FOMC Minutes

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Minutes of the Federal Open Market Committee

January 26-27, 2010

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, January 26,

2010, at 2:00 p.m. and continued on Wednesday, January 27, 2010, at 8:30 a.m.

Patrick M. Parkinson, Director, Division of Bank

Supervision and Regulation, Board of Governors

PRESENT:

Ben Bernanke, Chairman

William C. Dudley, Vice Chairman

James Bullard

Elizabeth Duke

Thomas M. Hoenig

Donald L. Kohn

Sandra Pianalto

Eric Rosengren

Daniel K. Tarullo

Kevin Warsh

Charles S. Struckmeyer, Deputy Staff Director,

Office of the Staff Director for Management,

Board of Governors

Robert deV. Frierson,¹ Deputy Secretary, Office of

the Secretary, Board of Governors

James A. Clouse, Deputy Director, Division of

Monetary Affairs, Board of Governors

Linda Robertson,² Assistant to the Board, Office

of Board Members, Board of Governors

Christine Cumming, Charles L. Evans, Richard

Fisher, Narayana Kocherlakota, and Charles I.

Plosser, Alternate Members of the Federal

Open Market Committee

Sherry Edwards, Andrew T. Levin, and William R.

Nelson, Senior Associate Directors, Division

of Monetary Affairs, Board of Governors; David Reifschneider and William Wascher, Senior

Associate Directors, Division of Research and

Statistics, Board of Governors

Jeffrey M. Lacker, Dennis P. Lockhart, and Janet L.

Yellen, Presidents of the Federal Reserve

Banks of Richmond, Atlanta, and San Francisco, respectively

Stephen A. Meyer, Senior Adviser, Division of

Monetary Affairs, Board of Governors; Stephen D. Oliner, Senior Adviser, Division of

Research and Statistics, Board of Governors

Brian F. Madigan, Secretary and Economist

Matthew M. Luecke, Assistant Secretary

David W. Skidmore, Assistant Secretary

Michelle A. Smith, Assistant Secretary

Scott G. Alvarez, General Counsel

Nathan Sheets, Economist

David J. Stockton, Economist

Michael Leahy, Associate Director, Division of International Finance, Board of Governors; Daniel E. Sichel, Associate Director, Division of

Research and Statistics, Board of Governors

Alan D. Barkema, Thomas A. Connors, William B.

English, Jeff Fuhrer, Steven B. Kamin, Simon

Potter, Lawrence Slifman, Mark S. Sniderman,

Christopher J. Waller, and David W. Wilcox,

Associate Economists

Michael G. Palumbo, Deputy Associate Director,

Division of Research and Statistics, Board of

Governors; Egon Zakrajsek, Deputy Associate

Director, Division of Monetary Affairs, Board

of Governors

David H. Small, Project Manager, Division of

Monetary Affairs, Board of Governors

Brian Sack, Manager, System Open Market Account

Jennifer J. Johnson, Secretary of the Board, Office

of the Secretary, Board of Governors

¹ Attended Tuesday’s session only.

² Attended Wednesday’s session only.

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Federal Open Market Committee

Carol C. Bertaut, Senior Economist, Division of

International Finance, Board of Governors;

Louise Sheiner, Senior Economist, Division of

Research and Statistics, Board of Governors

Mark A. Carlson and Kurt F. Lewis, Economists,

Division of Monetary Affairs, Board of Governors

_

The elected members and alternate members were as

follows:

William C. Dudley, President of the Federal Reserve

Bank of New York, with Christine Cumming, First

Vice President of the Federal Reserve Bank of New

York, as alternate.

Penelope A. Beattie, Assistant to the Secretary, Office of the Secretary, Board of Governors

Eric Rosengren, President of the Federal Reserve Bank

of Boston, with Charles I. Plosser, President of the

Federal Reserve Bank of Philadelphia, as alternate.

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

Sandra Pianalto, President of the Federal Reserve Bank

of Cleveland, with Charles L. Evans, President of the

Federal Reserve Bank of Chicago, as alternate.

Randall A. Williams, Records Management Analyst,

Division of Monetary Affairs, Board of Governors

James Bullard, President of the Federal Reserve Bank

of St. Louis, with Richard Fisher, President of the Federal Reserve Bank of Dallas, as alternate.

Harvey Rosenblum, Executive Vice President,

Federal Reserve Bank of Dallas

Thomas M. Hoenig, President of the Federal Reserve

Bank of Kansas City, with Narayana Kocherlakota,

President of the Federal Reserve Bank of Minneapolis,

as alternate.

David Altig, Spence Hilton, Loretta J. Mester, and

Glenn D. Rudebusch, Senior Vice Presidents,

Federal Reserve Banks of Atlanta, New York,

Philadelphia, and San Francisco, respectively

Warren Weber, Senior Research Officer, Federal

Reserve Bank of Minneapolis

David C. Wheelock, Vice President, Federal Reserve Bank of St. Louis

Julie Ann Remache, Assistant Vice President, Federal Reserve Bank of New York

Hesna Genay, Economic Advisor, Federal Reserve

Bank of Chicago

Robert L. Hetzel, Senior Economist, Federal Reserve Bank of Richmond

Annual Organizational Matters

In the agenda for this meeting, it was reported that advices of the election of the following members and alternate members of the Federal Open Market Committee for a term beginning January 26, 2010, had been

received and that these individuals had executed their

oaths of office.

By unanimous vote, the following officers of the Federal Open Market Committee were selected to serve

until the selection of their successors at the first regularly scheduled meeting of the Committee in 2011, with

the understanding that in the event of the discontinuance of their official connection with the Board of

Governors or with a Federal Reserve Bank, they would

cease to have any official connection with the Federal

Open Market Committee:

Ben Bernanke

William C. Dudley

Brian F. Madigan

Matthew M. Luecke

David W. Skidmore

Michelle A. Smith

Scott G. Alvarez

Thomas Baxter

Richard M. Ashton

Nathan Sheets

David J. Stockton

Chairman

Vice Chairman

Secretary and

Economist

Assistant Secretary

Assistant Secretary

Assistant Secretary

General Counsel

Deputy General

Counsel

Assistant General

Counsel

Economist

Economist

Minutes of the Meeting of January 26-27, 2010

Alan D. Barkema

Thomas A. Connors

William B. English

Jeff Fuhrer

Steven B. Kamin

Simon Potter

Lawrence Slifman

Mark S. Sniderman

Christopher J. Waller

David W. Wilcox

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of, or fully guaranteed as to principal and interest by,

any agency of the United States” in temporary shortterm investment transactions with foreign and international accounts and fiscal agency accounts. The Guidelines for the Conduct of System Open Market Operations in Federal-Agency Issues remained suspended.

Associate

Economists

By unanimous vote, the Committee amended its Program for Security of FOMC Information with the addition of a summary of the rule that governs noncitizen

access to FOMC information.

By unanimous vote, the Federal Reserve Bank of New

York was selected to execute transactions for the System Open Market Account.

By unanimous vote, Brian Sack was selected to serve at

the pleasure of the Committee as Manager, System

Open Market Account, with the understanding that his

selection was subject to being satisfactory to the Federal Reserve Bank of New York.

In his annual review of the Committee’s authorizations

for domestic open market operations and foreign currency transactions, the Manager noted that the Desk

recommended continuing to use dollar roll transactions

in the process of settling agency mortgage-backed securities (MBS) purchases, and that staff proposed adding a sentence to the directive to authorize using dollar

roll transactions after March 31 for the purpose of settling MBS purchases executed by that date. He also

noted that the Desk intended to conduct reverse repurchase agreements (RRPs) over the course of the coming year to ensure the readiness of the Federal Reserve’s tools for absorbing bank reserves. Such transactions were authorized by the Committee’s resolution

of November 24, 2009. Finally, he indicated that the

Desk was developing the capability to conduct agency

MBS administration, trading, and settlement using internal resources, but it would continue to use agents to

conduct these tasks until that capability was fully developed.

By unanimous vote, the Committee approved the Authorization for Domestic Open Market Operations

(shown below) with amendments to paragraph 4 that

allow the use of “securities that are direct obligations

AUTHORIZATION FOR DOMESTIC OPEN

MARKET OPERATIONS

(Amended January 26, 2010)

1. The Federal Open Market Committee authorizes

and directs the Federal Reserve Bank of New York, to

the extent necessary to carry out the most recent domestic policy directive adopted at a meeting of the

Committee:

A. To buy or sell U.S. government securities, including securities of the Federal Financing Bank, and

securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of

the United States in the open market, from or to securities dealers and foreign and international accounts maintained at the Federal Reserve Bank of

New York, on a cash, regular, or deferred delivery

basis, for the System Open Market Account at market prices, and, for such Account, to exchange maturing U.S. government and federal agency securities

with the Treasury or the individual agencies or to allow them to mature without replacement; and

B. To buy or sell in the open market 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 System Open Market Account under agreements to resell or repurchase such securities or obligations (including such transactions as are commonly referred

to as repo and reverse repo transactions) in 65 business days or less, at rates that, unless otherwise expressly authorized by the Committee, shall be determined by competitive bidding, after applying reasonable limitations on the volume of agreements with

individual counterparties.

2. In order to ensure the effective conduct of open

market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York

to use agents in agency MBS-related transactions.

3. In order to ensure the effective conduct of open

market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York

to lend on an overnight basis U.S. government securities and securities that are direct obligations of any

agency of the United States, held in the System Open

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Federal Open Market Committee

Market Account, to dealers at rates that shall be determined by competitive bidding. The Federal Reserve

Bank of New York shall set a minimum lending fee

consistent with the objectives of the program and apply

reasonable limitations on the total amount of a specific

issue that may be auctioned and on the amount of securities that each dealer may borrow. The Federal Reserve Bank of New York may reject bids that could

facilitate a dealer’s ability to control a single issue as

determined solely by the Federal Reserve Bank of New

York.

4. In order to ensure the effective conduct of open

market operations, while assisting in the provision of

short-term investments for foreign and international

accounts maintained at the Federal Reserve Bank of

New York and accounts maintained at the Federal Reserve Bank of New York as fiscal agent of the United

States pursuant to section 15 of the Federal Reserve

Act, the Federal Open Market Committee authorizes

and directs the Federal Reserve Bank of New York:

A. For the System Open Market Account, to sell

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, to

such accounts on the bases set forth in paragraph 1.A

under agreements providing for the resale by such

accounts of those securities in 65 business days or

less on terms comparable to those available on such

transactions in the market; and

B. For the New York Bank account, when appropriate, to undertake with dealers, subject to the conditions imposed on purchases and sales of securities

in paragraph l.B, repurchase agreements in 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, and to arrange corresponding sale and repurchase agreements

between its own account and such foreign, international, and fiscal agency accounts maintained at the

Bank.

Transactions undertaken with such accounts under the

provisions of this paragraph may provide for a service

fee when appropriate.

5. In the execution of the Committee’s decision regarding policy during any intermeeting period, the

Committee authorizes and directs the Federal Reserve

Bank of New York, upon the instruction of the Chairman of the Committee, to adjust somewhat in exceptional circumstances the degree of pressure on reserve

positions and hence the intended federal funds rate and

to take actions that result in material changes in the

composition and size of the assets in the System Open

_

Market Account other than those anticipated by the

Committee at its most recent meeting. Any such adjustment shall be made in the context of the Committee’s discussion and decision at its most recent meeting

and the Committee’s long-run objectives for price stability and sustainable economic growth, and shall be

based on economic, financial, and monetary developments during the intermeeting period. Consistent with

Committee practice, the Chairman, if feasible, will consult with the Committee before making any adjustment.

By unanimous vote, the Authorization for Foreign Currency Operations, the Foreign Currency Directive, and

the Procedural Instructions with Respect to Foreign

Currency Operations were reaffirmed in the form

shown below. The vote to reaffirm these documents

included approval of the System’s warehousing agreement with the U.S. Treasury.

AUTHORIZATION FOR FOREIGN CURRENCY

OPERATIONS

(Reaffirmed January 26, 2010)

1. The Federal Open Market Committee authorizes

and directs the Federal Reserve Bank of New York, for

the System Open Market Account, to the extent necessary to carry out the Committee’s foreign currency directive and express authorizations by the Committee

pursuant thereto, and in conformity with such procedural instructions as the Committee may issue from

time to time:

A. To purchase and sell the following foreign currencies in the form of cable transfers through spot or

forward transactions on the open market at home

and abroad, including transactions with the U.S.

Treasury, with the U.S. Exchange Stabilization Fund

established by section 10 of the Gold Reserve Act of

1934, with foreign monetary authorities, with the

Bank for International Settlements, and with other

international financial institutions:

Australian dollars

Brazilian reais

Canadian dollars

Danish kroner

euro

Japanese yen

Korean won

Mexican pesos

New Zealand dollars

Norwegian kroner

Pounds sterling

Minutes of the Meeting of January 26-27, 2010

Singapore dollars

Swedish kronor

Swiss francs

B. To hold balances of, and to have outstanding

forward contracts to receive or to deliver, the foreign

currencies listed in paragraph A above.

C. To draw foreign currencies and to permit foreign banks to draw dollars under the reciprocal currency arrangements listed in paragraph 2 below, provided that drawings by either party to any such arrangement shall be fully liquidated within 12 months

after any amount outstanding at that time was first

drawn, unless the Committee, because of exceptional

circumstances, specifically authorizes a delay.

D. To maintain an overall open position in all foreign currencies not exceeding $25.0 billion. For this

purpose, the overall open position in all foreign currencies is defined as the sum (disregarding signs) of

net positions in individual currencies, excluding

changes in dollar value due to foreign exchange rate

movements and interest accruals. The net position in

a single foreign currency is defined as holdings of

balances in that currency, plus outstanding contracts

for future receipt, minus outstanding contracts for

future delivery of that currency, i.e., as the sum of

these elements with due regard to sign.

2. The Federal Open Market Committee directs the

Federal Reserve Bank of New York to maintain reciprocal currency arrangements (“swap” arrangements)

for the System Open Market Account for periods up to

a maximum of 12 months with the following foreign

banks, which are among those designated by the Board

of Governors of the Federal Reserve System under

section 214.5 of Regulation N, Relations with Foreign

Banks and Bankers, and with the approval of the

Committee to renew such arrangements on maturity:

Foreign bank

Bank of Canada

Bank of Mexico

Amount of arrangement

(millions of dollars equivalent)

2,000

3,000

Any changes in the terms of existing swap arrangements, and the proposed terms of any new arrangements that may be authorized, shall be referred for review and approval to the Committee.

3. All transactions in foreign currencies undertaken

under paragraph 1.A above shall, unless otherwise expressly authorized by the Committee, be at prevailing

market rates. For the purpose of providing an invest-

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ment return on System holdings of foreign currencies

or for the purpose of adjusting interest rates paid or

received in connection with swap drawings, transactions with foreign central banks may be undertaken at

nonmarket exchange rates.

4. It shall be the normal practice to arrange with foreign central banks for the coordination of foreign currency transactions. In making operating arrangements

with foreign central banks on System holdings of foreign currencies, the Federal Reserve Bank of New York

shall not commit itself to maintain any specific balance,

unless authorized by the Federal Open Market Committee. Any agreements or understandings concerning

the administration of the accounts maintained by the

Federal Reserve Bank of New York with the foreign

banks designated by the Board of Governors under

section 214.5 of Regulation N shall be referred for review and approval to the Committee.

5. Foreign currency holdings shall be invested to

ensure that adequate liquidity is maintained to meet

anticipated needs and so that each currency portfolio

shall generally have an average duration of no more

than 18 months (calculated as Macaulay duration).

Such investments may include buying or selling outright obligations of, or fully guaranteed as to principal

and interest by, a foreign government or agency thereof; buying such securities under agreements for repurchase of such securities; selling such securities under

agreements for the resale of such securities; and holding various time and other deposit accounts at foreign

institutions. In addition, when appropriate in connection with arrangements to provide investment facilities

for foreign currency holdings, U.S. government securities may be purchased from foreign central banks under

agreements for repurchase of such securities within 30

calendar days.

6. All operations undertaken pursuant to the preceding paragraphs shall be reported promptly to the Foreign Currency Subcommittee and the Committee. The

Foreign Currency Subcommittee consists of the

Chairman and Vice Chairman of the Committee, the

Vice Chairman of the Board of Governors, and such

other member of the Board as the Chairman may designate (or in the absence of members of the Board

serving on the Subcommittee, other Board members

designated by the Chairman as alternates, and in the

absence of the Vice Chairman of the Committee, the

Vice Chairman’s alternate). Meetings of the Subcommittee shall be called at the request of any member, or

at the request of the Manager, System Open Market

Account (“Manager”), for the purposes of reviewing

recent or contemplated operations and of consulting

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Federal Open Market Committee

with the Manager on other matters relating to the Manager’s responsibilities. At the request of any member

of the Subcommittee, questions arising from such reviews and consultations shall be referred for determination to the Federal Open Market Committee.

7. The Chairman is authorized:

A. With the approval of the Committee, to enter

into any needed agreement or understanding with the

Secretary of the Treasury about the division of responsibility for foreign currency operations between

the System and the Treasury;

B. To keep the Secretary of the Treasury fully advised concerning System foreign currency operations,

and to consult with the Secretary on policy matters

relating to foreign currency operations;

C. From time to time, to transmit appropriate reports and information to the National Advisory

Council on International Monetary and Financial

Policies.

8. Staff officers of the Committee are authorized to

transmit pertinent information on System foreign currency operations to appropriate officials of the Treasury Department.

9. All Federal Reserve Banks shall participate in the

foreign currency operations for System Account in accordance with paragraph 3G(1) of the Board of Governors’ Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks dated January 1, 1944.

FOREIGN CURRENCY DIRECTIVE

(Reaffirmed January 26, 2010)

1. System operations in foreign currencies shall generally be directed at countering disorderly market conditions, provided that market exchange rates for the

U.S. dollar reflect actions and behavior consistent with

IMF Article IV, Section 1.

2. To achieve this end the System shall:

A. Undertake spot and forward purchases and sales

of foreign exchange.

B. Maintain reciprocal currency (“swap”) arrangements with selected foreign central banks.

C. Cooperate in other respects with central banks

of other countries and with international monetary

institutions.

3. Transactions may also be undertaken:

A. To adjust System balances in light of probable

future needs for currencies.

B. To provide means for meeting System and

Treasury commitments in particular currencies, and

_

to facilitate operations of the Exchange Stabilization

Fund.

C. For such other purposes as may be expressly

authorized by the Committee.

4. System foreign currency operations shall be conducted:

A. In close and continuous consultation and cooperation with the United States Treasury;

B. In cooperation, as appropriate, with foreign

monetary authorities; and

C. In a manner consistent with the obligations of

the United States in the International Monetary Fund

regarding exchange arrangements under IMF Article

IV.

PROCEDURAL INSTRUCTIONS WITH RESPECT

TO FOREIGN CURRENCY OPERATIONS

(Reaffirmed January 26, 2010)

In conducting operations pursuant to the authorization

and direction of the Federal Open Market Committee

as set forth in the Authorization for Foreign Currency

Operations and the Foreign Currency Directive, the

Federal Reserve Bank of New York, through the Manager, System Open Market Account (“Manager”), shall

be guided by the following procedural understandings

with respect to consultations and clearances with the

Committee, the Foreign Currency Subcommittee, and

the Chairman of the Committee, unless otherwise directed by the Committee. All operations undertaken

pursuant to such clearances shall be reported promptly

to the Committee.

1. The Manager shall clear with the Subcommittee

(or with the Chairman, if the Chairman believes that

consultation with the Subcommittee is not feasible in

the time available):

A. Any operation that would result in a change in

the System’s overall open position in foreign currencies exceeding $300 million on any day or $600 million since the most recent regular meeting of the

Committee.

B. Any operation that would result in a change on

any day in the System’s net position in a single foreign currency exceeding $150 million, or $300 million

when the operation is associated with repayment of

swap drawings.

C. Any operation that might generate a substantial

volume of trading in a particular currency by the System, even though the change in the System’s net position in that currency might be less than the limits

specified in 1.B.

Minutes of the Meeting of January 26-27, 2010

D. Any swap drawing proposed by a foreign bank

not exceeding the larger of (i) $200 million or (ii) 15

percent of the size of the swap arrangement.

2. The Manager shall clear with the Committee (or

with the Subcommittee, if the Subcommittee believes

that consultation with the full Committee is not feasible

in the time available, or with the Chairman, if the

Chairman believes that consultation with the Subcommittee is not feasible in the time available):

A. Any operation that would result in a change in

the System’s overall open position in foreign currencies exceeding $1.5 billion since the most recent regular meeting of the Committee.

B. Any swap drawing proposed by a foreign bank

exceeding the larger of (i) $200 million or (ii) 15 percent of the size of the swap arrangement.

3. The Manager shall also consult with the Subcommittee or the Chairman about proposed swap

drawings by the System and about any operations that

are not of a routine character.

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 during the period since the Committee

met on December 15-16, 2009. Financial market conditions remained supportive of economic growth,

though volatility in securities markets increased notably

toward the end of the intermeeting period. Year-end

funding pressures were minimal. No market strains

had appeared as a result of the imminent closing, on

February 1, of most of the Federal Reserve’s special

liquidity facilities. The Manager also reported on System open market operations in agency debt and agency

MBS during the intermeeting period. The Desk continued to gradually slow the pace of its purchases of

these securities as it moved toward completing the

Committee’s program of asset purchases by March 31.

The Desk also continued to engage in dollar roll transactions in agency MBS securities to facilitate settlement

of its outright purchases. The Federal Reserve’s total

assets remained a bit above $2.2 trillion, as the increase

in the System’s holdings of securities was almost entirely offset by a further decline in usage of the System’s

credit and liquidity facilities. By unanimous vote, the

Committee ratified the Desk’s transactions. Participants agreed that the Desk should continue the interim

approach of not reinvesting the proceeds of maturing

or prepaid agency securities and MBS held by the Federal Reserve. The Desk had continued to reinvest the

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proceeds of maturing Treasury securities by acquiring

newly auctioned Treasury securities issued on the same

day its existing holdings matured; participants agreed

that the Desk should continue this practice for now,

but the Committee would consider further its policy for

redeeming or reinvesting maturing Treasury securities.

There were no open market operations in foreign currencies for the System’s account during the intermeeting period.

Staff briefed the Committee on current usage of the

discount window and other liquidity facilities and suggested additional steps policymakers could take to

normalize the Federal Reserve’s liquidity provision.

These steps included continuing to scale back amounts

offered through the Term Auction Facility (TAF); returning to the pre-crisis standard of one-day maturity

for primary credit loans to all but the smallest depository institutions; and increasing, initially to 50 basis points

from 25 basis points, the spread between the primary

credit rate and the upper end of the Committee’s target

range for the federal funds rate. Setting the spread reflects a balance between two objectives: encouraging

depository institutions to use the discount window as a

backup source of liquidity when they are faced with

temporary liquidity shortfalls or when funding markets

are disrupted, and discouraging depository institutions

from relying on the discount window as a routine

source of funds when other funding is generally available. The spread was 100 basis points before the financial crisis emerged; the Federal Reserve narrowed the

spread to 50 basis points and then to 25 basis points as

part of its response to the financial crisis. Participants

judged that improvements in bank funding markets

warranted reducing amounts offered at TAF auctions

toward zero in three steps over the next few months,

while noting that they would be prepared to modify

that plan if necessary to support financial stability and

economic growth. They agreed that it would soon be

appropriate to return the maturity of primary credit

loans to overnight and to widen the spread between the

primary credit rate and the top of the Committee’s target range for the federal funds rate. Several participants noted that the optimal spread could depend, in

part, on the Committee’s eventual decisions about the

most suitable approach to implementing U.S. monetary

policy over the longer term. Participants generally

agreed that such steps to return the Federal Reserve’s

liquidity provision to a normal footing would be technical adjustments to reflect the notable diminution of

the market strains that had made the creation of new

liquidity facilities and expansion of existing facilities

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Federal Open Market Committee

necessary and emphasized that such steps would not

indicate a change in the Committee’s assessment of the

appropriate stance of monetary policy or the proper

time to begin moving to a less accommodative policy

stance.

Secretary’s note: After the FOMC meeting,

the Chairman, acting under authority delegated by the Board of Governors, directed

that TAF auction amounts be reduced to

$50 billion for the February 8 auction and to

$25 billion for the final TAF auction, to be

held on March 8.

Staff also briefed policymakers about tools and strategies for an eventual withdrawal of policy accommodation and summarized linkages between these tools and

strategies and alternative frameworks for implementing

monetary policy in the longer run. The tools for moving to a less accommodative policy stance encompassed

(1) raising the interest rate paid on excess reserve balances (the IOER rate); (2) executing term reverse repurchase agreements with the primary dealers; (3) executing term RRPs with a broader range of counterparties; (4) using a term deposit facility (TDF) to absorb

excess reserves; (5) redeeming maturing and prepaid

securities held by the Federal Reserve without reinvesting the proceeds; and (6) selling securities held by the

Federal Reserve before they mature. All but the first of

these tools would shrink the supply of reserve balances;

the last two would also shrink the Federal Reserve’s

balance sheet. The Desk already had successfully

tested its ability to conduct term RRPs with primary

dealers by arranging several small-scale transactions

using Treasury securities and agency debt as collateral;

staff anticipated that the Federal Reserve would be able

to execute term RRPs against MBS early this spring and

would have the capability to conduct RRPs with an

expanded set of counterparties soon after. In coming

weeks, staff would analyze comments received in response to a Federal Register notice, published in late December, requesting the public’s input on the TDF proposal. Staff would then prepare a final proposal for the

Board’s consideration. A TDF could be operational as

soon as May.

Staff described several feasible strategies for using these

six tools to support a gradual return toward a more

normal stance of monetary policy: (1) using one or

more of the tools to progressively reduce the supply of

reserve balances—which rose to an exceptionally high

level as a consequence of the expansion of the Federal

Reserve’s liquidity and lending facilities and subsequent

_

large-scale asset purchases during the financial crisis—

before raising the IOER rate and the target for the federal funds rate; (2) increasing the IOER rate in line with

an increase in the federal funds rate target and concurrently using one or more tools to reduce the supply of

reserve balances; and (3) raising the IOER rate and the

target for the federal funds rate and using reserve draining tools only if the federal funds rate did not increase

in line with the Committee’s target.

Participants expressed a range of views about the tools

and strategies for removing policy accommodation

when that step becomes appropriate. All agreed that

raising the IOER rate and the target for the federal

funds rate would be a key element of a move to less

accommodative monetary policy. Most thought that it

likely would be appropriate to reduce the supply of

reserve balances, to some extent, before the eventual

increase in the IOER rate and in the target for the federal funds rate, in part because doing so would tighten

the link between short-term market rates and the IOER

rate; however, several noted that draining operations

might be seen as a precursor to tightening and should

only be undertaken when the Committee judged that an

increase in its target for the federal funds rate would

soon be appropriate. For the same reason, a few

judged that it would be better to drain reserves concurrently with the eventual increase in the IOER and target rates.

With respect to longer-run approaches to implementing

monetary policy, most policymakers saw benefits in

continuing to use the federal funds rate as the operating

target for implementing monetary policy, so long as

other money market rates remained closely linked to

the federal funds rate. Many thought that an approach

in which the primary credit rate was set above the

Committee’s target for the federal funds rate and the

IOER rate was set below that target—a corridor system—would be beneficial. Participants recognized,

however, that the supply of reserve balances would

need to be reduced considerably to lift the funds rate

above the IOER rate. Several saw advantages to using

the IOER rate, rather than a target for a market rate, to

indicate the stance of policy. Participants noted that

their judgments were tentative, that they would continue to discuss the ultimate operating regime, and that

they might well gain useful information about longerrun approaches during the eventual withdrawal of policy accommodation.

Finally, staff noted that the Committee might want to

address both the eventual size of the Federal Reserve’s

Minutes of the Meeting of January 26-27, 2010

balance sheet and its composition. Policymakers were

unanimous in the view that it will be appropriate to

shrink the supply of reserve balances and the size of

the Federal Reserve’s balance sheet substantially over

time. Moreover, they agreed that it will eventually be

appropriate for the System Open Market Account to

return to holding only securities issued by the U.S.

Treasury, as it did before the financial crisis. Several

thought the Federal Reserve should hold, eventually, a

portfolio composed largely of shorter-term Treasury

securities. Participants agreed that a policy of redeeming and not replacing agency debt and MBS as those

securities mature or are prepaid would contribute to

achieving both goals and thus would be appropriate.

Many thought it would also be desirable to redeem

some or all of the Treasury securities owned by the

Federal Reserve as they mature, recognizing that at

some point in the future the Federal Reserve would

need to resume purchases of Treasury securities to offset reductions in other assets and to accommodate

growth in the public’s demand for U.S. currency. Participants expressed a range of views about asset sales.

Most judged that a future program of gradual asset

sales could be helpful in shrinking the size of the Federal Reserve’s balance sheet, reducing reserve balances,

and shifting the composition of securities holdings

back toward Treasury securities; however, many were

concerned that such transactions could cause market

disruptions and have adverse implications for the economic recovery, particularly if they were to begin before the recovery had become self-sustaining and before the Committee had determined that a tightening of

financial conditions was appropriate and had begun to

raise short-term interest rates. Several thought it important to begin a program of asset sales in the near

future to ensure that the Federal Reserve’s balance

sheet shrinks more quickly and in a more predictable

manner than could be achieved solely by redeeming

maturing securities and not reinvesting prepayments;

they judged that a program of asset sales spread over a

number of years would underscore the Committee’s

determination to exit from the period of exceptionally

accommodative monetary policy in a manner and at a

pace that would keep inflation contained without having large effects on asset prices or market interest rates.

A few suggested that the pace of asset sales, and potentially of purchases, could be adjusted over time in response to developments in the economy and the evolution of the economic outlook. The Committee made

no decisions about asset sales at this meeting.

Page 9

Staff Review of the Economic Situation

The information reviewed at the January 26-27 meeting

suggested that economic activity continued to strengthen in recent months. Consumer spending was well

maintained in the fourth quarter, and business expenditures on equipment and software appeared to expand

substantially. However, the improvement in the housing market slowed, and spending on nonresidential

structures continued to fall. Recent data suggested that

the pace of inventory liquidation diminished considerably last quarter, providing a sizable boost to economic

activity. Indeed, industrial production advanced at a

solid pace in the fourth quarter. In the labor market,

layoffs subsided noticeably in the final months of last

year, but the unemployment rate remained elevated and

hiring stayed weak. Meanwhile, increases in energy

prices pushed up headline consumer price inflation

even as core consumer price inflation remained subdued.

Some indicators suggested that the deterioration in the

labor market was abating. The pace of job losses continued to moderate: The three-month change in private nonfarm payrolls had become progressively less

negative since early 2009; that pattern was widespread

across industries. The unemployment rate was essentially unchanged from October through December.

The labor force participation rate, however, had declined steeply since the spring, likely reflecting, at least

in part, adverse labor market conditions. Moreover,

hiring remained weak, the total number of individuals

receiving unemployment insurance—including extended and emergency benefits—continued to climb,

the average length of ongoing unemployment spells

rose steeply, and joblessness became increasingly concentrated among the long-term unemployed.

Total industrial production (IP) rose in December, the

sixth consecutive increase since its trough. The gain in

December primarily resulted from a jump in output at

electric and natural gas utilities caused by unseasonably

cold weather. Manufacturing IP edged down after large

and widespread gains in November. For the fourth

quarter as a whole, the solid increase in manufacturing

IP reflected a recovery in motor vehicle output, rising

export demand, and a slower pace of business inventory liquidation. Output of consumer goods, business

equipment, and materials all rose in the fourth quarter,

though the average monthly gains in these categories

were a little smaller than in the third quarter. The

available near-term indicators of production suggested

that IP would increase further in coming months.

Page 10

Federal Open Market Committee

Consumer spending continued to trend up late last year

but remained well below its pre-recession level. After a

strong increase in November, real personal consumption expenditures appeared to drop back some in December. Retail sales may have been held down by unusually bad weather, but purchases of new light motor

vehicles continued to increase. The fundamental determinants of household spending—including real disposable income and wealth—strengthened modestly,

on balance, near the end of the year but were still relatively weak. Despite the improvement from early last

year, measures of consumer sentiment remained low

relative to historical norms, and terms and standards on

consumer loans, particularly credit card loans, stayed

very tight.

The recovery in the housing market slowed in the

second half of 2009, even though a number of factors

supported housing demand. Interest rates for conforming 30-year fixed-rate mortgages remained historically low. In addition, the Reuters/University of Michigan Surveys of Consumers reported that the number

of respondents who expected house prices to increase

continued to exceed the number who expected prices

to decrease. Sales of existing single-family homes rose

strongly from July to November but fell in December,

a pattern that suggested sales were pulled ahead in anticipation of the originally scheduled expiration of the

first-time homebuyer credit on November 30. Still,

existing home sales remained above their level in earlier

quarters. Sales of new homes also turned down in November and December, retracing part of their recovery

earlier in the year. Similarly, starts of single-family

homes retreated a little from June to December after

advancing briskly last spring. The pace of construction

was slow enough that even the modest pace of new

home sales was sufficient to further reduce the overhang of unsold new single-family houses.

Real spending on equipment and software apparently

rose robustly in the fourth quarter following a slight

increase in the previous quarter. Spending on hightech equipment, in particular, appeared to increase at a

considerably more rapid clip in the fourth quarter than

in the third; both orders and shipments of high-tech

equipment rose markedly, on net, in October and November. Business purchases of motor vehicles likely

also climbed in the fourth quarter. Outside of the

transportation and high-tech sectors, business outlays

on equipment and software appeared to change little in

the fourth quarter. Conditions in the nonresidential

construction sector generally remained poor. Real

spending on structures outside of the drilling and min-

_

ing sector dropped in the third quarter; data on nominal expenditures through November pointed to an even

faster rate of decline in the fourth quarter. The pace of

real business inventory liquidation appeared to decrease

considerably in the fourth quarter. After three quarters

of sizable declines, real nonfarm inventories shrank at a

more modest pace in October, and book-value data for

this category suggested that inventories may have increased in real terms in November. Available data suggested that the change in inventory investment—

including a sizable accumulation in wholesale stocks of

farm products—made an appreciable contribution to

the increase in real gross domestic product (GDP) in

the fourth quarter.

Consumer price inflation was modest in December

after being boosted in the preceding two months by

increases in energy prices. Core consumer price inflation remained subdued. Price increases for non-energy

services slowed early last year and remained modest

throughout 2009, reflecting declining prices for housing

services and perhaps the deceleration in labor costs.

Price increases for core goods were quite modest during the second half of 2009. According to survey results, households’ expectations of near-term inflation

increased in January; in addition, median longer-term

inflation expectations edged up, though they remained

near the lower end of the narrow range that has prevailed over the past few years.

The U.S. international trade deficit widened in November, as a sharp rise in nominal imports outpaced an

increase in exports. The rise in exports was driven

primarily by a large gain in agricultural exports, which

was partially offset by a decline in exports of consumer

goods that followed robust growth in October. Imports of oil accounted for roughly one-third of the increase in total imports, though most other categories of

imports also recorded gains.

Incoming data suggested that activity in advanced foreign economies continued to expand in the fourth

quarter, though at a moderate pace. However, unemployment rates remained elevated and consumption

indicators were mixed. Credit conditions improved

further, as lending to the private sector expanded in

some economies. Increases in export and import volumes pointed to a gradual recovery in international

trade. Economic activity in emerging market economies continued to expand in the fourth quarter, although at a pace slower than that of the third quarter.

Within emerging Asia, growth appeared to have remained robust in China and to have slowed elsewhere.

Minutes of the Meeting of January 26-27, 2010

In Latin America, indicators pointed to a continuation

of growth in much of the region, although growth in

Mexico appeared to slow significantly following the

third quarter’s outsized gain. Amid rising energy prices,

12-month headline inflation for December picked up in

all advanced foreign economies except Japan, where

deflation moderated only mildly. Headline inflation

continued to rise in emerging Asia, driven by energy

and food prices. In Latin America, headline inflation

remained below its earlier elevated pace.

Staff Review of the Financial Situation

The decision by the FOMC to keep the target range for

the federal funds rate unchanged at the December

meeting and its retention of the “extended period” language in the statement were widely anticipated by market participants and elicited little price response. Later

in the intermeeting period, the expected path of the

federal funds rate implied by federal funds and Eurodollar futures quotes shifted down slightly as investors

apparently interpreted Federal Reserve communications, including the discussion of large-scale asset purchases in the FOMC minutes, as pointing to a more

protracted period of accommodative monetary policy

than had been anticipated. By contrast, yields on

2- and 10-year nominal Treasury securities were about

unchanged on net. Inflation compensation based on

5-year Treasury inflation-protected securities (TIPS)

increased; the increase likely reflected higher inflation

risk premiums and a further improvement in TIPS

market liquidity, along with some rise in inflation expectations owing, in part, to increases in oil prices.

Inflation compensation 5 to 10 years ahead declined

slightly.

Financial market conditions remained supportive of

economic growth over the intermeeting period, and

short-term funding markets were generally stable.

Spreads between London interbank offered rates (Libor) and overnight index swap (OIS) rates at one- and

three-month maturities remained low, while spreads at

the six-month maturity continued to edge down.

Spreads on A2/P2-rated commercial paper (CP) and

AA-rated asset-backed CP held steady at the low end of

the range that has prevailed since mid-2007. Strong

demand for Treasury bills in the cash and repurchase

agreement (repo) market, together with a seasonal decline in bills outstanding, put downward pressure on

both bill yields and short-term repo rates. Although

year-end pressures in short-term funding markets were

generally modest amid ample liquidity, the repo market

experienced some year-end dislocations, with a few

transactions reportedly occurring at negative interest

Page 11

rates. Use of Federal Reserve credit facilities edged

lower over the intermeeting period, and market commentary suggested little concern about the impending

expiration of a number of the facilities.

After trending higher for most of the intermeeting period, broad stock price indexes subsequently reversed

course amid elevated volatility, ending the period little

changed on balance. The gap between the staff’s estimate of the expected real equity return over the next

10 years for S&P 500 firms and the real 10-year Treasury yield—a rough gauge of the equity risk premium—stayed about the same and remained well

above its average level during the past decade. Over

the intermeeting period, yields on both investmentgrade and speculative-grade corporate bonds edged

down, while those on comparable-maturity Treasury

securities held steady. Estimates of bid-asked spreads

for corporate bonds—a measure of liquidity in the corporate bond market—remained steady. In the leveraged loan market, average bid prices rose further and

bid-asked spreads were little changed.

Overall, net debt financing by nonfinancial businesses

was near zero in the fourth quarter after declining in

the third, consistent with weak demand for credit and

still tight credit standards and terms at banks. In December, gross public equity issuance by nonfinancial

firms maintained its solid pace and issuance by financial

firms increased noticeably, as several large banks issued

shares and used the proceeds to repay capital injections

they had received from the Troubled Asset Relief Program. Financing conditions for commercial real estate,

however, remained strained. Moody’s index of commercial property prices showed another drop in October, bringing the index back to its 2002 level. Delinquency rates on loans in commercial mortgage-backed

securities pools increased further in December. The

average interest rate on 30-year conforming fixed-rate

residential mortgages increased slightly over the intermeeting period but remained within the narrow range

of values over recent months. Consumer credit contracted for the 10th consecutive month in November,

owing to a further steep decline in revolving credit.

Credit card interest rate spreads continued to increase

in November. In contrast, spreads on new auto loans

extended their downtrend through early January. Delinquency rates on consumer loans remained high in

recent months. Issuance of credit card asset-backed

securities was minimal in October and November but

picked up in December after the Federal Deposit Insurance Corporation announced a temporary extension

of safe-harbor rules for its handling of securitized as-

Page 12

Federal Open Market Committee

sets should a sponsoring bank be taken into receivership.

Commercial bank credit continued to contract in December, as an increase in banks’ securities holdings was

more than offset by a large drop in total loans. Commercial and industrial loans and commercial real estate

loans again fell markedly. Although a substantial fraction of banks continued to tighten their credit policies

on commercial real estate loans in the fourth quarter,

lending standards for most other types of loans were

little changed, according to the January Senior Loan

Officer Opinion Survey on Bank Lending Practices.

Nonetheless, standards and terms on all major loan

types remained tight, and the demand for loans reportedly weakened further.

M2 continued to expand sluggishly in December.

Growth of liquid deposits remained robust, but small

time deposits and retail money market mutual funds

again contracted at a rapid pace in response to the low

yields on those assets. The monetary base and total

bank reserves were roughly flat, as the contraction in

credit outstanding from the Federal Reserve’s liquidity

and credit facilities was about offset by the Desk’s purchases of agency debt and MBS.

Over the intermeeting period, benchmark sovereign

yields in most advanced foreign economies displayed

some volatility but ended little changed on net. Global

sovereign bond offerings since the start of the year had

been reasonably well received, although mounting fiscal

concerns made investors more reluctant to hold debt

issued by the Greek government; sovereign yields rose

in Greece and, to a lesser extent, in several other countries where fiscal issues have raised concerns among

investors. All major foreign central banks kept their

policy rates unchanged. Foreign equity prices generally

ended the intermeeting period down. European financial stocks declined substantially, as early profit reports

for the fourth quarter from a few banks rekindled some

concerns about the health of the banking system. The

broad nominal index of the foreign exchange value of

the dollar rose, reportedly reflecting a growing perception that U.S. growth prospects were better than those

in Europe and Japan. Concerns that policy tightening

by China might restrain the global recovery also may

have contributed to the dollar’s appreciation against

many currencies late in the period.

Staff Economic Outlook

In the forecast prepared for the January FOMC meeting, the staff revised up its estimate of the increase in

real GDP in the fourth quarter of 2009. The upward

_

revision was in inventory investment; the staff’s projection of the increase in final demand was unchanged.

Nonfarm businesses apparently moved earlier to stem

the pace of inventory liquidation than the staff had anticipated. As a result, the economy likely entered 2010

with production in closer alignment with sales than the

staff had expected in mid-December. Apart from the

fluctuations in inventories, economic developments

largely were as the staff had anticipated. The incoming

information on the labor market and industrial production was broadly consistent with staff expectations,

and, though housing activity seemed to be on a lowerthan-anticipated trajectory, recent data on business capital spending were slightly above expectations. The

staff continued to project a moderate recovery in economic activity over the next two years, with economic

growth supported by the accommodative stance of

monetary policy and by a further waning of the factors

that weighed on spending and production over the past

two years. The staff also continued to expect that resource slack would be taken up only gradually over the

forecast period.

The staff’s forecasts for some slowing of core and

headline inflation over the next two years were little

changed. There were no significant surprises in the

incoming price data, substantial slack in resource utilization was still expected to put downward pressure on

costs, and longer-term inflation expectations remained

relatively stable. Given staff projections for consumer

energy prices, headline inflation was projected to run

somewhat above core inflation in 2010 but to slow to

the same subdued rate as core inflation in 2011.

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 2010 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 their discussion of the economic situation and outlook, participants agreed that the incoming data and

Minutes of the Meeting of January 26-27, 2010

information received from business contacts, though

mixed, indicated that economic growth had strengthened 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. Participants saw the economic news as broadly

in line with the expectations for moderate growth and

subdued inflation in 2010 that they held when the

Committee met in mid-December; moreover, financial

conditions were much the same, on balance, as when

the FOMC last met. Accordingly, participants’ views

about the economic outlook had not changed appreciably. Many noted the evidence that the pace of inventory decumulation slowed quite substantially in the

fourth quarter of 2009 as firms increased output to

bring production into closer alignment with sales. Participants saw the slower pace of inventory reductions as

a welcome indication that, in general, firms no longer

had large inventory overhangs. But they observed that

business contacts continued to report great reluctance

to build inventories, increase payrolls, and expand capacity. Participants expected the economic recovery to

continue, but 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 this year, with unemployment

declining only gradually. Most participants again projected that the economy would grow somewhat more

rapidly in 2011 and 2012, generating a more pronounced decline in the unemployment rate, as financial

conditions and the availability of credit continue to improve. In general, participants saw the upside and

downside risks to the outlook for economic growth as

roughly balanced. Participants agreed that underlying

inflation currently was subdued and was likely to remain so for some time. Some noted the risk that, with

output well below potential 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, focusing on risks to inflation expectations and

the challenge of removing monetary accommodation in

a timely manner, saw inflation risks as tilted toward the

upside, especially in the medium term.

The weakness in labor markets continued to be an important concern for the FOMC; moreover, the prospects for job growth remained an important source of

uncertainty in the economic outlook, particularly in the

outlook for consumer spending. While the average

pace of layoffs diminished substantially in recent

Page 13

months, few firms were hiring. The unusually large

fraction of individuals who were working part time for

economic reasons, as well as the uncommonly low level

of the average workweek, pointed to a gradual increase

in payrolls for some time even if hours worked were to

increase substantially as the economic recovery proceeded. Indeed, many business contacts again reported

that they would be cautious in hiring, saying they expected to meet any near-term increase in demand by

raising existing employees’ hours and boosting productivity, thus delaying the need to add employees. If

businesses were able to continue generating large productivity gains, as in recent quarters, then firms would

need to hire fewer workers in the near term to meet

rising demands for their products. But if the unusually

rapid productivity growth seen in recent quarters was

not sustained, then job growth could pick up significantly as productivity returned to sustainable levels.

The rise in employment of temporary workers in recent

months appeared to be continuing; historical experience suggested that increased use of temporary help

could presage a broader increase in job growth.

Participants generally saw the data and anecdotal evidence as indicating moderate growth in demands for

goods and services, although with substantial variation

across sectors. Consumer spending appeared to be

increasing modestly. Reports on holiday sales were

mixed. Retailers indicated that consumers appeared

more willing to buy but that they remained unusually

sensitive to pricing. Business contacts continued to

report that they were limiting investment outlays pending resolution of uncertainty about sales prospects and

future tax and regulatory policies; moreover, they had

substantial excess capacity and thus little need to expand production facilities. Even so, the data indicated

solid growth in business spending on high-tech equipment in recent months. Anecdotal evidence suggested

that such spending was being driven by opportunities

to reduce costs and by replacement investment that

firms had deferred during the downturn. By and large,

participants judged that residential investment had stabilized but did not expect housing construction to

make a sizable contribution to economic growth during

the next year or two. Commercial construction continued to trend down, primarily reflecting weak fundamentals, though financing constraints probably were

also playing a role. Stronger economic growth abroad

was contributing to growth in U.S. exports, thus helping support the recovery in industrial production in the

United States.

Page 14

Federal Open Market Committee

Policymakers judged that financial conditions were, on

balance, about as supportive of growth as when the

Committee met in December. Though volatility in equity prices increased late in the intermeeting period,

broad equity price indexes were about unchanged overall, private credit spreads narrowed somewhat, and financial markets generally continued to function significantly better than early last year. All categories of bank

loans, however, continued to contract sharply. Survey

evidence suggested that banks had ceased tightening

standards on most types of business and consumer

loans, though commercial real estate loans were a notable exception. Anecdotal evidence suggested that some

banks were starting to look for opportunities to expand

lending.

Though headline inflation had been variable, largely

reflecting swings in energy prices, core measures of

inflation were subdued and were expected to remain so.

One participant noted that core inflation had been held

down in recent quarters by unusually slow increases in

the price index for shelter, and that the recent behavior

of core inflation might be a misleading signal of the

underlying inflation trend. Reports from business contacts suggested less price discounting, but pricing power remained limited. Wage growth continued to be

restrained, and unit labor costs were still falling. Energy prices had dropped back in recent weeks, but many

participants saw upward pressures on commodity prices associated with expanding global economic activity

as an inflation risk. However, some noted that the high

degree of slack in resource utilization posed a downside

risk to inflation. Survey measures of expected future

inflation were fairly stable, but some market-based

measures of inflation expectations and inflation risk

suggested continuing concern among market participants about the risk of higher medium-term inflation,

perhaps reflecting large fiscal deficits and the size of

the Federal Reserve’s balance sheet.

Though participants agreed there was considerable

slack in resource utilization, their judgments about the

degree of slack varied. The several extensions of emergency unemployment insurance benefits appeared to

have raised the measured unemployment rate, relative

to levels recorded in past downturns, by encouraging

some who have lost their jobs to remain in the labor

force. If that effect were large—some estimates suggested it could account for 1 percentage point or more

of the increase in the unemployment rate during this

recession—then the reported unemployment rate

might be overstating the amount of slack in resource

utilization relative to past periods of high unemploy-

_

ment. Several participants observed that 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, could reduce the economy’s potential output,

at least temporarily; historical experience following

large adverse financial shocks suggests such an effect.

On the other hand, if recent productivity gains were to

be sustained, as some business contacts indicated they

would be, potential output currently could be higher

than standard measures suggested, and the high level of

the unemployment rate could be a more accurate indication of slack in resource utilization than usual measures of the output gap.

Committee Policy Action

In their discussion of monetary policy for the period

ahead, 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 asset purchase programs

were nearing completion and neither the economic outlook nor financial conditions had changed appreciably

since the December meeting. Accordingly, the Committee affirmed its intention to purchase a total of

$1.25 trillion of agency MBS and about $175 billion of

agency debt by the end of the current quarter 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 its purchases of securities in light of the evolving economic outlook and conditions in financial markets. Members

recognized that references to “purchases” of securities

would need to be modified as the completion of the

asset purchase programs draws near. One member

recommended that the FOMC replace the portion of

the statement that indicates the Committee will evaluate its “purchases” of securities with an indication that

the Committee will evaluate its “holdings” of securities.

The change in wording would encompass the possibility that the Committee might decide, at some point,

either to sell securities or to purchase additional securities. Other members judged that it would be premature

to make such a change in the statement before observing economic and financial conditions as the Committee’s current asset purchase program comes to a close.

Accordingly, the Committee decided to retain the reference to securities “purchases” for the time being.

The Committee also affirmed its 0 to ¼ percent target

range for the federal funds rate and, based on the outlook for a gradual economic recovery, decided to reiterate its anticipation that economic conditions, including

Minutes of the Meeting of January 26-27, 2010

low levels of resource utilization, subdued inflation

trends, and stable inflation expectations, were likely to

warrant exceptionally low rates for an extended period.

Members 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,

with few exceptions, the functioning of most financial

markets, including interbank markets, no longer

showed significant impairment. Accordingly they

agreed that the statement to be released following the

meeting would indicate that the Federal Reserve would

be closing 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 on February 1, 2010. Committee members also agreed to announce that temporary liquidity swap arrangements

between the Federal Reserve and other central banks

would expire on February 1. In addition, the statement

would say that amounts available through the Term

Auction Facility would be scaled back further, with

$50 billion of 28-day credit to be offered on February 8

and $25 billion of 28-day credit to be offered at the

final auction of March 8. The statement also would

note that the anticipated expiration dates for the Term

Asset-Backed Securities Loan Facility remained 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. Members

emphasized that they were prepared to modify these

plans if necessary to support financial stability and economic growth.

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

Page 15

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. 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

Committee directs the Desk to engage in

dollar roll transactions as necessary to facilitate settlement of the Federal Reserve’s

agency MBS transactions to be conducted

through the end of the first quarter, as directed above. 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 December

suggests that economic activity has continued to strengthen and that the deterioration

in the labor market is abating. Household

spending is expanding at a moderate rate but

remains constrained by a weak labor market,

modest income growth, lower housing

wealth, and tight credit. Business spending

on equipment and software appears to be

picking up, but investment in structures is

still contracting and employers remain reluctant to add to payrolls. Firms have brought

inventory stocks into better alignment with

sales. While bank lending continues to contract, financial market conditions remain

supportive of economic growth. Although

the pace of economic recovery is likely to be

moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

Page 16

Federal Open Market Committee

With substantial resource slack continuing to

restrain cost pressures and with longer-term

inflation expectations stable, inflation is likely

to be 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. The

Committee will continue to evaluate its purchases of securities in light of the evolving

economic outlook and conditions in financial

markets.

In light of improved functioning of financial

markets, the Federal Reserve will be closing

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 on February 1, as

previously announced. In addition, the temporary liquidity swap arrangements between

the Federal Reserve and other central banks

will expire on February 1. The Federal Reserve is in the process of winding down its

Term Auction Facility: $50 billion in 28-day

credit will be offered on February 8 and

$25 billion in 28-day credit will be offered at

the final auction on March 8. The anticipated expiration dates for the Term AssetBacked Securities Loan Facility remain set at

June 30 for loans backed by new-issue com-

_

mercial mortgage-backed securities and

March 31 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: Ben Bernanke, William C.

Dudley, James Bullard, Elizabeth Duke, Donald L.

Kohn, Sandra Pianalto, Eric Rosengren, Daniel K. Tarullo, and Kevin Warsh.

Voting against this action: Thomas M. Hoenig.

Mr. Hoenig dissented because he believed it was no

longer advisable to indicate that economic and financial

conditions were likely to “warrant exceptionally low

levels of the federal funds rate for an extended period.”

In recent months, economic and financial conditions

improved steadily, and Mr. Hoenig was concerned that,

under these improving conditions, maintaining shortterm interest rates near zero for an extended period of

time would lay the groundwork for future financial imbalances and risk an increase in inflation expectations.

Accordingly, Mr. Hoenig believed that it would be

more appropriate for the Committee to express an expectation that the federal funds rate would be low for

some time—rather than exceptionally low for an extended period. Such a change in communication would

provide the Committee flexibility to begin raising rates

modestly. He further believed that moving to a modestly higher federal funds rate soon would lower the

risks of longer-run imbalances and an increase in longrun inflation expectations, while continuing to provide

needed support to the economic recovery.

It was agreed that the next meeting of the Committee

would be held on Tuesday, March 16, 2010. The meeting adjourned at 1:20 p.m. on January 27, 2010.

Notation Vote

By notation vote completed on January 5, 2010, the

Committee unanimously approved the minutes of the

FOMC meeting held on December 15-16, 2009.

_____________________________

Brian F. Madigan

Secretary

Page 1

Summary of Economic Projections

In conjunction with the January 26–27, 2010, 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 2010 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.

FOMC participants’ forecasts for economic activity and

inflation were broadly similar to their previous projections, which were made in conjunction with the November 2009 FOMC meeting. As depicted in figure 1,

the economic recovery from the recent recession was

expected to be gradual, with real gross domestic product (GDP) expanding at a rate that was only moderately

above participants’ assessment of its longer-run sus-

tainable growth rate and the unemployment rate declining slowly over the next few years. Most participants

also anticipated that inflation would remain subdued

over this period. As indicated in table 1, a few participants made modest upward revisions to their projections for real GDP growth in 2010. Beyond 2010,

however, the contours of participants’ projections for

economic activity and inflation were little changed, with

participants continuing to expect that the pace of the

economic recovery will be restrained by household and

business uncertainty, only gradual improvement in labor market conditions, and slow easing of credit conditions in the banking sector. Participants generally expected that it would take some time for the economy to

converge fully to its longer-run path—characterized by

a sustainable rate of output growth and by rates of employment and inflation consistent with their interpretation of the Federal Reserve’s dual objectives—with a

sizable minority of the view that the convergence

process could take more than five to six years. As in

November, nearly all participants judged the risks to

their growth outlook as generally balanced, and most

also saw roughly balanced risks surrounding their inflation projections. Participants continued to judge the

uncertainty surrounding their projections for economic

activity and inflation as unusually high relative to historical norms.

Table 1. Economic projections of Federal Reserve Governors and Reserve Bank presidents, January 2010

Percent

Variable

Range2

Central tendency1

2010

2011

2012

Longer run

2010

2011

2012

Longer run

Change in real GDP. . . . . . 2.8 to 3.5

November projection. . 2.5 to 3.5

3.4 to 4.5

3.4 to 4.5

3.5 to 4.5

3.5 to 4.8

2.5 to 2.8

2.5 to 2.8

2.3 to 4.0

2.0 to 4.0

2.7 to 4.7

2.5 to 4.6

3.0 to 5.0

2.8 to 5.0

2.4 to 3.0

2.4 to 3.0

Unemployment rate. . . . . . 9.5 to 9.7

November projection. . 9.3 to 9.7

8.2 to 8.5

8.2 to 8.6

6.6 to 7.5

6.8 to 7.5

5.0 to 5.2

5.0 to 5.2

8.6 to 10.0

8.6 to 10.2

7.2 to 8.8

7.2 to 8.7

6.1 to 7.6

6.1 to 7.6

4.9 to 6.3

4.8 to 6.3

PCE inflation. . . . . . . . . . . 1.4 to 1.7

November projection. . 1.3 to 1.6

1.1 to 2.0

1.0 to 1.9

1.3 to 2.0

1.2 to 1.9

1.7 to 2.0

1.7 to 2.0

1.2 to 2.0

1.1 to 2.0

1.0 to 2.4

0.6 to 2.4

0.8 to 2.0

0.2 to 2.3

1.5 to 2.0

1.5 to 2.0

Core PCE inflation3. . . . . . 1.1 to 1.7

November projection. . 1.0 to 1.5

1.0 to 1.9

1.0 to 1.6

1.2 to 1.9

1.0 to 1.7

1.0 to 2.0

0.9 to 2.0

0.9 to 2.4

0.5 to 2.4

0.8 to 2.0

0.2 to 2.3

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 November projections were made in conjunction with the meeting of the Federal Open Market Committee on

November 3–4, 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, 2010–12 and over the longer run

Percent

Change in real GDP

5

Central tendency of projections

Range of projections

4

3

Actual

2

1

+

0

_

1

2

2005

2006

2007

2008

2009

2010

2011

2012

Longer

run

Percent

Unemployment rate

10

9

8

7

6

5

2005

2006

2007

2008

2009

2010

2011

2012

Longer

run

Percent

PCE inflation

3

2

1

2005

2006

2007

2008

2009

2010

2011

2012

Longer

run

Percent

Core PCE inflation

3

2

1

2005

2006

2007

2008

2009

2010

2011

2012

NOTE: Definitions of variables are in the notes to table 1. The data for the actual values of the variables are annual. The data for the change in real

GDP, PCE inflation, and core PCE inflation shown for 2009 incorporate the advance estimate of GDP for the fourth quarter of 2009, which the Bureau

of Economic Analysis released on January 29, 2010; this information was not available to FOMC meeting participants at the time of their meeting.

Summary of Economic Projections of the Meeting of January 26-27, 2010

The Outlook

Participants’ projections for real GDP growth in 2010

had a central tendency of 2.8 to 3.5 percent, a somewhat narrower interval than in November. Recent

readings on consumer spending, industrial production,

and business outlays on equipment and software were

seen as broadly consistent with the view that economic

recovery was under way, albeit at a moderate pace.

Businesses had apparently made progress in bringing

their inventory stocks into closer alignment with sales

and hence would be likely to raise production as spending gained further momentum. Participants pointed to

a number of factors that would support the continued

expansion of economic activity, including accommodative monetary policy, ongoing improvements in the

conditions of financial markets and institutions, and a

pickup in global economic growth, especially in emerging market economies. Several participants also noted

that fiscal policy was currently providing substantial

support to real activity, but said that they expected less

impetus to GDP growth from this factor later in the

year. Many participants indicated that the expansion

was likely to be restrained not only by firms’ caution in

hiring and spending in light of the considerable uncertainty regarding the economic outlook and general

business conditions, but also by limited access to credit

by small businesses and consumers dependent on

bank-intermediated finance.

Looking further ahead, participants’ projections were

for real GDP growth to pick up in 2011 and 2012; the

projections for growth in both years had a central tendency of about 3½ to 4½ percent. As in November,

participants generally expected that the continued repair of household balance sheets and gradual improvements in credit availability would bolster consumer spending. Responding to an improved sales outlook and readier access to bank credit, businesses were

likely to increase production to rebuild their inventory

stocks and increase their outlays on equipment and

software. In addition, improved foreign economic

conditions were viewed as supporting robust growth in

U.S. exports. However, participants also indicated that

elevated uncertainty on the part of households and

businesses and the very slow recovery of labor markets

would likely restrain the pace of expansion. Moreover,

although conditions in the banking system appeared to

have stabilized, distress in commercial real estate markets was expected to pose risks to the balance sheets of

banking institutions for some time, thereby contributing to only gradual easing of credit conditions for many

households and smaller firms. In the absence of fur-

Page 3

ther shocks, participants generally anticipated that real

GDP growth would converge over time to an annual

rate of 2.5 to 2.8 percent, the longer-run pace that appeared to be sustainable in view of expected demographic trends and improvements in labor productivity.

Participants anticipated that labor market conditions

would improve only slowly over the next several years.

Their projections for the average unemployment rate in

the fourth quarter of 2010 had a central tendency of 9.5

to 9.7 percent, only a little below the levels of about

10 percent that prevailed late last year. Consistent with

their outlook for moderate output growth, participants

generally expected that the unemployment rate would

decline only about 2½ percentage points by the end of

2012 and would still be well above its longer-run sustainable rate. Some participants also noted that considerable uncertainty surrounded their estimates of the

productive potential of the economy and the sustainable rate of employment, owing partly to substantial ongoing structural adjustments in product and labor markets. Nonetheless, participants’ longer-run unemployment projections had a central tendency of 5.0 to

5.2 percent, the same as in November.

Most participants anticipated that inflation would remain subdued over the next several years. The central

tendency of their projections for personal consumption

expenditures (PCE) inflation was 1.4 to 1.7 percent for

2010, 1.1 to 2.0 percent for 2011, and 1.3 to 2.0 percent

for 2012. Many participants anticipated that global

economic growth would spur increases in energy prices, and hence that headline PCE inflation would run

slightly above core PCE inflation over the next year or

two. Most expected that substantial resource slack

would continue to restrain cost pressures, but that inflation would rise gradually toward their individual assessments of the measured rate of inflation judged to

be most consistent with the Federal Reserve’s dual

mandate. As in November, the central tendency of

projections of the longer-run inflation rate was 1.7 to

2.0 percent. A majority of participants anticipated that

inflation in 2012 would still be below their assessments

of the mandate-consistent inflation rate, while the remainder expected that inflation would be at or slightly

above its longer-run value by that time.

Uncertainty and Risks

Nearly all participants shared the judgment that their

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

Page 4

Federal Open Market Committee

uncertainty.1 Participants generally saw the risks to

these projections as roughly balanced, although a few

indicated that the risks to the unemployment outlook

remained tilted to the upside. As in November, many

participants highlighted the difficulties inherent in predicting macroeconomic outcomes in the wake of a financial crisis and a severe recession. In addition, some

pointed to uncertainties regarding the extent to which

the recent run-up in labor productivity would prove to

be persistent, while others noted the risk that the deteriorating performance of commercial real estate could

adversely affect the still-fragile state of the banking system and restrain the growth of output and employment

over coming quarters.

As in November, most participants continued to see

the uncertainty surrounding their inflation projections

as higher than historical norms. However, a few

judged that uncertainty in the outlook for inflation was

about in line with typical levels, and one viewed the

uncertainty surrounding the inflation outlook as lower

than average. Nearly all participants judged the risks to

the inflation outlook as roughly balanced; however, two

saw these risks as tilted to the upside, while one regarded the risks as weighted to the downside. Some

participants noted that inflation expectations could

drift downward in response to persistently low inflation

and continued slack in resource utilization. Others

pointed to the possibility of an upward shift in expected and actual inflation, especially if extraordinarily

accommodative monetary policy measures were not

unwound in a timely fashion. Participants also noted

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 overall

inflation.

Diversity of Views

Figures 2.A and 2.B provide further details on the diversity of participants’ views regarding the likely outcomes for real GDP growth and the unemployment

rate in 2010, 2011, 2012, and over the longer run. The

distribution of participants’ projections for real GDP

Table 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 risk attending participants’ projections.

1

_

Table 2. Average historical projection error ranges

Percentage points

Variable

Change in real

2010

2011

2012

......

±1.3

±1.5

±1.6

.......

±0.6

±0.8

±1.0

±0.9

±1.0

±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 winter 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.

growth this year was slightly narrower than the distribution of their projections last November, but the distributions of the projections for real GDP growth in 2011

and in 2012 were little changed. The dispersion in participants’ output growth projections reflected, among

other factors, the diversity of their assessments regarding the current degree of underlying momentum in

economic activity, the evolution of consumer and business sentiment, and the likely pace of easing of bank

lending standards and terms. Regarding participants’

unemployment rate projections, the distribution for

2010 narrowed slightly, but the distributions of their

unemployment rate projections for 2011 and 2012 did

not change appreciably. The distributions of participants’ estimates of the longer-run sustainable rates of

output growth and unemployment were essentially the

same as in November.

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

the inflation outlook. For overall and core PCE inflation, the distributions of participants’ projections for

2010 were nearly the same as in November. The distributions of overall and core inflation for 2011 and

2012, however, were noticeably more tightly concentrated than in November, reflecting the absence of

forecasts of especially low inflation. The dispersion in

participants’ projections over the next few years was

mainly due to differences in their judgments regarding

the determinants of inflation, including their estimates

of prevailing resource slack and their assessments of

the extent to which such slack affects actual and expected inflation. In contrast, the relatively tight distribution of participants’ projections for longer-run infla-

Summary of Economic Projections of the Meeting of January 26-27, 2010

tion illustrates their substantial agreement about the

measured rate of inflation that is most consistent with

Page 5

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, 2010–12 and over the longer run

Number of participants

2010

14

January projections

November projections

12

10

8

6

4

2

2.02.1

2.22.3

2.42.5

2.62.7

2.82.9

3.03.1

3.23.3

3.43.5

3.63.7

3.83.9

4.04.1

4.24.3

4.44.5

4.64.7

4.84.9

5.05.1

Percent range

Number of participants

2011

14

12

10

8

6

4

2

2.02.1

2.22.3

2.42.5

2.62.7

2.82.9

3.03.1

3.23.3

3.43.5

3.63.7

3.83.9

4.04.1

4.24.3

4.44.5

4.64.7

4.84.9

5.05.1

Percent range

Number of participants

2012

14

12

10

8

6

4

2

2.02.1

2.22.3

2.42.5

2.62.7

2.82.9

3.03.1

3.23.3

3.43.5

3.63.7

3.83.9

4.04.1

4.24.3

4.44.5

4.64.7

4.84.9

5.05.1

Percent range

Number of participants

Longer run

14

12

10

8

6

4

2

2.02.1

2.22.3

2.42.5

2.62.7

2.82.9

3.03.1

3.23.3

3.43.5

Percent range

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

3.63.7

3.83.9

4.04.1

4.24.3

4.44.5

4.64.7

4.84.9

5.05.1

Summary of Economic Projections of the Meeting of January 26-27, 2010

Page 7

Figure 2.B. Distribution of participants’ projections for the unemployment rate, 2010–12 and over the longer run

Number of participants

2010

14

January projections

November projections

12

10

8

6

4

2

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- 10.24.9 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

Percent range

Number of participants

2011

14

12

10

8

6

4

2

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- 10.24.9 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

Percent range

Number of participants

2012

14

12

10

8

6

4

2

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- 10.24.9 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

Percent range

Number of participants

Longer run

14

12

10

8

6

4

2

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- 10.24.9 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

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, 2010–12 and over the longer run

Number of participants

2010

14

January projections

November projections

12

10

8

6

4

2

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

Percent range

Number of participants

2011

14

12

10

8

6

4

2

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

Percent range

Number of participants

2012

14

12

10

8

6

4

2

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

Percent range

Number of participants

Longer run

14

12

10

8

6

4

2

0.10.2

0.30.4

0.50.6

0.70.8

0.91.0

1.11.2

Percent range

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

1.31.4

1.51.6

1.71.8

1.92.0

2.12.2

2.32.4

Summary of Economic Projections of the Meeting of January 26-27, 2010

Page 9

Figure 2.D. Distribution of participants’ projections for core PCE inflation, 2010–12

Number of participants

2010

14

January projections

November projections

12

10

8

6

4

2

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

Percent range

Number of participants

2011

14

12

10

8

6

4

2

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

Percent range

Number of participants

2012

14

12

10

8

6

4

2

0.10.2

0.30.4

0.50.6

0.70.8

0.91.0

1.11.2

Percent range

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

1.31.4

1.51.6

1.71.8

1.92.0

2.12.2

2.32.4

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 1.7 to 4.3 percent in the current year, 1.5 to 4.5 percent in

the second year, and 1.4 to 4.6 percent in the

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

1.1 to 2.9 percent in the current year and 1.0 to

3.0 percent in the second and third years.

Because current conditions may differ

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

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

than, or broadly similar to typical levels of

forecast uncertainty in the past as shown in

table 2. Participants also provide judgments as

to whether the risks to their projections are

weighted to the upside, are weighted to the

downside, or are broadly balanced. That is,

participants judge whether each variable is

more likely to be above or below their projections of the most likely outcome. These judgments about the uncertainty and the risks attending each participant’s projections are distinct from the diversity of participants’ views

about the most likely outcomes. Forecast uncertainty is concerned with the risks associated

with a particular projection rather than with

divergences across a number of different projections.

_