fomc minutes · November 3, 2009

FOMC Minutes

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Minutes of the Federal Open Market Committee

November 3-4, 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, November 3,

2009, at 2:00 p.m. and continued on Wednesday, November 4, 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

Ms. Robertson, Assistant to the Board, Office of

Board Members, Board of Governors

Mr. Bullard, Mr. Hoenig, Ms. Pianalto, and Mr.

Rosengren, Alternate Members of the Federal

Open Market Committee

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

Minneapolis, and Philadelphia, respectively

Mr. Madigan, Secretary and Economist

Mr. Luecke, Assistant Secretary

Mr. Skidmore, Assistant Secretary

Ms. Smith, Assistant Secretary

Mr. Alvarez, General Counsel

Mr. Baxter, Deputy General Counsel

Mr. Sheets, Economist

Mr. Stockton, Economist

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

Sullivan, Wilcox, and Williams, Associate

Economists

Mr. Sack, Manager, System Open Market Account

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

Ms. Edwards, Messrs. Levin and Nelson, Senior

Associate Directors, Division of Monetary Affairs, Board of Governors; Messrs. Reifschneider, and Wascher, Senior Associate Directors, Division of Research and Statistics,

Board of Governors

Mr. Leahy,¹ Associate Director, Division of International Finance, Board of Governors

Mr. Palumbo, Deputy Associate Director, Division

of Research and Statistics, Board of Governors

Mr. Small, Project Manager, Division of Monetary

Affairs, Board of Governors

Ms. Ihrig, Section Chief, Division of Monetary Affairs, Board of Governors

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

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

Ms. Holcomb, First Vice President, Federal Reserve Bank of Dallas

Messrs. Fuhrer and Sniderman, Executive Vice

Presidents, Federal Reserve Banks of Boston

and Cleveland, respectively

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

Secretary, Board of Governors

¹ Attended the portion of the meeting relating to financial

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

developments, open market operations, and System facilities.

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Federal Open Market Committee

Mr. Barkema, Mses. Mester and Mosser, and Mr.

Waller, Senior Vice Presidents, Federal Reserve

Banks of Kansas City, Philadelphia, New York,

and St. Louis, respectively

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

Mr. Burke and Ms. Yucel, Vice Presidents, Federal

Reserve Banks of New York and Dallas, respectively

Ms. Sbordone and Mr. Sill, Assistant Vice Presidents, Federal Reserve Banks of New York

and Philadelphia, respectively

Mr. Hetzel, Senior Economist, Federal Reserve

Bank of Richmond

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 September 22-23 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 September, the Federal Reserve’s total assets were about

unchanged, on balance, at approximately $2.2 trillion,

as the increase in the System’s holdings of securities

roughly matched a further decline in usage of the System’s credit and liquidity facilities. The Manager noted

that, as of October 30, $300 billion in Treasury securities had been purchased, as directed by the Committee.

Overall, the Treasury market had recovered substantially from the strains during the financial crisis, and the

Manager reported that the completion of the Federal

Reserve’s purchase program did not appear to have led

to any significant upward pressure on Treasury yields

or to any notable deterioration in Treasury market

functioning. There was little evidence, to date, of a

buildup in year-end funding pressures, although demand for Treasury bills with maturities extending just

beyond the year-end seemed to be elevated. The Manager noted that the recent path of purchases of agency

debt was consistent with buying a cumulative amount

of $175 billion by the end of the first quarter of 2010.

The staff briefed the Committee on recent developments regarding various Federal Reserve liquidity and

credit facilities, including the Term Auction Facility

(TAF), the primary credit program, the Term AssetBacked Securities Loan Facility (TALF), and the swap

lines with foreign central banks. Usage of these facilities had been declining in recent months as financial

market conditions continued to improve. On September 24, the Board of Governors announced a gradual

reduction in amounts to be auctioned under the TAF

through January and indicated that auctions of credit

with maturities longer than 28 days would be phased

out. The staff reviewed the changes that had been

made since the onset of the crisis to the terms of the

primary credit program, including loan maturities and

interest rates. The staff noted that reducing the maximum maturity of loans available under the primary

credit program from 90 days to 28 days would

represent another step toward normalization of the

Federal Reserve’s policy-implementation framework

and would align the maximum maturities of the primary credit program with those under the TAF, but no

action on this matter was taken by the Board at this

meeting. Regarding the TALF, the staff indicated that

auto and credit card asset-backed security issuance was

increasingly being funded by non-TALF sources; however, commercial MBS remained more dependent on

TALF financing.

The staff presented another update on the continuing

development of several tools that could help support a

smooth withdrawal of policy accommodation at the

appropriate time. These measures include executing

reverse repurchase agreements (RPs) 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.

The staff had made considerable further progress on

these tools. Participants expressed confidence that the

Committee would be in a position to remove policy

accommodation when appropriate by raising the rate of

interest paid on excess reserves and by employing reserve-management tools such as reverse RPs, term deposits, and, if desirable, asset sales. Completing the

operational work necessary to establish reverse RPs and

term deposits as tools that can drain large volumes of

reserves was viewed as an important near-term objective. Participants anticipated that the Federal Reserve

would conduct tests of these tools, but they stressed

Minutes of the Meeting of November 3-4, 2009

that such testing would not imply that these tools

would be employed for policy purposes any time soon.

Participants expressed a range of views about how the

Committee might use its various tools in combination

to foster most effectively its dual objectives of maximum employment and price stability. As part of the

Committee’s strategy for eventual exit from the period

of extraordinary policy accommodation, several participants thought that asset sales could be a useful tool to

reduce the size of the Federal Reserve’s balance sheet

and lower the level of reserve balances, either prior to

or concurrently with increasing the policy rate. In their

view, such sales would help reinforce the effectiveness

of paying interest on excess reserves as an instrument

for firming policy at the appropriate time and would

help quicken the restoration of a balance sheet composition in which Treasury securities were the predominant asset. Other participants had reservations about

asset sales—especially in advance of a decision to raise

policy interest rates—and noted that such sales might

elicit sharp increases in longer-term interest rates that

could undermine attainment of the Committee’s goals.

Furthermore, they believed that other reserve management tools such as reverse RPs and term deposits

would likely be sufficient to implement an appropriate

exit strategy and that assets could be allowed to run off

over time, reflecting prepayments and the maturation

of issues. Participants agreed to continue to evaluate

various potential policy-implementation tools and the

possible combinations and sequences in which they

might be used. They also agreed that it would be important to develop communication approaches for

clearly explaining to the public the use of these tools

and the Committee’s exit strategy more broadly.

Staff Review of the Economic Situation

The information reviewed at the November 3-4 meeting suggested that overall economic activity continued

to rise in recent months. Manufacturers increased production in September for the third consecutive month.

The gradual recovery in construction of single-family

homes from its extremely low level earlier in the year

continued, and home sales increased in the third quarter. Although consumer spending on motor vehicles

declined in September after the expiration of government rebates, other household spending rose. Outlays

for equipment and software (E&S) appeared to be stabilizing. However, the labor market weakened further,

and business spending on nonresidential structures

continued to decline. Meanwhile, consumer price inflation remained subdued in recent months.

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The labor market continued to weaken in September,

but the pace of deterioration lessened from that seen

earlier in the year. Job losses remained widespread

across industries. The length of the average workweek

for production and nonsupervisory workers decreased,

and the index of aggregate hours worked for this group

fell, albeit more slowly than earlier in the year. In the

household survey, the unemployment rate rose in September to 9.8 percent, and the labor force participation

rate fell to its lowest level of the year. Continuing

claims for unemployment insurance through regular

state programs declined through early October, but

total claims, including those for extended and emergency benefits, remained high.

Industrial production rose in September for the third

consecutive month. A substantial portion of the thirdquarter gain was directly attributable to a rebound in

motor vehicle assemblies and related parts production,

but increases in production were widespread across the

industrial sector. Indicators from business surveys suggested that there would be further gains in factory output over the near term. Nevertheless, considerable

slack remained in the manufacturing sector, as the factory utilization rate for September was up only a bit

from its historical low earlier this year.

For the third quarter as a whole, real personal consumption expenditures (PCE) rose at a solid rate, with

noticeable increases in motor vehicles, furniture, electronics, and other durable goods. However, real outlays declined in September after a sharp increase in August. The monthly pattern in expenditures was significantly affected by swings in motor vehicle sales during

and after the government’s “cash-for-clunkers” program. Real disposable personal income fell for the

fourth consecutive month in September, reflecting the

weakness in the labor market. Poor labor market conditions and prior declines in household net worth appeared to have weighed on consumer sentiment, and

the October Senior Loan Officer Opinion Survey on

Bank Lending Practices (SLOOS) suggested that many

banking institutions continued to tighten standards for

consumer lending in the third quarter.

The housing sector continued to recover, on balance.

Although single-family starts were about flat in September, the number of starts was well above the record

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

much smaller multifamily sector, where tight credit

conditions persisted and vacancies remained elevated,

starts were about unchanged. Sales of new homes, although down a bit in September, rose over the third

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Federal Open Market Committee

quarter as a whole. The inventory of unsold new

homes declined further, as sales outpaced construction.

Sales of existing single-family homes increased in September and for the quarter as a whole, and recent resale

activity appeared to be driven primarily by transactions

of nondistressed properties. The average interest rate

on 30-year conforming fixed-rate mortgages remained

very low over the intermeeting period. Although some

house price indexes had risen in recent months, such

indexes remained below year-earlier levels.

Real spending on E&S appeared to have stabilized in

the third quarter. Real business outlays on high-tech

E&S increased modestly further, outlays for aircraft

posted another gain, and business investment in motor

vehicles and other areas was down only slightly. The

improvements in a number of the fundamental determinants of investment in E&S, including a decline in

the cost of capital and a rise in business output, suggested further, albeit sluggish, gains in spending over

the next few quarters. The responses to the October

SLOOS indicated that banks continued to tighten standards on commercial and industrial (C&I) loans to

firms. Meanwhile, conditions in the nonresidential

construction sector generally remained quite poor. The

recent trend in architectural billings was consistent with

further declines in nonresidential construction, and

employment in the sector continued to decline. The

October SLOOS suggested that financing for new construction projects was very difficult for businesses to

obtain. The Bureau of Economic Analysis estimated

that businesses continued to liquidate inventories in the

third quarter, but at a slower rate than in the preceding

quarter.

In August, the U.S. international trade deficit narrowed,

as exports edged up and imports declined, but it remained wider than it had been at its recent low point in

May. The increase in exports of goods and services

was held down by a sharp drop in the volatile aircraft

category. The decline in imports of goods and services

was led by a lower volume of imported oil. In contrast,

imports of machinery, automotive products, and industrial supplies increased.

Indicators of economic activity in the advanced foreign

economies during the third quarter were mixed, but

consistent with economic recovery in the aggregate. In

most countries, purchasing managers surveys were at

levels consistent with expansion, and many indicators

of consumer and business confidence continued to

show improvement. Economic indicators were strongest in Japan and the euro area, where industrial produc-

tion rebounded sharply. In contrast, real gross domestic product (GDP) contracted in the United Kingdom

in the third quarter, and real GDP in Canada edged

down in July and August. In most emerging market

economies, recent data showed that economic recovery

continued in the third quarter. Real GDP increased

strongly in China, Korea, and Singapore, and the recovery in Brazil continued. In Mexico, available data

suggested that activity had begun to expand after several quarters of contraction. Across most of the major

foreign economies, price pressures remained subdued.

Twelve-month inflation remained elevated but declined

further in Mexico and Brazil.

In the United States, recent monthly data indicated that

consumer price inflation remained subdued. The PCE

price index moved up only a bit in September as increases in energy prices were largely offset by declines

in food prices. Core PCE prices also edged up during

the month. Gasoline prices rose again in October.

Median year-ahead inflation expectations in the final

October Reuters/University of Michigan Surveys of

Consumers increased, remaining higher than at the turn

of the year, but longer-term inflation expectations from

this survey were about unchanged. Measures of labor

compensation rose moderately in the third quarter after

decelerating significantly in the first half of the year.

The employment cost index for wages and salaries was

boosted by increases in several industry categories that

might have been affected by the rise in the minimum

wage in July. Output per hour rose sharply in the

second and third quarters, contributing to a sizable decline in unit labor costs so far this year.

Staff Review of the Financial Situation

Market participants largely anticipated the decisions by

the Federal Open Market Committee (FOMC) at the

September meeting to leave the target range for the

federal funds rate unchanged and to extend the Federal

Reserve’s purchases of agency MBS and agency debt

through the end of the first quarter of 2010 to allow for

a gradual reduction in the pace of these purchases. The

announcement of the Committee’s intent to purchase

the full $1.25 trillion of agency MBS securities reduced

some uncertainty about the cumulative amount of these

purchases. After the release of the statement, investors

marked down their expected path for the federal funds

rate slightly; over subsequent weeks, that initial reaction

was largely reversed so that, on balance, the expected

path appeared to change little over the intermeeting

period. Yields on nominal Treasury securities were

about unchanged on net. Inflation compensation

based on five-year Treasury inflation-protected securi-

Minutes of the Meeting of November 3-4, 2009

ties (TIPS) rose over the intermeeting period, apparently owing in part to an increase in oil and other commodity prices, while five-year inflation compensation

five years ahead was little changed.

Overall conditions in short-term funding markets eased

a bit further during the intermeeting period. Spreads

between London interbank offered rates (Libor) and

overnight index swap (OIS) rates at the one- and threemonth maturities were about unchanged and were near

their pre-crisis levels. Spreads at the six-month maturity narrowed but remained elevated. Spreads on

A2/P2-rated commercial paper (CP) and AA-rated asset-backed CP remained at the lower ends of their respective ranges over the past two years. Indicators of

Treasury market functioning, including on-the-run liquidity premiums for the 10-year Treasury note and

trading volumes in both the nominal and TIPS markets, showed some signs of improvement over the intermeeting period, but trading conditions remained

somewhat impaired. Year-end pressures in funding

markets generally appeared modest. However, some

evidence pointed to increased demand for Treasury

securities that mature soon after the turn of the year.

Broad stock price indexes were about unchanged, on

net, over the intermeeting period despite initial thirdquarter earnings reports that mostly beat analysts’ forecasts. Option-implied volatility on the S&P 500 index

moved up slightly. The spread between an estimate of

the expected real return on equity over the next 10

years for S&P 500 firms and an estimate of the real 10year Treasury yield—a rough gauge of the equity risk

premium—remained elevated. Corporate bond spreads

narrowed further as yields on investment- and speculative-grade corporate bonds decreased more than those

on comparable-maturity Treasury securities. Bid-asked

spreads for corporate bonds—a measure of liquidity in

this market—remained at moderate levels. Conditions

in the secondary market for leveraged syndicated loans

continued to improve, as secondary-market prices rose

and bid-asked spreads narrowed.

Investor sentiment toward the banking sector appeared

to deteriorate over the intermeeting period. Bank share

prices fell, with equity prices for large banks declining

more than those for regional and smaller banks. Credit

default swap spreads for large bank holding companies

were about flat, but they widened for regional and

smaller banking organizations. Market participants

reportedly remained concerned about the earnings

prospects for banks in an environment of weak economic activity and rising loan losses.

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Debt of the private domestic nonfinancial sector appeared to have declined again in the third quarter, as

estimates suggested that household debt edged down

and nonfinancial business debt decreased. Consumer

credit contracted for the seventh consecutive month in

August, reflecting declines in both revolving and nonrevolving credit; issuance of consumer credit assetbacked securities also fell. Gross issuance of bonds by

investment-grade nonfinancial corporations slowed

somewhat in October, even as speculative-grade firms

continued to issue bonds at a robust pace. CP outstanding increased, though gains were concentrated at a

few large issuers. Bank loans continued to contract

rapidly. In contrast, the federal government continued

to issue debt at a brisk pace, and gross issuance of state

and local government debt remained strong in October.

Bank credit declined in September and in the first half

of October, as the contraction in C&I loans contributed importantly to a further decline in total loans

over the period. According to the SLOOS, bank lending standards and terms tightened further and demand

continued to decline, on net, for most types of loans in

the third quarter. Commercial real estate (CRE) loans

also continued to decrease, reportedly because of widespread paydowns and charge-offs. In addition, residential mortgage loans on banks’ books fell, and revolving

home equity loans and consumer loans also contracted.

The pace of decline in total loans at large banks continued to exceed that at smaller banks. The allowance for

loan and lease losses rose further at large banks in September, but it was about unchanged at small banks.

M2 appeared to have expanded at a moderate rate in

September and October. While liquid deposits rose

rapidly, small time deposits and retail money market

mutual funds continued to contract. Meanwhile, currency increased amid moderate demand for U.S. currency from abroad.

Stock indexes fell over the intermeeting period in most

major industrial economies, while 10-year sovereign

yields declined in Europe and were little changed in

Japan and Canada. Equity prices were mixed in emerging markets, and credit spreads on emerging market

sovereign debt edged up. The trade-weighted index of

the foreign exchange value of the dollar was little

changed over the intermeeting period. The Reserve

Bank of Australia and Norges Bank raised their policy

rates, while most other central banks left their respective policy rates unchanged over the intermeeting period. The European Central Bank, the Bank of Eng-

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Federal Open Market Committee

land, and the Bank of Japan continued implementing

their special liquidity and asset purchase programs, although Bank of Japan officials indicated they would let

some credit-easing programs expire at the end of the

year.

Staff Economic Outlook

In the forecast prepared for the November FOMC

meeting, the staff raised its projection for real GDP

growth over the second half of 2009 but left the forecast for output growth in 2010 and 2011 roughly unchanged. The spending and production data received

during the intermeeting period suggested that economic activity, especially household spending, was a little

stronger in the summer than previously estimated. Also, industrial production increased more than had been

anticipated at the September meeting. But with labor

market conditions somewhat weaker than anticipated,

earlier declines in wealth still weighing on household

balance sheets, and measures of consumer sentiment

relatively low, the staff did not take much signal from

the recent unexpected strength in spending and output.

Indeed, the staff boosted its projection for the unemployment rate over the next several years. Still, the

staff continued to believe that several factors that were

restraining spending would gradually fade. The staff

anticipated that the strengthening of the recovery in

real output during 2010 and 2011 would be supported

by an ongoing improvement in financial conditions and

household balance sheets, continued recovery in the

housing sector, improved household and business confidence, and accommodative monetary policy even as

the impetus to real activity from fiscal policy diminished.

The staff forecast for inflation was little changed from

the September meeting. Although oil prices moved

higher, likely boosting near-term inflation, the staff also

revised up its estimate of the degree of slack in the

economy, leaving the forecast for total and core PCE

inflation over the next two years little changed. With

significant underutilization of resources expected to

persist for several years, the staff continued to project

that core inflation would slow somewhat further over

the next two years.

Participants’ Views on Current Conditions and the

Economic Outlook

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 2012 and over a longer

horizon. 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. Participants’ forecasts through 2012 and over

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

to these minutes.

In the meeting participants’ discussion of the economic

situation and outlook, they agreed that the incoming

data and information received from business contacts

suggested that economic activity was picking up as anticipated, with output continuing to expand in the

fourth quarter. A number of factors were expected to

support near-term growth: Business inventories were

being brought into better alignment with sales, and the

pace of inventory runoff was slowing; activity in the

housing sector appeared to be turning up, and house

prices seemed to be leveling out or beginning to rise by

some measures; consumer spending appeared to be

rising even apart from the effects of fiscal incentives to

purchase autos; the outlook for growth abroad had

improved since earlier in the year, auguring well for

U.S. exports; and U.S. and global financial market conditions, while roughly unchanged over the intermeeting

period, were substantially better than earlier in the year.

Above-trend output growth in the third quarter was a

welcome development. Moreover, the upturn in real

GDP appeared to reflect stronger final demand and not

just a slower pace of inventory decumulation. While

these developments were positive, participants noted

that it was not clear how much of the recent firming in

final demand reflected the effects of temporary fiscal

programs to support the auto and housing sectors, and

some participants expressed concerns about the ability

of the economy to generate a self-sustaining recovery

without government support. Nonetheless, participants expected the recovery to continue in subsequent

quarters, although at a pace that would be rather slow

relative to historical experience, particularly the robust

recoveries that followed previous steep downturns.

Such a modest pace of expansion would imply only

slow improvement in the labor market next year, with

unemployment remaining high. Indeed, participants

noted that business contacts continued to report plans

to be cautious in hiring and capital spending even as

demand for their products increased. Nonetheless,

economic growth was expected to strengthen during

the next two years as housing construction continued

to rise and financial conditions improved further, lead-

Minutes of the Meeting of November 3-4, 2009

Page 7

ing to more-substantial increases in resource utilization

in product and labor markets.

ing at small businesses, which are normally a source of

employment growth in recoveries.

Most participants now viewed the risks to their growth

forecasts as being roughly balanced rather than tilted to

the downside, but uncertainty surrounding these forecasts was still viewed as quite elevated. Downside risks

to growth included the continued weakness in the labor

market and its implications for income growth and

consumer confidence, as well as the potential for credit

availability to remain relatively tight for consumers and

some businesses. In this regard, some participants

noted the difficulty that smaller, bank-dependent firms

were having in securing financing. The CRE sector

was also considered a downside risk to the forecast and

a possible source of increased pressure on banks. On

the other hand, consumer spending on items other

than autos had been stronger than expected, which

might be signaling more underlying momentum in the

recovery and some chance that the step-up in spending

would be sustained going forward. In addition, growth

abroad had exceeded expectations for some time, potentially providing more support to U.S. exports and

domestic growth than anticipated.

The weakness in labor market conditions remained an

important concern to meeting participants, with unemployment expected to remain elevated for some time.

Although the pace of job losses was moderating, the

unusually large fraction of those who were working

part time for economic reasons and the unusually low

level of the average workweek pointed to only a gradual

decline in the unemployment rate as the economic recovery proceeded. In addition, business contacts reported that they would be cautious in their hiring and

would continue to aggressively seek cost savings in the

absence of revenue growth. Indeed, participants expected that businesses would be able to meet any increases in demand in the near term by raising their employees’ hours and boosting productivity, thus delaying

the need to add to their payrolls; this view was supported by aggregate data indicating rapid productivity

growth in recent quarters. Moreover, the need to reallocate labor across sectors as the recovery proceeds, as

well as losses of skills caused by high levels of longterm unemployment and permanent separations, could

limit the pace of gains in employment. Participants

discussed the possibility that this recovery could resemble the past two, which were characterized by a

slow pace of hiring for a time even after aggregate demand picked up.

Financial market developments over recent months

were generally regarded as supportive of continued

economic recovery, with equity prices considerably

higher, private credit spreads substantially lower, and

financial markets generally performing significantly better than earlier in the year. Participants noted, however, that bank credit remained tight. With rising levels

of nonperforming loans expected to continue to be a

source of stress, and with many regional and small

banks vulnerable to the deteriorating performance of

CRE loans, banks continued to tighten lending standards for C&I loans and consumer loans, although the

net percentage of banks reporting further tightening in

each category had fallen in recent surveys. Bank loans

continued to contract sharply in all categories. Participants noted that the dichotomy between significant

easing of conditions in capital markets and continuing

tight conditions in the banking sector implied that financing conditions differed for large and small firms.

Large firms with access to debt and equity markets for

financing had relatively little difficulty in obtaining

credit and in many cases also had high levels of retained earnings with which to fund their operations and

investment. In contrast, smaller firms, which tend to

be more dependent on commercial banks for financing,

reportedly faced substantial constraints in their access

to credit. Limited credit availability, along with weak

aggregate demand, was viewed as likely to restrain hir-

The prospect for continued weakness in labor markets

remained an important factor in the outlook for consumer spending. Although consumer spending had

picked up more than expected in recent months, participants saw that increase as partly reflecting special factors such as the cash-for-clunkers program. Uncertain

job prospects, slow income growth, and tight credit, as

well as wealth levels that remained relatively low despite the recent rise in equity prices and stabilization in

house prices, were seen as weighing on consumer confidence and the growth of consumer spending for some

time to come. In such an environment, households’

saving behavior was an important source of uncertainty

in the outlook. Participants continued to believe that

the most likely outcome was for the saving rate to remain near its average level over the past few quarters or

to edge up gradually. However, they could not completely discount the possibility of a further substantial

rise in the saving rate as households took further steps

to repair their balance sheets.

Participants noted that firms seemed to be reducing

inventories at a slower pace than earlier in the year and

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Federal Open Market Committee

apparently had made substantial progress in reducing

stocks toward desired levels. With inventories lower,

firms were beginning to raise production to meet at

least a portion of increased demand, and this adjustment was expected to make an important contribution

to economic recovery in the fourth quarter of the year

and, to a lesser extent, in 2010 as well. Investment in

E&S appeared to have stabilized in the third quarter,

and recent data on new orders continued to point to a

pickup next year. However, many participants expressed the view that cautious business sentiment, together with low industrial utilization rates, was likely to

keep new capital spending subdued until firms became

more confident about the durability of increases in demand.

In the residential real estate sector, home sales and construction increased over recent months from very low

levels; moreover, house prices appeared to be stabilizing and in some areas had reportedly moved higher.

Generally, the outlook was for these trends to continue.

However, some participants still viewed the improvements as quite tentative, pointing to potential sources

of softness from the pending termination of the temporary tax credit for first-time homebuyers, the

winding down of the Federal Reserve’s agency MBS

purchase program, and the downward pressure that

anticipated further increases in foreclosures would put

on house prices. In contrast to developments in the

residential sector, CRE activity continued to fall markedly in most Districts as a result of deteriorating fundamentals, including declining occupancy and rental

rates and very tight credit conditions.

Stronger foreign economic activity, especially in Asia,

as well as the partial reversal this year of the dollar’s

appreciation during the latter part of 2008, was providing support to U.S. exports. Participants noted that the

recent fall in the foreign exchange value of the dollar

had been orderly and appeared to reflect an unwinding

of safe-haven demand in light of the recovery in financial market conditions this year, but that any tendency

for dollar depreciation to intensify or to put significant

upward pressure on inflation would bear close watching. Further improvements in foreign economies

would likely buoy U.S. exports going forward, but as

the recovery took hold in the United States, import

growth would also strengthen.

Participants continued to discuss the appropriate

weights to place on resource slack, inflation expectations, and other factors in assessing the inflation outlook. In the near term, most participants anticipated

that substantial slack in both labor and product markets

would likely keep inflation subdued. Indeed, the considerable decelerations in wages and unit labor costs this

year were cited as factors putting downward pressure

on inflation. However, some participants noted that

the recent rise in the prices of oil and other commodities, as well as increases in import prices stemming

from the decline in the foreign exchange value of the

dollar, could boost inflation pressures. Overall, many

participants viewed the risks to their inflation outlooks

over the next few quarters as being roughly balanced.

Some saw the risks as tilted to the downside in the near

term, reflecting the quite elevated level of economic

slack and the possibility that inflation expectations

could begin to decline in response to the low level of

actual inflation. But others felt that risks were tilted to

the upside over a longer horizon, because of the possibility that inflation expectations could rise as a result of

the public’s concerns about extraordinary monetary

policy stimulus and large federal budget deficits.

Moreover, these participants noted that banks might

seek to reduce appreciably their excess reserves as the

economy improves by purchasing securities or by easing credit standards and expanding their lending substantially. Such a development, if not offset by Federal

Reserve actions, could give additional impetus to

spending and, potentially, to actual and expected inflation. To keep inflation expectations anchored, all participants agreed that it was important for policy to be

responsive to changes in the economic outlook and for

the Federal Reserve to continue to clearly communicate

its ability and intent to begin withdrawing monetary

policy accommodation at the appropriate time and

pace.

Committee Policy Action

In the members’ discussion of monetary policy for the

period ahead, they agreed that no substantive changes

to the Committee’s federal funds target range or largescale asset purchase programs were warranted at this

meeting. On balance, the economic outlook had

changed little since the September meeting. The recovery appeared to be continuing and was expected to

gradually strengthen over time. Still, most members

projected that over the next couple of years, the unemployment rate would remain quite elevated and the level of inflation would remain below rates consistent over

the longer run with the Federal Reserve’s objectives.

Based on this outlook, members decided to maintain

the federal funds target range at 0 to ¼ percent and to

continue to state their expectation that economic conditions were likely to warrant exceptionally low rates

Minutes of the Meeting of November 3-4, 2009

for an extended period. Low levels of resource utilization, subdued inflation trends, and stable inflation expectations were among the important factors underlying their expectation for monetary policy, and members

agreed that policy communications would be enhanced

by citing these conditions in the policy statement.

Members noted the possibility that some negative side

effects might result from the maintenance of very low

short-term interest rates for an extended period, including the possibility that such a policy stance could lead

to excessive risk-taking in financial markets or an unanchoring of inflation expectations. While members

currently saw the likelihood of such effects as relatively

low, they would remain alert to these risks. All agreed

that the path of short-term rates going forward would

be dependent on the evolution of the economic outlook.

With respect to the large-scale asset purchase programs, all members supported reiterating the Committee’s intention to purchase $1.25 trillion of agency MBS

by the end of the first quarter of 2010. The Committee

also agreed to specify that its agency debt purchases

would cumulate to about $175 billion by the end of the

first quarter, $25 billion less than the previously announced maximum for these purchases. Owing to the

limited availability of agency debt and concerns that

larger purchases could impair market functioning, the

Committee’s transactions in these instruments for some

time had been on a trajectory that would leave total

purchases somewhat below the previously established

maximum. Announcing that purchases would total

about $175 billion was viewed as providing greater clarity to the public regarding the expected amount of purchases and would not reflect a decision to scale back

the degree of policy accommodation. Members also

decided to reiterate their intention to gradually slow the

pace of the Committee’s agency MBS and agency debt

purchases to promote a smooth transition in markets as

the announced purchases are completed. 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.

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

Page 9

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 and agency MBS 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 execute

purchases of about $175 billion in housingrelated 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 September

suggests that economic activity has continued to pick up. Conditions in financial markets were roughly unchanged, on balance,

over the intermeeting period. Activity in the

housing sector has increased over recent

months. Household spending appears to be

expanding 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

Page 10

Federal Open Market Committee

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, including low rates of resource utilization, subdued

inflation trends, and stable inflation expectations, 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 mortgagebacked securities and about $175 billion of

agency debt. The amount of agency debt

purchases, while somewhat less than the previously announced maximum of $200 billion,

is consistent with the recent path of purchases and reflects the limited availability of

agency debt. In order to promote a smooth

transition in markets, the Committee will

gradually slow the pace of its purchases of

both agency debt and agency mortgagebacked securities and anticipates that these

transactions will be executed by the end of

the first quarter of 2010. 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.”

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, December 1516, 2009. The meeting adjourned at 12:40 p.m. on November 4, 2009.

Notation Vote

By notation vote completed on October 13, 2009, the

Committee unanimously approved the minutes of the

FOMC meeting held on September 22-23, 2009.

_____________________________

Brian F. Madigan

Secretary

Page 1

Summary of Economic Projections

In conjunction with the November 3-4, 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 for the years 2009 to 2012 and over the

longer run. The 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.

As depicted in Figure 1, FOMC participants anticipated

that economic recovery would be gradual, with real

gross domestic product (GDP) growing at a moderate

pace and the unemployment rate declining slowly over

the next few years. Most participants also expected

that inflation would remain subdued over this period.

As indicated in Table 1, participants marked up their

projections for real GDP growth in 2009, reflecting a

faster pickup in output during the second half of the

year than they had anticipated at the time of their previous forecasts, which were made in conjunction with

the June FOMC meeting. Looking beyond 2009, the

contours of the participants’ outlook for economic activity and inflation were broadly similar to those in their

June projections, with the pace of the economic recovery expected to be restrained by household and business uncertainty, weak labor market conditions, and

slow waning of tight credit conditions in the banking

system. Most participants anticipated that about five or

six years would be needed for the economy to converge

fully to a longer-run path characterized by a sustainable

rate of output growth and by rates of unemployment

and inflation consistent with their interpretation of the

Federal Reserve’s objectives. However, some participants indicated that the convergence process might

well require even longer, while a few expected that although inflation would settle at its longer-run rate in

the next several years, the convergence process for the

real economy was likely to occur over a somewhat

longer period. With a further waning of downside risks

to growth since June, nearly all participants now judged

the risks to their growth outlook as roughly balanced,

and most also saw roughly balanced risks surrounding

their inflation projections. As in June, however, participants generally judged that their projections for economic activity and inflation were subject to an unusually high degree of uncertainty relative to historical

norms.

The Outlook

Participants’ projections for real GDP growth in 2009

had a central tendency of negative 0.4 percent to negative 0.1 percent, around a percentage point above the

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

Percent

Variable

Range2

Central tendency1

2009

2010

2011

2012

Longer run

2009

2010

2011

2012

Longer run

Change in real GDP . . -0.4 to -0.1 2.5 to 3.5 3.4 to 4.5

June projection. . . -1.5 to -1.0 2.1 to 3.3 3.8 to 4.6

3.5 to 4.8

n.a.

2.5 to 2.8 -0.5 to 0.0 2.0 to 4.0

2.5 to 2.7 -1.6 to -0.6 0.8 to 4.0

2.5 to 4.6

2.3 to 5.0

2.8 to 5.0

n.a.

2.4 to 3.0

2.4 to 2.8

Unemployment rate. . . 9.9 to 10.1 9.3 to 9.7 8.2 to 8.6

June projection. . . 9.8 to 10.1 9.5 to 9.8 8.4 to 8.8

6.8 to 7.5

n.a.

5.0 to 5.2

4.8 to 5.0

9.8 to 10.3 8.6 to 10.2

9.7 to 10.5 8.5 to 10.6

7.2 to 8.7

6.8 to 9.2

6.1 to 7.6

n.a.

4.8 to 6.3

4.5 to 6.0

PCE inflation. . . . . . . .

June projection. . .

Core PCE inflation3. .

June projection. . .

1.7 to 2.0

1.0 to 1.7 1.1 to 2.0

1.0 to 1.8 0.9 to 2.0

0.6 to 2.4

0.5 to 2.5

0.2 to 2.3

n.a.

1.5 to 2.0

1.5 to 2.1

1.3 to 1.6 0.9 to 2.0

1.2 to 2.0 0.5 to 2.0

0.5 to 2.4

0.2 to 2.5

0.2 to 2.3

n.a.

1.1 to 1.2

1.0 to 1.4

1.3 to 1.6 1.0 to 1.9

1.2 to 1.8 1.1 to 2.0

1.2 to 1.9

n.a.

1.4 to 1.5

1.3 to 1.6

1.0 to 1.5 1.0 to 1.6

1.0 to 1.5 0.9 to 1.7

1.0 to 1.7

n.a.

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 June projections were made in conjunction with the meeting of the Federal Open Market Committee on June 23-24, 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, 2009–12 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

2012

Longer

run

Percent

Unemployment rate

2004

2005

2006

2007

2008

2009

2010

2011

2012

Longer

run

Percent

PCE inflation

2004

2005

2006

2007

2008

2009

2010

2011

2012

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.

2012

Summary of Economic Projections for the Meeting of November 3-4, 2009

central tendency of their June projections. The projections for the year as a whole were broadly consistent

with participants’ previous expectations that economic

activity would bottom out around midyear. However,

the contraction over the first half was a bit sharper than

many participants had anticipated at the time of the

June FOMC meeting, which took place about a month

before the Bureau of Economic Analysis (BEA) published its advance estimate of second-quarter GDP and

its comprehensive revision of previous estimates, including a substantial downward revision to the estimate

of first-quarter GDP growth. Subsequent data on consumer spending, housing starts, and industrial production, as well as the advance estimate of third-quarter

GDP, suggested that the economy was growing at a

moderate pace over the second half of the year. Participants took note of the continuing improvement in

financial market conditions, the progress that businesses appeared to be making in bringing inventories into

line with sales, and the signs of stronger growth abroad,

especially in Asia. Participants also indicated that GDP

growth in the second half of 2009 had likely been

boosted by transitory factors such as the “cash-forclunkers” program and the first-time homebuyers’

credit, which had brought forward spending that would

have otherwise occurred in subsequent quarters.

Looking beyond this year, participants’ outlook for real

GDP growth was generally similar to that reflected in

their June forecasts. The central tendency of their output growth projections was 2.5 to 3.5 percent for 2010,

3.4 to 4.5 percent for 2011, and 3.5 to 4.8 percent for

2012. Participants indicated that consumer spending

would likely be bolstered by the turnaround in housing

prices, further increases in equity values, and gradual

improvements in credit availability. With an improved

sales outlook, businesses would rebuild their inventory

stocks and spending on equipment and software would

pick up; in addition, exports would likely receive a significant boost from stronger global growth. Monetary

and fiscal stimulus would provide further support to

aggregate demand next year. Nevertheless, the pace of

expansion would probably be damped for some time

by elevated uncertainty on the part of households and

businesses and by the slow and lagging recovery of labor markets, which would hold down income growth

and limit any rebound in household confidence. In

addition, distress in commercial real estate markets

would likely weigh further on the balance sheets of

banking institutions, thereby contributing to continued

tight credit conditions for many households and smaller firms. However, participants anticipated that the

Page 3

recovery would gather steam in 2011 and 2012 as a

consequence of further improvements in consumer and

business confidence and in the condition of financial

markets and institutions. In the absence of any further

shocks, participants generally expected that the economy would converge over time to a sustainable path

with real GDP growing at a rate of 2.5 to 2.8 percent,

reflecting longer-term demographic trends and improvements in labor productivity.

Participants generally anticipated that the unemployment rate would rise somewhat further during the final

months of 2009 and then decline steadily over the next

few years. Their projections for the average unemployment rate in the fourth quarter of 2009 had a central tendency of 9.9 to 10.1 percent, somewhat higher

than the actual unemployment rate of 9.8 percent in

September—the latest reading available at the time of

the November FOMC meeting. Participants noted

that, as in the early stages of previous recoveries the

unemployment rate was continuing to rise after output

turned up, reflecting firms’ uncertainty about the pace

of recovery and their efforts to raise productivity and

hold down costs. Looking further ahead, participants’

unemployment rate projections had a central tendency

of 9.3 to 9.7 percent for the fourth quarter of 2010, 8.2

to 8.6 percent for the end of 2011, and 6.8 to 7.5 percent for the final quarter of 2012. A number of participants made modest upward revisions to their estimates

of the longer-run sustainable rate of unemployment in

light of their assessments of the extent to which ongoing structural adjustments would be associated with

somewhat higher labor market frictions. Thus, participants’ longer-run unemployment rate projections had a

central tendency of 5.0 to 5.2 percent, about a quarter

percentage point higher than in June.

The central tendency of participants’ projections for

personal consumption expenditures (PCE) inflation in

2009 was 1.1 to 1.2 percent, and the central tendency of

their projections for core PCE inflation was 1.4 to 1.5

percent.1 While actual PCE inflation over the first half

of the year turned out to be somewhat lower than participants had anticipated at the time of the June FOMC

meeting, recent increases in energy prices led most of

them to make upward revisions to their second-half

In July 2009, the BEA adjusted the definition of core PCE

inflation to include prices for food consumed at restaurants

and other establishments away from home. FOMC participants indicated that this definitional adjustment did not

cause any material changes in their core inflation projections

for 2009 or beyond.

Page 4

Federal Open Market Committee

inflation forecasts; thus, participants’ PCE inflation

projections for the year as a whole were broadly similar

to their previous forecasts. Core PCE inflation was 1.6

percent at an annual rate over the first half of 2009,

about a quarter point lower than most participants had

anticipated last June, and nearly all participants projected that core PCE inflation would decline further to

an annual rate of about 1¼ percent in the second half.

Looking beyond this year, participants generally anticipated that inflation would remain subdued. The central tendency of their projections for PCE inflation was

1.3 to 1.6 percent for 2010, 1.0 to 1.9 percent for 2011,

and 1.2 to 1.9 percent for 2012, and the central tendency of their projections for core PCE inflation was 1.0 to

1.5 percent for 2010, 1.0 to 1.6 percent for 2011, and

1.0 to 1.7 percent for 2012. Many participants stated

that well-anchored inflation expectations would play an

important role in avoiding further declines in inflation

over the next few years despite the persistence of sizable resource slack. Participants also pointed out that

strong global growth was likely to place significant upward pressure on the prices of energy and other commodities; as a consequence, their projections for overall

inflation over the next several years were generally a

notch higher than their projections for core inflation.

As in June, the central tendency of projections for PCE

inflation over the longer run was 1.7 to 2.0 percent,

reflecting participants’ assessments of the measured

rate of inflation that would best satisfy the Federal Reserve’s dual mandate of maximum employment and

stable prices. Most participants expected that inflation

in 2012 would remain below its longer-run value, but a

few expected inflation to have converged to its longerrun value by that time.

Uncertainty and Risks

As in June, nearly all participants judged the degree of

uncertainty surrounding their projections of output

growth and unemployment as higher than historical

norms.2 Participants generally saw the risks to these

projections as roughly balanced, although a few indicated that the risks to the unemployment outlook remained weighted to the upside. In explaining these

judgments, participants highlighted the intrinsic diffiTable 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 “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.

Table 2. Average historical projection error ranges

Percentage points

Variable

Change in real

2009

2010

2011

2012

.....

±0.6

±1.4

±1.6

±1.5

.....

±0.2

±0.7

±0.9

±1.1

±0.5

±1.0

GDP1

Unemployment

rate1

Total consumer

prices2

....

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 fall by various private and government forecasters. As described in the box “Forecast Uncertainty,” under certain assumptions,

there is about a 70 percent probability that actual outcomes for real GDP,

unemployment, and consumer prices will be in ranges implied by the average size of projection errors made in the past. Further information is in

David Reifschneider and Peter Tulip (2007), “Gauging the Uncertainty of

the Economic Outlook from Historical Forecasting Errors,” Finance and

Economics Discussion Series 2007-60 (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.

culties in predicting the dynamics of the economy following a financial crisis and a severe recession. Participants noted that the recent pickup in economic growth

might reflect stronger underlying momentum in economic activity than anticipated and hence point to a

faster pace of recovery going forward. On the other

hand, participants referred to the possibility that deteriorating performance of commercial real estate and consumer loans could have adverse effects on the financial

system that would damp the growth of output and employment over coming quarters.

Most participants continued to see the uncertainty surrounding their inflation projections as unusually high,

although a few viewed the extent of such uncertainty as

roughly in line with historical norms. Participants generally judged the risks to the inflation outlook to be

roughly balanced, and many of them indicated that

these risks were linked, at least in part, to the risks associated with the economic outlook. Participants cited

the risk that longer-term inflation expectations might

start drifting downward in response to persistent economic slack and low inflation outcomes; alternatively,

those expectations could shift upwards in response to a

sharper recovery, especially if extraordinary monetary

policy stimulus were not unwound in a timely fashion.

Participants also noted the possibility that an acceleration in global economic activity could induce a surge in

the prices of energy and other commodities that would

place upward pressure on headline inflation.

Diversity of Views

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

Summary of Economic Projections for the Meeting of November 3-4, 2009

for real GDP growth and the unemployment rate in

2009, 2010, 2011, 2012, and over the longer run. The

dispersion in these projections reflects, among other

factors, differences in the participants’ assessments regarding the current degree of underlying momentum in

economic activity, the evolution of consumer and business sentiment, and the trajectory for private saving,

and in their interpretations of the continued weakness

in bank credit. The distribution of participants’ GDP

growth projections for 2009 shifted upward about a

percentage point and became narrower in response to

the economic and financial information received since

the June FOMC meeting. Most participants only

shaded up their growth projections for 2010, but a few

participants made more substantial upward revisions;

hence the lowest points in the distribution increased

markedly while the median was just a notch higher than

in June. The distribution of growth projections for

2011 was little changed from June, while the distribution for 2012 was centered at a slightly higher rate than

for 2011 with about the same degree of dispersion. A

few participants made modest upward revisions to their

estimates of the longer-run sustainable rate of output

growth, producing a slight widening of the range for

these longer-run projections. Regarding participants’

unemployment rate projections, the distribution for

2009 narrowed but with roughly the same mode as in

June, while the distributions for 2010 and 2011 shifted

down a bit and narrowed somewhat. The distribution

of unemployment rate projections for 2012 exhibited

noticeably greater dispersion than for 2011. The distribution of longer-run unemployment rate projections

Page 5

was generally more tightly concentrated than in June,

reflecting modest upward revisions to some participants’ estimates of the sustainable rate of unemployment to which the economy would converge under

appropriate monetary policy and in the absence of further shocks.

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

the inflation outlook. For total PCE inflation, the distribution of participants’ projections for 2009 was narrower than in June, whereas the distributions of their

projections for 2010 and 2011 did not change significantly, and there was virtually no change in the distribution of longer-run projections. For core PCE inflation, participants’ projections for 2009 became more

tightly concentrated, while their projections for 2010

and 2011 were only slightly less dispersed than in June.

The distributions of total and core PCE inflation projections for 2012 exhibited somewhat greater dispersion than those for 2011. The dispersion in participants’ projections for 2010, 2011, and 2012 mainly reflected differences in their judgments regarding the

determinants of inflation, including their estimates of

prevailing resource slack and their assessments of the

extent to which that slack affects inflation outcomes

and expectations. In contrast, the relatively concentrated distribution of longer-run inflation projections

indicates substantial agreement among participants regarding the measured rate of inflation that best satisfies

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, 2009–12 and over the longer run

Number of participants

2009

November projections

June projections

-1.6--1.4--1.2--1.0--0.8--0.6--0.4--0.2- 0.0- 0.2- 0.4- 0.6- 0.8- 1.0- 1.2- 1.4- 1.6- 1.8- 2.0- 2.2- 2.4- 2.6- 2.8- 3.0- 3.2- 3.4- 3.6- 3.8- 4.0- 4.2- 4.4- 4.6- 4.8- 5.0- 5.2-1.5 -1.3 -1.1 -0.9 -0.7 -0.5 -0.3 -0.1 0.1 0.3 0.5 0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5 4.7 4.9 5.1 5.3

Percent range

Number of participants

2010

Percent range

Number of participants

2011

Percent range

Number of participants

2012

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 for the Meeting of November 3-4, 2009

Page 7

Figure 2.B. Distribution of participants’ projections for the unemployment rate, 2009–12 and over the longer run

Number of participants

2009

November projections

June 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

2012

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, 2009–12 and over the longer run

Number of participants

2009

November projections

June 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

1.51.6

1.71.8

1.92.0

2.12.2

2.32.4

2.52.6

Percent range

Number of participants

2012

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

0.10.2

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

Summary of Economic Projections for the Meeting of November 3-4, 2009

Page 9

Figure 2.D. Distribution of participants’ projections for core PCE inflation, 2009–12

Number of participants

2009

November projections

June 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

1.51.6

1.71.8

1.92.0

2.12.2

2.32.4

2.52.6

Percent range

Number of participants

2012

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 2.4 to 3.6 percent in the current year, 1.6 to 4.4 percent in

the second year, 1.4 to 4.6 in the third year and

1.5 to 4.5 percent in the fourth year. The corresponding 70 percent confidence intervals for

overall inflation would be 1.5 to 2.5 percent in

the current year and 1.0 to 3.0 percent in the

second, third and fourth years.

Because current conditions may differ

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

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

than, or broadly similar to typical levels of

forecast uncertainty in the past as shown in

table 2. Participants also provide judgments as

to whether the risks to their projections are

weighted to the upside, 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, November 3). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_20091104

BibTeX

@misc{wtfs_fomc_minutes_20091104,
  author = {Federal Reserve},
  title = {FOMC Minutes},
  year = {2009},
  month = {Nov},
  howpublished = {Fomc Minutes, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/fomc_minutes_20091104},
  note = {Retrieved via When the Fed Speaks corpus}
}