Kohn, Lacker, Lockhart,

Tarullo, and Warsh, and Ms. Yellen.

Voting against this action: None.

It was agreed that the next meeting of the Committee

would be held on Tuesday-Wednesday, April 28-29,

2009. The meeting adjourned at 1:35 p.m. on March

18, 2009.

Conference Call

On February 7, 2009, the Committee met by conference call in a joint session with the Board of Governors to discuss the potential role of the Federal Reserve

in the Treasury’s forthcoming financial stabilization

plan. After hearing an overview of the version of the

plan envisioned at the time of the meeting, meeting

participants discussed its principal elements and shared

a range of perspectives on its implications for financial

markets and institutions. The Federal Reserve’s primary direct role in the plan would be through an expansion of the previously announced TALF, which would

be supported by additional funds from the Troubled

Asset Relief Program (TARP). In the current envi-

_

ronment, it was anticipated that such an expansion

would provide additional assistance to financial markets

and institutions in meeting the credit needs of households and businesses and thus would support overall

economic activity. While several participants expressed

some concern that the expansion of the TALF program could increase the Federal Reserve’s exposure to

credit risk, the program’s requirements for highly rated

collateral that would exceed the value of the related

loans, in combination with the added TARP funds as a

backstop against losses, were generally seen as providing the Federal Reserve with adequate protection. Participants also discussed the implications of the expanded TALF program for the Federal Reserve’s balance sheet over time. Participants agreed it would be

important to work with the Treasury to obtain tools to

ensure that any reserves added to the banking system

through this program could be removed at the appropriate time.

Notation Vote

By notation vote completed on February 17, 2009, the

Committee unanimously approved the minutes of the

FOMC meeting held on January 27-28, 2009.

_____________________________

Brian F. Madigan

Secretary