fomc minutes · June 23, 2009

FOMC Minutes

Page 1

Minutes of the Federal Open Market Committee

June 23-24, 2009

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve

System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, June 23, 2009,

at 1:00 p.m. and continued on Wednesday, June 24,

2009, at 9:00 a.m.

Mr. Struckmeyer, Deputy Staff Director, Office of

the Staff Director for Management, 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

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

Messrs. Greenlee, Nelson, Reifschneider, and

Wascher, Associate Directors, Divisions of

Banking Supervision and Regulation, 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

Messrs. Bullard and 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

Messrs. Carpenter and Perli, Deputy Associate Directors, 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,¹ General Counsel

Mr. Baxter, Deputy General Counsel

Mr. Sheets, Economist

Mr. Stockton, Economist

Mr. Kiley, Assistant Director, Division of Research

and Statistics, Board of Governors

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

Weinberg, and Wilcox, Associate Economists

Mr. Sack, Manager, System Open Market Account

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

Secretary, Board of Governors

Mr. Frierson,¹ Deputy Secretary, Office of the Secretary, Board of Governors

Mr. Small, Project Manager, Division of Monetary

Affairs, Board of Governors

Ms. Lindner, Group Manager, Division of Research and Statistics, Board of Governors

Mr. Wood, Senior Economist, Division of International Finance, Board of Governors

Messrs. Driscoll, King,¹ and McCarthy, Economists, Division of Monetary Affairs, Board of

Governors

Ms. Beattie, Assistant to the Secretary, Office of

the Secretary, Board of Governors

¹ Attended Tuesday’s session only.

Page 2

Federal Open Market Committee

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

Messrs. Fuhrer and Rosenblum, Executive Vice

Presidents, Federal Reserve Banks of Boston

and Dallas, respectively

Mr. Judd, Advisor to the President, Federal Reserve Bank of San Francisco

Messrs. Feldman, Hilton, Krane, McAndrews,

Mses. Mester and Mosser, and Messrs.

Schweitzer, Sellon, and Waller, Senior Vice

Presidents, Federal Reserve Banks of Minneapolis, New York, Chicago, New York, Philadelphia, New York, Cleveland, Kansas City,

and St. Louis, respectively

Ms. Logan, Vice President, Federal Reserve Bank

of New York

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

The Manager of the System Open Market Account

(SOMA) 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 mortgagebacked securities (MBS) during the period since the

Committee’s April 28-29 meeting. By unanimous vote,

the Committee ratified those transactions. There were

no open market operations in foreign currencies for the

System’s account over the intermeeting period.

The Committee reviewed a staff proposal that would

authorize the Desk to lend, as part of the Federal Reserve’s regular overnight securities lending operations,

securities held in the SOMA portfolio that are direct

obligations of federal agencies. Lending agency securities was viewed as a technical modification to the existing overnight securities lending program that would

support functioning of agency debt markets. The

Committee voted unanimously to amend paragraph 3

of the Authorization for Domestic Open Market Operations with the text underlined below.

“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 and securities that are di-

rect obligations of any agency of the United States, 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.”

The staff reported on projections of the Federal Reserve’s balance sheet under various assumptions about

economic and financial conditions and the associated

path of monetary policy. Staff projections suggested

that the size of the Federal Reserve’s balance sheet

might peak late this year and decline gradually thereafter. The staff also presented information on the possible implications of substantial changes in the size and

composition of the Federal Reserve’s balance sheet for

the System’s net income. The analysis indicated that

the Federal Reserve was likely to earn substantial net

interest income over the next few years under most

interest rate scenarios. The staff presented one scenario, however, in which aggressive increases in shortterm interest rates significantly reduced System net income relative to a baseline scenario. The analysis also

suggested that the market value of the Federal Reserve’s securities holdings could decline appreciably

under some scenarios. However, while the Federal

Reserve would retain the option of selling securities

before they mature or are prepaid as a means of tightening policy when appropriate, it was not expected to

have to do so. Changes in market valuations were thus

seen as unlikely to have significant implications for the

System’s net income.

In a related discussion, the staff briefed the Committee

on a number of possible tools that the Federal Reserve

might employ to foster effective control of the federal

funds rate in the context of a much expanded balance

sheet. Some of those tools were focused primarily on

shaping or strengthening the demand for reserves,

while others were designed to provide greater control

over the supply of reserves. In discussing the staff

presentation, meeting participants generally agreed that

the Federal Reserve either already had or could develop

tools to remove policy accommodation when appropri-

Minutes of the Meeting of June 23-24, 2009

ate. Ensuring that policy accommodation can ultimately

be withdrawn smoothly and at the appropriate time

would remain a top priority of the Federal Reserve.

The staff also provided the Committee with an analysis

of the potential adverse effects of very high reserve

balances on bank capital ratios. An important issue

was whether the further increase in reserve balances

that is likely to result from the Federal Reserve’s already-announced program of asset purchases could

lead banks to limit their lending and acquisition of securities in order to prevent an excessive decline in their

capital ratios. The analysis concluded that, with few

exceptions, banks’ regulatory leverage ratios (defined as

tier 1 capital divided by total average assets) were likely

to remain comfortably above regulatory minimums,

even with the substantial growth in reserve balances

projected to occur in coming months and even if there

were some erosion in bank capital. In part, that result

reflected the fact that many institutions had raised capital lately; in addition, the leverage ratios for most institutions were well above the regulatory minimums at the

end of the first quarter.

The staff also reviewed the experience to date with the

Federal Reserve’s purchases of Treasury securities,

agency debt securities, and agency MBS. A number of

potential modifications to those programs were presented for the Committee’s consideration, including

possible expansions in their size, extensions of the duration of securities purchased, steps to increase the

flexibility of those purchases both within each program

and across programs in response to short-term market

developments, and possible approaches to winding

down purchases as the programs near completion. The

Federal Reserve was already purchasing a very large

fraction of new current-coupon agency MBS and agency debt, and further increasing the scale of those programs could compromise market functioning. Some

participants thought that increases in purchases of

Treasury securities might have little or no effect on

long-term interest rates unless the increases were very

sizable, given the large amount of current and projected

supply of Treasury securities. Others were concerned

that announcements of substantial additional purchases

could add to perceptions that the federal debt was being monetized. While most members did not see largescale purchases of Treasury securities as likely to be a

source of inflation pressures given the weak economic

outlook, public concern about monetization could have

adverse implications for inflation expectations. The

asset purchase programs were intended to support economic activity by improving market functioning and

Page 3

reducing interest rates on mortgage loans and other

long-term credit to households and businesses relative

to what they otherwise would have been. But the

Committee had not set specific objectives for longerterm interest rates, and participants did not consider it

appropriate to allow the Desk discretion to adjust the

size and composition of the Federal Reserve’s asset

purchases in response to short-run fluctuations in market interest rates. Some participants noted that, in

principle, the Committee could formulate a plan for

asset purchases that would respond to economic and

financial developments in a way that might better promote monetary policy objectives. Most, however,

thought that formulating and communicating such a

plan would be very difficult, potentially leading to an

increase in market uncertainty regarding Federal Reserve actions and intentions. Many participants agreed,

however, that it was appropriate for the Desk to make

small adjustments to the size and timing of purchases

aimed at fostering market liquidity and improving market functioning. Participants discussed the merits of

including securities backed by adjustable-rate mortgages in MBS purchases and of tapering off purchases of

securities as the asset purchase programs were being

completed, but the Committee did not reach a decision

on those issues at the meeting.

The staff presented policymakers with proposals for

extensions, modifications, and terminations of various

liquidity programs. A number of the credit and liquidity facilities that the Federal Reserve had established in

the course of the financial crisis were scheduled to expire on October 30. Use of most of the liquidity facilities had declined in recent months as market conditions

had improved. Still, meeting participants judged that

market conditions remained fragile, and that concerns

about counterparty credit risk and access to liquidity,

both of which had ebbed notably in recent months,

could increase again. Moreover, participants viewed

the availability of the liquidity facilities as a factor that

had contributed to the reduction in financial strains. If

the Federal Reserve’s backup liquidity facilities were

terminated prematurely, such developments might put

renewed pressure on some financial institutions and

markets and tighten credit conditions for businesses

and households. The period over year-end was seen as

posing heightened risks given the usual pressures in

financial markets at that time. In these circumstances,

participants agreed that most facilities should be extended into early next year. However, participants also

judged that improved market conditions and declining

use of the facilities warranted scaling back, suspending,

Page 4

Federal Open Market Committee

or tightening access to several programs, including the

Term Auction Facility (TAF), the Term Securities

Lending Facility (TSLF), and the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity

Facility (AMLF).

Following the presentation and discussion of the staff

proposal, the Board voted unanimously to extend the

AMLF, the Commercial Paper Funding Facility

(CPFF), the Primary Dealer Credit Facility (PDCF),

and the TSLF through February 1, 2010. The Board

did not extend the Money Market Investor Funding

Facility (MMIFF) beyond October 30. The extension

of the TSLF required the approval of the Federal Open

Market Committee (FOMC), as that facility was established under the joint authority of the Board and the

FOMC. The Board and the FOMC jointly decided to

suspend some TSLF auctions and to reduce the size

and frequency of others. In addition, the FOMC extended the temporary reciprocal currency arrangements

(swap lines) between the Federal Reserve and other

central banks to February 1, 2010. The FOMC unanimously passed the following resolution to extend the

temporary swap arrangements and the TSLF:

“The Federal Open Market Committee extends until February 1, 2010, its authorizations for the Federal Reserve Bank of New

York to engage in temporary reciprocal

currency arrangements (“swap arrangements”) with foreign central banks under

the conditions previously established by

the Committee.

The Federal Open Market Committee extends until February 1, 2010, its authorizations for the Federal Reserve Bank of New

York to provide a Term Securities Lending

Facility, subject to the same collateral, interest rate, and other conditions previously

established by the Committee. However,

the Federal Reserve Bank of New York is

directed to suspend Schedule 1 TSLF auctions, effective immediately. The Federal

Reserve Bank of New York is directed to

conduct Schedule 2 TSLF auctions initially on a monthly basis in amounts of

$75 billion; the Reserve Bank is directed to

reduce over time the amounts provided

through the TSLF as market conditions

warrant. The Federal Reserve Bank of

New York is directed to suspend operations of the Term Securities Lending Facil-

ity Options Program (TOP), effective immediately. Should market conditions appear to warrant the resumption of Schedule 1 TSLF or TOP auctions, the Account

Manager is to consult with the Chairman

and, if possible, the Board and the Federal

Open Market Committee.”

Board members and FOMC participants noted their

expectation that a number of these facilities may not

need to be extended beyond February 1, 2010, if the

recent improvements in market conditions continue.

However, if financial stresses do not moderate as expected, the Board and the FOMC were prepared to

extend the terms of some or all of the facilities as

needed to promote financial stability and economic

growth.

Staff Review of the Economic Situation

The information reviewed at the June 23-24 meeting

suggested that the economy remained very weak,

though declines in activity seemed to be lessening.

Employment was still falling, and manufacturers had

cut production further in response to excess inventories and soft demand. But the reductions in employment and industrial production had slowed somewhat,

consumer spending appeared to be holding reasonably

steady after shrinking in the second half of 2008, and

sales and construction of single-family homes had apparently flattened out. In addition, the recent declines

in capital spending were smaller than those recorded

earlier in the year. Consumer price inflation was fairly

quiescent in recent months, although the upturn in

energy prices appeared likely to boost headline inflation

in June.

The demand for labor weakened further in May, albeit

less rapidly than in earlier months. Nonfarm payrolls

continued to shrink, but the decline was the smallest

since September. In addition, average weekly hours of

production and nonsupervisory workers on private

payrolls, which had dropped substantially from September to March, were essentially unchanged in April

and May. Thus aggregate hours worked by this group

fell at a slower pace in April and May than on average

over the previous seven months. The unemployment

rate, however, rose further in May, to 9.4 percent. Despite the high level of joblessness, the labor force participation rate moved up for a second consecutive

month to a level close to where it was at the beginning

of the recession. The four-week moving average of

initial claims for unemployment insurance fell back a

Minutes of the Meeting of June 23-24, 2009

little, but the number of individuals receiving unemployment insurance benefits continued to increase.

Industrial production decreased in April and May but at

a slower pace than in the first quarter. Manufacturing

output also fell in those months, and the factory operating rate dipped further in May. In the high-tech sector, computer output fell at a pace similar to that in the

first quarter, but near-term indicators of production

turned somewhat less negative and global semiconductor sales climbed in April for the second consecutive

month. The production of motor vehicles and parts

dropped sharply in May, principally because of extended plant shutdowns at General Motors and Chrysler. The production of commercial aircraft moved up.

Outside the transportation and high-tech sectors, most

industries continued to cut production in both April

and May, though at a slower pace than over the preceding five months.

Real personal consumption expenditures rose somewhat in the first quarter after falling in the second half

of 2008, and available data suggested that spending was

holding reasonably steady in the second quarter. On

the basis of the latest retail sales data, real expenditures

on goods other than motor vehicles appeared to have

risen slightly in May and to have changed little, on net,

since the turn of the year. Sales of light motor vehicles

in April and May were slightly higher than the firstquarter average. Real outlays on services were reported

to have picked up some in April from the average

monthly gain seen over the first three months of the

year. The fundamental determinants of consumer demand appeared to have improved a bit: Despite the

ongoing decline in employment, real disposable personal income rose in the first quarter and posted

another sizable gain in April as various provisions of

the American Recovery and Reinvestment Act of 2009

boosted transfer payments and reduced personal taxes.

In addition, equity prices recorded substantial gains in

April and May, reversing a small portion of the prior

wealth declines. Measures of consumer sentiment,

while remaining at levels typically seen during recessions, improved markedly from the historical lows recorded around the turn of the year.

Single-family housing starts edged up in May, and adjusted permit issuance for single-family houses was a

little above the level of starts, as it had been since January. In contrast, activity in the much smaller multifamily sector fell significantly further, reflecting a sharp deterioration in the fundamentals in that sector. The

steep decline in the demand for new single-family

Page 5

houses seemed to have abated. However, the pace of

new home sales was still very low in April, and the

months’ supply of new homes remained quite elevated

relative to sales despite a decrease in the stock of unsold new single-family homes to a level roughly onehalf of its mid-2006 peak. Sales of existing singlefamily homes had been fairly steady from late 2008

through May. The relative stability of the resale market

over this period coincided with a heightened proportion of transactions involving bank-owned and other

distressed properties. The apparent stabilization in

housing demand was likely due, in part, to the improvement in housing affordability that resulted from

low mortgage rates and declining house prices. Rates

for conforming 30-year fixed-rate mortgages rose on

net between late April and late June but remained below the levels seen over most of 2008. Although the

market for private-label nonprime mortgages remained

closed, spreads between rates for jumbo and standard

conforming loans narrowed substantially since March.

Meanwhile, national house prices continued to decline.

Real investment in equipment and software (E&S) continued to contract; however, the decline in the second

quarter appeared likely to be smaller than in either of

the two preceding quarters. Outlays on transportation

equipment seemed to be firming after shrinking for an

extended period, and the incoming data on shipments

and orders of nondefense capital goods pointed to a

moderation in the rate of decrease in other major components of E&S. The contraction in spending on

computing equipment appeared to be leveling off, although businesses continued to cut their real outlays on

software. Real spending on equipment outside of hightech and transportation seemed to have dropped less

rapidly in the second quarter than in the first quarter.

Data suggested a substantial increase in outlays for

nonresidential construction in March and April, concentrated in energy-related sectors. Outside of the

energy-related sectors, demand for nonresidential

building remained extremely weak and financing difficult to obtain. Although the months’ supply of nonfarm business inventories remained elevated, large production cutbacks in recent quarters allowed producers

to stem the rise in stocks relative to sales. The principal determinants of investment were still weak: Business output dropped further in the first quarter, the

user cost of capital was higher than it was a year earlier,

and credit remained tight. However, corporate bond

yields eased considerably in the weeks leading to the

June meeting, and monthly surveys of business condi-

Page 6

Federal Open Market Committee

tions and sentiment were generally less downbeat than

earlier in the year.

The U.S. international trade deficit widened slightly in

April, as a decrease in imports was more than offset by

a drop in exports. Most major categories of exports

fell, with exports of machinery, industrial supplies, and

consumer goods exhibiting significant declines. The

value of imports of goods and services also edged

down after remaining about unchanged in March. Imports of machinery and industrial supplies displayed

significant decreases, and imports of services fell moderately. Imports of consumer goods increased. The

value of oil imports also rose, as higher prices outweighed lower volumes.

The decline in output in the advanced foreign economies deepened in the first quarter. Domestic demand

fell in all major economies, led by double-digit declines

in fixed investment and sizable negative contributions

of inventories to growth. Recent indicators, however,

suggested that the pace of contraction likely moderated

in the second quarter. Purchasing managers indexes

rebounded from the exceptionally low levels reached in

the first quarter, and industrial production stabilized

somewhat. In emerging market economies, incoming

data showed that first-quarter real gross domestic

product (GDP) contracted sharply in Mexico, Hong

Kong, Malaysia, and Singapore, edged up in Korea, and

expanded considerably in India and Indonesia. For the

second quarter, indicators suggested a broader stabilization of activity in emerging market economies. In China, retail sales and fixed-asset investment rose strongly.

Financial conditions continued to improve in most

emerging market economies.

In the United States, headline consumer prices were

little changed between March and May, held down by

declines in the prices of food and energy over that period. Core inflation was slightly higher from March to

May than during the preceding three months, although

core prices posted fairly small increases apart from a

tax-induced jump in tobacco prices. Near-term inflation expectations in the Reuters/University of Michigan Surveys of Consumers remained steady in May and

then rose somewhat in the preliminary June survey.

Survey measures of long-term inflation expectations

showed no signs of moving lower despite the considerable margin of labor- and product-market slack present

in the economy. At earlier stages of processing, the

producer price index for core intermediate materials

continued to decline through May, albeit at a slower

pace than that seen at the end of 2008. Spot commodi-

ty prices, which had moved higher over the first four

months of 2009, rose more rapidly since the end of

April. Nevertheless, these prices remained well below

their year-earlier levels. The incoming data on labor

costs were mixed. Although the rise in hourly compensation in the nonfarm business sector picked up slightly

in the first quarter, the employment cost index decelerated further. Increases in average hourly earnings also

slowed further in April and May.

Staff Review of the Financial Situation

The decision by the FOMC at its April 28-29 meeting

to leave the target range for the federal funds rate unchanged and the accompanying statement indicating

that the FOMC would maintain the size of the largescale asset purchase program were largely anticipated,

but yields on Treasury securities rose slightly, as a few

investors apparently had seen some chance that the

Committee would expand the purchase program. The

release of the April FOMC minutes three weeks later

prompted a reversal of this move, as market participants reportedly focused on the suggestion that the

total size of the purchase program might need to be

increased at some point to spur a more rapid pace of

recovery. The expected path of the federal funds rate

implied by futures prices was largely unchanged by the

release of the Committee’s statement and minutes.

However, in the days following the release of the May

employment report, which was read as being significantly less negative than anticipated, market participants marked up their expected path for the federal

funds rate. Yields on nominal Treasury coupon securities increased, on net, over the intermeeting period.

These moves likely reflected a number of factors, including investors’ perceptions of an improvement in

the economic outlook, decreased concerns about the

risk of deflation, a reversal of flight-to-quality flows,

and selling of long-duration assets as exposure to mortgage prepayment risk dropped with a rise in mortgage

rates. In addition, inflation compensation rose over the

intermeeting period as yields on inflation-indexed Treasury securities increased much less than those on their

nominal counterparts. Some of the rise in inflation

compensation may have reflected an increase in inflation expectations, but an improvement in liquidity in

the market for Treasury inflation-protected securities

and mortgage-related hedging flows may have boosted

inflation compensation as well.

Pressures in short-term bank funding markets eased

further, as evidenced by declines in London interbank

offered rate (Libor) fixings and in spreads between

one- and three-month Libor and comparable-maturity

Minutes of the Meeting of June 23-24, 2009

overnight index swap (OIS) rates. These spreads narrowed to levels not seen since early 2008, transaction

volume rose modestly, and tentative signs of increased

liquidity reportedly emerged. The market for repurchase agreements saw slight improvement, with bidasked spreads for most types of transactions narrowing

a bit and haircuts roughly unchanged. Spreads on

A2/P2-rated commercial paper and AA-rated assetbacked commercial paper were little changed, on net,

since late April, remaining at the low end of their

ranges over the previous 18 months.

Over the intermeeting period, functioning in the market for Treasury securities generally improved and trading picked up, but some strains remained. The on-therun/off-the-run premium narrowed considerably at the

short end of the yield curve. Such spreads, however,

remained somewhat wide for longer-dated issues, apparently reflecting concerns about volatility linked to

mortgage-related hedging flows. Some strains, perhaps

associated with these flows, emerged at times in the

MBS market; market participants reacted to the large

and rapid changes in MBS yields by widening bid-asked

spreads on these securities.

Broad stock price indexes rose, on net, over the intermeeting period, reflecting generally better-thanexpected economic news and further declines in risk

premiums. The spread between an estimate of the expected real equity return over the next 10 years for S&P

500 firms and an estimate of the real 10-year Treasury

yield—a rough gauge of the equity risk premium—

narrowed noticeably but remained high by historical

standards. Option-implied volatility on the S&P 500

index declined but remained elevated.

Yields on speculative-grade and investment-grade corporate bonds dropped, and spreads over yields on

comparable-maturity Treasury securities narrowed considerably. Estimates of bid-asked spreads in the secondary market for speculative-grade corporate bonds

fell significantly to about their average levels in the few

years before the summer of 2007, while estimates of

such spreads for investment-grade corporate bonds

remained somewhat elevated. Market sentiment toward the syndicated leveraged loan market also improved, with the average bid price increasing noticeably

and bid-asked spreads narrowing a bit further. The

inclusion of commercial mortgage-backed securities

(CMBS) in the Term Asset-Backed Securities Loan Facility (TALF) program resulted initially in a narrowing

of commercial mortgage credit default swap (CDS)

spreads; however, spreads later widened as rating agen-

Page 7

cies issued conflicting opinions regarding the credit

quality of senior CMBS tranches.

Market sentiment toward the financial sector improved

over the intermeeting period, reflecting, in part, the

release of the Supervisory Capital Assessment Program

(SCAP) results for the nation’s 19 largest bank holding

companies (BHCs) on May 7. Nearly all the BHCs

evaluated had enough Tier 1 capital to absorb the higher losses envisioned under the hypothetical more adverse scenario; however, 10 institutions were required

to enhance their capital structure to put greater emphasis on common equity. Following the announcement

of the SCAP results, the 19 evaluated institutions

raised, or announced plans to raise, around $70 billion

in common equity through public offerings, conversion

of preferred stock, and asset sales. These offerings

accounted for most of the record-high total financial

equity issuance in May. The evaluated BHCs have also

issued additional debt under the Federal Deposit Insurance Corporation’s Temporary Liquidity Guarantee

Program (TLGP), as well as nonguaranteed debt. On

June 9, the Treasury announced that 10 large financial

institutions were eligible to repay the $68 billion in capital that they had received through the Troubled Asset

Relief Program (TARP). CDS spreads for banking organizations declined considerably over the intermeeting

period, although they remained well above historical

norms. Stock price indexes for the banking sector and

the broader financial sectors rose significantly.

The level of private-sector debt was estimated to have

remained about unchanged in the second quarter, as a

further modest decline in household debt about offset

a slight increase in nonfinancial business debt. Gross

bond issuance by nonfinancial corporations was robust

in May. Investment-grade issuance rebounded after a

lull in April. Speculative-grade issuance was the highest

since June 2007, but issuance of lower-rated speculative-grade bonds remained minimal. Meanwhile, the

federal government issued large amounts of debt, and

state and local government debt was estimated to have

expanded moderately.

The expansion of M2 slowed significantly in April and

May, as the reallocation of household wealth toward

the safety and liquidity of M2 assets evidently moderated. Retail money market mutual funds and small

time deposits contracted in both months, probably in

response to declining interest rates on these assets.

The rise in currency diminished, likely reflecting primarily a waning in foreign demand.

Page 8

Federal Open Market Committee

Commercial bank credit increased slightly in May following six consecutive monthly declines, but the turnaround reflected a rise in securities holdings and in the

volatile “other” loans category—that is, loans other

than commercial and industrial (C&I), real estate, and

consumer loans. C&I loans dropped in May, amid

subdued origination activity and broad-based paydowns

of outstanding loans. Home equity loans edged

down—the first monthly decline in this category since

October 2006—partly because of banks’ reductions in

existing lines of credit. Closed-end residential mortgages decreased; originations were reportedly strong

but were more than offset by loan sales to the government-sponsored enterprises. The amount of outstanding consumer loans originated by banks shrank during

April and May; the quantity of consumer loans on

banks’ balance sheets decreased even more because of

a number of large credit card securitizations.

The dollar depreciated substantially during the intermeeting period against all other major currencies. This

decline appeared to be driven by a renewed sense of

optimism about global growth prospects, leading investors to shift away from safe-haven assets in the United

States to riskier assets elsewhere. Libor-to-OIS spreads

in euros and sterling decreased, and several foreign

banks took advantage of improved financial conditions

to raise capital and increase issuance of debt outside of

government guarantee programs. The improved access

to capital markets and better economic outlook buoyed

bank stocks, which helped headline equity indexes

move higher. Most stock markets in emerging market

economies rose considerably, and mutual fund flows

into those markets strengthened.

The European Central Bank lowered its main policy

rate 25 basis points to 1 percent and announced that it

would purchase up to €60 billion in covered bonds.

The Bank of England, the Bank of Canada, and the

Bank of Japan kept their policy rates constant over the

intermeeting period, but the Bank of England increased

the size of its planned asset purchases from £75 billion

to £125 billion. The Bank of Japan continued purchasing commercial paper, corporate bonds, equities, and

government bonds. Chinese authorities held the renminbi nearly unchanged against the dollar, and several

central banks intervened to purchase dollars, attempting to slow the dollar’s depreciation against their currencies.

Staff Economic Outlook

In the forecast prepared for the June meeting, the staff

revised upward its outlook for economic activity during

the remainder of 2009 and for 2010. Consumer spending appeared to have stabilized since the start of the

year, sales and starts of new homes were flattening out,

and the recent declines in capital spending did not look

as severe as those that had occurred around the turn of

the year. Recent declines in payroll employment and

industrial production, while still sizable, were smaller

than those registered earlier in 2009. Household wealth

was higher, corporate bond rates had fallen, the value

of the dollar was lower, the outlook for foreign activity

was better, and financial stress appeared to have eased

somewhat more than had been anticipated in the staff

forecast prepared for the prior FOMC meeting. The

projected boost to aggregate demand from these factors more than offset the negative effects of higher oil

prices and mortgage rates. The staff projected that real

GDP would decline at a substantially slower rate in the

second quarter than it had in the first quarter and then

increase in the second half of 2009, though less rapidly

than potential output. The staff also revised up its projection for the increase in real GDP in 2010, to a pace

above the growth rate of potential GDP. As a consequence, the staff projected that the unemployment rate

would rise further in 2009 but would edge down in

2010. Meanwhile, the staff forecast for inflation was

marked up. Recent readings on core consumer prices

had come in a bit higher than expected; in addition, the

rise in energy prices, less-favorable import prices, and

the absence of any downward movement in inflation

expectations led the staff to raise its medium-term inflation outlook. Nonetheless, the low level of resource

utilization was projected to result in an appreciable deceleration in core consumer prices through 2010.

Looking ahead to 2011 and 2012, the staff anticipated

that financial markets and institutions would continue

to recuperate, monetary policy would remain stimulative, fiscal stimulus would be fading, and inflation expectations would be relatively well anchored. Under

such conditions, the staff projected that real GDP

would expand at a rate well above that of its potential,

that the unemployment rate would decline significantly,

and that overall and core personal consumption expenditures inflation would stay low.

Participants’ Views and Committee Policy Action

In conjunction with this FOMC meeting, all meeting

participants—the five members of the Board of Governors and the presidents of the 12 Federal Reserve

Banks—provided projections for economic growth, the

unemployment rate, and consumer price inflation for

each year from 2009 through 2011 and over a longer

horizon. Longer-run projections represent each partic-

Minutes of the Meeting of June 23-24, 2009

ipant’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. Participants’ forecasts through 2011 and over

the longer run are described in the Summary of Economic Projections, which is attached as an addendum

to these minutes.

In their discussion of the economic situation and outlook, participants generally agreed that the information

received since the April meeting indicated that the economic contraction was slowing and that the decline in

activity could cease before long. Business and household confidence had picked up some, and survey data

and anecdotal reports showed improved expectations

for the future. The inventory adjustment process was

continuing, housing and consumption demand apparently had leveled off, and financial market strains had

eased further. Nonetheless, most participants saw the

economy as still quite weak and vulnerable to further

adverse shocks. Conditions in the labor market remained poor, and the unemployment rate continued to

rise. These factors, along with past declines in wealth,

would weigh on consumer spending. Although financial market conditions had improved, credit was still

quite tight in many sectors. Economic activity in foreign economies was unlikely to be sufficiently strong to

provide a substantial boost to U.S. exports. Against

this backdrop, participants generally judged that, while

U.S. output would probably begin to grow again in the

second half of the year, the rate of increase was likely to

be relatively slow. Most believed that downside risks to

economic growth had diminished somewhat since the

April meeting, but were still significant.

Developments in financial markets over the intermeeting period were seen as broadly positive, reflecting, at

least in part, a reduction in the perceived risk of further

severely adverse outcomes. In particular, many participants noted that the results of the SCAP helped bolster

confidence in banks and led to large infusions of private capital in that sector. Corporate credit markets

continued to improve, and markets for asset-backed

securities also showed an increasing amount of activity,

supported in part by the TALF. Increases in equity

prices had favorable effects on household wealth and

overall sentiment. Still, participants generally noted

that the improvement in market conditions was in part

due to ongoing support from various government programs and that underlying financial conditions remained fragile. Credit was tight, with some banks quite

reluctant to lend. Worsening credit quality, especially

for consumer and commercial real estate loans, was

Page 9

seen as an important reason for reduced lending and

tighter terms, and banks could face substantial losses in

their loan portfolios in coming quarters. Many participants noted that obtaining financing for commercial

real estate projects remained extremely difficult amid

worsening fundamentals in the sector.

Consumer spending appeared no longer to be declining

but nonetheless remained weak. The continued sluggishness in consumer expenditures mainly reflected

falling employment, sharply lower wealth as a result of

earlier steep declines in asset prices, and tight credit

conditions. Because these factors were not seen as likely to dissipate quickly, most participants judged that

consumer spending would continue to be subdued for

some time. Given the significant uncertainties in the

economic outlook, a sizable reduction in the saving rate

seemed unlikely in the near term; some saw the possibility of further increases in the household saving rate.

Participants also observed that, while personal income

had expanded briskly of late, those increases had been

boosted by special one-time factors such as fiscal stimulus and large cost-of-living adjustments for Social Security recipients. Personal income was likely to contract for a time going forward as the effects of these

factors waned, and there was some risk that consumer

spending might also decline as a consequence.

Indicators of single-family starts and sales suggested

that housing activity may be leveling out, but most participants viewed the sector as still vulnerable to further

weakness. Some expressed concern that the increases

in mortgage rates seen over the intermeeting period

had the potential to further depress the demand for

housing and thus impede an economic recovery. Others noted that foreclosures were continuing at a very

high rate and could push house prices down further

and add to inventories of unsold homes, holding back

housing activity and weighing on household wealth.

Labor market conditions were of particular concern to

meeting participants. Although some improvements

were evident in new and continuing unemployment

insurance claims and the May payroll report was less

weak than expected, job losses remained substantial

over the intermeeting period and the unemployment

rate continued to rise rapidly. Rising labor force participation contributed to the increase in the unemployment rate. Some participants pointed out that households’ financial strains may be encouraging many individuals to enter the labor market despite difficult labor

market conditions. Reports from district contacts suggested that workweeks were being trimmed and that

Page 10

Federal Open Market Committee

total hours worked were falling significantly. The large

number of people working part time for economic reasons and the prevalence of permanent job reductions

rather than temporary layoffs suggested that labor market conditions were even more difficult than indicated

by the unemployment rate. With the recovery projected to be rather sluggish, most participants anticipated that the employment situation was likely to be

downbeat for some time.

Anecdotal reports suggested that the weakness in activity was widespread across many industries and extended to the service sector. However, some meeting

participants highlighted evidence from regional surveys

that pointed to a stabilization or even a slight pickup in

manufacturing in some areas, and positive signs were

apparent in the energy and agriculture sectors. Participants noted an improvement in business sentiment in

many districts, but contacts remained quite uncertain

about the timing and extent of the recovery; elevated

uncertainty was said to be inhibiting capital spending in

many cases. Many businesses had been successful in

working down inventories of unsold goods. Some participants noted that, as this process continues, increases

in sales will have to be met by increases in production,

which would, in turn, support growth in hours worked

and eventually in investment outlays.

Many participants noted that the global nature of this

recession meant that growth abroad was not likely to

bolster U.S. exports and so contribute to a recovery in

the United States. In Europe, for example, unemployment was also rising sharply and financial strains remained significant. Some participants thought that

recovery there was likely to lag behind that of the United States. In Asia, the outlook appeared more promising, with some evidence that the rate of decline in activity was diminishing. Recent information from China

suggested that economic growth may be picking up

there. Still, some participants mentioned that growth in

that region was likely to remain importantly dependent

on exports to major industrial economies that were

likely to recover slowly.

Although recent increases in oil and other commodity

prices were likely to raise headline inflation over the

near term, most participants expected core inflation to

remain subdued for some time. Several measures of

labor compensation had slowed in recent quarters as

unemployment mounted and wages were not likely to

exert any significant upward pressures on prices, given

the expectation that labor market conditions were likely

to deteriorate further in coming months and probably

would not improve quickly thereafter. In addition,

many participants noted that productivity growth had

been surprisingly strong in recent quarters. Although

the measured increase in productivity might reflect cyclical factors rather than changes in the underlying trend

and was subject to data revisions, growth in unit labor

costs was expected to continue to be restrained in coming quarters. Substantial resource slack was also likely

to keep price inflation low in the future. Participants

noted the considerable uncertainty surrounding estimates of the output and unemployment gaps and the

extent of their effects on prices. However, most agreed

that, even taking account of such uncertainty, the

economy was almost certainly operating well below its

potential and that significant price pressures were unlikely to materialize in the near and medium terms.

Still, in light of the signs that economic activity was

stabilizing, most participants saw less downside risk to

their expectations for inflation. Moreover, participants

pointed out that some measures of inflation expectations had edged up recently from very low readings,

perhaps reflecting in part reduced concerns about deflation, and were now at levels close to those prevailing

prior to the onset of the crisis. A few participants were

concerned that inflation expectations could continue to

rise, especially in light of the Federal Reserve’s greatly

expanded balance sheet and the associated large volume of reserves in the banking system, and that as a

result inflation could temporarily rise above levels consistent with the Committee’s dual objectives of maximum employment and stable prices. Most participants,

however, expected that inflation would remain subdued

for some time.

In their discussion of monetary policy for the period

ahead, Committee members agreed that the stance of

monetary policy should not be changed at this meeting.

Given the prospects for weak economic activity, substantial resource slack, and subdued inflation, the

Committee agreed that it should maintain its target

range for the federal funds rate at 0 to ¼ percent. The

future path of the federal funds rate would depend on

the Committee’s evolving expectations for the economy, but for now, members thought it most likely that

the federal funds rate would need to be maintained at

an exceptionally low level for an extended period, given

their forecasts for only a gradual upturn in activity and

the lack of inflation pressures. The Committee also

agreed that changes to its program of asset purchases

were not warranted at this time. Although an expansion of such purchases might provide additional support to the economy, the effects of further asset pur-

Minutes of the Meeting of June 23-24, 2009

chases, especially purchases of Treasury securities, on

the economy and on inflation expectations were uncertain. Moreover, it seemed likely that economic activity

was in the process of leveling out, and the considerable

improvements in financial markets over recent months

were likely to lend further support to aggregate demand. Accordingly, the Committee agreed that the

asset purchase programs should proceed for now on

the schedule announced at previous meetings.

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 agency debt,

agency 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

agency debt by the end of this year. The

Desk is expected to purchase up to $1.25

trillion of agency MBS by the end of the

year. The Desk is expected to purchase up

to $300 billion of longer-term Treasury securities by the end of the third quarter.

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.”

Page 11

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 April suggests that the pace of economic contraction is slowing. Conditions in financial

markets have generally improved in recent

months. Household spending has shown

further signs of stabilizing but remains

constrained by ongoing job losses, lower

housing wealth, and tight credit. Businesses are cutting back on fixed investment

and staffing but appear to be making

progress in bringing inventory stocks into

better alignment with sales. Although

economic activity is likely to remain weak

for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and

monetary stimulus, and market forces will

contribute to a gradual resumption of sustainable economic growth in a context of

price stability.

The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost

pressures, and the Committee expects that

inflation will remain subdued for some

time.

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 continues

to anticipate that economic conditions are

likely to warrant exceptionally low levels of

the federal funds rate for an extended period. As previously announced, to provide

support to mortgage lending and housing

markets and to improve overall conditions

in private credit markets, the Federal Reserve will purchase a total of up to $1.25

trillion of agency mortgage-backed securities and up to $200 billion of agency debt

by the end of the year. In addition, the

Federal Reserve will buy up to $300 billion

of Treasury securities by autumn. The

Committee will continue to evaluate the

timing and overall amounts of its purchas-

Page 12

Federal Open Market Committee

es of securities in light of the evolving

economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its

credit and liquidity programs as warranted.”

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, August 11-12,

2009. The meeting adjourned at 12:40 p.m. on June 24,

2009.

Notation Vote

By notation vote completed on May 19, 2009, the

Committee unanimously approved the minutes of the

FOMC meeting held on April 28-29, 2009.

Conference Call

On June 3, 2009, the Committee met by conference call

in a joint session with the Board of Governors to review recent economic and financial developments, including changes in the Federal Reserve’s balance sheet.

In addition, by unanimous vote, Brian Sack was selected to serve as Manager, System Open Market Account, on the understanding that his selection was subject to being satisfactory to the Federal Reserve Bank

of New York.

Secretary’s note: Advice subsequently was

received that the selection of Mr. Sack as

Manager was satisfactory to the Board of Directors of the Federal Reserve Bank of New

York.

_____________________________

Brian F. Madigan

Secretary

Page 1

Summary of Economic Projections

In conjunction with the June 23-24, 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, submitted projections for output growth, unemployment,

and inflation in 2009, 2010, 2011, and over the longer

run. Projections were based on information available

through the end of the meeting and on each participant’s assumptions about factors likely to affect economic outcomes, including his or her assessment of

appropriate monetary policy. “Appropriate monetary

policy” is defined as the future path of policy that the

participant deems most likely to foster outcomes for

economic activity and inflation that best satisfy his or

her interpretation of the Federal Reserve’s dual objectives of maximum employment and stable prices.

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 generally expected that, after declining over the first half of this year, output would

expand sluggishly over the remainder of the year. Consequently, as indicated in table 1 and depicted in figure

1, all FOMC participants projected that real gross domestic product (GDP) would contract over the entirety

of this year and that the unemployment rate would increase in coming quarters. All participants also expected that overall inflation would be somewhat slower

this year than in recent years, and most projected that

core inflation would edge down this year. Almost all

participants viewed the near-term outlook for domestic

output as having improved modestly relative to the

projections they made at the time of the April FOMC

meeting, reflecting both a slightly less severe contraction in the first half of 2009 and a moderately stronger,

but still sluggish, recovery in the second half. With the

strong adverse forces that have been acting on the

economy likely to abate only slowly, participants generally expected the recovery to be gradual in 2010. Even

though all participants had raised their near-term outlook for real GDP, in light of incoming data on labor

markets, they increased their projections for the path of

the unemployment rate from those published in April.

Participants foresaw only a gradual improvement in

labor market conditions in 2010 and 2011, leaving the

unemployment rate at the end of 2011 well above the

level they viewed as its longer-run sustainable rate.

Participants projected low inflation this year. For 2010

and 2011, the central tendencies of the participants’

inflation forecasts pointed to fairly stable inflation that

would be modestly below most participants’ estimates

of the rate consistent with the dual objectives; however,

the divergence of participants’ views about the inflation

outlook remained wide. Most participants indicated

that they expected the economy to take five or six years

to converge to a longer-run path characterized by a

sustainable rate of output growth and by rates of unemployment and inflation consistent with the Federal

Table 1. Economic projections of Federal Reserve Governors and Reserve Bank presidents, June 2009

Percent

Variable

Central tendency1

2009

Range2

2010

2011

Longer run

2009

2010

2011

Change in real GDP. . . . . . -1.5 to -1.0

April projection. . . . . . -2.0 to -1.3

2.1 to 3.3

2.0 to 3.0

3.8 to 4.6

3.5 to 4.8

2.5 to 2.7

-1.6 to -0.6

-2.5 to -0.5

0.8 to 4.0

1.5 to 4.0

2.3 to 5.0

Longer run

2.4 to 2.8

2.4 to 3.0

Unemployment rate. . . . . . 9.8 to 10.1

April projection. . . . . . 9.2 to 9.6

9.5 to 9.8

9.0 to 9.5

8.4 to 8.8

7.7 to 8.5

4.8 to 5.0

9.7 to 10.5 8.5 to 10.6

9.1 to 10.0 8.0 to 9.6

6.8 to 9.2

6.5 to 9.0

4.5 to 6.0

4.5 to 5.3

PCE inflation. . . . . . . . . . .

April projection. . . . . .

1.0 to 1.4

0.6 to 0.9

1.2 to 1.8

1.0 to 1.6

1.1 to 2.0

1.0 to 1.9

1.7 to 2.0

1.0 to 1.8

-0.5 to 1.2

0.9 to 2.0

0.7 to 2.0

0.5 to 2.5

1.5 to 2.1

1.5 to 2.0

Core PCE inflation3. . . . . .

April projection. . . . . .

1.3 to 1.6

1.0 to 1.5

0.7 to 1.3

0.9 to 1.7

0.8 to 1.6

1.2 to 2.0

0.7 to 1.6

0.5 to 2.0

0.2 to 2.5

NOTE: Projections of change in real gross domestic product (GDP) and in 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 April projections were made in conjunction with the meeting of the Federal Open Market Committee on April

28-29, 2009.

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 consists of 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

Central tendency of projections

Range of projections

Actual

2004

2005

2006

2007

2008

2009

2010

2011

Longer

run

Percent

Unemployment rate

2004

2005

2006

2007

2008

2009

2010

2011

Longer

run

Percent

PCE inflation

2004

2005

2006

2007

2008

2009

2010

2011

Longer

run

Percent

Core PCE inflation

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 of the Meeting of June 23-24, 2009

Reserve’s dual objectives, but several said full convergence would take longer. In contrast to recent projections, a majority of participants perceived the risks to

growth as roughly balanced, although several still

viewed those risks as tilted to the downside. Most participants saw the risks surrounding their inflation outlook as roughly balanced, and fewer participants than in

April characterized those risks as skewed to the downside. With few exceptions, participants judged that the

projections for economic activity and inflation remained subject to a degree of uncertainty exceeding

historical norms.

The Outlook

Participants’ projections for the change in real GDP in

2009 had a central tendency of negative 1.5 percent to

negative 1.0 percent, somewhat above the central tendency of negative 2.0 percent to negative 1.3 percent

for their April projections. Participants noted that the

data received between the April and June FOMC meetings pointed to a somewhat smaller decline in output

during the first half of the year than they had anticipated at the time of the April meeting. Moreover, participants saw additional indications that the economic

downturn in the United States and worldwide was

moderating in the second quarter, and they continued

to expect that sales and production would begin to recover gradually during the second half of the year, reflecting the effects of monetary and fiscal stimulus,

measures to support credit markets, and diminishing

financial stresses. As reasons for marking up their projections for near-term economic activity, participants

pointed to a further improvement in financial conditions during the intermeeting period, signs of stabilization in consumer spending, and tentative indications of

a leveling out of activity in the housing sector. In addition, they observed that aggressive inventory reductions

during the first half of this year appeared to have left

firms’ stocks in better balance with sales, suggesting

that production is likely to increase as sales stabilize

and then start to turn up later this year. Participants

expected, however, that recoveries in consumer spending and residential investment initially would be

damped by further deterioration in labor markets, the

continued repair of household balance sheets, persistently tight credit conditions, and still-weak housing

demand. They also anticipated that very low capacity

utilization, sluggish growth in sales, uncertainty about

the economic environment, and a continued elevated

cost and limited availability of financing would contribute to continued weakness in business fixed investment this year. Some participants noted that weak

economic conditions in other countries probably would

Page 3

hold down growth in U.S. exports. A number of participants also saw recent increases in some long-term

interest rates and in oil prices as factors that could

damp a near-term economic recovery.

Looking further ahead, participants’ projections for real

GDP growth in 2010 and 2011 were not materially different from those provided in April. The projections

for growth in 2010 had a central tendency of 2.1 to 3.3

percent, and those for 2011 had a central tendency of

3.8 to 4.6 percent. Participants generally expected that

household financial positions would improve only

gradually and that strains in credit markets and in the

banking system would ebb slowly; hence, the pace of

recovery would continue to be damped in 2010. But

they anticipated that the upturn would strengthen in

late 2010 and in 2011 to a pace exceeding the growth

rate of potential GDP. Participants noted several factors contributing to this pickup, including accommodative monetary policy, fiscal stimulus, and continued

improvement in financial conditions and household

balance sheets. Beyond 2011, they expected that output growth would remain above that of potential GDP

for a time, leading to a gradual elimination of slack in

resource utilization. Over the longer run, most participants expected that, without further shocks, real GDP

growth eventually would converge to a rate of 2.5 to

2.7 percent per year, reflecting longer-term trends in

the growth of productivity and the labor force.

Even though participants raised their output growth

forecasts, they also moved up their unemployment rate

projections and continued to anticipate that labor market conditions would deteriorate further over the remainder of the year. Their projections for the average

unemployment rate during the fourth quarter of 2009

had a central tendency of 9.8 to 10.1 percent, about ½

percentage point above the central tendency of their

April projections and noticeably higher than the actual

unemployment rate of 9.4 percent in May—the latest

reading available at the time of the June FOMC meeting. All participants raised their forecasts of the unemployment rate at the end of this year, reflecting the

sharper-than-expected rise in unemployment that occurred over the intermeeting period. With little material change in projected output growth in 2010 and 2011,

participants still expected unemployment to decline in

those years, but the projected unemployment rate in

each year was about ½ percentage point above the

April forecasts, reflecting the higher starting point of

the projections. Most participants anticipated that output growth next year would not substantially exceed its

longer-run sustainable rate and hence that the unem-

Page 4

Federal Open Market Committee

ployment rate would decline only modestly in 2010;

some also pointed to frictions associated with the reallocation of labor from shrinking economic sectors to

expanding sectors as likely to restrain progress in reducing unemployment. The central tendency of the

unemployment rate at the end of 2010 was 9.5 to 9.8

percent. With output growth and job creation generally

projected to pick up appreciably in 2011, participants

anticipated that joblessness would decline more noticeably, as evident from the central tendency of 8.4 to 8.8

percent for their projections of the unemployment rate

in the fourth quarter of 2011. They expected that the

unemployment rate would decline considerably further

in subsequent years as it moved back toward its longerrun sustainable level, which most participants still saw

as between 4.8 and 5.0 percent; however, a few participants raised their estimates of the longer-run unemployment rate.

The central tendency of participants’ projections for

personal consumption expenditures (PCE) inflation in

2009 was 1.0 to 1.4 percent, about ½ percentage point

above the central tendency of their April projections.

Participants noted that higher-than-expected inflation

data over the intermeeting period and the anticipated

influence of higher oil and commodity prices on consumer prices were factors contributing to the increase

in their inflation forecasts. Looking beyond this year,

participants’ projections for total PCE inflation had

central tendencies of 1.2 to 1.8 percent for 2010 and

1.1 to 2.0 percent for 2011, modestly higher than the

central tendencies from the April projections. Reflecting the large increases in energy prices over the intermeeting period, the forecasts for core PCE inflation

(which excludes the direct effects of movements in

food and energy prices) in 2009 were raised by less than

the projections for total PCE inflation, while the forecasts for core and total PCE inflation in 2010 and 2011

increased by similar amounts. The central tendency of

projections for core inflation in 2009 was 1.3 to 1.6

percent; those for 2010 and 2011 were 1.0 to 1.5 percent and 0.9 to 1.7 percent, respectively. Most participants expected that sizable economic slack would continue to damp inflation pressures for the next few years

and hence that total PCE inflation in 2011 would still

be below their assessments of its appropriate longerrun level. Some thought that such slack would generate

a decline in inflation over the next few years. Most,

however, projected that, as the economy recovers, inflation would increase gradually and move closer to

their individual assessments of the measured rate of

inflation consistent with the Federal Reserve’s dual

mandate for maximum employment and price stability.

Several participants, noting that the public’s longer-run

inflation expectations had not changed appreciably,

expected that inflation would return more promptly to

levels consistent with their judgments about longer-run

inflation than these participants had projected in April.

A few participants also anticipated that projected inflation in 2011 would be modestly above their longer-run

inflation projections because of the possible effects of

very low short-term interest rates and of the large expansion of the Federal Reserve’s balance sheet on the

public’s inflation expectations. Overall, the range of

participants’ projections of inflation in 2011 remained

quite wide.

As in April, the central tendency of projections of the

longer-run inflation rate was 1.7 to 2.0 percent. Most

participants judged that a longer-run PCE inflation rate

of 2 percent would be consistent with the Federal Reserve’s dual mandate; others indicated that inflation of

1½ percent or 1¾ percent 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 suffers a

large negative shock to demands for goods and services.

Uncertainty and Risks

In contrast to the participants’ views over the past several quarters, in June a majority of participants saw the

risks to their projections for real GDP growth and the

unemployment rate as broadly balanced. In explaining

why they perceived a reduction in downside risks to the

outlook, these participants pointed to the tentative

signs of economic stabilization, indications of some

effectiveness of monetary and fiscal policy actions, and

improvements in financial conditions. In contrast, several participants still saw the risks to their GDP growth

forecasts as skewed to the downside and the associated

risks to unemployment as skewed to the upside. Almost all participants shared the judgment that their

projections of future economic activity and unemployment continued to be subject to greater-than-average

uncertainty.1 Many participants again high-lighted the

still-considerable uncertainty about the future course of

the financial crisis and the risk that a resurgence of fiTable 2 provides estimates of forecast uncertainty for the

change in real GDP, the unemployment rate, and total consumer price inflation over the period from 1989 to 2008. At

the end of this summary, the box titled “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.

Summary of Economic Projections of the Meeting of June 23-24, 2009

Page 5

nancial turmoil could adversely impact the real economy. In addition, some noted the difficulty in gauging

the macroeconomic effects of the credit-easing policies

that have been employed by the Federal Reserve and

other central banks, given the limited experience with

such tools.

Table 2. Average historical projection error ranges

Most participants judged the risks to the inflation outlook as roughly balanced, with the number doing so

higher than in April. A few participants continued to

view these risks as skewed to the downside, and one

saw the inflation risks as tilted to the upside. Some

participants noted the risk that inflation expectations

might drift downward in response to persistently low

inflation outcomes and continued significant slack in

resource utilization. Several participants pointed to the

possibility of an upward shift in expected and actual

inflation if the stimulative monetary policy measures

and the attendant expansion of the Federal Reserve’s

balance sheet were not unwound in a timely fashion as

the economy recovers. Most participants again saw the

uncertainty surrounding their inflation projections as

exceeding historical norms.

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

mean squared error of projections for 1989 through 2008 that were

released in the summer by various private and government forecasters.

As described in the box titled “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 (Washington: Board of Governors of the Federal Reserve System, November).

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

2. Measure is the overall consumer price index, the price measure

that has been most widely used in government and private economic

forecasts. Projection is percent change, fourth quarter of the previous

year to the fourth quarter of the year indicated.

Diversity of Views

Figures 2.A and 2.B provide further details on the diversity of participants’ views regarding likely outcomes

for real GDP growth and the unemployment rate in

2009, 2010, 2011, and over the longer run. The dispersion in participants’ June projections for the next three

years reflects, among other factors, the diversity of

their assessments regarding the effects of fiscal stimulus

and nontraditional monetary policy actions as well as

the likely pace of improvement in financial conditions.

For real GDP growth, the distribution of projections

for 2009 narrowed and shifted slightly higher, reflecting

the somewhat better-than-expected data received during the intermeeting period. The distributions for 2010

and 2011 changed little. For the unemployment rate,

the surprisingly large increases in unemployment reported during the intermeeting period prompted an

upward shift in the distribution. Because of the persistence exhibited in many of the unemployment forecasts, there were similar upward shifts in the distributions for 2010 and 2011. The dispersion of these forecasts for all three years was roughly similar to that of

April. The distribution of participants’ projections of

longer-run real GDP growth was about unchanged. A

few participants raised their longer-run projections of

the unemployment rate, widening the dispersion of

Percentage points

Variable

2009

2010

2011

Change in real GDP1 . . . . . . . .

±1.0

±1.5

±1.6

±0.4

±0.8

±1.0

±0.9

±1.0

Unemployment

rate1

........

Total consumer

prices2

......

these estimates, as they incorporated the effects of unexpectedly high recent unemployment data and of the

reallocation of labor from declining sectors to expanding ones. 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 monetary policy and in the absence

of any further shocks.

Figures 2.C and 2.D provide corresponding information about the diversity of participants’ views regarding

the inflation outlook. The distribution of the projections for total and core PCE inflation in 2009 moved

upward, reflecting the higher inflation data released

over the intermeeting period, while distributions for the

projections in 2010 and 2011 did not change significantly. The dispersion in participants’ projections for

total and core PCE inflation for 2009, 2010, and 2011

illustrates their varying assessments of the effects on

inflation and inflation expectations of persistent economic slack as well as of the recent expansion of the

Federal Reserve’s balance sheet. These varying assessments are especially evident in the wide dispersion of

inflation projections for 2011. In contrast, the tight

distribution of participants’ projections for longer-run

inflation illustrates their substantial agreement about

the measured rate of inflation that is most consistent

with the Federal Reserve’s dual objectives of maximum

employment and stable prices.

Page 6

Federal Open Market Committee

Figure 2.A. Distribution of participants’ projections for the change in real GDP, 2009–11 and over the longer run

Number of participants

2009

June projections

April projections

-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- 5.0-2.5 -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

Percent range

Number of participants

2010

Percent range

Number of participants

2011

Percent range

Number of participants

Longer run

Percent range

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

Summary of Economic Projections of the Meeting of June 23-24, 2009

Page 7

Figure 2.B. Distribution of participants’ projections for the unemployment rate, 2009–11 and over the longer run

Number of participants

2009

June projections

April projections

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- 9.2- 9.4- 9.6- 9.8- 10.0-10.2-10.4-10.64.5 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 9.5 9.7 9.9 10.1 10.3 10.5 10.7

Percent range

Number of participants

2010

Percent range

Number of participants

2011

Percent range

Number of participants

Longer run

Percent range

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

Page 8

Federal Open Market Committee

Figure 2.C. Distribution of participants’ projections for PCE inflation, 2009–11 and over the longer run

Number of participants

2009

June projections

April projections

-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

2.32.4

2.52.6

Percent range

Number of participants

2010

-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

2.32.4

2.52.6

Percent range

Number of participants

2011

-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

2.32.4

2.52.6

Percent range

Number of participants

Longer run

-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

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

2.32.4

2.52.6

Summary of Economic Projections of the Meeting of June 23-24, 2009

Page 9

Figure 2.D. Distribution of participants’ projections for core PCE inflation, 2009–11

Number of participants

2009

June projections

April projections

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

2.32.4

2.52.6

Percent range

Number of participants

2010

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

2.32.4

2.52.6

Percent range

Number of participants

2011

0.10.2

0.30.4

0.50.6

0.70.8

0.91.0

1.11.2

1.31.4

Percent range

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

1.51.6

1.71.8

1.92.0

2.12.2

2.32.4

2.52.6

Page 10

Federal Open Market Committee

Forecast Uncertainty

The economic projections provided by

the members of the Board of Governors and

the presidents of the Federal Reserve Banks

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 gross domestic

product (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 within a range of 2.0 to 4.0 percent in the current year, 1.5 to 4.5 percent in

the second year, and 1.4 to 4.6 percent in the

third year. The corresponding 70 percent confidence intervals for overall inflation would be

1.1 to 2.9 percent in the current year and 1.0 to

3.0 percent in the second and third years.

Because current conditions may differ

from those that prevailed, on average, over history, participants provide judgments as to

whether the uncertainty attached to their projections of each variable is greater than, smaller

than, or broadly similar to typical levels of

forecast uncertainty in the past as shown in

table 2. Participants also provide judgments as

to whether the risks to their projections are

weighted to the upside, are weighted to the

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.

Cite this document

APA

Federal Reserve (2009, June 23). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_20090624

BibTeX

@misc{wtfs_fomc_minutes_20090624,
  author = {Federal Reserve},
  title = {FOMC Minutes},
  year = {2009},
  month = {Jun},
  howpublished = {Fomc Minutes, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/fomc_minutes_20090624},
  note = {Retrieved via When the Fed Speaks corpus}
}