FOMC Minutes
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Minutes of the Federal Open Market Committee
December 15-16, 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, December 15,
2009, at 2:00 p.m. and continued on Wednesday, December 16, 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
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
Messrs. Altig, Clouse, Connors, Kamin, Slifman,
Tracy, and Wilcox, Associate Economists
Mr. Sack, Manager, System Open Market Account
Ms. Johnson, Secretary of the Board, Office of the
Secretary, Board of Governors
Mr. Parkinson, Director, Division of Bank Supervision and Regulation, Board of Governors
Mr. Frierson,¹ Deputy Secretary, Office of the Secretary, Board of Governors
Mr. Struckmeyer, Deputy Staff Director, Office of
the Staff Director for Management, Board of
Governors
Mr. English, Deputy Director, Division of Monetary Affairs, Board of Governors
Ms. Robertson, Assistant to the Board, Office of
Board Members, Board of Governors
Ms. Edwards, Messrs. Levin² and Nelson,¹ 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. Meyer, Senior Adviser, Division of Monetary
Affairs, Board of Governors; Mr. Oliner, Senior Adviser, Division of Research and Statistics, Board of Governors
Ms. Zickler, Deputy Associate Director, Division
of Research and Statistics, Board of Governors
Mr. Small, Project Manager, Division of Monetary
Affairs, Board of Governors
Mr. Bassett, Section Chief, Division of Monetary
Affairs, Board of Governors; Mr. Roberts,²
Section Chief, Division of Research and Statistics, Board of Governors
Ms. Beattie,³ Assistant to the Secretary, Office of
the Secretary, Board of Governors
Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors
Mr. Williams, Records Management Analyst, Division of Monetary Affairs, Board of Governors
¹ Attended Tuesday’s session only.
² Attended the portion of the meeting related to inflation dynamics.
³ Attended Wednesday’s session only.
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Federal Open Market Committee
Messrs. Fuhrer and Rosenblum, Executive Vice
Presidents, Federal Reserve Banks of Boston
and Dallas, respectively
Mr. Krane, Ms. Mester, Messrs. Schweitzer and
Waller, Senior Vice Presidents, Federal Reserve
Banks of Chicago, Philadelphia, Cleveland, and
St. Louis, respectively
Mr. Weber, Senior Research Officer, Federal Reserve Bank of Minneapolis
Messrs. Clark, Dotsey,² Fernald, Hornstein, Olivei,²
and Wynne,² Vice Presidents, Federal Reserve
Banks of Kansas City, Philadelphia, San Francisco, Richmond, Boston, Dallas, respectively
Messrs. Friedman and van der Klaauw,² Assistant
Vice Presidents, Federal Reserve Bank of New
York
Mr. Martinez-Garcia,² Research Economist, Federal Reserve Bank of Dallas
² Attended the portion of the meeting related to inflation dynamics.
Developments in Financial Markets and the Federal Reserve’s Balance Sheet
The Manager of the System Open Market Account
reported on developments in domestic and foreign financial markets since the Committee’s November 3-4
meeting. Financial conditions generally had become
somewhat more supportive of economic growth.
There was little evidence of year-end funding pressures,
although demand for Treasury bills with maturities extending just beyond year-end remained elevated. The
Manager also reported on System open market operations in agency debt and agency mortgage-backed securities (MBS) during the intermeeting period. The
Desk continued to gradually slow the pace of purchases
of these securities in accordance with the program for
asset purchases that the Committee announced at the
end of its November 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 November, the Federal Reserve’s total assets were about unchanged, at nearly
$2.2 trillion, as the increase in the System’s holdings of
securities roughly matched a further decline in usage of
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the System’s credit and liquidity facilities. The Manager
noted that the System’s holdings of securities will tend
to decline gradually after the completion of the asset
purchase programs, reflecting maturing issues and prepayments on holdings of MBS. The Manager noted
that the Committee would likely wish to discuss in detail its policy for reinvesting the proceeds of maturing
issues and prepayments; he proposed, as an interim
approach, continuing the practice of not reinvesting the
proceeds of maturing agency securities or MBS prepayments. Meeting participants supported that interim
approach pending further discussion at future meetings.
The staff presented another update on the continuing
development of several tools that could be used to
support a smooth withdrawal of policy accommodation
at the appropriate time; these tools include executing
reverse repurchase agreements (RRPs) on a large scale
and implementing a term deposit facility (TDF). To
further test its RRP capabilities, in early December, the
Desk executed a few small RRPs with primary dealers,
using both Treasury and agency debt as collateral.
These transactions confirmed the operational capability
to execute triparty RRPs on a larger scale if so directed
by the Committee. The Desk was continuing to develop the capacity to conduct RRPs using agency MBS
collateral and anticipated that this work would be completed by the spring. In addition, the Desk reported
that it was exploring the operational issues associated
with expanding potential counterparties for RRPs
beyond the primary dealers. Staff also reported significant progress in developing and implementing a TDF.
The staff noted that it planned to ask the Board to approve a Federal Register notice requesting public comments on a TDF and summarized the contents of the
draft notice.
The staff also briefed the Committee on recent developments regarding various Federal Reserve liquidity
and credit facilities, including the Term Auction Facility
(TAF), the primary credit program, and the Term Asset-Backed Securities Loan Facility (TALF). TAF auctions continued to be undersubscribed even as the Federal Reserve progressively reduced the total amount of
funding available from the TAF. With the exception of
the TALF, usage of the other facilities declined further
as financial market conditions continued to improve.
The TALF expanded modestly, supporting issuance of
asset-backed securities collateralized by consumer,
small business, and student loans as well as commercial
mortgage-backed securities (CMBS). Indeed, over the
intermeeting period, TALF lending supported the first
Minutes of the Meeting of December 15-16, 2009
new CMBS issue since June 2008. On November 17,
the Board of Governors announced a reduction in the
maximum maturity of loans available under the discount window’s primary credit program from 90 days
to 28 days, effective January 14, 2010. Participants
agreed it would be useful to consider further steps the
Federal Reserve might take to move toward normalization of its lending facilities at upcoming meetings, when
the Committee plans to discuss alternative approaches
to implementing monetary policy in the longer-run.
Staff Review of the Economic Situation
The information reviewed at the December 15-16
meeting suggested that the recovery in economic activity was gaining momentum. The pace of job losses
slowed noticeably in recent months, and total hours
worked increased in November; however, the unemployment rate remained quite elevated. Industrial production sustained the broad-based expansion that began in the third quarter, but capacity utilization remained very low. Consumer spending expanded solidly
in October, reflecting in part a faster pace of motor
vehicle sales. Both light vehicle sales and total retail
sales rose again in November. Sales of new homes increased significantly in recent months, a development
that, given the slow pace of construction, reduced the
inventory of unsold new homes; sales of existing
homes rose strongly. Spending on equipment and
software continued to stabilize, but investment in nonresidential structures declined further as conditions in
nonresidential real estate markets remained poor. Both
imports and exports continued to recover from their
depressed levels of earlier this year, and the U.S. trade
deficit in September and October was wider than in
earlier months. Although a jump in energy prices
pushed up headline inflation somewhat, core consumer
price inflation remained subdued.
Data received over the intermeeting period suggested
that the pace of job loss slowed considerably in recent
months relative to the steep declines that occurred in
the first half of the year. The average decline in private
payrolls in October and November was much smaller
than in the third quarter; that recent improvement was
widespread across industries. The length of the average
workweek for production and nonsupervisory workers
increased in November; moreover, aggregate hours
worked registered the first substantial increase since the
recession began. The unemployment rate dropped in
November but remained quite high, while the labor
force participation rate continued to decrease. The
four-week moving average of initial claims for unemployment benefits declined somewhat through early
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December. Continuing claims for unemployment insurance through regular state programs also moved
down, but the average length of spells of unemployment continued to increase.
After expanding briskly in the third quarter, industrial
production increased further in October and November. The gains continued to be fairly broad based, and
were particularly strong for consumer durables and
materials. Business surveys suggested that factory output would advance further in the coming months. Capacity utilization rose again in November, but remained
at a very low level by historical standards.
Real personal consumption expenditures increased at a
solid pace in October, with broad-based advances in
both goods and services. The data for nominal retail
sales in November showed continued widespread improvement, particularly at general merchandise stores,
electronics and appliance stores, and nonstore retailers.
Outlays for motor vehicles bounced back in October
after a slump in September that followed the end of the
“cash-for-clunkers” program in August. Sales of new
light vehicles increased again in November. Real disposable personal income rose in October, reflecting
modest gains in nominal labor income; moreover, the
increase in real after-tax income during the spring and
summer was revised up. The latest readings from indexes of consumer sentiment remained within the relatively low range that prevailed over the previous six
months, apparently still weighed down by weak labor
market conditions and prior declines in household net
worth.
Housing construction held fairly steady in recent
months, while demand for housing continued to firm.
Single-family housing starts remained roughly flat from
June to November at levels only modestly above those
reported earlier in the year. In the much smaller multifamily sector, where tight credit conditions persisted
and vacancies stayed elevated, the average pace of starts
in October and November decreased somewhat from
the already very low rate in the third quarter. In contrast, sales of existing single-family homes increased
significantly again in October. Sales of new homes also
rose in October after two months of little change.
With sales continuing to outpace construction, the inventory of unsold new homes declined to its lowest
level in three years. The recent increases in sales likely
reflected improved fundamentals: The average interest
rate on 30-year conforming fixed-rate mortgages declined to less than 5 percent, and surveys suggested that
households now expected home prices to be fairly stable over the next year. Although some house price
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Federal Open Market Committee
indexes declined a little in September and October,
they remained above the troughs reached last spring.
Real spending on equipment and software was estimated to have risen slightly in the third quarter after
falling sharply for more than a year. Increased outlays
for transportation equipment and high-tech goods accounted for the stabilization. Outside of those sectors,
spending declined a bit further in the third quarter, although not as steeply as it had earlier in the year.
Shipments of transportation and high-tech equipment
remained strong in October, but shipments of nondefense capital goods excluding those categories declined,
and new orders fell sharply across a range of products.
Business purchases of motor vehicles rose significantly
again in November. Moreover, monthly surveys of
business conditions, sentiment, and capital spending
plans pointed to a moderate rise in business spending
going forward. In contrast, conditions in the nonresidential construction sector generally remained quite
poor. For instance, real outlays on structures outside
of the drilling and mining sector plunged in the third
quarter. Also in the third quarter, vacancy rates on
nonresidential properties rose further, and property
prices continued to fall amid difficult financing conditions. The book value of manufacturing and trade inventories excluding motor vehicles and parts increased
in October for the first time in more than a year, even
as the ratio of such inventories to sales declined further. Capital markets continued to become somewhat
more supportive of business investment over the intermeeting period. In contrast, available data indicated
that banks continued to raise spreads on business loans.
The U.S. international trade deficit was somewhat wider in September and October than in previous months.
Exports of goods and services increased sharply, and
the gains were broadly distributed across most major
categories of exports. After surging in September, imports flattened out in October, although the slowing
almost entirely reflected reduced oil purchases. Most
other categories of imports, including automotive
goods, industrial supplies other than oil and gold, consumer goods, and capital goods, posted solid increases
in the past two months.
The most recent data from the advanced foreign economies suggested that they continue to emerge from
their deep recessions. Real gross domestic product
(GDP) rose in the third quarter in Japan, the euro area,
and Canada, and the pace of contraction in the United
Kingdom moderated substantially. The limited data
relating to the fourth quarter suggested that economic
activity advanced in all of those economies. Surveys of
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purchasing managers and indicators of business and
consumer confidence generally improved further. Data
for October indicated that trade volumes continued to
rise in each of these economies, retail sales increased in
the United Kingdom and stopped declining in the euro
area, housing starts climbed in Canada, and industrial
production increased in Japan for the eighth consecutive month. Third-quarter real GDP growth was surprisingly strong in several emerging market economies,
most notably Mexico and India. In emerging Asia and
in Latin America, indicators suggested that economic
activity was expanding somewhat less rapidly, but still
briskly, in the fourth quarter. Price pressures remained
subdued in most of the advanced foreign economies,
although headline inflation generally moved up. Headline inflation also increased in emerging Asia, generally
from low levels, but declined further in Latin America,
likely in part because of the recent appreciation of several Latin American currencies.
In the United States, the latest data indicated that total
consumer price inflation turned up in recent months,
while core consumer price inflation remained subdued.
The higher readings on headline consumer price inflation were the result of a rebound in energy prices.
Core consumer prices increased modestly in October
and were unchanged in November. Median year-ahead
inflation expectations in the Reuters/University of
Michigan Survey of Consumers declined in early December, and the same survey’s measure of longer-term
inflation expectations moved down to the lower end of
the narrow range that prevailed over the previous few
years. Revised data showed solid increases in hourly
compensation in the second and third quarters, along
with quite rapid productivity growth and a further decline in unit labor costs. Average hourly earnings of
production and nonsupervisory workers increased
modestly, on average, in October and November.
Staff Review of the Financial Situation
Market participants largely anticipated the decisions by
the Federal Open Market Committee (FOMC) at the
November meeting to keep the target range for the
federal funds rate unchanged and to retain the “extended period” language in the accompanying statement. However, market participants took note of the
Committee’s explicit enumeration of the factors that
were expected to continue to warrant this policy stance,
and Eurodollar futures rates fell a bit on the release. In
contrast, the announcement that the Federal Reserve
would purchase only about $175 billion of agency debt
securities had not been generally anticipated. Spreads
on those securities widened a few basis points follow-
Minutes of the Meeting of December 15-16, 2009
ing the release, but declined, on net, over the intermeeting period. Incoming economic data, while somewhat
better than expected, seemed to have little net effect on
interest rate expectations. Indeed, the expected path of
the federal funds rate shifted down somewhat over the
intermeeting period. Consistent with the decrease in
short-term interest rates, yields on 2-year nominal offthe-run Treasury securities declined slightly, on net,
over the intermeeting period. In contrast, yields on
nominal 10-year Treasury securities edged higher on
balance. Inflation compensation based on 5-year Treasury inflation-protected securities (TIPS) increased,
apparently owing in part to an announcement by the
Treasury of a smaller-than-expected amount of issuance of TIPS next year. Five-year inflation compensation five years ahead also rose, and was near the upper end of its range in recent years.
Conditions in short-term funding markets were little
changed over the intermeeting period. Spreads between London interbank offered rates (Libor) and
overnight index swap (OIS) rates at one- and threemonth maturities were about flat; spreads at the sixmonth maturity narrowed somewhat further but remained above pre-crisis levels. Spreads on A2/P2rated commercial paper (CP) and AA-rated assetbacked CP remained near their lows of the past two
years. Indicators of functioning in the market for nominal Treasury securities—including trading volumes and
liquidity premiums for the on-the-run 10-year note—
were roughly stable. Liquidity conditions in the TIPS
market showed further improvement. Year-end pressures in short-term funding markets, including the CP
and bank funding markets, remained modest. However, high demand for Treasury bills maturing just past
December 31 drove yields on such issues to zero in
some recent auctions.
Over the intermeeting period, broad stock price indexes increased further. The rise in share prices likely reflected the improvement in the economic outlook and
strong third-quarter earnings, which led analysts to
mark up their estimates of future earnings. The gains
were widespread across industry sectors. However,
financial stocks significantly underperformed the market, as investors continued to express concerns about
the future profitability of the banking industry. Option-implied volatility on the S&P 500 index declined.
The spread between an estimate of the expected real
return on equity over the next 10 years and an estimate
of the real 10-year Treasury yield—a rough gauge of
the equity risk premium—remained about unchanged
at a relatively high level. Yields on investment- and
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speculative-grade corporate bonds fell a little more than
those on comparable-maturity nominal Treasury securities, leaving their spreads somewhat narrower. Bidasked spreads for corporate bonds—a measure of the
liquidity of such instruments—were about unchanged.
Prices and bid-asked spreads in the secondary market
for leveraged loans also were stable over the intermeeting period. Spreads on credit default swaps (CDS) for
large bank holding companies narrowed a bit.
Debt of the private domestic nonfinancial sector appeared to be declining again in the fourth quarter, as
estimates suggested a further drop in household debt
and a tick down in nonfinancial business debt. Consumer credit contracted for the ninth consecutive
month in October, reflecting a steep decline in revolving credit that offset a small increase in nonrevolving
credit. Issuance of consumer credit asset-backed securities rebounded in November from its subdued pace in
October. Moreover, with support from the TALF, the
first CMBS issue in nearly 18 months came to market.
A few other CMBS deals were subsequently completed
without support from the TALF. Business debt was
held down in November by another drop in bank
loans, as well as a decrease in CP outstanding, though
the latter was concentrated among a few large firms. In
contrast, gross issuance of investment- and speculativegrade bonds was robust in November. The federal
government continued to issue debt at a brisk pace, and
gross issuance of state and local government debt remained strong in November.
Commercial bank credit decreased further in November, although the pace of decline slowed relative to recent months. Commercial and industrial (C&I) loans
continued to drop, likely reflecting weak demand and a
continued tightening of credit terms by banks. The
Survey of Terms of Business Lending conducted in
November indicated that the average C&I loan rate
spread over comparable-maturity market instruments
rose for the fifth consecutive survey. The runoff in
commercial real estate loans continued, consistent with
the further weakening of fundamentals in that sector.
Bank loans to households rose, reflecting a slowdown
in loan sales to the housing-related governmentsponsored enterprises that resulted in a modest increase
in banks’ on-balance-sheet holdings of closed-end residential mortgages in November. However, home equity loans and consumer loans fell again. According to
third-quarter Call Report data, unused loan commitments shrank for the seventh consecutive quarter,
though the rate of decline slowed, especially for commitments to lend to businesses. The aggregate profita-
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Federal Open Market Committee
bility of the banking sector turned positive in the third
quarter, but most of the increase was due to strong
earnings at a few large institutions. Credit quality appeared to worsen as delinquency and charge-off rates
increased further for most major loan categories.
Banks’ regulatory capital ratios increased again as banks
continued to raise equity and shrink their balance
sheets.
M2 expanded at a moderate rate in November. As was
the case in recent months, liquid deposits grew rapidly,
while small time deposits and retail money market mutual funds contracted, albeit at slightly slower paces.
Currency declined somewhat in November as foreign
demand for U.S. banknotes appeared to ebb, consistent
with the continued stabilization in most global financial
markets.
Broad stock price indexes in major advanced foreign
economies rose, although generally somewhat less than
those in the United States. Stock price indexes in major emerging markets increased as well, particularly in
Brazil and Mexico, amid generally rising commodity
prices and a better-than-expected Mexican GDP report; Chinese stock prices also increased strongly.
Long-term government bond yields declined in most
advanced foreign economies, but increased in the United Kingdom. The dollar depreciated over much of the
intermeeting period, but then reversed course following
the release of better-than-expected U.S. data on employment and retail sales for November. On balance,
the dollar ended the period up slightly against the major
foreign currencies and down a little relative to the currencies of other important trading partners.
Concerns about the potential for default by some sovereign borrowers rose over the intermeeting period.
News that the Dubai government had requested a
standstill on debts owed by Dubai World, a government-owned corporation, temporarily roiled some financial markets. However, those pressures eased as
investors concluded that Dubai World’s difficulties
were likely to be isolated. Subsequently, the sovereign
debt rating for Greece was lowered amid long-standing
concerns over its public finances and a widening of its
sovereign CDS spreads.
Although the central banks of the major foreign industrial economies kept policy rates on hold, the Bank of
England expanded its asset purchase program and the
Bank of Japan announced a new secured lending facility. In contrast, the European Central Bank took some
initial steps toward scaling back emergency lending. It
announced that the one-year refinancing operation in
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December would be its last and that the cost of the
funds provided would float with interest rates set in
future refinancing operations rather than being fixed as
in previous such operations.
Staff Economic Outlook
In the forecast prepared for the December FOMC
meeting, the staff raised its projection for average real
GDP growth in the second half of 2009 somewhat, and
it also modestly increased its forecast for economic
growth in 2010 and 2011. Better-than-expected data
on employment, consumer spending, home sales, and
industrial production received during the intermeeting
period pointed to a somewhat stronger increase in real
GDP in the current quarter than had previously been
projected. In addition, the positive signal from the incoming data, along with the sizable upward revisions to
household income in earlier quarters and more supportive financial market conditions, led to small upward
adjustments to projected growth in real GDP over the
rest of the forecast period. The staff again anticipated
that the recovery would strengthen in 2010 and 2011,
supported by further improvement in financial conditions and household balance sheets, continued recovery
in the housing sector, growing household and business
confidence, and accommodative monetary policy, even
as the impetus to real activity from fiscal policy diminished. However, the projected pace of real output
growth in 2010 and 2011 was expected to exceed that
of potential output by only enough to produce a very
gradual reduction in economic slack.
The staff forecast for inflation was nearly unchanged.
The staff interpreted the increases in prices of energy
and nonmarket services that recently boosted consumer
price inflation as largely transitory. Although the projected degree of slack in resource utilization over the
next two years was a little lower than shown in the previous staff forecast, it was still quite substantial. Thus,
the staff continued to project that core inflation would
slow somewhat from its current pace over the next two
years. Moreover, the staff expected that headline consumer price inflation would decline to about the same
rate as core inflation in 2010 and 2011.
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 growth was strengthening in
the fourth quarter, that firms were reducing payrolls at
a less rapid pace, and that downside risks to the outlook for economic growth had diminished a bit further.
Minutes of the Meeting of December 15-16, 2009
Although some of the recent data had been better than
anticipated, most participants saw the incoming information as broadly in line with the projections for moderate growth and subdued inflation in 2010 that they
had submitted just before the Committee’s November
3-4 meeting; accordingly, their views on the economic
outlook had not changed appreciably. Participants expected the economic recovery to continue, but, consistent with experience following previous financial crises,
most anticipated that the pickup in output and employment growth would be rather slow relative to past
recoveries from deep recessions. A moderate pace of
expansion would imply slow improvement in the labor
market next year, with unemployment declining only
gradually. Participants agreed that underlying inflation
currently was subdued and was likely to remain so for
some time. Some noted the risk that, over the next
couple of years, inflation could edge further below the
rates they judged most consistent with the Federal Reserve’s dual mandate for maximum employment and
price stability; others saw inflation risks as tilted toward
the upside in the medium term.
A number of factors were expected to support nearterm expansion in economic activity. Consumer
spending appeared to be on a moderately rising trend,
reflecting gains in after-tax income and wealth this year.
Recent upward revisions to official estimates of the
level of household income in recent quarters gave participants somewhat greater confidence that consumer
spending would continue to expand. The housing sector showed continuing signs of improvement, though
housing starts had leveled out after increasing earlier in
the year and activity remained quite low. Businesses
seemed to be reducing the pace of inventory reductions. The outlook for growth abroad had improved
since earlier in the year, auguring well for U.S. exports.
In addition, financial market conditions generally had
become more supportive of economic growth. While
these developments were positive, participants noted
several factors that likely would continue to restrain the
expansion in economic activity. Business contacts
again emphasized they would be cautious in adding to
payrolls and capital spending, even as demand for their
products increases. Conditions in the commercial real
estate (CRE) sector were still deteriorating. Bank credit
had contracted further, and with many banks facing
continuing loan losses, tight bank credit could continue
to weigh on the spending of some households and
businesses. Some participants remained concerned
about the economy’s ability to generate a self-sustaining
recovery without government support. In particular,
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they noted the risk that improvements in the housing
sector might be undercut next year as the Federal Reserve’s purchases of MBS wind down, the homebuyer
tax credits expire, and foreclosures and distress sales
continue. Though the near-term outlook remains uncertain, participants generally thought the most likely
outcome was that economic growth would gradually
strengthen over the next two years as financial conditions improved further, leading to more-substantial
increases in resource utilization.
Financial market conditions were generally regarded as
having become more supportive of continued economic recovery during the intermeeting period: Equity
prices rose further, private credit spreads narrowed
somewhat, and financial markets generally continued to
function significantly better than early in the year. Participants noted, however, that securitization markets
were still substantially impaired. In general, U.S. asset
values did not seem out of line with improving fundamentals. While investors evidently had become less
cautious and more willing to bear risk, they appeared to
be discriminating among risky assets. Banks were raising new capital and in some cases paying back funds
received from the Troubled Asset Relief Program.
Bank loans, however, continued to contract sharply in
all categories, reflecting lack of demand, deterioration
in potential borrowers’ credit quality, uncertainty about
the economic outlook, and banks’ concerns about their
own capital positions. With rising levels of nonperforming loans expected to be a continuing source of
stress, and with many regional and small banks vulnerable to the deteriorating performance of CRE loans,
bank lending terms and standards were seen as likely to
remain tight. Participants again noted the contrast between large and small firms’ access to financing. Large
firms that can issue debt in the markets appeared to
have relatively little difficulty obtaining credit. In contrast, smaller firms, which tend to be more dependent
on commercial banks for financing, reportedly faced
substantial constraints in gaining access to credit.
While survey evidence suggested that small businesses
considered weak demand to be a larger problem than
access to credit, participants saw limited credit availability as a potential constraint on future investment and
hiring by small businesses, which normally are a significant source of employment growth in recoveries.
The weakness in labor markets continued to be an important concern to meeting participants, who generally
expected unemployment to remain elevated for quite
some time. The unemployment rate was not the only
indicator pointing to substantial slack in labor markets:
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The employment-to-population ratio had fallen to a 25year low, and aggregate hours of production workers
had dropped more than during the 1981-82 recession.
Although the November employment report was considerably better than anticipated, several participants
observed that more than one good report would be
needed to provide convincing evidence of recovery in
the labor market. Participants also noted that the slowing pace of employment declines mainly reflected a
diminished pace of layoffs; few firms were hiring.
Moreover, the unusually large fraction of those individuals with jobs who were working part time for economic reasons, as well as the uncommonly low level of
the average workweek, pointed to only a gradual decline in unemployment as the economic recovery proceeded. Indeed, many business contacts again reported
that they would be cautious in their hiring, saying they
expected to meet any near-term increase in demand by
raising their existing employees’ hours and boosting
productivity, thus delaying the need to add employees.
The necessity of reallocating labor across sectors as the
recovery proceeds, as well as the loss of skills caused by
high levels of long-term unemployment and permanent
separations, also could limit the pace of employment
gains. Nonetheless, the reported rise in employment of
temporary workers in recent months could presage a
broader increase in job growth and thus was a welcome
development.
The prognosis for labor markets remained an important factor in the outlook for consumer spending. Recent data on household expenditures were encouraging.
Retail sales increased, spurred by price discounting.
The Bureau of Economic Analysis revised up its estimates of the level of real disposable income—and thus
of the personal saving rate—in the second and third
quarters of this year. Those revisions, along with recent gains in equity prices, suggested a smaller probability that households would reduce spending to rebuild
their savings more rapidly. However, uncertain job
prospects, modest growth in real incomes, tight credit,
and wealth levels that remained relatively low despite
this year’s rise in equity prices and stabilization in house
prices were seen as likely to weigh on consumer confidence and the growth of consumer spending for some
time to come. Anecdotal evidence on consumer
spending in this year’s holiday season was mixed.
Participants noted that firms had made substantial
progress in reducing inventories toward desired levels
and were cutting stocks at a slower pace than earlier in
the year. This adjustment likely was making an important contribution to economic growth in the fourth
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quarter, and participants expected that it would do so
into 2010 as well. The combination of rising consumer
spending, slower destocking, and rising goods production was reflected in reports from major transportation
companies that shipping volumes were up.
Investment in equipment and software appeared to
have stabilized, and recent data on new orders continued to point to some pickup next year. Even so, 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. Many also noted widespread reports from business contacts that uncertainties about
health-care, tax, and environmental policies were adding to businesses’ reluctance to commit to higher capital spending. CRE activity continued to fall markedly
in most parts of the country as a result of deteriorating
fundamentals, including declining occupancy and rental
rates, and very tight credit conditions. Prospects for
nonresidential construction remained weak.
In the residential real estate sector, home sales and construction had risen relative to the very low levels reported in the spring; moreover, house prices appeared
to be stabilizing and in some areas had reportedly
moved higher. Generally, the outlook was for gains in
housing activity to continue. However, some participants still viewed the improved outlook as quite tentative and again pointed to potential sources of softness,
including the termination next year of the temporary
tax credits for homebuyers and the downward pressure
that further increases in foreclosures could put on
house prices. Moreover, mortgage markets could come
under pressure as the Federal Reserve’s agency MBS
purchases wind down.
Stronger foreign economic activity, especially in the
emerging market economies in Asia, as well as the partial reversal this year of the dollar’s appreciation during
the latter part of 2008, was providing further support to
U.S. exports, including agricultural exports. Further
improvements in foreign economies would likely buoy
U.S. exports going forward, but import growth would
also strengthen as the recovery took hold in the United
States. Participants noted that any tendency for dollar
depreciation to put significant upward pressure on inflation would bear close watching.
Most participants anticipated that substantial slack in
labor and product markets, along with well-anchored
inflation expectations, would keep inflation subdued in
the near term, although they had differing views as to
Minutes of the Meeting of December 15-16, 2009
the relative importance of those two factors. The decelerations in wages and unit labor costs this year, and
the accompanying deceleration in marginal costs, were
cited as factors putting downward pressure on inflation.
Moreover, anecdotal evidence suggested that most
firms had little ability to raise their prices in the current
economic environment. Some participants noted,
however, that rising prices of oil and other commodities, along with increases in import prices, could boost
inflation pressures going forward. Overall, many participants viewed the risks to their inflation outlooks as
being roughly balanced. Some saw inflation risks as
tilted to the downside, 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 inflation
risks were tilted to the upside, particularly in the medium term, 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, a few participants
noted that banks might seek, as the economy improves,
to reduce their excess reserves quickly and substantially
by purchasing securities or by easing credit standards
and expanding their lending. A rapid shift, if not offset
by Federal Reserve actions, could give excessive impetus to spending and potentially result in expected and
actual inflation higher than would be consistent with
price stability. To keep inflation expectations anchored, all participants agreed that monetary policy
would need to be responsive to any significant improvement or worsening in the economic outlook and
that the Federal Reserve would need to continue to
clearly communicate its ability and intent to begin
withdrawing monetary policy accommodation at the
appropriate time and pace.
In the Committee’s discussion of monetary policy for
the period ahead, all members agreed that no changes
to the Committee’s large-scale asset purchase programs, or to its target range for the federal funds rate,
were warranted at this meeting, inasmuch as the economic outlook had changed little since the November
meeting. Accordingly, the Committee affirmed its intention to purchase $1.25 trillion of agency MBS and
about $175 billion of agency debt by the end of the first
quarter of 2010 and to gradually slow the pace of these
purchases to promote a smooth transition in markets.
The Committee emphasized 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. A few mem-
Page 9
bers noted that resource slack was expected to diminish
only slowly and observed that it might become desirable at some point in the future to provide more policy
stimulus by expanding the planned scale of the Committee’s large-scale asset purchases and continuing
them beyond the first quarter, especially if the outlook
for economic growth were to weaken or if mortgage
market functioning were to deteriorate. One member
thought that the improvement in financial market conditions and the economic outlook suggested that the
quantity of planned asset purchases could be scaled
back, and that it might become appropriate to begin
reducing the Federal Reserve’s holdings of longer-term
assets if the recovery gains strength over time. The
Committee maintained the federal funds target range at
0 to ¼ percent and, based on the outlook for a slow
economic recovery, decided to reiterate its anticipation
that economic conditions, including low levels of resource utilization, subdued inflation trends, and stable
inflation expectations, were likely to warrant exceptionally low rates for an extended period. Although members generally saw little risk that maintaining very low
short-term interest rates could raise inflation expectations or create instability in asset markets, they noted
that it was important to remain alert to these risks. All
agreed that the path of short-term rates going forward
would depend on the evolution of the economic outlook.
Committee members and Board members agreed that
there had been substantial improvements in the functioning of financial markets; accordingly they agreed
that the statement to be released following the meeting
should indicate an anticipation that most of the Federal
Reserve’s special liquidity facilities will expire on February 1, 2010; these facilities include the Asset-Backed
Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the
Primary Dealer Credit Facility, and the Term Securities
Lending Facility. Committee members also agreed to
announce that the Federal Reserve will be working with
its central bank counterparties to close its temporary
liquidity swap arrangements by February 1. In addition, the statement would announce an expectation that
amounts provided under the Term Auction Facility will
continue to be scaled back in early 2010, and that the
anticipated expiration dates for the Term Asset-Backed
Securities Loan Facility remained June 30, 2010, for
loans backed by new-issue CMBS, and March 31, 2010,
for loans backed by all other types of collateral. Members emphasized that they were prepared to modify
these plans if necessary to support financial stability
Page 10
Federal Open Market Committee
and economic growth. In that context, several members noted that the TALF was still providing important
support for securitization markets, particularly the
CMBS market, and that improvements in the functioning of securitization markets were lagging behind those
in other 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
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 November
suggests that economic activity has continued to pick up and that the deterioration in
the labor market is abating. The housing
sector has shown some signs of improvement over recent months.
Household
spending appears to be expanding at a moderate rate, though it remains constrained by a
weak labor market, modest income growth,
lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment, though at a slower pace, and remain
reluctant to add to payrolls; they continue to
make progress in bringing inventory stocks
into better alignment with sales. Financial
market conditions have become more supportive of economic growth. 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 contribute to 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.
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 is in the process of purchasing
$1.25 trillion of agency mortgage-backed securities and about $175 billion of agency
debt. In order to promote a smooth transition in markets, the Committee is gradually
slowing the pace of these purchases, and it
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.
_
Minutes of the Meeting of December 15-16, 2009
In light of ongoing improvements in the
functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February
1, 2010, consistent with the Federal Reserve’s announcement of June 25, 2009.
These facilities include the Asset-Backed
Commercial Paper Money Market Mutual
Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer
Credit Facility, and the Term Securities
Lending Facility. The Federal Reserve will
also be working with its central bank counterparties to close its temporary liquidity
swap arrangements by February 1. The Federal Reserve expects that amounts provided
under the Term Auction Facility will continue to be scaled back in early 2010. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain
set at June 30, 2010, for loans backed by
new-issue commercial mortgage-backed securities and March 31, 2010, for loans
backed by all other types of collateral. The
Federal Reserve is prepared to modify these
plans if necessary to support financial stability and economic growth.”
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.
Following the Committee’s policy decision, staff gave
several presentations on the key determinants of inflation dynamics. Theoretical and empirical research indicates that inflation can respond to deviations of economic activity from its longer-run sustainable path.
However, in some theoretical frameworks, the connection between resource slack and inflation depends on
the nature of the shock and its impact on marginal
costs and markups. Moreover, estimates of the magnitude of slack and its effect on inflation are sensitive to
the details of the analytical framework and the statistical methodology used in each study. While theory suggests that the degree of slack prevailing in foreign
economies could affect domestic inflation, empirical
evidence on the importance of such an effect was
mixed. Evidence suggested that sizable shifts in the
longer-run inflation expectations of households and
firms had influenced the evolution of inflation over
previous decades; in contrast, the anchoring of inflation
Page 11
expectations in recent years likely had damped somewhat the response of actual inflation to the recent economic downturn and to fluctuations in the prices of
energy and other commodities. In discussing these
issues, participants noted that they bear in mind the
shocks hitting the economy and regularly monitor more
than one measure of resource slack as they assess the
outlook for economic activity and inflation. They also
noted the importance of formulating monetary policy
in ways that would work well across a range of possible
economic structures rather than relying on any one analytical framework. Finally, they underscored the importance of keeping longer-run inflation expectations firmly anchored to help achieve the Federal Reserve’s dual
mandate for maximum employment and price stability.
It was agreed that the next meeting of the Committee
would be held on Tuesday-Wednesday, January 26-27,
2010. The meeting adjourned at 1:00 p.m. on December 16, 2009.
Notation Votes
By notation vote completed on November 23, 2009,
the Committee unanimously approved the minutes of
the FOMC meeting held on November 3-4, 2009.
By notation vote completed on November 24, 2009,
the Committee unanimously approved the following
resolution:
“The Federal Open Market Committee authorizes the Federal Reserve Bank of New
York to conduct reverse repo transactions
involving U.S. Government securities, and
securities that are direct obligations of, or
fully guaranteed as to principal and interest
by, any agency of the United States, for the
purpose of helping to ensure the readiness of
the Federal Reserve’s tools for absorbing
bank reserves. The reverse repo transactions
authorized in this resolution shall have terms
to maturity of 20 business days or less and
the total amount of all transactions outstanding at a given time shall be $5 billion or less.”
_____________________________
Brian F. Madigan
Secretary
Cite this document
Federal Reserve (2009, December 15). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_20091216
@misc{wtfs_fomc_minutes_20091216,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {2009},
month = {Dec},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_20091216},
note = {Retrieved via When the Fed Speaks corpus}
}