FOMC Minutes

_____________________________________________________________________________________________

Page 1

Minutes of the Federal Open Market Committee

September 21, 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, September 21,

2010, at 8:00 a.m.

PRESENT:

Ben Bernanke, Chairman

William C. Dudley, Vice Chairman

James Bullard

Elizabeth Duke

Thomas M. Hoenig

Sandra Pianalto

Eric Rosengren

Daniel K. Tarullo

Kevin Warsh

Christine Cumming, 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

William B. English, Secretary and Economist

Deborah J. Danker, Deputy Secretary

Matthew M. Luecke, Assistant Secretary

David W. Skidmore, Assistant Secretary

Michelle A. Smith, Assistant Secretary

Scott G. Alvarez, General Counsel

Thomas C. Baxter, Deputy General Counsel

Nathan Sheets, Economist

David J. Stockton, Economist

Alan D. Barkema, James A. Clouse, Thomas A.

Connors, Jeff Fuhrer, Steven B. Kamin, Lawrence Slifman, Mark S. Sniderman, 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

Charles S. Struckmeyer, Deputy Staff Director,

Office of the Staff Director, Board of Governors

Maryann F. Hunter, Deputy Director, Division of

Banking Supervision and Regulation, Board of

Governors; William Nelson, Deputy Director,

Division of Monetary Affairs, Board of Governors

Linda Robertson, Assistant to the Board, Office of

Board Members, Board of Governors

David Reifschneider and William Wascher, Senior

Associate Directors, Division of Research and

Statistics, Board of Governors

Eric M. Engen and Michael G. Palumbo, 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

David H. Small, Project Manager, Division of

Monetary Affairs, Board of Governors

Jennifer E. Roush, Senior Economist, Division of

Monetary Affairs, Board of Governors

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

Randall A. Williams, Records Management Analyst,

Division of Monetary Affairs, Board of Governors

Gordon Werkema, First Vice President, Federal

Reserve Bank of Chicago

Harvey Rosenblum and Daniel G. Sullivan, Executive Vice Presidents, Federal Reserve Banks of

Dallas and Chicago, respectively

David Altig, John A. Weinberg, and Kei-Mu Yi,

Senior Vice Presidents, Federal Reserve Banks

of Atlanta, Richmond, and Minneapolis, respectively

_____________________________________________________________________________________________

Page 2

Federal Open Market Committee

Chris Burke, John Fernald, James M. Nason, Vice

Presidents, Federal Reserve Banks of New

York, San Francisco, and Philadelphia, respectively

Gauti B. Eggertsson, Research Officer, Federal Reserve Bank of New York

By unanimous vote, the Committee selected Deborah J.

Danker to serve as Deputy Secretary until the selection

of a successor at the first regularly scheduled meeting

of the Committee in 2011.

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 August 10, 2010. He also reported

on System open market operations during the intermeeting period, including the implementation of the

Committee’s decision at the August meeting to reinvest

principal payments on agency debt and agency

mortgage-backed securities (MBS) in longer-term Treasury securities. Following the August meeting, the

Open Market Desk at the Federal Reserve Bank of

New York announced that purchase operations would

follow a schedule that would be released in the middle

of each month, with the amounts calibrated to offset

the amount of principal payments from agency debt

and agency MBS expected to be received from the

middle of the month to the middle of the following

month. The Desk conducted 12 such operations over

the intermeeting period and purchased about $28 billion of Treasury securities, with maturities concentrated

in the 2- to 10-year sector of the nominal Treasury

curve, although purchases were made across both the

nominal and inflation-protected Treasury coupon yield

curves. The Manager also briefed the Committee on

progress in developing temporary reserve draining

tools. Over the intermeeting period, the Federal Reserve announced a schedule for ongoing small-value

auctions of term deposits. The auctions, which will be

held about every other month, are intended to ensure

the operational readiness of the term deposit facility

and to increase the familiarity of eligible participants

with the auction procedures. In addition, the Desk

continued to conduct small-scale tri-party reverse repurchase operations using MBS collateral with the primary dealers, and it published a list of money market

mutual funds that have been accepted as counterparties

for reverse repurchase operations. The Manager also

discussed plans to publish a new set of criteria that

would allow a broader set of money market funds to

become eligible counterparties. There were no open

market operations in foreign currencies for the System’s account over the intermeeting period. By unanimous vote, the Committee ratified the Desk’s transactions over the intermeeting period.

Staff Review of the Economic Situation

The information reviewed at the September 21 meeting

indicated that the pace of the economic expansion

slowed in recent months and that inflation remained

low. Private businesses increased employment modestly in August, but the length of the workweek was unchanged and the unemployment rate remained elevated.

Industrial production advanced at a solid pace in July

and rose further in August. Consumer spending continued to increase at a moderate rate in July and appeared to move up again in August. The rise in business outlays for equipment and software looked to

have moderated recently following outsized gains in the

first half of the year. Housing activity weakened further, and nonresidential construction remained depressed. After falling in the previous three months,

headline consumer prices rose in July and August as

energy prices retraced some of their earlier decline

while prices for core goods and services edged up

slightly.

The labor market situation continued to improve only

slowly. The average monthly increase in private payroll

employment over the three months ending in August

was small and was less than the average gain earlier in

the year. Moreover, average weekly hours of all employees were little changed, on net, in recent months

after rising during the first half of the year. The unemployment rate ticked up in August and remained close

to the level that has prevailed since the beginning of

this year. The labor force participation rate moved up

a little in August but was still low. Initial claims for

unemployment insurance remained at an elevated level

over the intermeeting period. In addition, other indicators of labor demand, such as measures of hiring and

job vacancies, did not improve.

Industrial production increased solidly in July and then

rose more moderately in August. Manufacturing production was boosted in July by a pickup in motor vehicle assemblies as automakers replenished lean stocks

at dealers. However, the production of motor vehicles

was pared back in August. More broadly, the output of

_____________________________________________________________________________________________

Minutes of the Meeting of September 21, 2010

Page 3

high-technology items and other business equipment

expanded at a solid pace in July and August. The output of utilities declined over the past two months after

it was boosted by unseasonably hot weather in the preceding two months. Capacity utilization in manufacturing ticked up further in August from its mid-2009 low,

but it was still substantially below its longer-run average.

Real personal consumption expenditures rose modestly

in July, similar to the average increase over the preceding two months. Data for retail sales and the sales of

light motor vehicles pointed to a moderate gain in real

consumer spending in August. Real disposable personal income declined a bit in July after increasing at a solid pace in the second quarter. The personal saving rate

edged down in July but remained near the high level

registered in the second quarter. Indicators of household net worth were mixed; home prices moved down

in July, while equity prices inched up, on balance, over

the intermeeting period. After falling back in July, consumer confidence remained downbeat in August and

early September, with households more pessimistic

about the outlook for their personal financial situations

and general economic conditions.

Housing activity, which had been supported earlier in

the year by the availability of homebuyer tax credits,

softened further in July. Sales of new single-family

homes remained at a depressed level. Sales of existing

homes fell substantially in July, and the index of pending home sales suggested that sales were muted in August. Starts of new single-family houses in July and

August were below the low level seen in June, and the

number of new permits issued in August appeared to

signal that little improvement in new homebuilding was

likely in September. House prices declined modestly in

July after changing little, on net, in recent months. The

interest rate for 30-year fixed-rate conforming mortgages remained essentially unchanged over the intermeeting period at a historically low level.

Real business spending on equipment and software

appeared to have slowed in July after expanding rapidly

over the preceding three quarters. Both new orders

and shipments of nondefense capital goods excluding

aircraft dipped in July. Moreover, survey indicators of

business conditions softened further in August. Incoming construction data indicated that business investment in nonresidential structures decreased in the

second quarter but at a slower pace than over the preceding year. Increases in spending for drilling and mining structures were more than offset by continued de-

clines in outlays for other types of nonresidential buildings. Despite some indications that the difficult financial conditions in commercial real estate markets might

be stabilizing, credit was still tight and vacancy rates for

office and commercial space remained high. In the

second quarter, businesses appeared to build their inventories at a faster pace than earlier in the year, but

ratios of inventories to sales for most industries did not

point to any sizable overhangs.

Inflation remained subdued in recent months. Headline consumer prices rose in July and August as energy

prices rebounded after their decline over the previous

three months. At the same time, prices for core goods

and services moved up slightly. At earlier stages of

production, producer prices of core intermediate materials moved down, on net, during July and August while

most indexes of spot commodity prices increased.

Survey measures of short- and long-term inflation expectations were essentially unchanged.

Unit labor costs at the end of the second quarter remained below their level one year earlier, as labor compensation continued to increase only slowly and labor

productivity stayed near its recent high level. Hourly

labor compensation—as measured by compensation

per hour in the nonfarm business sector and the employment cost index—rose modestly during the year

ending in the second quarter. More recently, the yearover-year change in average hourly earnings of all employees in July and August remained subdued. While

output per hour in the nonfarm business sector declined in the second quarter following large increases in

the preceding three quarters, productivity was still well

above its level one year earlier.

The U.S. international trade deficit narrowed in July

after widening in June. The rise in exports in July more

than offset their decline in June, as overseas sales of

capital goods rose sharply. Most other major categories

of exports were little changed in July, although exports

of automotive products posted their first decline since

May 2009. The narrowing of the trade deficit in July

also reflected a broad-based decline in imports following their large increase in June. Imports of consumer

goods fell substantially in July, while imports of industrial supplies, capital goods, and automotive products

also moved down. In contrast, imports of petroleum

products remained about flat in July.

Increases in foreign economic activity were robust, on

average, in the second quarter. In particular, gross domestic product (GDP) grew strongly in the emerging

market economies, even though gains in China appar-

_____________________________________________________________________________________________

Page 4

Federal Open Market Committee

ently moderated. Among the advanced foreign economies, Europe posted a notable rise in economic activity in the second quarter; rapid expansion in Germany

more than offset weaker outcomes in other euro-area

economies, particularly those experiencing financial

stress related to concerns about their fiscal situations

and potential vulnerabilities in their banking sectors. In

Canada and Japan, the rise in real GDP slowed noticeably in the second quarter. Recent indicators of foreign

economic activity for the third quarter, including data

on exports, production, and purchasing managers indexes, generally pointed to a slowing in the pace of expansion in economic activity abroad. Headline inflation rates in foreign economies generally were restrained in the second quarter by a deceleration in food

and energy prices, but prices appeared to be rising a bit

more rapidly of late.

Staff Review of the Financial Situation

The decision by the Federal Open Market Committee

(FOMC) at its August meeting to maintain the 0 to

¼ percent target range for the federal funds rate was

widely anticipated, but Treasury yields declined as investors reportedly focused on the indication in the accompanying statement that principal payments from

agency debt and MBS in the Federal Reserve’s portfolio

would be reinvested in longer-term Treasury securities

and also on the characterization of the economic outlook, which was seen as somewhat more downbeat

than expected. The expected path of the federal funds

rate moved down early in the intermeeting period in

response to weaker-than-expected economic data. The

Chairman’s Jackson Hole speech was reportedly viewed

by market participants as more encouraging about economic prospects and as providing more clarity about

the policy options available to the FOMC, but it did

not have a sustained effect on policy expectations. The

expected path of the federal funds rate rose for a time

following the more-positive-than-expected data on

manufacturing activity and the labor market released in

early September, but the path ended the intermeeting

period down on balance.

Yields on nominal Treasury coupon securities were

volatile and ended the period somewhat lower, particularly for intermediate- and longer-term maturities. In

addition to Federal Reserve communications and news

about the economic outlook, market participants

pointed to strong demand for long-duration assets by

institutional investors and speculation about additional

large-scale asset purchases by the Federal Reserve as

factors contributing to the drop in longer-term yields.

Five-year inflation compensation based on Treasury

inflation-protected securities (TIPS) fell, while forward

inflation compensation 5 to 10 years ahead edged up,

on net, over the intermeeting period but remained at a

lower level than in the spring. Treasury auctions over

the intermeeting period were generally well received.

Yields on investment- and speculative-grade corporate

bonds moved roughly in line with those on comparable-maturity Treasury securities, leaving risk spreads

little changed. Measures of liquidity in secondary markets for corporate bonds remained stable. In the secondary market for syndicated leveraged loans, the average bid price moved up and bid-asked spreads edged

down.

Conditions in short-term funding markets continued to

improve following the recent stresses related to concerns about financial stability in Europe. In dollar

funding markets, spreads of term London interbank

offered rates (or Libor) over those on overnight index

swaps fell further at most horizons over the intermeeting period. Spreads on unsecured financial commercial

paper were little changed at low levels. In secured

funding markets, spreads on asset-backed commercial

paper remained narrow, and rates on repurchase

agreements involving various types of collateral held

steady. In the September Senior Credit Officer Opinion Survey on Dealer Financing Terms (SCOOS), dealers indicated, on net, that they loosened credit terms

applicable to several important classes of counterparties

and types of collateral over the past three months amid

increased demand for funding for most types of securities covered in the survey.

Broad U.S. stock price indexes edged up, on balance,

over the intermeeting period, and option-implied volatility on the S&P 500 index was little changed on net.

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 rough measure of the equity risk premium—remained at an elevated level. Bank stocks

underperformed the broader equity market and continued to be more volatile, while credit default swap

spreads for large banking organizations edged up. The

greater volatility in bank stocks reportedly reflected, in

part, the effects of domestic and international financial

regulatory reform efforts.

Net debt financing by U.S. nonfinancial corporations

remained robust in August. Gross bond issuance was

strong, a pattern that appeared to persist into the first

part of September. Meanwhile, nonfinancial commercial paper outstanding contracted as very low yields on

_____________________________________________________________________________________________

Minutes of the Meeting of September 21, 2010

Page 5

corporate bonds led to some substitution toward

longer-term debt. Measures of the credit quality of

nonfinancial corporations remained solid. The pace of

initial public offerings and seasoned equity offerings by

nonfinancial firms slowed in August, partly reflecting

typical seasonal patterns.

Commercial real estate markets continued to face difficult financial conditions, although some further signs

emerged that this sector might be stabilizing. The prices of commercial properties appeared to have edged up

in the first half of the year, and the volume of commercial real estate sales rose again in August. A few small

commercial mortgage-backed securities (CMBS) deals

were issued over the intermeeting period and were reportedly well received by investors, consistent with an

easing of conditions and renewed interest in the CMBS

market since the beginning of the year that was reported in the SCOOS. Nonetheless, the volume of

CMBS issuance in 2010 remained quite low compared

with the levels seen before the onset of the financial

crisis, and total commercial mortgage debt continued to

contract amid further increases in delinquency rates on

commercial mortgages.

For households, record-low mortgage rates supported a

relatively high level of refinancing activity, but many

borrowers reportedly remained unable to refinance because of insufficient home equity or poor credit histories. Consumer credit declined in the second quarter

and appeared to contract further in July. Issuance of

consumer asset-backed securities in August proceeded

at a moderate pace that was similar to that posted in

July. Spreads of interest rates on consumer loans relative to the yield on the two-year Treasury note were

little changed on balance. The credit quality of consumer loans continued to improve; delinquency and

charge-off rates for most types of loans dropped further in recent months, although they remained elevated.

Bank credit expanded in August, reflecting significant

purchases of Treasury securities and agency MBS by

large banks. Bank loans continued to contract, but the

pace of contraction slowed noticeably from earlier in

the year. Commercial and industrial loans rose slightly

in July, the first increase on a monthly basis since late

2008, and held steady in August. In addition, holdings

of closed-end residential mortgage loans expanded

moderately in August, reportedly spurred by refinancing activity. However, both home equity loans and

commercial real estate loans contracted further in August, while consumer loans fell sharply.

On average over July and August, M2 expanded at a

rate slightly above its pace in the second quarter. Liquid deposits grew fairly rapidly over the two months,

reflecting in part a compositional shift from other

lower-yielding M2 assets. Currency trended higher,

while small time deposits and retail money market mutual funds contracted further, as yields on these assets

remained at extremely low levels.

In foreign markets, concerns about the global economic outlook prompted substantial drops in equity prices

and benchmark sovereign bond yields in many countries in August, and the dollar appreciated broadly on

safe-haven demands. In September, however, as better

economic news led to some improvement in investor

sentiment, equity prices and bond yields moved back

up, and the dollar retraced its earlier appreciation.

Yield spreads relative to German bunds on the 10-year

sovereign bonds of Greece, Ireland, and Portugal widened to near-record levels over the period. Moreover,

euro-area bank stock prices fell on continued concerns

about the condition of some troubled institutions.

With the yen at a 15-year high against the dollar in

nominal terms, Japan’s Ministry of Finance intervened

in currency markets on September 15 to buy dollars

against yen, and the Bank of Japan (BOJ) noted that it

would continue to provide ample liquidity. In reaction,

the yen depreciated about 3 percent against the dollar,

essentially reversing its rise over the preceding part of

the intermeeting period. The European Central Bank

(ECB) said that it would continue to provide term liquidity by offering several more full-allotment threemonth refinancing operations through the end of the

year. In contrast to the continued accommodative

stance of the ECB and the BOJ, the Bank of Canada

increased its target for the overnight rate by 25 basis

points to 1 percent, its third hike since June. Several

other central banks tightened monetary policy over the

intermeeting period, including those of Chile, India,

Indonesia, Sweden, and Thailand.

Staff Economic Outlook

In the economic forecast prepared for the September

FOMC meeting, the staff lowered its projection for the

increase in real economic activity over the second half

of 2010. The staff also reduced slightly its forecast of

growth next year but continued to anticipate a moderate strengthening of the expansion in 2011 as well as

a further pickup in economic growth in 2012. The softer tone of incoming economic data suggested that the

underlying level of demand was weaker than projected

at the time of the August meeting. Moreover, the out-

_____________________________________________________________________________________________

Page 6

Federal Open Market Committee

look for foreign economic activity also appeared a bit

weaker. In the medium term, the recovery in economic

activity was expected to receive support from accommodative monetary policy, further improvements in

financial conditions, and greater household and business confidence. Over the forecast period, the increase

in real GDP was projected to be sufficient to slowly

reduce economic slack, although resource slack was

anticipated to still remain elevated at the end of 2012.

Overall inflation was projected to remain subdued, with

the staff’s forecasts for headline and core inflation little

changed from the previous projection. The current

and projected wide margins of economic slack were

expected to contribute to a small slowing in core inflation in 2011, which was anticipated to be tempered by

stable inflation expectations. Inflation was projected to

change little in 2012, as considerable economic slack

was expected to remain even as economic activity was

anticipated to strengthen.

Participants’ Views on Current Conditions and the

Economic Outlook

In their discussion of the economic situation and outlook, meeting participants generally agreed that the incoming data indicated that output and employment

were increasing only slowly and at rates well below

those recorded earlier in the year. Although participants considered it unlikely that the economy would

reenter a recession, many expressed concern that output growth, and the associated progress in reducing the

level of unemployment, could be slow for some time.

Participants noted a number of factors that were restraining growth, including low levels of household and

business confidence, heightened risk aversion, and the

still weak financial conditions of some households and

small firms. A few participants noted that economic

recoveries were often uneven and were typically slow

following downturns triggered by financial crises. A

number of participants observed that the sluggish pace

of growth and continued high levels of slack left the

economy exposed to potential negative shocks. Nevertheless, participants judged the economic recovery to

be continuing and generally expected growth to pick up

gradually next year.

Indicators of spending by businesses and households

were mixed. Several participants observed that data on

retail sales had been a bit stronger than expected over

the intermeeting period, although business contacts

indicated that shoppers remained very price sensitive.

There were some reports of retailers cautiously boosting inventories ahead of the holiday season by some-

what more than they did a year ago. Households were

continuing efforts to repair their balance sheets by saving more and paying down debt. Participants noted

that elevated uncertainty about employment prospects

continued to weigh on consumption spending. Many

businesses had built up large reserves of cash, in part

by issuing long-term debt, but were refraining from

adding workers or expanding plants and equipment. A

number of business contacts indicated that they were

holding back on hiring and spending plans because of

uncertainty about future fiscal and regulatory policies.

However, businesses also indicated that concerns about

actual and anticipated demand were important factors

limiting investment and hiring. Businesses reported

continued strong foreign demand for their products,

particularly from Asia.

Participants noted that the housing sector, including

residential construction and home sales, continued to

be very weak. Despite efforts aimed at mitigation,

fore-closures continued to add to the elevated supply

of available homes, putting downward pressure on

home prices and housing construction.

Financial developments were mixed over the intermeeting period. Banks remained generally cautious and uncertain about the regulatory outlook, although investors

appeared confident that U.S. banks could meet the new

international standards for bank capital and liquidity

that were announced over the intermeeting period.

Improving household financial conditions were contributing to better consumer loan performance, and credit

problems more broadly appeared to have mostly

peaked, although banks continued to report elevated

losses on commercial real estate loans, especially construction and land development loans. Credit remained

readily available for larger corporations with access to

financial markets, and there were some signs that credit

conditions had begun to improve for smaller firms.

Asset prices had been relatively sensitive to incoming

economic data over the intermeeting period but generally ended the period little changed on net. Stresses in

European financial markets remained broadly contained but bore watching going forward.

A number of participants noted that the current sluggish pace of employment growth was insufficient to

reduce unemployment at a satisfactory pace. Several

participants reported feedback from business contacts

who were delaying hiring until the economic and regulatory outlook became more certain. Participants discussed the possible extent to which the unemployment

rate was being boosted by structural factors such as

_____________________________________________________________________________________________

Minutes of the Meeting of September 21, 2010

Page 7

mismatches between the skills of the workers who had

lost their jobs and the skills needed in the sectors of the

economy with vacancies, the inability of the unemployed to relocate because their homes were worth less

than their mortgages, and the effects of extended unemployment benefits. Participants agreed that factors

like these were pushing the unemployment rate up, but

they differed in their assessments of the extent of such

effects. Nevertheless, many participants saw evidence

that the current unemployment rate was considerably

above levels that could be explained by structural factors alone, pointing, for example, to declines in employment across a wide range of industries during the

recession, job vacancy rates that were relatively low,

and reports that weak demand for goods and services

remained a key reason why firms were adding employees only slowly.

Inflation had declined since the start of the recession,

and most participants indicated that underlying inflation was at levels somewhat below those that they

judged to be consistent with the Committee’s dual

mandate for maximum employment and price stability.

Although prices of some commodities and imported

goods had risen recently, many business contacts reported that they currently had little pricing power and

that they anticipated limited, if any, increases in labor

costs. Meeting participants noted that several measures

of inflation expectations had changed little, on net,

over the intermeeting period and that analysis of the

components of price indexes suggested disinflation

might be abating. However, TIPS-based inflation

compensation had declined, on balance, in recent quarters. While underlying inflation remained subdued,

participants saw only small odds of deflation.

Participants discussed the medium-term outlook for

monetary policy and issues related to monetary policy

implementation. Many participants noted that if economic growth remained too slow to make satisfactory

progress toward reducing the unemployment rate or if

inflation continued to come in below levels consistent

with the FOMC’s dual mandate, it would be appropriate to provide additional monetary policy accommodation. However, others thought that additional accommodation would be warranted only if the outlook worsened and the odds of deflation increased materially.

Meeting participants discussed several possible approaches to providing additional accommodation but

focused primarily on further purchases of longer-term

Treasury securities and on possible steps to affect inflation expectations. Participants reviewed the likely benefits and costs associated with a program of purchasing

additional longer-term assets—with some noting that

the economic benefits could be small in current circumstances—as well as the best means to calibrate and

implement such purchases. A number of participants

commented on the important role of inflation expectations for monetary policy: With short-term nominal

interest rates constrained by the zero bound, a decline

in short-term inflation expectations increases shortterm real interest rates (that is, the difference between

nominal interest rates and expected inflation), thereby

damping aggregate demand. Conversely, in such circumstances, an increase in inflation expectations lowers

short-term real interest rates, stimulating the economy.

Participants noted a number of possible strategies for

affecting short-term inflation expectations, including

providing more detailed information about the rates of

inflation the Committee considered consistent with its

dual mandate, targeting a path for the price level rather

than the rate of inflation, and targeting a path for the

level of nominal GDP. As a general matter, participants felt that any needed policy accommodation

would be most effective if enacted within a framework

that was clearly communicated to the public. The minutes of FOMC meetings were seen as an important

channel for communicating participants’ views about

monetary policy.

Committee Policy Action

In their discussion of monetary policy for the period

immediately ahead, nearly all of the Committee members agreed that it would be appropriate to maintain the

target range for the federal funds rate of 0 to ¼ percent

and to leave unchanged the level of the combined holdings of Treasury, agency debt, and agency mortgagebacked securities in the SOMA. Although many members considered the recent and anticipated progress

toward meeting the Committee’s mandate of maximum

employment and price stability to be unsatisfactory,

members observed that incoming data over the intermeeting period indicated that the economic recovery

was continuing, albeit slowly. Moreover, the data had

been mixed, with readings early in the period generally

weaker than anticipated but the more-recent data coming in on the strong side of expectations. In light of

the considerable uncertainty about the current trajectory for the economy, some members saw merit in accumulating further information before reaching a decision

about providing additional monetary stimulus. In addition, members wanted to consider further the most

effective framework for calibrating and communicating

any additional steps to provide such stimulus. Several

members noted that unless the pace of economic re-

_____________________________________________________________________________________________

Page 8

Federal Open Market Committee

covery strengthened or underlying inflation moved

back toward a level consistent with the Committee’s

mandate, they would consider it appropriate to take

action soon.

With respect to the statement to be released following

the meeting, members agreed that it was appropriate to

adjust the statement to make it clear that underlying

inflation had been running below levels that the Committee judged to be consistent with its mandate for

maximum employment and price stability, in part to

help anchor inflation expectations. Nearly all members

agreed that the statement should reiterate the expectation that economic conditions were likely to warrant

exceptionally low levels of the federal funds rate for an

extended period. One member, however, believed that

continuing to communicate that expectation in the

Committee’s statement would create conditions that

could lead to macroeconomic and financial imbalances.

Members generally thought that the statement should

note that the Committee was prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to

levels consistent with its mandate. Such an indication

accorded with the members’ sense that such accommodation may be appropriate before long, but also

made clear that any decisions would depend upon future information about the economic situation and outlook.

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 maintain

the total face value of domestic securities

held in the System Open Market Account at

approximately $2 trillion by reinvesting principal payments from agency debt and agency

mortgage-backed securities in longer-term

Treasury securities. The System Open Market Account Manager and the Secretary will

keep the Committee informed of ongoing

developments regarding the System’s balance

sheet that could affect the attainment over

time of the Committee’s objectives of maximum employment and price stability.”

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

“Information received since the Federal

Open Market Committee met in August indicates that the pace of recovery in output

and employment has slowed in recent

months. Household spending is increasing

gradually, but remains constrained by high

unemployment, modest income growth, lower housing wealth, and tight credit. Business

spending on equipment and software is rising, though less rapidly than earlier in the

year, while investment in nonresidential

structures continues to be weak. Employers

remain reluctant to add to payrolls. Housing

starts are at a depressed level. Bank lending

has continued to contract, but at a reduced

rate in recent months. 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 modest in the near term.

Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With

substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to

remain subdued for some time before rising

to levels the Committee considers consistent

with its mandate.

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 for the federal funds rate for an extended period. The

Committee also will maintain its existing policy of reinvesting principal payments from its

securities holdings.

The Committee will continue to monitor the

economic outlook and financial develop-

_____________________________________________________________________________________________

Minutes of the Meeting of September 21, 2010

Page 9

ments and is prepared to provide additional

accommodation if needed to support the

economic recovery and to return inflation,

over time, to levels consistent with its

mandate.”

Voting for this action: Ben Bernanke, William C.

Dudley, James Bullard, Elizabeth Duke, Sandra Pianalto, Eric Rosengren, Daniel K. Tarullo, and Kevin

Warsh.

Voting against this action: Thomas M. Hoenig.

Mr. Hoenig dissented, emphasizing that the economy

was entering the second year of moderate recovery and

that, while the zero interest rate policy and “extended

period” language were appropriate during the crisis and

its immediate aftermath, they were no longer appropriate with the recovery under way. Mr. Hoenig also emphasized that, in his view, the current high levels of

unemployment were not caused by high interest rates

but by an extended period of exceptionally low rates

earlier in the decade that contributed to the housing

bubble and subsequent collapse and recession. He believed that holding rates artificially low would invite the

development of new imbalances and undermine longrun growth. He would prefer removing the “extended

period” language and thereafter moving the federal

funds rate upward, consistent with his views at past

meetings that it approach 1 percent, before pausing to

determine what further policy actions were needed.

Also, given current economic and financial conditions,

Mr. Hoenig did not believe that continuing to reinvest

principal payments from SOMA securities holdings was

required to support the Committee’s policy objectives.

It was agreed that the next meeting of the Committee

would be held on Tuesday-Wednesday, November 2-3,

2010. The meeting adjourned at 1:10 p.m. on September 21, 2010.

Notation Vote

By notation vote completed on August 30, 2010, the

Committee unanimously approved the minutes of the

FOMC meeting held on August 10, 2010.

_____________________________

William B. English

Secretary