FOMC Minutes

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Minutes of the Federal Open Market Committee

September 22-23, 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, September 22,

2009, at 2:00 p.m. and continued on Wednesday, September 23, 2009, at 9:00 a.m.

PRESENT:

Mr. Bernanke, Chairman

Mr. Dudley, Vice Chairman

Ms. Duke

Mr. Evans

Mr. Kohn

Mr. Lacker

Mr. Lockhart

Mr. Tarullo

Mr. Warsh

Ms. Yellen

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

of the Federal Open Market Committee

Mr. Struckmeyer, Deputy Staff Director, Office of

the Staff Director for Management, Board of

Governors

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

and Monetary Affairs, respectively, Board of

Governors

Ms. Robertson, Assistant to the Board, Office of

Board Members, Board of Governors

Ms. Edwards, Messrs. Reifschneider and Wascher,

Senior Associate Directors, Divisions of Monetary Affairs, Research and Statistics, and Research and Statistics, respectively, Board of

Governors

Mr. Oliner, Senior Adviser, Division of Research

and Statistics, Board of Governors

Mr. Small, Project Manager, Division of Monetary

Affairs, Board of Governors

Messrs. Fisher and Plosser, Presidents of the Federal Reserve Banks of Dallas and Philadelphia,

respectively

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

Mr. Lyon, First Vice President, Federal Reserve

Bank of Minneapolis

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

Mr. Madigan, Secretary and Economist

Mr. Luecke, Assistant Secretary

Mr. Skidmore, Assistant Secretary

Ms. Smith, Assistant Secretary

Mr. Alvarez, General Counsel

Mr. Ashton, Assistant General Counsel

Mr. Sheets, Economist

Mr. Stockton, Economist

Mr. Connolly,¹ First Vice President, Federal Reserve Bank of Boston

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

Sullivan, Tracy, Weinberg, and Wilcox, Associate Economists

Mr. Sack, Manager, System Open Market Account

Messrs. Fuhrer and Rosenblum, Executive Vice

Presidents, Federal Reserve Banks of Boston

and Dallas, respectively

Mr. Hakkio, Ms. Mester, Messrs. Rasche, Rudebusch, and Schweitzer, Senior Vice Presidents,

Federal Reserve Banks of Kansas City, Philadelphia, St. Louis, San Francisco, and Cleveland, respectively

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

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

Secretary, Board of Governors

¹ Attended Tuesday’s session only.

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Federal Open Market Committee

Mr. McCarthy and Ms. O’Connor, Assistant Vice

Presidents, Federal Reserve Bank of New York

Mr. Chatterjee, Senior Economic Advisor, Federal

Reserve Bank of Philadelphia

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,

agency debt, and agency mortgage-backed securities

(MBS) since the Committee’s August 11-12 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

intermeeting period. Since the Committee met in August, the Federal Reserve’s total assets had risen about

$125 billion, on balance, to approximately $2.1 trillion,

as the System’s purchases of securities exceeded a further decline in usage of the System’s credit and liquidity

facilities.

The staff briefed the Committee on the current status

of the asset purchase programs. Participants noted that

the primary influence of the programs is likely through

the cumulative effect that they generate on the publicly

available stocks of securities. However, they also observed that the rate of new purchases could have an

effect on asset prices, especially of MBS. Given this

possibility, participants remarked that a gradual reduction in the pace at which the Federal Reserve buys

agency debt and agency MBS could help promote a

smooth transition in markets as the announced asset

purchases are completed. Participants observed that

such a strategy would be similar to the approach

adopted in August for the purchases of Treasury securities and generally viewed it as a useful step to mitigate the risk of a sharp change in yields as purchases

end. Participants expressed a range of views about the

rate at which asset purchases should be slowed. Some

suggested tapering quickly and completing the purchases by year-end, while a few preferred slowing the rate

of purchases over a longer period in order to maintain

flexibility regarding the pace and the cumulative

amount purchased and thus potentially better calibrate

the programs to evolving economic and financial market conditions. Most participants supported extending

purchases of agency debt and agency MBS through the

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first quarter of 2010.

The staff also briefed the Committee on the likely implications of very high reserve balances for bank balance sheet management and for the economy. The

staff’s assessment, based in part on consultations with

market participants, was that many banks were currently comfortable holding high levels of reserves as a

means of managing liquidity risks, and these balances

or further increases along the lines implied by the announced programs were not likely to crowd out other

lending through pressures on capital positions. As the

economy improves, however, banks could seek to lower their levels of reserve balances by purchasing securities, thereby putting downward pressure on market

interest rates, or by easing their credit standards and

terms in order to expand lending. Such effects, if significant, would provide further impetus to economic

growth. The staff analysis indicated that these effects

would likely emerge only gradually and that their magnitude could be quite limited. However, some participants thought that declining demand for reserves might

already be putting downward pressure on yields. Participants expressed a range of views about the likely

stimulative effect of a further expansion of reserve balances on economic activity, as well as the potential impact of elevated reserves on inflation expectations.

Some meeting participants noted that the announced

decrease in the balance in the Treasury’s Supplementary

Financing Account (SFA) would increase reserves in

the banking system unless it were offset by Federal Reserve actions or by a further reduction in borrowing

from the Federal Reserve’s various credit and liquidity

facilities, and that these increases could be expansionary. Others noted that the decrease in the SFA could

well be temporary and, in any event, that the macroeconomic effects of the increase in reserves would

probably be limited in the current environment.

The staff presented an update on the continuing development of several tools that could help support a

smooth withdrawal of policy accommodation at the

appropriate time. These measures included executing

reverse repurchase agreements on a large scale, potentially with counterparties other than the primary dealers; implementing a term deposit facility, available to

depository institutions, to reduce the supply of reserve

balances; and taking steps to tighten the link between

the interest rate paid on reserve balances held at the

Federal Reserve Banks and the federal funds rate. Participants expressed confidence that these tools, along

with the payment of interest on reserves and possible

sales of assets from the System’s portfolio, would allow

Minutes of the Meeting of September 22-23, 2009

them to remove policy accommodation at the appropriate time and pace. Completing development of

these tools would remain a top priority of the Federal

Reserve.

The staff presented proposed schedules for operations

under the Term Auction Facility (TAF) and Term Securities Lending Facility (TSLF) through January 2010.

As conditions in short-term funding markets had continued to improve, usage of these facilities had diminished. The proposed schedules were consistent with

not only the Federal Reserve’s previously announced

intention to gradually scale back these facilities in response to continued improvements in financial market

conditions, but also with a desire to assure market participants that the Federal Reserve will provide sufficient

liquidity over year-end. There was general agreement

that the Federal Reserve should assess over the next

several months whether to maintain a TAF on a permanent basis.

Secretary’s note: On September 24, 2009,

the Federal Reserve announced schedules for

operations under the TAF and the TSLF

through January 2010 and indicated that it

would seek public comment on a proposal

for a permanent TAF.

Staff Review of the Economic Situation

The information reviewed at the September 22-23

meeting suggested that overall economic activity was

beginning to pick up. Factory output, particularly motor vehicle production, rose in July and August. Consumer spending on motor vehicles during that period

was boosted by government rebates and greater dealer

incentives, and household spending outside of motor

vehicles appeared to rise in August after having been

roughly flat from May through July. Although employment continued to contract in August, the pace of

job losses slowed noticeably from that of earlier in the

year. Investment in equipment and software (E&S)

also seemed to be stabilizing. Sales and construction of

single-family homes during July and August, while still

at low levels, were significantly above the readings at

the beginning of the year. The sharp cuts in production this year reduced inventory stocks significantly,

though they remained elevated relative to the recent

level of sales. Core consumer price inflation continued

to be subdued in July and August, but higher gasoline

prices raised overall consumer price inflation in August.

Firms continued to reduce payrolls, but job losses

abated further in August, with the decline in private

payroll employment the smallest since that of August

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2008. Although employment losses continued to be

widespread, the rate of decline diminished in most industries. The length of the average workweek for production and nonsupervisory workers remained steady,

albeit at a low level, and the rate of decline in aggregate

hours for this group over July and August was the

smallest of the past year. In the household survey, although the unemployment rate rose in August to

9.7 percent, the rise in the unemployment rate slowed,

on net, in recent months from its pace earlier in the

year. The labor force participation rate in August remained at the low level that had prevailed through

much of the year. Continuing claims for unemployment insurance through regular state programs fell

slightly, on balance, from its earlier peak, but the total

including extended and emergency benefits stayed near

its recent high level. Initial claims for unemployment

insurance fluctuated within a narrow range that was

consistent with further declines in employment. With

labor markets still weak, the year-over-year increase in

average hourly earnings of production and nonsupervisory workers slowed further in August, even with the

higher federal minimum wage that went into effect at

the end of July.

Industrial production rose in July and August, led by a

rebound in motor vehicle production from the extraordinarily low assembly rates in the first half of the year.

Manufacturing production outside of motor vehicles

increased solidly, likely reflecting stronger demand for

materials from the motor vehicle sector and a slower

pace of inventory liquidation elsewhere. Business survey indicators suggested further gains in factory output

over the near term. Nevertheless, the factory utilization rate in August was only modestly above its recent

historical low.

Real personal consumption expenditures increased

modestly in July, led by a strong advance in motor vehicle purchases, which were boosted appreciably by the

government’s “cash-for-clunkers” program. This program contributed to a further surge in motor vehicle

sales in August to their highest level since the first half

of 2008. After declining in July, sales at retailers, excluding those at motor vehicle dealers, building materials stores, and gasoline stations, rose significantly in

August, suggesting an increase in real consumer expenditures on non-motor-vehicle goods for the month.

Even so, many determinants of spending continued to

be tepid. In particular, the weak labor market continued to restrain growth in household income, and the

prior declines in household net worth probably continued to weigh on spending. However, an increase in

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household net worth since March, a rise in nominal

labor compensation in July, and increases in various

measures of consumer sentiment indicated some improvement in the outlook for consumer spending.

Data from the housing sector indicated that a gradual

recovery in activity was under way. Although singlefamily housing starts fell modestly in August, this decrease followed five consecutive monthly increases, and

the number of starts in August was well above the

record low reached in the first quarter of the year. In

contrast, in the much smaller multifamily sector, where

credit conditions were still particularly tight and vacancy rates remained high, starts continued to be down, on

net, in 2009 after a significant fall in the second half of

2008. The sales data for July indicated further increases

in the demand for both new and existing single-family

homes. Even though new home sales remained modest, they had been sufficient, given the slow pace of

construction, to pare the overhang of unsold new single-family houses: In July, the level of inventories of

such homes was about one-half of its peak in the summer of 2006, and the months’ supply had fallen considerably from its record high in January. Sales of existing

homes in July were at their fastest pace since mid-2007,

and pending home sales agreements suggested that resale activity would rise further in following months.

Although sales of distressed properties remained elevated, the rise in total sales of existing homes over the

summer appeared to have been driven by an increase in

transactions involving nondistressed properties. The

apparent modest strengthening of housing demand was

likely due, in part, to improvements in housing affordability stemming from low interest rates for conforming mortgages, a lower level of house prices, and possibly the first-time homebuyer tax credit. In addition,

demand may have been buoyed by a sense that house

prices were beginning to stabilize. Through the end of

the second quarter, many house price indexes had

smaller year-over-year declines than they had shown

earlier this year, and some indexes recorded positive

changes for the second quarter.

Real spending on E&S appeared to be stabilizing after

falling sharply for more than a year. Business purchases of transportation equipment seemed to be expanding

solidly in the third quarter. Nominal shipments and

orders for high-tech equipment in July were significantly above their second-quarter averages; moreover, a few

major producers of high-tech equipment reported

some signs of improvement in demand. Business investment in equipment other than high tech and transportation showed tentative signs of stabilization. Some

_

forward-looking indicators of investment in E&S improved, suggesting that conditions had become less

adverse than earlier in the year. Monthly surveys of

business conditions and sentiment recently recovered

to levels consistent with a modest rise in business

spending, and corporate bond spreads over Treasury

securities narrowed further. In contrast, conditions in

the nonresidential construction sector generally remained quite poor, and measures of construction

spending excluding energy-related projects stayed on a

downward trajectory through July. Vacancy rates continued to rise, property prices fell further, and financing

for nonresidential construction projects remained very

tight. The nominal book value of businesses inventories continued to fall in July, which contributed to further declines in inventory-to-sales ratios; however,

those ratios stayed elevated.

After narrowing to a 10-year low in May, the U.S. international trade deficit widened in June and July, as

strong increases in exports were more than offset by

sizable rises in imports. The July trade data provided

additional evidence that the levels of both exports and

imports probably reached their trough in the second

quarter. About one-half of the increase in exports of

goods and services in July was in exports of automotive

products; the other gains were widespread across other

major categories of exports. As with exports, the largest increase in imports of goods and services in July

was in automotive products, reflecting some recovery

in North American motor vehicle production. Imports

of consumer goods, capital goods, and industrial supplies also rose markedly. Imports of oil increased more

moderately, with the rise wholly reflecting higher prices.

Real gross domestic product (GDP) in the advanced

foreign economies contracted more moderately in the

second quarter than in the first quarter, with growth

resuming in several countries. In Japan, a trade-related

rebound in industrial production led to an increase in

overall output. Government incentives for motor vehicle purchases contributed to a modest expansion of

the German and French economies, but the euro-area

economy as a whole contracted slightly as inventory

drawdowns weighed on activity. Output also fell in

Canada and the United Kingdom. Purchasing managers indexes (PMIs) rose further in the major economies

during the intermeeting period, and reached levels consistent with stabilization or moderate expansion of output in the third quarter. Indicators of consumer sentiment continued to increase, but remained well below

pre-recession levels, in part because of concerns about

Minutes of the Meeting of September 22-23, 2009

rising unemployment. In most emerging market economies, particularly in Asia, economic activity rebounded in the second quarter; however, output declined again in Mexico. Indicators of activity in the

third quarter pointed to a continued expansion of output in most emerging market countries, and PMIs

moved into the expansionary range in many of them.

International trade in emerging market economies

picked up, supported by Chinese demand, while demand from advanced economies still appeared weak.

In the United States, core consumer price inflation remained subdued in July and August, as price increases

in housing services moderated and durable goods prices declined. Overall consumer price inflation increased

in August, boosted by a sharp upturn in energy prices,

particularly those of gasoline. The latest available survey data indicated that gasoline prices edged up further

in the first half of September. Consumer food prices

were little changed in August. According to the preliminary September release of the Reuters/University of

Michigan Surveys of Consumers, median year-ahead

inflation expectations decreased modestly in the first

half of September, but remained somewhat above the

low levels posted at the beginning of the year. Longerterm inflation expectations from this survey stayed in

the narrow range that has prevailed over recent years.

The producer price index for core intermediate materials rose in August, its third consecutive monthly increase; over those three months, the index retraced

about one-third of the decline of the previous eight

months. All measures of nominal hourly compensation

and wages suggested that labor costs had decelerated

markedly this year amid the considerable weakness in

labor markets.

Staff Review of the Financial Situation

The decisions by the Federal Open Market Committee

(FOMC) at the August meeting to leave the target

range for the federal funds rate unchanged and to

maintain the maximum sizes of its large-scale asset purchase programs, along with the accompanying statement, were broadly in line with market expectations.

The announcement in the statement of the decision to

slow the pace of Treasury securities purchases so that

the full amount of $300 billion would be completed by

the end of October reduced uncertainty about the timing of the end of this program and the ultimate amount

of purchases. After the release of the statement, the

expected path for the federal funds rate implied by

money market futures prices declined modestly. Subsequently, the expected policy path shifted down further, on net, as investors apparently interpreted weak

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labor market conditions and generally quiescent inflation as consistent with an outlook that would lead the

FOMC to maintain low policy rates over the medium

term. In addition, investors’ uncertainty about the future policy rate path appeared to diminish, which may

have also contributed to the lowering of the path implied by futures prices by reducing term premiums.

Yields on nominal Treasury securities also decreased

since the Committee met in August. A decline in implied volatility on longer-term Treasury yields suggested

that some of the drop in yields was due to reduced risk

premiums. Inflation compensation based on five-year

Treasury inflation-protected securities (TIPS) increased

a little, on balance, over the intermeeting period, while

five-year inflation compensation five years ahead declined modestly; the decrease in forward inflation compensation partially reversed increases in prior intermeeting periods. Liquidity in the TIPS market reportedly continued to be poor, complicating inferences

about investors’ expectations of future inflation.

Conditions in short-term funding markets showed

modest further improvement over the intermeeting

period. Spreads between London interbank offered

rates (Libor) and overnight index swaps (OIS) at the

one- and three-month maturities returned to near the

levels that prevailed before the onset of the financial

crisis in August 2007. Longer-term Libor-OIS spreads

also narrowed, but they remained high by historical

standards. Reports continued to suggest that lending

institutions were unusually selective about their counterparties in funding markets. Spreads on A2/P2-rated

commercial paper and AA-rated asset-backed commercial paper were little changed, on net, remaining at the

low end of their ranges over the past two years. Indicators of Treasury market functioning showed no material change, and functioning continued to be somewhat

impaired. Bid-asked spreads held roughly steady, and

trading volumes remained low. The on-the-run liquidity premium for the 10-year Treasury note was little

changed at an elevated level, although it was well below

its peak last fall; the premiums on two- and five-year

Treasury securities stayed low.

Amid lower interest rates as well as further indications

that the contraction in economic activity may have

ended, broad stock price indexes rose, on net, over the

intermeeting period. 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—remained high by historical standards. After

having dropped significantly in prior months, option-

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implied volatility on the S&P 500 index declined modestly, on balance, over the intermeeting period, but was

still at a level comparable with that of previous recessions. Yields on corporate bonds fell a bit more than

those on Treasury securities of similar duration. Indicators suggested that liquidity in the secondary market

for corporate bonds increased a bit further. Conditions

in the secondary market for leveraged syndicated loans

continued to improve slowly, as secondary-market

prices rose slightly and bid-asked spreads narrowed.

Changes in investor sentiment toward claims on financial firms were mixed over the intermeeting period.

Equity prices for larger banks increased, but stock prices for regional and smaller banks were little changed.

Market participants reportedly took note of the increased number of failures at regional and smaller

banks and remained concerned about the credit quality

of such banks’ loan portfolios and their ability to raise

capital. Credit default swap spreads for banking institutions changed little, on net, over the intermeeting period. A number of financial institutions issued debt

that was not guaranteed by the Federal Deposit Insurance Corporation.

The level of debt of the private domestic nonfinancial

sector declined again in the second quarter, as both

household and nonfinancial business debt fell. Consumer credit posted its sixth consecutive monthly decline in July; both revolving and nonrevolving credit

showed sizable drops. While issuance of consumer

credit asset-backed securities decreased in August, a

large volume of securities eligible for the Term AssetBacked Securities Loan Facility was issued in early September. Gross bond issuance by nonfinancial corporations rose in August following a lull in July; the rebound was particularly robust for speculative-grade

firms. However, commercial paper outstanding was

unchanged and bank loans fell again; as a result, borrowing by the nonfinancial business sector declined, on

net, again in August. In contrast, the federal government continued to issue debt at a rapid pace, and gross

issuance of state and local government debt was robust,

supported in part by issuance of Build America Bonds

authorized under the fiscal stimulus program.

Commercial bank credit contracted further in August;

all major loan categories declined. Commercial and

industrial (C&I) lending again decreased steeply amid

reported broad-based paydowns of outstanding loans.

At the same time, the latest Survey of Terms of Business Lending showed that C&I loan spreads over comparable-maturity market instruments rose noticeably in

_

recent months. The contraction of commercial real

estate loans held by banks also intensified in August.

Even though originations of residential mortgages apparently increased during August, banks sold an unusually large volume of loans to the governmentsponsored enterprises; consequently, banks’ balance

sheet holdings of residential mortgages decreased markedly.

After declining in July, M2 contracted more quickly in

August. The reduced demand for M2 assets likely reflected low interest rates on retail deposits and money

market mutual fund shares, as well as a continued reallocation of wealth toward riskier assets. Small time

deposits and retail money market mutual funds fell

more sharply in August than earlier in the year. Liquid

deposits increased in August, but at a slower rate than

in July. Currency expanded less rapidly in July and August than in the first half of the year, as demand from

abroad evidently was restrained.

Global financial markets showed some further signs of

stabilization over the intermeeting period. Stock indexes in Europe rose solidly, apparently reflecting an

improved economic outlook, but the Japanese stock

market declined modestly. In emerging markets, credit

default swap spreads on sovereign debt declined

slightly, and equity prices in most countries rose moderately; however, stock prices fell notably in China,

partly driven by reports that authorities were taking

actions to moderate loan growth. Despite fairly positive economic indicators, sovereign yields fell in major

industrial economies, reportedly in part because of the

reiteration by major central banks of their intention to

keep policy interest rates low. On a trade-weighted

basis, the dollar depreciated against major foreign currencies, notably against the euro and Japanese yen; it

was little changed, on average, against the currencies of

the other major trading partners of the United States.

The European Central Bank, the Bank of England, the

Bank of Canada, and the Bank of Japan kept their respective policy rates constant over the intermeeting

period. On the first day of the FOMC meeting, the

Bank of Canada announced the expiration of two temporary liquidity facilities at the end of October 2009.

Staff Economic Outlook

In the forecast prepared for the September FOMC

meeting, the staff raised its projection for real GDP

growth over the second half of 2009 and over 2010.

The information received during the intermeeting period appeared to indicate a more noticeable upturn than

anticipated at the time of the August meeting: Sales

Minutes of the Meeting of September 22-23, 2009

and starts of single-family homes provided evidence of

some firming in housing activity, capital spending indicators pointed to an earlier-than-anticipated trough for

investment in E&S, and some data suggested a modest

recovery in consumer spending. These tentative signs

of a recovery of economic activity were supported by

other factors, including recent rises in house and equity

prices that would support household net worth, declines in interest rates on corporate bonds and fixedrate mortgages, and a stronger outlook for activity in

foreign economies. The staff expected that these positive factors would lead to a modest increase in final

sales in the second half of 2009, despite continued

weakness in commercial construction and some further

deterioration in labor markets. As a result of the expected increase in final sales and an anticipated reduction in inventory liquidation, the staff projected that

real GDP would increase in the second half of 2009 at

a rate somewhat above the growth rate of potential

output. For 2010, the staff forecast that output growth

would continue to strengthen, supported by an ongoing

improvement in financial conditions, a fading of the

drag from earlier declines in income and wealth, accommodative monetary and fiscal policy, and recovery

in the housing sector. These factors also contributed

to an expected further increase in real GDP growth in

2011, despite an anticipated decline in the impetus

from fiscal policy. Even though the upward revision to

the projection for output was expected to generate

larger gains in employment than previously forecast,

the staff still projected only a slow improvement in labor markets, with the unemployment rate moving

down to about 9¼ percent by the end of 2010 and then

falling to about 8 percent by the end of 2011.

The staff forecast for inflation was little changed from

that at the August meeting. The recent data on consumer price inflation were a little above staff expectations, but still indicated a slower increase in core prices

compared with those of earlier in the year. Survey

measures of inflation expectations displayed no significant change. Nonetheless, with the significant underutilization of resources expected to persist through

2011, the staff forecast core inflation to slow somewhat

further over the next two years from the pace of the

first half of 2009. Because of recent increases in energy

prices, overall consumer price inflation was projected

to be somewhat above core inflation in the second half

of 2009 and 2010, but it was expected to be near the

core rate in 2011.

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Participants’ Views on Current Conditions and the

Economic Outlook

In their discussion of the economic situation and outlook, meeting participants agreed that the incoming

data and information received from business contacts

suggested that economic activity had picked up following its severe downturn; most thought an economic

recovery was under way. Many participants noted that

since August, they had revised up their projections for

the second half of 2009 and for subsequent years. A

number of factors were expected to support growth

over the next few quarters: Activity in the housing sector was evidently rising, and house prices had apparently stabilized or even increased; consumer spending

seemed to be in the process of leveling out; reports

from business contacts and regional surveys were consistent with firms making progress in bringing inventories into better alignment with sales and with production stabilizing or beginning to rise in many sectors; the

outlook for growth abroad had also improved, auguring

well for U.S. exports; and financial market conditions

had continued to improve over the past several

months. Despite these positive factors, many participants noted that the economic recovery was likely to be

quite restrained. Credit from banks remained difficult

to obtain and costly for many borrowers; these conditions were expected to improve only gradually. In light

of recent experience, consumers were likely to be cautious in spending, and business contacts indicated that

their firms would also be cautious in hiring and investing even as demand for their products picked up.

Some of the recent gains in activity probably reflected

government policy support, and participants expressed

considerable uncertainty about the likely strength of the

upturn once those supports were withdrawn or their

effects waned. Overall, the economy was projected to

expand over the remainder of 2009 and during 2010,

but at a pace that was unlikely to reduce the unemployment rate appreciably. Subsequently, as the housing market picked up further and financial conditions

improved, economic growth was expected to strengthen, leading to more-substantial increases in resource

utilization over time.

Nonetheless, most participants anticipated that slack in

both labor and product markets would be substantial

over the next few years, leading to subdued and potentially declining wage and price inflation. Some participants were skeptical of the usefulness of measures of

resource utilization in gauging inflation pressures, partly

because of the difficulty of measuring slack, especially

in real time. Also, those participants noted that the

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Federal Open Market Committee

degree to which slack reduces inflation depends on the

stability of longer-term inflation expectations, which in

turn depends on expectations for monetary policy. In

any case, all participants recognized that inflation expectations are a key determinant of inflation, and that

various measures of inflation expectations, although

imperfect, needed to be carefully monitored in the current environment. Participants discussed the extent to

which the size of the Federal Reserve’s balance sheet

would affect inflation expectations going forward. To

keep inflation expectations well anchored, all agreed on

the importance of the Federal Reserve continuing to

communicate that it has the tools and willingness to

begin withdrawing monetary policy accommodation at

the appropriate time and pace to prevent any persistent

increase in inflation. Overall, many participants viewed

the risks to their inflation outlook over the next few

quarters as being roughly balanced. A few continued to

see some risk of substantial further disinflation, but

that risk had eased somewhat further over the intermeeting period. Over a longer horizon, a few felt the

risks were tilted to the upside.

Developments in financial markets were again regarded

as broadly positive; participants saw the cumulative

improvement in market functioning and pricing since

the spring as substantial. Over the intermeeting period,

the strengthening in the economic outlook led to an

increase in investors’ appetite for riskier assets. Markets for corporate debt continued to improve, private

credit spreads narrowed further, and equity prices rose.

Given the improved economic prospects, the decline in

longer-term Treasury yields and the apparent marking

down of the implied path for the policy interest rate

were seen as somewhat puzzling but supportive of recovery. Some participants saw the decline in yields on

Treasury securities and other instruments as an indication that the expansion of excess reserve balances was

putting downward pressure on market rates; some others viewed the configuration of rate movements as

consistent with reduced concerns about inflation and

with lower term premiums in a more settled economic

environment. In any event, the ongoing improvement

in broader financial and economic conditions seemed

to some participants to reflect the onset of a positive

feedback loop in which better financial conditions contribute to stronger growth in output and employment,

which in turn bolsters expected returns and strengthens

financial firms, leading to a further easing in financial

conditions. Others noted, however, that many financial

markets and institutions were still strained and that

downside financial risks remained. In particular, be-

_

cause the improvement in financial markets was due, in

part, to support from various government programs,

market functioning might deteriorate as those programs

wind down. Moreover, credit remained quite tight for

many businesses and households dependent on banks,

and many regional and small banks were vulnerable to

the deteriorating performance of commercial real estate

loans. Participants noted that all categories of bank

lending continued to decline.

Participants emphasized that labor market conditions

remained weak. Although recent data indicated that

the pace at which employment was declining had

slowed, job losses remained sizable and the unemployment rate was high. The unusually large fraction of

those who were working part time for economic reasons, the unusually low level of the average workweek,

and indications from business contacts that firms

would be slow to hire additional staff as sales and production turn up all pointed to a period of modest job

gains, and thus only a slow decline in the unemployment rate as the economic recovery proceeds. Significant cost cutting by firms was thought to have led to a

sizable increase in productivity growth in the first half

of the year; sustained outsized gains in productivity

could further damp hiring. Finally, high levels of longterm unemployment and permanent separations could

lead to losses of skills and greater needs for labor reallocation that could slow employment growth.

Consumer spending had picked up more than expected

over the intermeeting period, but participants saw that

increase as partly reflecting special factors like the cashfor-clunkers program. Recent increases in house prices

and equity prices were positives, but participants generally expected no more than moderate growth in consumer spending over the near term. Households still

faced considerable headwinds, including tight credit,

high levels of debt, uncertain job prospects, and wealth

levels that remained relatively low despite the recent

rise in equity prices and stabilization in house prices.

In that environment, households’ saving behavior remained an important source of uncertainty in the outlook. The household saving rate had risen considerably

in recent quarters, and the most likely outcome was for

the saving rate to remain near its higher level; however,

some participants noted that there was some chance

that the sharp drop in household net worth over the

past few years, reduced access to credit, and high

household debt burdens could lead households to save

a substantially larger fraction of their incomes going

forward.

Minutes of the Meeting of September 22-23, 2009

Firms appeared to be reducing inventories and fixed

investment at a slower pace than earlier in the year and

had made substantial progress in reducing stocks toward desired levels. With inventories low, firms were

beginning to raise production to meet at least a portion

of new demand; this adjustment was likely to make an

important contribution to economic recovery in the

second half of this year. Recent data on new orders

and shipments pointed to an earlier bottoming out in

equipment and investment spending than previously

anticipated. Some participants reported that while

business contacts had expressed relief that the most

severe economic outcomes had been avoided, they remained cautious about the recovery. This caution, together with low utilization rates and substantial excess

capacity, could hold back the rate of increase of new

capital spending.

In the residential real estate sector, home sales and construction had increased from very low levels, and house

prices appeared to be stabilizing. Participants welcomed the cumulating evidence that the housing sector

was beginning to recover, and many participants had

marked up their forecasts for housing activity. However, some viewed the improvement as quite tentative,

pointing to the pending termination of the temporary

tax credit for first-time homebuyers and the winding

down of the Federal Reserve’s agency MBS purchase

program as potential risks to the outlook for the sector.

Also, some participants questioned whether the recent

stabilization in house prices would be sustained as likely

further increases in foreclosures would probably put

downward pressure on prices. Still, a better outlook

for house prices was an important input to the improved economic outlook; not only would household

wealth benefit from a turnaround in such prices, but

the exposure of lenders to real estate losses would be

diminished. In contrast to developments in the residential sector, commercial real estate activity continued

to fall markedly in most districts, reflecting deteriorating fundamentals, including declining occupancy and

rental rates and very tight credit conditions.

Participants marked up their outlook for foreign economies, mainly reflecting better-than-expected incoming

data from a range of countries. The pickup in foreign

economic activity, especially in Asia, had buoyed U.S.

export growth, and several participants noted that

higher growth abroad would support growth in U.S.

exports going forward.

Page 9

Committee Policy Action

In their discussion of monetary policy for the period

ahead, Committee members agreed that no significant

changes to its policy target rate or large-scale asset purchase programs were warranted at this meeting. Although the economic outlook had improved further in

recent weeks and the risks to the forecast had become

more balanced, the level of economic activity was likely

to be quite weak and resource utilization low. With

substantial resource slack likely to persist and longerterm inflation expectations stable, the Committee anticipated that inflation would remain subdued for some

time. Under these circumstances, the Committee

judged that the costs of growth turning out to be weaker than anticipated could be relatively high. Accordingly, the Committee agreed that it was appropriate to

maintain its target range for the federal funds rate at

0 to ¼ percent and to reiterate its view that economic

conditions were likely to warrant an exceptionally low

level of the federal funds rate for an extended period.

With respect to the large-scale asset purchase programs, some members thought that an increase in the

maximum amount of the Committee’s purchases of

agency MBS could help to reduce economic slack more

quickly than in the baseline outlook. Another member

believed that the recent improvement in the economic

outlook could warrant a reduction in the Committee’s

maximum purchases. However, all members were able

to support an indication by the Committee of its intention at this time to purchase the full $1.25 trillion of

agency MBS that it had previously established as the

maximum for this program. With respect to agency

debt, the Committee agreed to reiterate its intention to

purchase up to $200 billion of these securities. To

promote a smooth transition in markets as these programs are concluded, members decided to gradually

slow the pace of both its agency MBS and agency debt

purchases and to extend their completion through the

end of the first quarter of 2010. The Committee

agreed that it would continue to evaluate the timing and

overall amounts of its purchases of securities in light of

the evolving economic outlook and conditions in financial markets. Members discussed the importance of

maintaining flexibility to expand the asset purchase

programs should the economic outlook deteriorate or

to scale back the programs should economic and financial conditions improve more than anticipated.

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 ex-

Page 10

Federal Open Market Committee

ecute 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 Desk is expected to complete purchases

of about $300 billion of longer-term Treasury securities by the end of October. It is also expected to execute purchases of up to

$200 billion in housing-related agency debt

and about $1.25 trillion of agency MBS by

the end of the first quarter of 2010. The

Desk is expected to gradually slow the pace

of these purchases as they near completion.

The Committee anticipates that outright purchases of securities will cause the size of the

Federal Reserve’s balance sheet to expand

significantly in coming months. The System

Open Market Account Manager and the Secretary will keep the Committee informed of

ongoing developments regarding the System’s balance sheet that could affect the attainment over time of the Committee’s objectives of maximum employment and price

stability.”

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

“Information received since the Federal

Open Market Committee met in August suggests that economic activity has picked up

following its severe downturn. Conditions in

financial markets have improved further, and

activity in the housing sector has increased.

Household spending seems to be stabilizing,

but remains constrained by ongoing job

losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are

still cutting back on fixed investment and

staffing, though at a slower pace; they continue to make progress in bringing inventory

stocks into better alignment with sales. Although economic activity is likely to remain

weak for a time, the Committee anticipates

that policy actions to stabilize financial markets and institutions, fiscal and monetary

stimulus, and market forces will support a

strengthening of economic growth and a

gradual return to higher levels of resource

utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with

longer-term inflation expectations stable, the

Committee expects that inflation will remain

subdued for some time.

In these circumstances, the Federal Reserve

will continue to employ a wide range of 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.

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 $1.25

trillion of agency mortgage-backed securities

and up to $200 billion of agency debt. The

Committee will gradually slow the pace of

these purchases in order to promote a

smooth transition in markets and anticipates

that they will be executed by the end of the

first quarter of 2010. As previously announced, the Federal Reserve’s purchases of

$300 billion of Treasury securities will be

completed by the end of October 2009. The

Committee will continue to evaluate the timing and overall amounts of its purchases 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.”

_

Minutes of the Meeting of September 22-23, 2009

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, November 3-4,

2009. The meeting adjourned at 12:35 p.m. on September 23, 2009.

Notation Votes

By notation vote completed on August 28, 2009, the

Committee unanimously approved the designation of

Matthew M. Luecke as the Committee’s Chief Freedom

Page 11

of Information Act Officer, with authority to subdelegate duties as appropriate.

By notation vote completed on September 1, 2009, the

Committee unanimously approved the minutes of the

FOMC meeting held on August 11-12, 2009.

_____________________________

Brian F. Madigan

Secretary