FOMC Minutes
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Minutes of the Federal Open Market Committee
June 22-23, 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, June 22, 2010,
at 2:00 p.m. and continued on Wednesday, June 23,
2010, at 9:00 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
Charles L. Evans, Richard W. Fisher, Narayana
Kocherlakota, and Charles I. Plosser, Alternate
Members of the Federal Open Market Committee
Jeffrey M. Lacker, Dennis P. Lockhart, and Janet L.
Yellen, Presidents of the Federal Reserve
Banks of Richmond, Atlanta, and San Francisco, respectively
Brian F. Madigan, Secretary and Economist
Matthew M. Luecke, Assistant Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Thomas Baxter, Deputy General Counsel
Richard M. Ashton, Assistant General Counsel
Nathan Sheets, Economist
David J. Stockton, Economist
Thomas A. Connors, William B. English, Jeff
Fuhrer, Steven B. Kamin, Simon Potter, Lawrence Slifman, Christopher J. Waller, and David W. Wilcox, Associate Economists
Brian Sack, Manager, System Open Market Account
Jennifer J. Johnson, Secretary of the Board, Office
of the Secretary, 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
Nellie Liang, David Reifschneider, and William
Wascher, Senior Associate Directors, Division
of Research and Statistics, Board of Governors; William Nelson, Senior Associate Director, Division of Monetary Affairs, Board of
Governors
Seth B. Carpenter, Associate Director, Division of
Monetary Affairs, Board of Governors
Christopher J. Erceg, Deputy Associate Director,
Division of International Finance, Board of
Governors; Michael G. Palumbo and Joyce K.
Zickler, Deputy Associate Directors, Division
of Research and Statistics, Board of Governors
Brian J. Gross, Special Assistant to the Board, Office of Board Members, Board of Governors
Fabio M. Natalucci, Assistant Director, Division of
Monetary Affairs, Board of Governors
David H. Small, Project Manager, Division of
Monetary Affairs, Board of Governors
Beth Anne Wilson, Section Chief, Division of International Finance, Board of Governors
¹ Attended Tuesday’s session only.
² Attended Wednesday’s session only.
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Federal Open Market Committee
John C. Driscoll and Jennifer E. Roush, Senior
Economists, Division of Monetary Affairs,
Board of Governors; Andrea L. Kusko, Senior
Economist, Division of Research and Statistics, Board of Governors; John W. Schindler,
Senior Economist, Division of International
Finance, Board of Governors
Penelope A. Beattie, Assistant to the Secretary, Office of the Secretary, Board of Governors
Valerie Hinojosa and Randall A. Williams, Records
Management Analysts, Division of Monetary
Affairs, Board of Governors
Patrick K. Barron and John F. Moore, First Vice
Presidents, Federal Reserve Banks of Atlanta
and San Francisco, respectively
Loretta J. Mester, Harvey Rosenblum, and John C.
Williams, Executive Vice Presidents, Federal
Reserve Banks of Philadelphia, Dallas, and San
Francisco, respectively
David Altig, Richard P. Dzina, Arthur Rolnick, and
Mark E. Schweitzer, Senior Vice Presidents,
Federal Reserve Banks of Atlanta, New York,
Minneapolis, and Cleveland, respectively
Daniel Aaronson, Todd E. Clark, and Andreas L.
Hornstein, Vice Presidents, Federal Reserve
Banks of Chicago, Kansas City, and Richmond, respectively
Joshua L. Frost, Assistant Vice President, Federal
Reserve Bank of New York
Developments in Financial Markets and the Federal Reserve’s Balance Sheet
The Manager of the System Open Market Account
(SOMA) reported on developments in domestic and
foreign financial markets during the period since the
Committee met on April 27–28, 2010. He also briefed
the Committee on the System’s progress in developing
tools for managing the supply of reserves, including
reverse repurchase agreements and the Term Deposit
Facility. In preparation for possible future reserve
draining operations, in June the Federal Reserve conducted the first of several small-value auctions to test
the Term Deposit Facility. In addition, the Manager
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reported on System open market operations during the
intermeeting period. By unanimous vote, the Committee ratified those transactions. There were no open
market operations in foreign currencies for the System’s account over the intermeeting period.
In his presentation to the Committee, the Manager
noted that “fails to deliver” in the mortgage-backed
securities (MBS) market had reached very high levels in
recent months. Under these conditions, dealers had
experienced difficulty in arranging delivery of a small
amount—including about $9 billion of securities with
5.5 percent coupons issued by Fannie Mae—of the
$1.25 trillion of MBS that the Desk at the Federal Reserve Bank of New York had purchased between January 2009 and March 2010. The Desk had postponed
settlement of some of these transactions through the
use of dollar rolls. The Manager discussed alternative
methods of settling the outstanding transactions and
recommended that the Committee authorize the Desk
to engage in coupon swap transactions to facilitate the
settlement of these purchases. The Manager noted that
a coupon swap is a common transaction in the market
for MBS in which the two counterparties exchange securities at market prices. By engaging in a coupon
swap, the Federal Reserve would effectively sell the
scarce securities that it had not yet received and purchase instead securities that are more readily available
in the market. After discussing various approaches,
meeting participants agreed that coupon swaps were an
appropriate method to achieve settlement of outstanding transactions.
As background for the Committee’s continuing consideration of its portfolio management policies, the Manager gave a presentation on alternative strategies for
reinvesting the proceeds from maturing Treasury securities. Under current practice, the Desk reinvests the
proceeds of maturing Treasury coupon securities in
new Treasury securities that are issued on the date the
older securities mature, allocating the investments
across the new securities in proportion to the issuance
amounts. The Manager presented two alternatives to
the status quo. First, the Committee could consider
halting all reinvestment of the proceeds of maturing
securities. Such a strategy would shrink the size of the
Federal Reserve’s balance sheet and reduce the quantity
of reserve balances in the banking system gradually
over time. Second, the Committee could reinvest the
proceeds of maturing securities only in new issues of
Treasury securities with relatively short maturities—
bills only, or bills as well as coupon issues with terms of
three years or less. This strategy would maintain the
Minutes of the Meeting of June 22-23, 2010
size of the Federal Reserve’s balance sheet but would
reduce somewhat the average maturity of the portfolio
and increase its liquidity. One participant favored halting all reinvestment, and many saw benefits to eventually adopting an approach of reinvesting in bills and
shorter-term coupon issues to shift the maturity composition of the portfolio toward the structure that had
prevailed prior to the financial crisis. However, the
Committee made no change to its reinvestment policy
at this meeting.
Continuing a discussion from previous meetings, participants again addressed issues regarding asset sales.
Participants continued to agree that gradual sales of
MBS should be undertaken, at some point, to speed the
return to a Treasury-securities-only portfolio. A few
participants supported beginning such sales fairly soon;
they noted that, given the evident demand in the market for safe, longer-term assets, modest sales of MBS
might not put much, if any, upward pressure on longterm interest rates or be disruptive to the functioning
of financial markets. However, many participants still
saw asset sales as potentially tightening financial conditions to some extent. Most participants continued to
judge it appropriate to defer asset sales for some time;
several noted the modest weakening in the economic
outlook since the Committee’s last meeting as an additional reason to do so. A majority of participants continued to anticipate that asset sales would start after the
Committee had begun to firm policy by increasing
short-term interest rates; such an approach would
postpone asset sales until the economic recovery was
well established and maintain short-term interest rates
as the Committee’s key monetary policy tool. A few
participants suggested selling MBS and using the
proceeds to purchase Treasury securities of comparable
duration, arguing that doing so would hasten the move
toward a Treasury-securities-only portfolio without
tightening financial conditions. Participants agreed that
it would be important to maintain flexibility regarding
the appropriate timing and pace of asset sales, given the
uncertainties associated with the unprecedented size
and composition of the Federal Reserve’s balance sheet
and its effects on financial conditions. Overall, participants emphasized that any decision to engage in asset
sales would need to be communicated well in advance
of the initiation of such transactions, and that sales
should be conducted at a gradual pace and potentially
be adjusted in response to developments in economic
and financial conditions.
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Staff Review of the Economic Situation
The information reviewed at the June 22–23 meeting
suggested that the economic recovery was proceeding
at a moderate pace in the second quarter. Businesses
continued to increase employment and lengthen workweeks in April and May, but the unemployment rate
remained elevated. Industrial production registered
strong and widespread gains, and business investment
in equipment and software rose rapidly. Consumer
spending appeared to have moved up further in April
and May. However, housing starts dropped in May,
and nonresidential construction remained depressed.
Falling energy prices held down headline consumer
prices in April and May while core consumer prices
edged up.
Labor demand continued to firm in recent months.
While the change in total nonfarm payroll employment
in May was boosted significantly by the hiring of temporary workers for the decennial census, private employment posted only a small increase. This increase,
however, followed sizable gains in March and April,
and the average workweek of all private-sector employees increased over the March-to-May period. As a
result, aggregate hours worked by employees on private
nonfarm payrolls rose substantially through May. The
unemployment rate moved up in April but dropped
back in May to 9.7 percent, its first-quarter average.
The labor force participation rate was, on average,
higher in recent months than in the first quarter, as
rising employment was accompanied by an increasing
number of jobseekers. Although the number of workers who were employed part time for economic reasons
leveled off in recent months, the proportion of unemployed workers who were jobless for more than 26
weeks continued to move up. Initial claims for unemployment insurance were little changed over the intermeeting period, remaining at a still-elevated level.
Industrial production rose at a robust rate in April and
May, with production increases broadly based across
industries. Firming domestic demand, rising exports,
and business inventory restocking appeared to have
provided upward impetus to factory production. In
April and May, production in high-technology industries again rose strongly, with substantial gains in the
output of semiconductors and further solid increases in
the production of computers and communications
equipment. The production of other types of business
equipment continued to rebound, and the output of
construction supplies advanced further. Production of
light motor vehicles turned up in May; nonetheless,
dealers’ inventories remained lean. Capacity utilization
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Federal Open Market Committee
in manufacturing rose in May to a rate noticeably above
the low reached in mid-2009, but it was still substantially below its longer-run average.
The rise in consumer spending slowed in recent
months after a brisk increase in the first quarter. Although sales of light motor vehicles continued to trend
higher, nominal sales of non-auto consumer goods and
food services were little changed in April and May.
The moderation in spending appeared, on balance, to
be aligning the pace of consumption with recent trends
in income, wealth, and consumer sentiment. Real disposable personal income moved up at a solid rate in
March and April, reflecting increases in employment
and hours worked as well as slightly higher real wages,
but home values declined in recent months and equity
prices moved down since the April meeting. Measures
of consumer sentiment improved in May and early June
but were still at relatively low levels.
The anticipated expiration of the homebuyer tax credit
appeared to have pulled home sales forward, boosting
their level in recent months. Sales of existing singlefamily homes rose strongly in April, and, although they
moved down in May, these sales were still above their
level earlier in the year. Purchases of new single-family
homes also jumped in April, but then fell steeply in
May. On net, the upswing in the volume of real estate
transactions in recent months was likely to boost the
brokers’ commissions component of residential investment in the second quarter. However, starts of
new single-family homes, which had trended higher in
the first four months of the year, declined sharply in
May. In addition, the number of permits for new
homes, which tends to lead starts, fell for a second
month in May. House prices declined somewhat in
recent months, reversing some of the modest increases
that occurred in the spring and summer of 2009. After
changing little on net during the preceding year, interest
rates for 30-year fixed-rate conforming mortgages
moved lower in May and June.
Real spending on equipment and software increased
further early in the second quarter. Business outlays
for computing equipment and software continued to
rise at a brisk pace through April, and shipments of
aircraft to domestic carriers rebounded. Orders and
shipments of nondefense capital goods excluding
transportation and high-tech equipment stayed on a
noticeable uptrend, on net, in March and April, with
the increases broadly based by type of equipment. The
recovery in equipment and software spending was consistent with the relatively strong gains in production in
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recent months, improved financial conditions over the
first part of the year, and the positive readings from
surveys on business conditions and earnings reports for
producers of capital goods. Business outlays for nonresidential construction appeared to be contracting further, on balance, in March and April, although the rate
of decline seemed to be moderating. Outlays for new
power plants and for manufacturing facilities firmed,
and investment in drilling and mining structures continued to rise strongly. However, spending on office
and commercial structures was still falling steeply
through April, with the weakness likely related to high
vacancy rates, falling property prices, and the light volume of sales.
Businesses appeared to have begun to restock their
inventories. Real nonfarm inventory investment turned
positive in the first quarter, and data for April pointed
to further modest accumulation. Ratios of inventories
to sales for most industries looked to be within comfortable ranges.
Consumer price inflation remained low in April and
May. The core consumer price index rose only slightly
over the period, and the year-over-year change in the
index was lower than earlier this year. Core goods
prices continued to decline, on net, and prices of nonenergy services remained soft. The headline consumer
price index edged down in both months, as the drop in
the price of crude oil since April led consumer energy
prices to retrace a portion of the run-up that occurred
during the nine months ending in January. At earlier
stages of processing, producer prices of core intermediate materials rose moderately in May after five
months of large increases. Inflation compensation
based on Treasury inflation-protected securities decreased recently in response to low readings on inflation and falling oil prices. Survey measures of both
short- and long-term inflation expectations remained
relatively stable.
Unit labor costs continued to be restrained by weakness in hourly compensation and further gains in productivity. Revised estimates of labor compensation indicated that hourly compensation in the nonfarm business sector was about flat, on net, during the fourth
quarter of 2009 and the first quarter of 2010. The employment cost index showed a moderate rise over the
period, boosted by a sizable increase in benefit costs in
the first quarter. The year-over-year increase in average
hourly earnings of all employees was also moderate
through May. Output per hour in the nonfarm busi-
Minutes of the Meeting of June 22-23, 2010
ness sector, which rose rapidly in 2009, posted a more
moderate but still-solid gain in the first quarter of 2010.
The U.S. international trade deficit widened slightly in
April, as nominal exports fell a bit more than nominal
imports. The April declines in both exports and imports followed robust increases in March. The April
fall in exports reflected declines in exports of consumer
goods, primarily due to a drop in pharmaceuticals, and
in agricultural goods. Exports of industrial supplies
moved up while exports of capital goods were flat after
increasing strongly in March. Imports in April were
pulled down by lower imports of consumer goods,
which more than offset sharply higher imports of capital goods, particularly computing equipment. Imports
of automotive products and non-oil industrial supplies
declined slightly, and imports of petroleum products
were flat following a large increase in March.
Incoming data suggested that economic activity abroad
continued to expand at a strong pace in the first half of
the year. Among the advanced foreign economies,
growth of real gross domestic product (GDP) in the
first quarter was particularly strong in Canada and Japan, and recent indicators for those countries pointed
to continued solid increases in the second quarter. In
contrast, the rise in economic activity in the euro area
was subdued, as favorable readings for the manufacturing sector were counterbalanced by weakness in domestic demand. Since the time of the April meeting of
the Federal Open Market Committee (FOMC), concerns about the fiscal situation of several euro-area
countries intensified sharply. In response, European
authorities announced a number of policy measures,
including acceleration of fiscal consolidation plans in
some countries, finalization of an International Monetary Fund (IMF) and European Union (EU) assistance
package for Greece, and the introduction of a broader
€500 billion financial assistance program that could be
complemented by bilateral IMF lending. The European Central Bank (ECB) also announced further
measures to improve liquidity conditions in impaired
markets, including a program to purchase sovereign
and private debt.
Economic activity in emerging market economies continued to expand briskly in the first half of this year.
Growth of economic activity was particularly robust in
emerging Asia, driven in part by strong increases in
industrial production and exports associated with solid
gains in final demand as well as the turn in the inventory cycle. The rise of real GDP in Latin America appeared to have stalled in the first quarter, but this de-
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velopment reflected a contraction in Mexico that morefavorable monthly indicators suggested should prove
temporary. In contrast, the increase in Brazilian real
GDP was very strong. Consumer price inflation in the
foreign economies in aggregate was buoyed by higher
food and energy prices in the first quarter, while core
inflation generally remained subdued. More recent information suggested some moderation in foreign inflation in the second quarter.
Staff Review of the Financial Situation
The FOMC’s decision at its April meeting to maintain
the 0 to ¼ percent target range for the federal funds
rate and the wording of the accompanying statement
were largely in line with expectations and prompted
little market reaction. Economic data releases were
mixed, on balance, over the intermeeting period, but
market participants were especially attentive to incoming information on the labor market—most notably,
the private payroll figures in the employment report for
May, which were considerably weaker than investors
expected. Those data, combined with heightened concerns about the global economic outlook stemming in
part from Europe’s sovereign debt problems, contributed to a downward revision in the expected path of
policy implied by money market futures rates.
In the market for Treasury coupon securities, 2- and
10-year nominal yields fell considerably over the intermeeting period. Market participants pointed to flightto-quality flows and greater concern about the economic outlook as factors boosting the demand for Treasury
securities. The drop in Treasury yields was accompanied by a small widening of swap spreads.
Conditions in short-term funding markets deteriorated
somewhat, particularly for European financial institutions. Spreads of the term London interbank offered
rate, or Libor, over rates on overnight index swaps widened noticeably, with the availability of funding at maturities longer than one week reportedly quite limited.
Market participants also reduced holdings of commercial paper sponsored by entities thought to have exposures to peripheral European financial institutions and
governments. Even so, spreads of high-grade unsecured financial commercial paper to nonfinancial
commercial paper widened only modestly over the intermeeting period. In secured funding markets, spreads
on asset-backed commercial paper also widened modestly, while rates on repurchase agreements involving
Treasury and agency collateral changed little. In the
inaugural Senior Credit Officer Opinion Survey on
Dealer Financing Terms, which was conducted by the
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Federal Open Market Committee
Federal Reserve between May 24 and June 4, dealers
generally reported that the terms on which they provided credit remained tight relative to those at the end
of 2006. However, they noted some loosening of
terms for both securities financing and over-thecounter derivatives transactions, on net, over the previous three months for certain classes of clients—
including hedge funds, institutional investors, and nonfinancial corporations—and intensified efforts by those
clients to negotiate more-favorable terms. At the same
time, they reported a pickup in demand for financing
across several collateral types over the past three
months.
Broad U.S. stock price indexes fell over the intermeeting period, in part reflecting deepening concerns about
the European fiscal situation and its potential for adverse spillovers to global economic growth. Optionimplied volatility on the S&P 500 index spiked in midMay, to more than double its value at the time of the
April FOMC meeting, but largely reversed its run-up by
the time of the June meeting. The spread between the
staff’s estimate of the expected real return on equities
over the next 10 years and an estimate of the expected
real return on a 10-year Treasury note—a measure of
the equity risk premium—increased from its already
elevated level.
Investors’ attitudes toward financial institutions deteriorated somewhat, as the equity of financial firms underperformed the broader market amid uncertainty
about the implications of developments in Europe and
the potential effects of financial regulatory reform.
Yields on investment- and speculative-grade corporate
bonds moved higher over the intermeeting period, and
high-yield bond mutual funds recorded substantial net
outflows. Spreads on corporate bonds widened, although they remained within the range prevailing since
last summer. Secondary-market bid prices on syndicated leveraged loans fell, while bid-asked spreads in
that market widened.
Net debt financing by nonfinancial corporations increased in April and May relative to its pace in the first
quarter. Gross bond issuance by investment-grade
nonfinancial corporations in the United States remained solid, on average, over those two months; nonfinancial commercial paper outstanding increased as
well. High-yield corporate bond issuance in the United
States briefly paused in May, reflecting the market’s
pullback from risky assets, although speculative-grade
U.S. firms continued to issue bonds abroad and a few
placed issues domestically in the first half of June.
_
Gross equity issuance fell a bit, on net, in April and
May, likely due in part to recent declines in equity prices and elevated market volatility. Measures of the credit quality of nonfinancial firms generally continued to
improve, and first-quarter profits for firms in the S&P
500 jumped substantially, primarily reflecting an upturn
in financial sector profits from quite depressed levels.
The outlook in commercial real estate markets stayed
weak; prices of commercial properties fell a bit further
in the first quarter, and the volume of commercial
property sales remained light. The delinquency rate for
securitized commercial mortgages continued to climb
in May, and indexes of prices of credit default swaps on
commercial mortgages declined, on net, over the intermeeting period.
Consumer credit contracted again in recent months, as
revolving credit continued on a steep downtrend. Issuance of consumer credit asset-backed securities
(ABS) increased in May, although the pace was still well
below that observed before the onset of the financial
crisis. Credit card ABS issuance remained subdued,
partly reflecting regulatory changes that made financing
credit card receivables via securitization less desirable.
In primary markets, spreads of credit card interest rates
over those on Treasury securities remained extremely
high in April, while interest rate spreads on auto loans
stayed near their average level of the past decade. Consumer credit quality improved further, with delinquency
rates on credit cards and auto loans moving down a bit
in April.
Bank credit declined, on average, in April and May at
about the same pace as in the first quarter. Commercial and industrial loans, after dropping rapidly in April,
decreased at a slower pace in May. While commercial
real estate and home equity loans fell at a slightly faster
rate than in recent quarters, the contraction in closedend residential loans abated, partly because of a reduced pace of sales to Fannie Mae and Freddie Mac.
Consumer loans declined again, on average, in April
and May. The amount of Treasury and agency securities held by large domestic banks and foreign-related
institutions declined in May, contributing to a sizable
drop in banks’ securities holdings.
On a seasonally adjusted basis, M2 contracted in April
but surged in May, with much of the month-to-month
variation apparently associated with the effects of federal tax payments and refunds. Averaging across the
two months, M2 expanded moderately after having
been about unchanged in the first quarter; liquid deposits accounted for most of the net change.
Minutes of the Meeting of June 22-23, 2010
The threat to global economic growth and financial
stability posed by the fiscal situation in some European
nations sparked widespread flight-to-quality flows over
most of the intermeeting period. This retreat led to a
broad appreciation of the dollar as well as declines in
equity prices abroad and in yields on benchmark sovereign bonds. However, investor sentiment improved
near the end of the period, leading to a partial reversal
in some of these movements, despite Moody’s downgrade of Greece to below-investment-grade status in
mid-June. On net, the dollar ended the intermeeting
period up, most headline equity indexes fell, and
benchmark government bond yields declined. Strains
in euro-area bank funding markets reemerged during
the period. In response, the ECB announced some
changes to its liquidity operations that would provide
greater market access to term funding in euros.3 Difficulties also appeared in corporate debt markets as both
nonfinancial and financial corporate debt issuance
dropped substantially in May. In addition, pressures in
dollar funding markets reappeared for foreign financial
institutions, especially those thought to have significant
exposure to Greece and other peripheral euro-area
countries. To help contain these pressures and to prevent their spread to other institutions and regions, the
Federal Reserve reestablished dollar liquidity swap arrangements with the ECB, the Bank of England, the
Bank of Japan, the Bank of Canada, and the Swiss National Bank.
Yields on the sovereign obligations of peripheral European countries declined noticeably following a May 10
announcement of a framework established by the EU
for providing financial aid to euro-area governments
and of the ECB’s intention to purchase euro-area sovereign debt. However, yields remained high even after
these announcements and moved up subsequently,
notwithstanding the ECB’s purchases of government
debt. Amid a weakening outlook for economic growth
in Europe, central banks in several emerging European
economies began to decrease policy rates. By contrast,
brighter economic prospects in Canada and China
prompted the Bank of Canada to raise its target for the
overnight rate to 50 basis points at its June meeting and
Chinese authorities to raise banks’ reserve requirement
further in May. In addition, the People’s Bank of China announced late in the period that it would allow the
renminbi to move more flexibly, and the currency apThe ECB reinstituted a six-month lending operation and
switched its three-month lending operations from fixedquantity auctions to full-allotment offerings at a fixed rate of
1 percent.
3
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preciated slightly immediately following the announcement.
Staff Economic Outlook
In the economic forecast prepared for the June FOMC
meeting, the staff continued to anticipate a moderate
recovery in economic activity through 2011, supported
by accommodative monetary policy, an attenuation of
financial stress, and strengthening consumer and business confidence. While the recent data on production
and spending were broadly in line with the staff’s expectations, the pace of the expansion over the next year
and a half was expected to be somewhat slower than
previously predicted. The intensifying concerns among
investors about the implications of the fiscal difficulties
faced by some European countries contributed to an
increase in the foreign exchange value of the dollar and
a drop in equity prices, which seemed likely to damp
somewhat the expansion of domestic demand. The
implications of these less-favorable factors for U.S.
economic activity appeared likely to be only partly offset by lower interest rates on Treasury securities, other
highly rated securities, and mortgages, as well as by a
lower price for crude oil. The staff still expected that
the pace of economic activity through 2011 would be
sufficient to reduce the existing margins of economic
slack, although the anticipated decline in the unemployment rate was somewhat slower than in the previous projection.
The staff’s forecasts for headline and core inflation
were also reduced slightly. The changes were a response to the lower prices of oil and other commodities, the appreciation of the dollar, and the greater
amount of economic slack in the forecast. Despite
these developments, inflation expectations had remained stable, likely limiting movements in inflation.
On balance, core inflation was expected to continue at
a subdued rate over the projection period. As in earlier
forecasts, headline inflation was projected to move into
line with the core rate by 2011.
Participants’ Views of 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 of 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 appro-
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Federal Open Market Committee
priate 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, meeting participants generally saw the incoming
data and information received from business contacts
as consistent with a continued, moderate recovery in
economic activity. Participants noted that the labor
market was improving gradually, household spending
was increasing, and business spending on equipment
and software had risen significantly. With private final
demand having strengthened, inventory adjustments
and fiscal stimulus were no longer the main factors
supporting economic expansion. In light of stable inflation expectations and incoming data indicating low
rates of inflation, policymakers continued to anticipate
that both overall and core inflation would remain subdued through 2012. However, financial markets were
generally seen as recently having become less supportive of economic growth, largely reflecting international
spillovers from European fiscal strains. In part as a
result of the change in financial conditions, most participants revised down slightly their outlook for economic growth, and about one-half of the participants
judged the balance of risks to growth as having moved
to the downside. Most participants continued to see
the risks to inflation as balanced. A number of participants expressed the view that, over the next several
years, both employment and inflation would likely be
below levels they consider to be consistent with their
dual mandate, but they anticipated that, with appropriate monetary policy, both would rise over time to levels
consistent with the Federal Reserve’s objectives.
Financial markets had become somewhat less supportive of economic growth since the April meeting, with
the developments in Europe cited as a leading cause of
greater global financial market tensions. Risk spreads
for many corporate borrowers had widened noticeably,
equity prices had fallen appreciably, and the dollar had
risen in value against a broad basket of other currencies. Participants saw these changes as likely to weigh
to some degree on household and business spending
over coming quarters. Participants also noted ongoing
difficulties in financing commercial real estate. Nonetheless, reports suggested that more-creditworthy business borrowers were still able to obtain funding in the
open markets on fairly attractive terms, and a couple of
participants noted that credit from the banking sector,
which had been contracting for some time, was show-
_
ing some tentative signs of stabilizing. Moreover, several participants observed that the decline in yields on
Treasury securities resulting from the global flight to
quality was positive for the domestic economy; in particular, the associated decline in mortgage rates was
seen as potentially helpful in supporting the housing
sector.
Supporting the view of a continued recovery, incoming
data and anecdotal reports pointed to strength in a
number of business sectors, particularly manufacturing
and transportation. Policymakers noted that firms’
investment in equipment and software had advanced
rapidly of late, and they anticipated that such spending
would continue to rise, though perhaps at a somewhat
slower pace. Business contacts suggested that investment spending had been supported by the replacement
and upgrading of existing capital, making up for some
spending that had been postponed in the downturn,
and this component of investment demand was seen as
unlikely to remain robust. In addition, inventory accumulation, which had been a significant contributor to
recent gains in production, appeared likely to provide
less impetus to growth in coming quarters. Participants
also noted that several uncertainties, including those
related to legislative changes and to developments in
global financial markets, were generating a heightened
level of caution that could lead some firms to delay
hiring and planned investment outlays.
Participants commented that household spending continued to advance, with notable increases in auto sales
and expenditures on other durable goods. Going forward, consumption spending was expected to continue
to post moderate gains, with the effects of income
growth and improved confidence as the economy recovers more than offsetting the effects of lower stock
prices and housing wealth. However, continued labor
market weakness could weigh on consumer sentiment,
and households were still repairing their balance sheets;
both factors could restrain consumer spending going
forward. Although readings from the housing sector
had been strong through mid-spring, participants noted
that the strength likely reflected the effects of the temporary tax credits for homebuyers. Indeed, data for the
most recent month suggested that, with the expiration
of those provisions, home sales and starts had stepped
down noticeably and could remain weak in the near
term; with lower demand and a continuing supply of
foreclosed houses coming to market, participants
judged that house prices were likely to remain flat or
decline somewhat further in the near term.
Minutes of the Meeting of June 22-23, 2010
Meeting participants interpreted the data on the labor
market as consistent with their outlook for gradual recovery. Employers were adding hours to the workweek
and hiring temporary workers, suggesting a pickup in
labor demand; however, the most recent data on employment had been disappointing, and new claims for
unemployment insurance remained elevated. Reportedly, employers were still cautious about adding to payrolls, given uncertainties about the outlook for the
economy and government policies. Participants expected the pace of hiring to remain low for some time.
Indeed, the unemployment rate was generally expected
to remain noticeably above its long-run sustainable level for several years, and participants expressed concern
about the extended duration of unemployment spells
for a large number of workers. Participants also noted
a risk that continued rapid growth in productivity,
though clearly beneficial in the longer term, could in
the near term act to moderate growth in the demand
for labor and thus slow the pace at which the unemployment rate normalizes.
A broad set of indicators suggested that underlying inflation remained subdued and was, on net, trending
lower. The latest readings on core inflation—which
excludes the relatively volatile prices of food and energy—had slowed, and other measures of the underlying
trajectory of inflation, such as median and trimmedmean measures, also had moved down this year. Crude
oil prices declined somewhat over the intermeeting period, a factor that was likely to damp headline inflation
at the consumer level in coming months. Other commodity prices were moderating, and nominal wages
appeared to be rising only slowly. Some participants
indicated that they viewed the substantial slack in labor
and resource markets as likely to reduce inflation. The
financial strains in Europe had led to an increase in the
foreign exchange value of the dollar, and the resulting
downward pressure on import prices also was expected
to weigh on consumer prices for a time. However,
inflation expectations were seen by most participants as
well anchored, which would tend to curb any tendency
for actual inflation to decline. On balance, meeting
participants revised down modestly their outlook for
inflation over the next couple of years; they generally
expected inflation to be quite low in the near term and
to trend slightly higher over time.
Some participants judged the risks to the outlook for
inflation as tilted to the downside, particularly in the
near term, in light of the large amount of resource slack
already prevailing in the economy, the significant
downside risks to the outlook for real activity, and the
Page 9
possibility that inflation expectations could begin to
decline in response to low actual inflation. A few participants cited some risk of deflation. Other participants, however, thought that inflation was unlikely to
fall appreciably further given the stability of inflation
expectations in recent years and very accommodative
monetary policy. Over the medium term, participants
saw both upside and downside risks to inflation. Several participants noted that a continuation of lowerthan-expected inflation and high unemployment could
eventually lead to a downward movement in inflation
expectations that would reinforce disinflationary pressures. By contrast, a few participants noted the possibility that a potentially unsustainable fiscal position and
the size of the Federal Reserve’s balance sheet could
boost inflation expectations and actual inflation over
time.
Committee Policy Action
In their discussion of monetary policy for the period
ahead, members agreed that it would be appropriate to
maintain the target range of 0 to ¼ percent for the federal funds rate. The economic outlook had softened
somewhat and a number of members saw the risks to
the outlook as having shifted to the downside. Nonetheless, all saw the economic expansion as likely to be
strong enough to continue raising resource utilization,
albeit more slowly than they had previously anticipated.
In addition, they saw inflation as likely to stabilize near
recent low readings in coming quarters and then gradually rise toward more desirable levels. In sum, the
changes to the outlook were viewed as relatively modest and as not warranting policy accommodation
beyond that already in place. However, members
noted that in addition to continuing to develop and test
instruments to exit from the period of unusually accommodative monetary policy, the Committee would
need to consider whether further policy stimulus might
become appropriate if the outlook were to worsen appreciably. Given the slightly softer cast of recent data
and the shift to less accommodative financial conditions, members agreed that some changes to the statement’s characterization of the economic and financial
situation were necessary. Nearly all members judged
that it was appropriate to reiterate the expectation that
economic conditions—including low levels of resource
utilization, subdued inflation trends, and stable inflation
expectations—were likely to warrant exceptionally low
levels of the federal funds rate for an extended period.
One member, however, believed that continuing to
communicate an expectation in the Committee’s statement that the federal funds rate would remain at an
Page 10
Federal Open Market Committee
exceptionally low level for an extended period would
create conditions that could lead to macroeconomic
and financial imbalances.
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 engage
in dollar roll and coupon swap transactions
as necessary to facilitate settlement of the
Federal Reserve’s agency MBS transactions.
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 April suggests that the economic recovery is proceeding and that the labor market is improving
gradually. Household spending is increasing
but remains constrained by high unemployment, modest income growth, lower housing
wealth, and tight credit. Business spending
on equipment and software has risen significantly; however, investment in nonresidential
structures continues to be weak and employers remain reluctant to add to payrolls.
Housing starts remain at a depressed level.
Financial conditions have become less supportive of economic growth on balance,
largely reflecting developments abroad.
Bank lending has continued to contract in
recent months. Nonetheless, the Committee
anticipates a gradual return to higher levels
of resource utilization in a context of price
stability, although the pace of economic recovery is likely to be moderate for a time.
_
Prices of energy and other commodities have
declined somewhat in recent months, and
underlying inflation has trended lower. With
substantial resource slack continuing to restrain cost pressures and 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.
The Committee will continue to monitor the
economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and
price stability.”
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 that, as the
economy completed its first year of modest recovery, 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.” Although risks to the forecast remained, Mr.
Hoenig was concerned that communicating such an
expectation would limit the Committee’s flexibility to
begin raising rates modestly in a timely fashion and
could result in a buildup of future financial imbalances
and increase the risks to longer-run macroeconomic
and financial stability.
By unanimous vote, the Committee selected William B.
English to serve as Secretary and Economist, and
James A. Clouse to serve as Associate Economist, effective July 23, 2010, until the selection of their successors at the first regularly scheduled meeting of the
Committee in 2011.
It was agreed that the next meeting of the Committee
would be held on Tuesday, August 10, 2010. The
meeting adjourned at 12:10 p.m. on June 23, 2010.
Minutes of the Meeting of June 22-23, 2010
Conference Call
On May 9, 2010, the Committee met by conference call
to discuss developments in global financial markets and
possible policy responses. Over the previous several
months, market concerns about the ability of Greece
and some other euro-area countries to contain their
sizable budget deficits and finance their debt had increased. By early May, financial strains had intensified,
reflecting investors’ uncertainty about whether fiscally
stronger euro-area governments would provide financial support to the weakest members, the extent of the
drag on euro-area economies that could result from
efforts at fiscal consolidation, and the degree of exposure of major European banks and financial institutions
to vulnerable countries. Conditions in short-term
funding markets in Europe had also deteriorated, and
global financial markets more generally had been volatile and less supportive of economic growth.
The Chairman indicated that European authorities were
considering a number of measures to promote fiscal
sustainability and to provide increased liquidity and
support to money markets and markets for European
sovereign debt. In connection with the possible implementation of these measures, some major central
banks had requested that dollar liquidity swap lines
with the Federal Reserve be reestablished. These swap
lines would enhance the ability of these central banks
to provide support for dollar funding markets in their
jurisdictions. The terms and conditions of the swap
lines would generally be similar to those in place prior
to their expiration earlier in the year.
The Committee discussed considerations surrounding
the possible reestablishment of dollar liquidity swap
lines. Participants agreed that such arrangements could
be helpful in limiting the strains in dollar funding markets and the adverse implications of recent developments for the U.S. economy. Participants observed
that, in current circumstances, the dollar swap lines
should be made available to a smaller number of major
foreign central banks than previously. In order to
promote the transparency of these arrangements, participants agreed that it would be appropriate for the
Federal Reserve to publish the swap contracts and to
release on a weekly basis the amounts of draws under
the swap lines by central bank counterparty. It was
recognized that the Committee would need to consider
the implications of swap lines for bank reserves and
overall management of the Federal Reserve’s balance
sheet. Participants noted the importance of appropriate consultation with U.S. government officials and
Page 11
emphasized that a reestablishment of the lines should
be contingent on strong and effective actions by authorities in Europe to address fiscal sustainability and
support financial markets.
At the conclusion of the discussion, the Committee
voted unanimously to approve the following resolution:
“The Committee authorizes the Chairman to
agree to establish swap lines with the European Central Bank, the Bank of England, the
Swiss National Bank, the Bank of Japan, and
the Bank of Canada, as discussed by the
Committee today.”
Secretary’s note: Later on May 9, 2010, the
Federal Reserve, in coordination with the
Bank of Canada, the Bank of England, the
European Central Bank (ECB), and the
Swiss National Bank, announced that U.S.
dollar liquidity swap facilities had been reestablished with those central banks. The arrangements with the Bank of England, the
ECB, and the Swiss National Bank provide
these central banks with the capacity to conduct tenders of U.S. dollars in their local
markets at fixed rates for full allotment, similar to arrangements that had been in place
previously. The arrangement with the Bank
of Canada would support drawings of up to
$30 billion, as was the case previously. On
May 10, the Federal Reserve and the Bank of
Japan (BOJ) announced that a temporary
U.S. dollar liquidity swap arrangement had
been established that would provide the BOJ
with the capacity to conduct tenders of U.S.
dollars at fixed rates for full allotment.
Notation Vote
By notation vote completed on May 17, 2010, the
Committee unanimously approved the minutes of the
FOMC meeting held on April 27–28, 2010.
_____________________________
Brian F. Madigan
Secretary
Page 1
Summary of Economic Projections
In conjunction with the June 22–23, 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 suggested that they expected the recovery to
continue and inflation to remain subdued, but with, on
balance, slightly weaker real activity and a bit lower inflation than in the projections they made in conjunction
with the April 2010 FOMC meeting. As depicted in
figure 1, the economic recovery was anticipated to be
gradual, with real gross domestic product (GDP) expanding at a pace only moderately above the partici-
pants’ assessment of its longer-run sustainable growth
rate and the unemployment rate slowly trending lower
over the next few years. Most participants also anticipated that inflation would remain relatively low over
the forecast period. As indicated in table 1, participants
generally made modest downward revisions to their
projections for real GDP growth for the years 2010 to
2012, as well as modest upward revisions to their projections for the unemployment rate for the same period. Participants also revised down a little their projections for inflation over the forecast period. Several
participants noted that these revisions were largely the
result of the incoming economic data and the anticipated effects of developments abroad on U.S. financial
markets and the economy. Overall, participants continued to expect the pace of the economic recovery to
be held back by a number of factors, including household and business uncertainty, persistent weakness in
real estate markets, only gradual improvement in labor
market conditions, waning fiscal stimulus, and slow
easing of credit conditions in the banking sector. Participants generally anticipated that, in light of the severity of the economic downturn, it would take some
time for the economy to converge fully to its longerrun path as characterized by sustainable rates of output
growth, unemployment, and inflation consistent with
participants’ interpretation of the Federal Reserve’s
dual objectives; most expected the convergence process
to take no more than five to six years. About one-half
Table 1. Economic projections of Federal Reserve Governors and Reserve Bank presidents, June 2010
Percent
Variable
Central tendency1
Range2
2010
2011
2012
Longer run
2010
2011
2012
Longer run
Change in real GDP. . . . . .
April projection. . . . . .
3.0 to 3.5
3.2 to 3.7
3.5 to 4.2
3.4 to 4.5
3.5 to 4.5
3.5 to 4.5
2.5 to 2.8
2.5 to 2.8
2.9 to 3.8
2.7 to 4.0
2.9 to 4.5
3.0 to 4.6
2.8 to 5.0
2.8 to 5.0
2.4 to 3.0
2.4 to 3.0
Unemployment rate. . . . . .
April projection. . . . . .
9.2 to 9.5
9.1 to 9.5
8.3 to 8.7
8.1 to 8.5
7.1 to 7.5
6.6 to 7.5
5.0 to 5.3
5.0 to 5.3
9.0 to 9.9
8.6 to 9.7
7.6 to 8.9
7.2 to 8.7
6.8 to 7.9
6.4 to 7.7
5.0 to 6.3
5.0 to 6.3
PCE inflation. . . . . . . . . . .
April projection. . . . . .
1.0 to 1.1
1.2 to 1.5
1.1 to 1.6
1.1 to 1.9
1.0 to 1.7
1.2 to 2.0
1.7 to 2.0
1.7 to 2.0
0.9 to 1.8
1.1 to 2.0
0.8 to 2.4
0.9 to 2.4
0.5 to 2.2
0.7 to 2.2
1.5 to 2.0
1.5 to 2.0
Core PCE inflation3. . . . . .
April projection. . . . . .
0.8 to 1.0
0.9 to 1.2
0.9 to 1.3
1.0 to 1.5
1.0 to 1.5
1.2 to 1.6
0.7 to 1.5
0.7 to 1.6
0.6 to 2.4
0.6 to 2.4
0.4 to 2.2
0.6 to 2.2
NOTE: Projections of change in real gross domestic product (GDP) and in inflation are from the fourth quarter of the previous year to the fourth quarter of
the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index for personal consumption expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in
the fourth quarter of the year indicated. Each participant’s projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the
absence of further shocks to the economy. The April projections were made in conjunction with the meeting of the Federal Open Market Committee on April
27–28, 2010.
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.
Summary of Economic Projections of the Meeting of June 22-23, 2010
of the participants now judged the risks to the growth
outlook to be tilted to the downside, while most continued to see balanced risks surrounding their inflation
projections. Participants generally continued to judge
the uncertainty surrounding their projections for both
economic activity and inflation to be unusually high
relative to historical norms.
The Outlook
Participants’ projections for real GDP growth in 2010
had a central tendency of 3.0 to 3.5 percent, slightly
lower than in April. Participants noted that the economic recovery was proceeding. Consumer spending
was increasing, supported by rising disposable income
as labor markets gradually improved. Business outlays
on equipment and software were also rising, driven by
replacement spending, the low cost of capital, and increased production. Participants pointed to a number
of factors that would provide ongoing support to economic activity, including accommodative monetary
policy and still generally supportive conditions in financial markets. Fiscal policy was also seen as currently
contributing to economic growth, although participants
expected that the effects of fiscal stimulus would diminish going forward and also anticipated that budgetary pressures would continue to weigh on spending at
the state and local levels. Participants noted that financial conditions had tightened somewhat because of developments abroad. The effects of a stronger dollar, a
lower stock market, and wider corporate credit spreads
were expected to be offset only partially by lower oil
and commodity prices and a decline in Treasury yields.
Many participants anticipated that the economic expansion would be held back by firms’ caution in hiring and
spending in light of the considerable uncertainty regarding the economic outlook, by households’ focus on
repairing balance sheets weakened by equity and house
price declines, and by tight credit conditions for small
businesses and households.
Looking further ahead, the central tendencies of participants’ projections for real GDP growth were 3.5 to 4.2
percent in 2011 and 3.5 to 4.5 percent in 2012. Participants generally expected a rebound in spending on
housing, consumer durables, and business capital
equipment as household income and balance sheets
strengthen, credit becomes more widely available, and
the recovery is seen by households and firms as more
firmly established. Nevertheless, participants cited several factors that could restrain the pace of expansion
over the next two years, including a rising household
saving rate as households seek to make further progress
in repairing balance sheets, persistent uncertainty on
Page 3
the part of households and businesses about the
strength of the recovery, spillovers from fiscal strains
abroad to U.S. financial markets and the U.S. economy,
and continued weakness in residential construction.
Moreover, despite improvements in the condition of
banking institutions, strains in the commercial real estate sector were seen as posing risks to the balance
sheets of such institutions for some time. Terms and
standards on bank loans continued to be restrictive,
and participants anticipated only a gradual loosening of
credit conditions for many households and smaller
firms. In the absence of further shocks, participants
generally expected that real GDP growth would eventually settle down at an annual rate of 2.5 to 2.8 percent, a pace that appeared to be sustainable in view of
expected long-run trends in the labor force and labor
productivity.
Participants anticipated that labor market conditions
would improve slowly over the next several years. The
central tendency of their projections for the average
unemployment rate in the fourth quarter of 2010 was
9.2 to 9.5 percent. Consistent with their expectations
of a gradual economic recovery, participants generally
anticipated that the unemployment rate would decline
to 7.1 to 7.5 percent by the end of 2012, remaining well
above their assessments of its longer-run sustainable
rate. Although a few participants were concerned
about a possible decrease in the sustainable level of
employment resulting from ongoing structural adjustments in product and labor markets, participants’ longer-term unemployment projections had a central tendency of 5.0 to 5.3 percent, the same as in April.
Participants noted that prices of energy and other
commodities declined somewhat in recent months, and
underlying inflation trended lower. They generally expected inflation to remain subdued over the next several years. Indeed, most of the participants marked down
a bit their projections for inflation over the forecast
period: The central tendency of their projections for
personal consumption expenditures (PCE) inflation
was 1.0 to 1.1 percent for 2010, 1.1 to 1.6 percent for
2011, and 1.0 to 1.7 percent for 2012, generally about
¼ percentage point lower than in April. The central
tendencies of participants’ projections for core PCE
inflation followed a broadly similar path, although
headline PCE inflation was expected to run slightly
above core PCE inflation over the forecast period, reflecting somewhat more rapid increases in food and
energy prices. Most participants anticipated that, with
appropriate monetary policy, inflation would rise gradually toward the inflation rate that they individually
Page 4
Federal Open Market Committee
consider most consistent with the Federal Reserve’s
dual mandate for maximum employment and stable
prices. The central tendency of participants’ projections of the longer-run, mandate-consistent inflation
rate was 1.7 to 2.0 percent, unchanged from April. A
majority of participants anticipated that inflation in
2011 and 2012 would continue to be below their assessments of the mandate-consistent inflation rate.
Uncertainty and Risks
Most participants judged that their projections of future economic activity and unemployment continued to
be subject to greater-than-average uncertainty, while a
few viewed the uncertainty surrounding their outlook
for growth and unemployment as in line with typical
levels.1 About one-half of the participants saw the risks
to their growth outlook as tilted to the downside; in
contrast, in April a large majority of participants saw
the risks to growth as balanced. In the current survey,
a substantial number of participants also viewed the
risks to unemployment as tilted to the upside. The remaining participants saw the risks to the projections for
economic growth and unemployment as roughly balanced. Participants pointed to developments abroad
and their possible ramifications for U.S. financial markets and the U.S. economy as suggesting somewhat
greater uncertainty about the path of economic growth.
In addition, some participants cited the unusual rise in
the unemployment rate last year, which was associated
with rapid growth in labor productivity, as contributing
to increased uncertainty regarding the outlook for employment and economic activity. Participants who
judged that the risks to their growth outlook were tilted
to the downside pointed to recent developments
abroad and the risk of further contagion, together with
the potential for an increase in risk aversion among
investors, as important factors contributing to their
assessment. Participants noted that problems in the
commercial real estate market and the effects of financial regulatory reform could lead to greater constraints
on credit availability, thereby restraining growth of output and employment. However, some participants
viewed the downside risks to the growth outlook as
roughly balanced by upside risks; they saw the possibility that monetary policy might remain accommodative
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 1990 to 2009. 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
......
±1.0
±1.6
±1.8
.......
±0.4
±1.2
±1.5
±0.9
±1.0
±1.1
GDP1
Unemployment
rate1
Total consumer
prices2
.....
NOTE: Error ranges shown are measured as plus or minus the root
mean squared error of projections for 1990 through 2009 that were
released in the summer 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.
for too long as one reason that growth could prove
stronger than expected.
As in April, most participants continued to see the uncertainty surrounding their inflation projections as
above average. Still, a few judged that uncertainty in
the outlook for inflation was about in line with or lower
than typical levels. Most participants judged the risks
to the inflation outlook as roughly balanced. As factors
accounting for elevated uncertainty regarding the outlook for inflation, participants pointed to the extraordinary degree of monetary policy accommodation, the
uncertain timing of the exit from accommodation, and
the unusually large gap between expected inflation, as
measured by surveys of households and businesses, and
current inflation. Participants noted that, despite the
downward trend in underlying inflation in recent
months, inflation expectations continued to be well
anchored. Nonetheless, the possibility that inflation
expectations might start to decline in response to persistently low levels of actual inflation and the potential
effects of continued weakness of the economy on price
trends were seen by a few participants as posing some
downside risks to the inflation outlook.
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. The distribution of participants’ projections for
real GDP growth this year was slightly narrower than
the distribution in April, but the distributions for real
GDP growth in 2011 and 2012 were about unchanged.
As in earlier projections, the dispersion in forecasts for
Summary of Economic Projections of the Meeting of June 22-23, 2010
output growth appeared to reflect the diversity of their
assessments regarding the current degree of underlying
momentum in economic activity, the evolution of consumer and business sentiment, the degree of support to
economic growth provided by financial markets, the
effects of monetary policy accommodation, and other
factors. Regarding participants’ projections for the unemployment rate, the distributions shifted somewhat
higher for the years 2010 to 2012. The distributions of
their estimates of the longer-run sustainable rates of
output growth and unemployment were little changed
from April.
Corresponding information about the diversity of participants’ views regarding the inflation outlook is provided in figures 2.C and 2.D. The distributions of projections for overall and core PCE inflation for 2010
Page 5
shifted lower relative to the distributions in April, and
the distributions were noticeably more tightly concentrated. The distributions of overall and core inflation
for 2011 and 2012, however, were generally little
changed and remained fairly wide. 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 inflation illustrates their substantial agreement about the
measured rate of inflation that is most consistent with
the Federal Reserve’s dual objectives of maximum employment and stable prices.
Page 6
Federal Open Market Committee
_
Figure 2.A. Distribution of participants’ projections for the change in real GDP, 2010–12 and over the longer run
Number of participants
2010
14
June projections
April projections
12
10
8
6
4
2
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
2.42.5
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
2.42.5
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
2.42.5
2.62.7
2.82.9
3.03.1
3.23.3
3.43.5
3.63.7
Percent range
NOTE: Definitions of variables are in the general note to table 1.
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 June 22-23, 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
June projections
April projections
12
10
8
6
4
2
5.05.1
5.25.3
5.45.5
5.65.7
5.85.9
6.06.1
6.26.3
6.46.5
6.66.7
6.86.9
7.07.1
7.27.3
7.47.5
7.67.7
7.87.9
8.08.1
8.28.3
8.48.5
8.68.7
8.88.9
9.09.1
9.29.3
9.49.5
9.69.7
9.89.9
Percent range
Number of participants
2011
14
12
10
8
6
4
2
5.05.1
5.25.3
5.45.5
5.65.7
5.85.9
6.06.1
6.26.3
6.46.5
6.66.7
6.86.9
7.07.1
7.27.3
7.47.5
7.67.7
7.87.9
8.08.1
8.28.3
8.48.5
8.68.7
8.88.9
9.09.1
9.29.3
9.49.5
9.69.7
9.89.9
Percent range
Number of participants
2012
14
12
10
8
6
4
2
5.05.1
5.25.3
5.45.5
5.65.7
5.85.9
6.06.1
6.26.3
6.46.5
6.66.7
6.86.9
7.07.1
7.27.3
7.47.5
7.67.7
7.87.9
8.08.1
8.28.3
8.48.5
8.68.7
8.88.9
9.09.1
9.29.3
9.49.5
9.69.7
9.89.9
Percent range
Number of participants
Longer run
14
12
10
8
6
4
2
5.05.1
5.25.3
5.45.5
5.65.7
5.85.9
6.06.1
6.26.3
6.46.5
6.66.7
6.86.9
7.07.1
7.27.3
7.47.5
7.67.7
Percent range
NOTE: Definitions of variables are in the general note to table 1.
7.87.9
8.08.1
8.28.3
8.48.5
8.68.7
8.88.9
9.09.1
9.29.3
9.49.5
9.69.7
9.89.9
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
June projections
April projections
12
10
8
6
4
2
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
0.50.6
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
0.50.6
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
0.50.6
0.70.8
0.91.0
1.11.2
1.31.4
Percent range
NOTE: Definitions of variables are in the general note to table 1.
1.51.6
1.71.8
1.92.0
2.12.2
2.32.4
Summary of Economic Projections of the Meeting of June 22-23, 2010
Page 9
Figure 2.D. Distribution of participants’ projections for core PCE inflation, 2010–12
Number of participants
2010
14
June projections
April projections
12
10
8
6
4
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
0.30.4
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
0.30.4
0.50.6
0.70.8
0.91.0
1.11.2
1.31.4
Percent range
NOTE: Definitions of variables are in the general note to table 1.
1.51.6
1.71.8
1.92.0
2.12.2
2.32.4
Page 10
Federal Open Market Committee
Forecast Uncertainty
The economic projections provided by
the members of the Board of Governors and
the presidents of the Federal Reserve Banks
inform discussions of monetary policy among
policymakers and can aid public understanding of the basis for policy actions. Considerable uncertainty attends these projections,
however. The economic and statistical models
and relationships used to help produce economic forecasts are necessarily imperfect descriptions of the real world. And the future
path of the economy can be affected by myriad unforeseen developments and events.
Thus, in setting the stance of monetary policy,
participants consider not only what appears to
be the most likely economic outcome as embodied in their projections, but also the range
of alternative possibilities, the likelihood of
their occurring, and the potential costs to the
economy should they occur.
Table 2 summarizes the average historical
accuracy of a range of forecasts, including
those reported in past Monetary Policy Reports
and those prepared by Federal Reserve Board
staff in advance of meetings of the Federal
Open Market Committee. The projection
error ranges shown in the table illustrate the
considerable uncertainty associated with economic forecasts. For example, suppose a participant projects that real gross domestic
product (GDP) and total consumer prices will
rise steadily at annual rates of, respectively,
3 percent and 2 percent. If the uncertainty
attending those projections is similar to that
experienced in the past and the risks around
the projections are broadly balanced, the numbers reported in table 2 would imply a probability of about 70 percent that actual GDP
would expand within a range of 2.0 to 4.0 percent in the current year, 1.4 to 4.6 percent in
the second year, and 1.2 to 4.8 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, 1.0 to 3.0
percent in the second year, and 0.9 to 3.1 percent in the third year.
Because current conditions may differ
from those that prevailed, on average, over history, participants provide judgments as to
whether the uncertainty attached to their projections of each variable is greater than, smaller
than, or broadly similar to typical levels of
forecast uncertainty in the past as shown in
table 2. Participants also provide judgments as
to whether the risks to their projections are
weighted to the upside, are weighted to the
downside, or are broadly balanced. That is,
participants judge whether each variable is
more likely to be above or below their projections of the most likely outcome. These judgments about the uncertainty and the risks attending each participant’s projections are distinct from the diversity of participants’ views
about the most likely outcomes. Forecast uncertainty is concerned with the risks associated
with a particular projection rather than with
divergences across a number of different projections.
_
Cite this document
Federal Reserve (2010, June 23). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_20100624
@misc{wtfs_fomc_minutes_20100624,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {2010},
month = {Jun},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_20100624},
note = {Retrieved via When the Fed Speaks corpus}
}