FOMC Minutes
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Minutes of the Federal Open Market Committee
November 2–3, 2010
A meeting of the Federal Open Market Committee was
held in the offices of the Board of Governors in Washington, D.C., on Tuesday, November 2, 2010, at
1:00 p.m. and continued on Wednesday, November 3,
2010, at 9:00 a.m.
PRESENT:
Ben Bernanke, Chairman
William C. Dudley, Vice Chairman
James Bullard
Elizabeth Duke
Thomas M. Hoenig
Sandra Pianalto
Sarah Bloom Raskin
Eric Rosengren
Daniel K. Tarullo
Kevin Warsh
Janet L. Yellen
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 and Dennis P. Lockhart, Presidents of the Federal Reserve Banks of Richmond and Atlanta, respectively
John F. Moore, First Vice President, Federal Reserve Bank of San Francisco
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
James A. Clouse, Thomas A. Connors, 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
Patrick M. Parkinson, Director, Division of Bank
Supervision and Regulation, Board of Governors
Nellie Liang, Director, Office of Financial Stability
Policy and Research, 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
Charles S. Struckmeyer, Deputy Staff Director,
Office of the Staff Director, Board of Governors
Seth B. Carpenter and Andrew T. Levin, Senior
Associate Directors, Division of Monetary Affairs, Board of Governors; Michael Leahy, Senior Associate Director, Division of International Finance, Board of Governors; David
Reifschneider, Senior Associate Director, Division of Research and Statistics, Board of Governors
Stephen A. Meyer, Senior Adviser, Division of
Monetary Affairs, Board of Governors
Daniel M. Covitz and David E. Lebow, Deputy
Associate Directors, Division of Research and
Statistics, Board of Governors; Gretchen C.
Weinbach, Deputy Associate Director, Division of Monetary Affairs, Board of Governors
Brian J. Gross, Special Assistant to the Board, Office of Board Members, Board of Governors
Mark A. Carlson, Economist, Division of Monetary Affairs, Board of Governors
Randall A. Williams, Records Management Analyst,
Division of Monetary Affairs, Board of Governors
Sarah G. Green, First Vice President, Federal Reserve Bank of Richmond
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Loretta J. Mester, Harvey Rosenblum, Daniel G.
Sullivan, and John C. Williams, Executive Vice
Presidents, Federal Reserve Banks of Philadelphia, Dallas, Chicago, and San Francisco, respectively
David Altig, Richard P. Dzina, Mark E. Schweitzer,
and Kei-Mu Yi, Senior Vice Presidents, Federal Reserve Banks of Atlanta, New York, Cleveland, and Minneapolis, respectively
Todd E. Clark, Vice President, Federal Reserve
Bank of Kansas City
Robert L. Hetzel, Senior Economist, Federal Reserve Bank of Richmond
The meeting opened with a short discussion regarding
communicating with the public about monetary policy
deliberations and decisions. Meeting participants supported a review of the Committee’s communication
guidelines with the aim of ensuring that the public is
well informed about monetary policy issues while preserving the necessary confidentiality of policy discussions until their scheduled release. Governor Yellen
agreed to chair a subcommittee to conduct such a review.
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 since the Committee met on
September 21, 2010. He also reported on System open
market operations, including the continuing reinvestment into longer-term Treasury securities of principal
payments received on the SOMA’s holdings of agency
debt and agency-guaranteed mortgage-backed securities
(MBS). The Open Market Desk at the Federal Reserve
Bank of New York purchased a total of about $65 billion of Treasury securities since the Committee decided, on August 10, to begin reinvesting such principal
payments. Purchases were concentrated in nominal
Treasury securities with maturities of 2 to 10 years,
though some shorter-term and some longer-term securities were purchased along with some Treasury inflation-protected securities (TIPS). Over the intermeeting
period, the Desk also conducted a number of smallvalue tri-party reverse repurchase operations with the
primary dealers and with money market mutual funds
that have been accepted as counterparties for such operations; these transactions, which the Desk conducted
to ensure continuing operational and systems readiness,
used Treasury securities, agency debt, and agencyguaranteed MBS as collateral. In addition, the Federal
Reserve conducted another small-value auction of term
deposits to ensure the continued operational readiness
of the term deposit facility and to increase the familiarity of eligible depository institutions with the auction
procedures. 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.
The Manager described the tentative plans the Desk
had prepared for implementing a possible Committee
decision to expand further the System’s holdings of
longer-term Treasury securities. Purchases would continue to be concentrated in nominal Treasury securities
with remaining maturities between 2 and 10 years, with
some purchases of shorter- and longer-term securities
and of TIPS; with this maturity distribution, newly purchased securities would be expected to have an average
duration of 5 to 6 years, essentially the same as the average duration of the System’s existing holdings of
Treasury securities. The Desk planned to publish additional information about its transactions to increase the
transparency of, and encourage wider participation in,
future purchase operations. The Desk judged that if it
continued reinvesting principal payments from the
Federal Reserve System’s holdings of agency debt and
agency MBS in longer-term Treasury securities, then it
could purchase additional longer-term Treasury securities at a pace of about $75 billion per month while
avoiding disruptions in market functioning. The Manager indicated that implementing a sizable increase in
the System’s holdings of Treasury securities most effectively likely would entail a temporary relaxation of the
35 percent per-issue limit on SOMA holdings under
which the Desk had been operating; whether, and to
what extent, the System’s holdings of some issues
would exceed 35 percent would depend on the specific
securities that dealers choose to offer at future auctions. Finally, the Manager summarized the implications for the Federal Reserve’s balance sheet and income statement of alternative decisions that the Committee might make about the size and maturity distribution of the SOMA’s securities holdings. Participants
discussed the Desk’s tentative operational plans; they
also discussed the potential effects of an expansion of
the System’s holdings of longer-term securities on fi-
Minutes of the Meeting of November 2-3, 2010
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nancial markets and institutions and on the economy,
and the channels through which those effects could
occur.
Staff Review of the Economic Situation
The information reviewed at the November 2–3 meeting indicated that the economic recovery proceeded at
a modest rate in recent months, with only a gradual
improvement in labor market conditions, and was accompanied by a continued low rate of inflation. Consumer spending, business investment in equipment and
software, and exports posted further gains in the third
quarter, and nonfarm inventory investment stepped up.
But construction activity in both the residential and
nonresidential sectors remained depressed, and a significant portion of the rise in domestic demand was again
met by imports. U.S. industrial production slowed noticeably in August and September, hiring at private
businesses remained modest, and the unemployment
rate stayed elevated. Headline consumer price inflation was subdued in recent months, despite a rise in
energy prices, as core consumer price inflation trended
lower.
Private businesses continued to increase their demand
for labor only modestly. In September, private nonfarm payroll employment remained on a gradual uptrend, and the average workweek of all private-sector
employees was unchanged for a third month. In addition, the number of individuals working part time for
economic reasons moved back up for a second month,
and the available measures of job openings and hiring
were still low. The unemployment rate remained at
9.6 percent in September, leaving the average rate for
the third quarter only slightly below its average over the
first half of the year. Long-duration unemployment
continued to recede somewhat but was still very high.
Indicators of layoffs remained elevated, although initial
claims for unemployment insurance drifted down a
little during October. The labor force participation rate
in September was unchanged at a level lower than earlier in the year.
After rising rapidly from mid-2009 to mid-2010, industrial production decelerated in August
and edged
down in September. In the manufacturing sector, output gains across a wide range of industries were smaller
in recent months, and capacity utilization leveled off at
a rate still well below its longer-run average. Production of motor vehicles picked up during the third quarter as automakers replenished dealers’ stocks, but motor vehicle assemblies were scheduled to drop back in
coming months. More broadly, October surveys of
new orders received by manufacturers suggested that
demand for factory goods had continued to increase.
Real personal consumption expenditures (PCE) rose at
a moderate rate in the third quarter. Rising equity prices likely resulted in some further improvement in net
worth over the same period. However, real disposable
personal income, which rose strongly in the first half of
the year, increased only slightly in the third quarter. As
a result, the personal saving rate dropped back somewhat in the third quarter, although it remained near the
high levels that have prevailed since late 2008. Bank
lending standards were still relatively tight, and household borrowing remained low. Surveys taken in September and October indicated that consumers were
slightly more pessimistic about the economic outlook
than earlier in the year.
Activity in the housing market remained exceptionally
weak. Although sales of new and existing homes
turned up in August and September, the still-low level
of demand suggested that the payback for the earlier
boost to sales from the homebuyer tax credit had not
yet faded. Moreover, despite further declines in mortgage interest rates in recent months, other factors continued to restrain housing demand, including consumer
pessimism about the outlook for jobs and income, the
depressed rate of household formation, and tight underwriting standards for mortgages. In addition, the
moratoriums recently announced by some banks on the
sale of properties they had seized in foreclosures were
likely to damp home sales further in the near term.
Starts of new single-family houses rose somewhat in
August and September, but the pace of construction
was still noticeably below the already-depressed level of
the preceding year. New homebuilding appeared to be
weighed down by the backlog of unsold existing homes
and tight lending conditions for acquisition, development, and construction loans.
After a very strong increase in the first half of the year,
business investment in equipment and software posted
a smaller, but still solid, gain in the third quarter. Nominal shipments of nondefense capital goods from
domestic manufacturers remained on a moderate uptrend through September. But rising demand for
equipment and software during the third quarter was
also satisfied in part by a further rise in imports of capital goods. Near-term indicators of business spending
on equipment and software were generally positive.
New orders for nondefense capital goods, excluding
aircraft, continued to outpace shipments through September. Credit conditions improved further in the
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third quarter, particularly for larger firms with access to
the capital markets. Financing flows to smaller firms,
which are more dependent on banks, were more subdued.
Real nonfarm inventory investment was estimated to
have picked up during the third quarter. Rebuilding of
dealers’ stocks of motor vehicles accounted for part of
the step-up, but some of it likely reflected another large
increase in imports. In August, inventory-to-sales ratios for most industries remained well below their previous peaks. Surveys of purchasing managers in September and October indicated that most did not perceive their customers’ inventories to be too high.
Business investment in nonresidential structures was
about flat in the third quarter as another strong increase
in spending for drilling and mining structures offset
further declines in outlays on commercial and industrial
buildings.
Consumer price inflation remained low in recent
months. The total PCE price index increased slightly
in September as consumer energy prices moved up noticeably for a third month. The core PCE price index
was unchanged in September, and the 12-month increase in this index continued to trend down. At earlier
stages of processing, the rise in producer prices for intermediate materials remained moderate in September,
but prices of globally traded industrial and agricultural
commodities accelerated considerably in October, reflecting in part the lower foreign exchange value of the
dollar as well as concerns about supply for certain
commodities. In September and October, survey
measures of households’ short- and long-term expectations for inflation remained in the ranges that have
prevailed since the spring of 2009.
Labor compensation rose at a moderate rate in the
third quarter. Private-sector wage increases, as measured by both average hourly earnings of all employees
and the employment cost index (ECI), remained subdued. However, according to the ECI, employer benefit costs accelerated this year after posting a very small
increase in 2009.
The U.S. international trade deficit widened in August,
after narrowing in July, as a modest increase in nominal
exports was more than offset by a strong increase in
imports. Following widespread declines in July, most
major categories of imports rebounded in August, with
imports of consumer goods and capital goods exhibiting particular strength. Imports of petroleum products
also increased substantially, reflecting both higher volumes and higher prices. The increase in exports was
concentrated in agricultural goods, partly boosted by
rising prices, and in services; most other major categories either declined or were flat.
Recent indicators of foreign economic activity suggested that growth abroad had slowed appreciably after
midyear. Following an unsustainably high rate of expansion in the second quarter, growth of real gross
domestic product (GDP) in the emerging market economies appeared to have slowed markedly, notwithstanding an apparent acceleration in economic activity
in China. Real GDP growth apparently moderated in
the advanced foreign economies as well. In the euro
area, industrial production rose sharply in August, but
purchasing managers indexes moved down in recent
months. The German economy continued to perform
strongly, while recent data showed weakness in the peripheral euro-area countries. A reacceleration of food
and energy prices helped push up inflation abroad, albeit generally to still-moderate levels, in the third quarter.
Staff Review of the Financial Situation
The decision by the Federal Open Market Committee
(FOMC) at its September meeting to maintain the 0 to
¼ percent target range for the federal funds rate was
widely anticipated. However, yields declined as market
participants reportedly interpreted the language of the
accompanying statement to imply higher odds of additional asset purchases and a longer period of exceptionally low short-term interest rates. Investors took
particular note of the statement’s indication that inflation was below the levels consistent with the FOMC’s
dual mandate for maximum employment and price stability. In the weeks following the FOMC meeting,
Federal Reserve communications, along with economic
data releases that continued to point to a tepid economic outlook, appeared to reinforce market expectations that additional policy accommodation would be
forthcoming in the near term.
Yields on nominal Treasury coupon securities and
those on TIPS declined, on net, over the intermeeting
period, largely in response to Federal Reserve communications and somewhat weaker-than-expected economic data releases. Five-year inflation compensation
increased over the intermeeting period, and forward
inflation compensation 5 to 10 years ahead also rose.
Anecdotal reports pointed to the increased likelihood
of additional asset purchases by the Federal Reserve
and to FOMC communications noting that the Committee viewed underlying inflation as somewhat below
the levels judged to be most consistent with the Com-
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mittee’s dual mandate as factors contributing to lower
yields and to the increase in inflation compensation
over the period. Yields on investment- and speculative-grade corporate bonds declined somewhat more
than those on comparable-maturity Treasury securities,
leaving risk spreads slightly lower. In the secondary
market for syndicated leveraged loans, prices of loans
continued to move up and bid-asked spreads narrowed
a bit further.
Conditions in short-term funding markets were generally stable over the intermeeting period. In dollar funding markets, spreads of term London interbank offered
rates (or Libor) over those on overnight index swaps
edged up but remained at levels similar to those observed prior to the emergence of euro-area concerns
earlier this year. Spreads on unsecured financial commercial paper and on asset-backed commercial paper
remained low. Rates on repurchase agreements (repos)
involving various types of collateral were little changed
on net. Bid-asked spreads in most repo transactions
generally declined while changes in haircuts on different types of repo collateral were mixed.
Broad U.S. stock price indexes rose, on balance, over
the intermeeting period, reflecting investor expectations of further monetary policy accommodation and
better-than-expected third-quarter earnings news; option-implied volatility on the S&P 500 index was little
changed. 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—narrowed a bit but remained at an
elevated level. Bank stocks generally underperformed
the broader market amid concerns about the handling
of mortgage foreclosure documents and possible lack
of compliance with securitization agreements.
Net debt financing by U.S. nonfinancial corporations
was very strong in September, with sizable gross corporate bond issuance across the credit spectrum and a
substantial increase in commercial paper outstanding,
but data for October pointed to a moderation in these
flows. Issuance of syndicated leveraged loans in the
third quarter remained near the average pace recorded
in the first half of the year. Measures of the credit
quality of nonfinancial corporations remained solid.
The pace of gross public equity issuance from seasoned
and initial public offerings by nonfinancial firms remained moderate in September and appeared to slow in
October.
Commercial real estate markets remained strained.
Commercial mortgage debt in the third quarter was
estimated to have declined at a rate similar to the drop
in the second quarter, and the delinquency rate for securitized commercial mortgages continued to climb in
September. However, some signals offered modest
encouragement. In particular, vacancy rates for commercial buildings stabilized in the third quarter, and the
pipeline of new commercial mortgage-backed securities
picked up a bit from very low levels.
Residential mortgage refinancing activity moved up in
late September and early October, from an already high
level, as the average interest rate on fixed-rate mortgages fell further over the intermeeting period. In contrast, the level of applications for mortgages to purchase homes remained anemic. Total consumer credit
contracted in August at a pace roughly in line with the
declines posted earlier in the year. Issuance of consumer asset-backed securities was solid in September.
Consumer credit quality generally continued to improve, though delinquency rates remained elevated.
Bank credit edged up in September and October, as
brisk growth in banks’ holdings of securities more than
offset a further decline in total loans. Commercial and
industrial (C&I) loans turned down in September after
having increased slightly over the two previous months.
A moderate net fraction of banks reported, in their responses to the October Senior Loan Officer Opinion
Survey on Bank Lending Practices, that they had eased
standards on C&I loans and narrowed spreads of C&I
loan rates over their cost of funds; demand for such
loans reportedly declined, on net, over the preceding
three months. Commercial real estate loans, home equity loans, and consumer loans contracted. However,
closed-end residential mortgage loans on banks’ books
increased modestly for the second month in a row.
Over September and October, M2 expanded at an average annual rate that was noticeably above its pace
earlier in the year. The growth rate of liquid deposits
moved up, while small time deposits and retail money
market mutual funds continued to contract. The compositional shift likely reflected the relatively attractive
yields on liquid deposits. Currency growth strengthened, with indicators suggesting strong demand from
abroad.
The dollar declined about 3 percent against a broad
array of other currencies during the intermeeting period, depreciating even more against the euro and the
yen. In addition, Chinese authorities allowed the renminbi to appreciate slightly against the dollar. Market
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commentary highlighted the possibility that major central banks would further ease monetary policy, and the
Bank of Japan expanded its asset purchase program
and reduced its policy target rate to a range of 0 to
10 basis points. Benchmark 10-year sovereign yields
generally declined in the major advanced foreign economies, but the overnight rate in the euro area increased
as the European Central Bank continued to allow the
amount of liquidity provided to the banking system to
decline. Spreads relative to German bunds on the 10year sovereign bonds of most peripheral euro-area
countries either declined or were little changed over the
period, but Irish sovereign spreads moved higher on
concerns over the fiscal burdens associated with losses
in the Irish banking sector. Major equity indexes in the
euro area and in the United Kingdom increased moderately, whereas the Nikkei index declined.
Several emerging market central banks tightened monetary policy, including the People’s Bank of China.
Against the backdrop of interest rate declines in many
of the advanced economies, as well as heavy capital
flows toward emerging market countries, many emerging market currencies strengthened, reportedly prompting further official intervention in foreign exchange
markets.
slack in resource utilization was expected to be slightly
less than previously projected, and prices of imported
goods were anticipated to rise somewhat faster. As in
previous forecasts, further disinflation was expected to
be checked by the ongoing stability of inflation expectations.
Participants’ Views on Current Conditions and the
Economic Outlook
In conjunction with this FOMC meeting, all meeting
participants—the six members of the Board of Governors and the heads of the 12 Federal Reserve Banks—
provided projections of output growth, the unemployment rate, and inflation for each year from 2010
through 2013 and over the longer run. Longer-run
projections represent each participant’s assessment of
the rate to which each variable would be expected to
converge, over time, under appropriate monetary policy
and in the absence of further shocks. Participants’
forecasts are described in the Summary of Economic
Projections, which is attached as an addendum to these
minutes.
Staff Economic Outlook
Because the recent data on production and spending
were broadly in line with the staff’s expectations, the
forecast for economic activity that was prepared for the
November FOMC meeting showed little change to the
staff’s near-term outlook relative to the forecast prepared for the September FOMC meeting. However,
the staff revised up its forecast for economic activity in
2011 and 2012. In light of asset market developments
over the intermeeting period, which in large part appeared to reflect heightened expectations among investors that the Federal Reserve would undertake additional purchases of longer-term securities, the November forecast was conditioned on lower long-term interest rates, higher stock prices, and a lower foreign exchange value of the dollar than was the staff’s previous
forecast. These factors were expected to provide additional support to the recovery in economic activity.
Accordingly, the unemployment rate was anticipated to
recede somewhat more than in the previous forecast,
although the margin of slack at the end of 2011 was
still expected to be substantial.
In their discussion of the economic situation and outlook, meeting participants generally agreed that the incoming data indicated that output and employment
were continuing to increase, but only slowly. Progress
toward the Committee’s dual objectives of maximum
employment and price stability was described as disappointingly slow. Participants variously noted a number
of factors that were restraining growth, including low
levels of household and business confidence, concerns
about the durability of the economic recovery, continuing uncertainty about the future tax and regulatory environment, still-weak financial conditions of some
households and small businesses, the depressed housing market, and waning fiscal stimulus. Although participants considered it quite unlikely that the economy
would slide back into recession, some noted that continued slow growth and high levels of resource slack
could leave the economic expansion vulnerable to negative shocks. In the absence of such shocks, and assuming appropriate monetary policy, participants’ economic projections generally showed growth picking up
to a moderate pace and the unemployment rate declining somewhat next year. Participants generally expected growth to strengthen further and unemployment to decline somewhat more rapidly in 2012 and
2013.
The staff’s forecast continued to show subdued rates of
headline and core inflation during 2011 and 2012.
However, the downward pressure on inflation from
Indicators of spending by households and businesses
remained mixed. Consumer spending was expanding
gradually. Participants noted that households were
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continuing their efforts to repair their balance sheets, a
process that was restraining growth in consumer
spending. Sluggish employment growth and elevated
uncertainty about job prospects also continued to
weigh on household spending. With respect to business spending, contacts generally reported that they
were investing to reduce costs but were refraining from
adding workers or expanding capacity in the United
States. Energy producers were an exception. Participants observed that firms had generated rising profits,
but that business contacts indicated those gains largely
reflected cost-cutting rather than top-line growth in
revenues. A number of businesses continued to report
that they were holding back on hiring and capital
spending because of uncertainty about future taxes,
health-care costs, and regulations. But concerns about
actual and anticipated demand also were important factors limiting investment and hiring. Firms continued to
report strong foreign demand for their products, particularly from Asia.
Participants noted that the housing sector, including
residential construction and home sales, remained depressed. Foreclosures were adding to the elevated
supply of available homes and putting downward pressure on home prices and housing construction. Some
participants saw disputes over mortgage and foreclosure documents as likely to delay the eventual recovery
in housing markets. Commercial real estate markets
also were weak, and the availability of credit for commercial real estate transactions remained limited, but
low interest rates were helping stabilize prices.
Participants agreed that progress in reducing unemployment was disappointing; indeed, several noted that
the recent rate of output growth, if continued, would
more likely be associated with an increase than a decrease in the unemployment rate. Participants again
discussed the extent to which employment was being
held down, and the unemployment rate boosted, by
structural factors such as 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 the principal they
owed on their mortgages, and the effects of extended
unemployment benefits on the duration of unemployed
workers’ search for a new job. Participants agreed that
such factors were contributing to continued high unemployment but differed in their assessments of the
magnitude of such effects. Many participants saw evidence that the current unemployment rate was well
above levels that could be explained by structural fac-
tors alone, noting, for example, reports from business
contacts indicating that weak growth in demand for
their firms’ products remained a key reason why they
were reluctant to add employees, and job vacancy rates
that were low relative to historical experience. A number of participants noted that continued high unemployment, particularly with large numbers of workers
suffering very long spells of unemployment, would lead
to an erosion of workers’ skills that would have adverse
consequences for those workers and for the economy’s
potential level of output in the longer term.
Participants saw financial conditions as having become
more supportive of growth over the course of the intermeeting period; most, though not all, of the change
appeared to reflect investors’ increasing anticipation of
a further easing of monetary policy. Most longer-term
nominal interest rates declined, real interest rates fell
even more, credit spreads tightened, and equity prices
rose, in part reflecting better-than-expected corporate
earnings reports. Inflation compensation rose noticeably, returning to a level more typical of recent years.
Participants noted that credit remained readily available—in debt markets and from banks—for larger corporations, and there were some signs that credit conditions had begun to improve for smaller firms that obtain credit primarily from banks. Banking institutions
reported signs of improving credit quality. Improvements in household financial conditions were contributing to better performance of consumer loans.
However, banks continued to report elevated losses on
commercial real estate loans, especially construction
and land development loans. Participants noted the
risk of losses at financial institutions stemming from
investors putting mortgages back to sellers if the quality
of the loans was misrepresented when the mortgages
were sold into securitization vehicles.
Measures of price inflation had generally trended lower
since the start of the recession; the same was true of
nominal wage growth. Most participants indicated that
underlying inflation was somewhat low relative to levels
that they judged to be consistent with the Committee’s
statutory mandate to foster maximum employment and
price stability. While underlying inflation remained
subdued, meeting participants generally saw only small
odds of deflation, given the stability of longer-term
inflation expectations and the anticipated recovery in
economic activity. They generally did not expect appreciably higher inflation, either. While prices of some
commodities and imported goods had risen recently,
business contacts reported that they currently had little
pricing power and that they would continue to seek
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productivity gains to offset higher input costs. Small
wage increases, coupled with productivity gains, meant
that unit labor costs were lower than a year earlier.
Many participants pointed to substantial slack in resource utilization, along with well-anchored inflation
expectations, as likely to contribute to subdued inflation for some time. A few participants expected that
continuing resource slack would lead to some further
disinflation in coming years. However, a few others
thought that the exceptionally accommodative stance
of monetary policy, coupled with rising prices of energy
and other commodities as well as rising prices of other
imports, made it more likely that inflation would increase, within a year or two, to levels they judged consistent with the Committee’s dual mandate.
Participants generally agreed that the most likely economic outcome would be a gradual pickup in growth
with slow progress toward maximum employment.
They also generally expected that inflation would remain, for some time, below levels the Committee considers most consistent, over the longer run, with maximum employment and price stability. However, participants held a range of views about the risks to that outlook. Most saw the risks to growth as broadly balanced, but many saw the risks as tilted to the downside.
Similarly, a majority saw the risks to inflation as balanced; some, however, saw downside risks predominating while a couple saw inflation risks as tilted to the
upside. Participants also differed in their assessments
of the likely benefits and costs associated with a program of purchasing additional longer-term securities in
an effort to provide additional monetary stimulus,
though most saw the benefits as exceeding the costs in
current circumstances. Most participants judged that a
program of purchasing additional longer-term securities
would put downward pressure on longer-term interest
rates and boost asset prices; some observed that it
could also lead to a reduction in the foreign exchange
value of the dollar. Most expected these changes in
financial conditions to help promote a somewhat
stronger recovery in output and employment while also
helping return inflation, over time, to levels consistent
with the Committee’s mandate. In addition, several
participants argued that the stimulus provided by additional securities purchases would help protect against
further disinflation and the small probability that the
U.S. economy could fall into persistent deflation—an
outcome that they thought would be very costly. Some
participants, however, anticipated that additional purchases of longer-term securities would have only a limited effect on the pace of the recovery; they judged that
the economy’s slow growth largely reflected the effects
of factors that were not likely to respond to additional
monetary policy stimulus and thought that additional
action would be warranted only if the outlook worsened and the odds of deflation increased materially.
Some participants noted concerns that additional expansion of the Federal Reserve’s balance sheet could
put unwanted downward pressure on the dollar’s value
in foreign exchange markets. Several participants saw a
risk that a further increase in the size of the Federal
Reserve’s asset portfolio, with an accompanying increase in the supply of excess reserves and in the
monetary base, could cause an undesirably large increase in inflation. However, it was noted that the
Committee had in place tools that would enable it to
remove policy accommodation quickly if necessary to
avoid an undesirable increase in inflation.
Committee Policy Action
Though the economic recovery was continuing, members considered progress toward meeting the Committee’s dual mandate of maximum employment and price
stability as having been disappointingly slow. Moreover, members generally thought that progress was
likely to remain slow. Accordingly, most members
judged it appropriate to take action to promote a
stronger pace of economic recovery and to help ensure
that inflation, over time, is at levels consistent with the
Committee’s mandate. In their discussion of monetary
policy for the period immediately ahead, nearly all
Committee members agreed to keep the federal funds
rate at its effective lower bound by maintaining the target range for that rate at 0 to ¼ percent and to expand
the Federal Reserve’s holdings of longer-term securities. To increase its securities holdings, the Committee
decided to continue its existing policy of reinvesting
principal payments from its securities holdings into
longer-term Treasury securities and intended to purchase a further $600 billion of longer-term Treasury
securities at a pace of about $75 billion per month
through the second quarter of 2011. One member
dissented from this action, judging that the risks of additional securities purchases outweighed the benefits.
Members agreed that the Committee will regularly review the pace of its securities purchases and the overall
size of the asset-purchase program in light of incoming
information and will adjust the program as needed to
best foster its goals of maximum employment and price
stability.
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 the unem-
Minutes of the Meeting of November 2-3, 2010
Page 9
_____________________________________________________________________________________________
ployment rate was elevated, and that measures of underlying inflation were somewhat low, relative to levels
that the Committee judged to be consistent, over the
longer run, with its dual mandate. 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. Members agreed that the statement
should note that the Committee will employ its policy
tools as necessary to support the economic recovery
and to help ensure that inflation, over time, is at levels
consistent with its mandate.
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 execute
purchases of longer-term Treasury securities
by the end of June 2011 in order to increase
the total face value of domestic securities
held in the System Open Market Account to
approximately $2.6 trillion. The Committee
also directs the Desk to reinvest 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 September
confirms that the pace of recovery in output
and employment continues to be slow.
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 continue
to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended
lower in recent quarters.
Consistent with its statutory mandate, the
Committee seeks to foster maximum employment and price stability. Currently, the
unemployment rate is elevated, and measures
of underlying inflation are somewhat low,
relative to levels that the Committee judges
to be consistent, over the longer run, with its
dual mandate. Although the Committee anticipates a gradual return to higher levels of
resource utilization in a context of price stability, progress toward its objectives has been
disappointingly slow.
To promote a stronger pace of economic recovery and to help ensure that inflation, over
time, is at levels consistent with its mandate,
the Committee decided today to expand its
holdings of securities. The Committee will
maintain its existing policy of reinvesting
principal payments from its securities holdings. In addition, the Committee intends to
purchase a further $600 billion of longerterm Treasury securities by the end of the
second quarter of 2011, a pace of about
$75 billion per month. The Committee will
regularly review the pace of its securities purchases and the overall size of the assetpurchase program in light of incoming information and will adjust the program as
needed to best foster maximum employment
and price stability.
The Committee will maintain the target
range for the federal funds rate at 0 to
¼ percent and continues to anticipate that
economic conditions, including low rates of
resource utilization, subdued inflation trends,
and stable inflation expectations, are likely to
warrant exceptionally low levels for 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 ne-
Page 10
Federal Open Market Committee
_____________________________________________________________________________________________
cessary to support the economic recovery
and to help ensure that inflation, over time,
is at levels consistent with its mandate.”
Voting for this action: Ben Bernanke, William C.
Dudley, James Bullard, Elizabeth Duke, Sandra Pianalto, Sarah Bloom Raskin, Eric Rosengren, Daniel K.
Tarullo, Kevin Warsh, and Janet L. Yellen.
Voting against this action: Thomas M. Hoenig.
Mr. Hoenig dissented because he judged that additional
accommodation would do little to accelerate the economy’s continuing, gradual recovery. In his assessment,
the risks of additional purchases of Treasury securities
outweighed the benefits. Mr. Hoenig believed that additional purchases would risk a further misallocation of
resources and future financial imbalances that could
destabilize the economy. He also saw a potential for
additional purchases to undermine the Federal Reserve’s independence and cause long-term inflation
expectations to rise. Mr. Hoenig also believed it was
not appropriate to indicate that economic and financial
conditions were “likely to warrant exceptionally low
levels of the federal funds rate for an extended period”
or to reinvest principal payments from agency debt and
mortgage-backed securities in long-term Treasury securities. In his assessment, this continued high level of
monetary policy accommodation could put at risk the
achievement of the Committee’s long-run policy objectives.
It was agreed that the next meeting of the Committee
would be held on Tuesday, December 14, 2010. The
meeting adjourned at 1:15 p.m. on November 3, 2010.
Notation Vote
By notation vote completed on October 8, 2010, the
Committee unanimously approved the minutes of the
FOMC meeting held on September 21, 2010.
Videoconference Meeting of October 15
The Committee met by videoconference on October
15 to discuss issues associated with its monetary policy
framework, including alternative ways to express and
communicate the Committee’s objectives, possibilities
for supplementing the Committee’s communication
about its policy decisions, the merits of smaller and
more frequent adjustments in the Federal Reserve’s
intended securities holdings versus larger and less frequent adjustments, and the potential costs and benefits
of targeting a term interest rate. The agenda did not
contemplate any policy decisions and none were taken.
Participants agreed that greater public understanding of
the Committee’s interpretation of its statutory objectives could contribute to better macroeconomic outcomes. Participants expressed a range of views about
the potential costs and benefits of quantifying the
Committee’s interpretation of its statutory mandate to
promote price stability by adopting a numerical inflation objective or a target path for the price level. In the
end, participants noted that the longer-run projections
contained in the Summary of Economic Projections,
which is released once per quarter in conjunction with
the minutes of four of the Committee’s meetings, convey considerable information about participants’ assessments of their statutory objectives. Participants
discussed whether it might be useful for the Chairman
to hold occasional press briefings to provide more detailed information to the public regarding the Committee’s assessment of the outlook and its policy decisionmaking than is included in Committee’s short postmeeting statements.
In their discussion of the relative merits of smaller and
more frequent adjustments versus larger and less frequent adjustments in the Federal Reserve’s intended
securities holdings, participants generally agreed that
large adjustments had been appropriate when economic
activity was declining sharply in response to the financial crisis. In current circumstances, however, most
saw advantages to a more incremental approach that
would involve smaller changes in the Committee’s
holdings of securities calibrated to incoming data.
Finally, participants discussed the potential benefits and
costs of setting a target for a term interest rate. Some
noted that targeting the yield on a term security could
be an effective way to reduce longer-term interest rates
and thus provide additional stimulus to the economy.
But participants also noted potentially large risks, including the risk that the Federal Reserve might find
itself buying undesirably large amounts of the relevant
security in order to keep its yield close to the target
level.
_____________________________
William B. English
Secretary
Page 1
_____________________________________________________________________________________________
Summary of Economic Projections
In conjunction with the November 2–3, 2010, FOMC
meeting, the members of the Board of Governors and
the presidents of the Federal Reserve Banks, all of
whom participate in the deliberations of the FOMC,
submitted projections for output growth, unemployment, and inflation for the years 2010 to 2013 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 each participant deems most likely to foster outcomes for economic activity and inflation that best satisfy his or her interpretation of the Federal Reserve’s
dual objectives of maximum employment and stable
prices. Longer-run projections represent each participant’s assessment of the rate to which each variable
would be expected to converge over time under appropriate monetary policy and in the absence of further
shocks.
As depicted in figure 1, FOMC participants’ projections
of economic activity over the next several years indicated that they expected the economic recovery to continue, with unemployment declining slowly and inflation remaining subdued. As indicated in table 1, relative to their previous projections in June, participants
saw weaker real activity this year and expected a somewhat more gradual economic recovery over the next
several years. Most participants expected the unem-
ployment rate would slowly decline over the forecast
horizon, while the rate of inflation would edge up but
stay subdued. Participants generally indicated that the
pace of expansion in real gross domestic product
(GDP) would rise over the projection period to one
that was somewhat above their assessment of the
economy’s longer-run rate of growth. They judged that
the pickup in economic activity would be spurred in
part by accommodative monetary policy and a gradual
easing in credit conditions that would help buoy spending by consumers and businesses. Stronger spending,
in turn, would lead to improved confidence in the
economy, a pickup in hiring, and a further improvement in credit conditions—forces that would continue
to support spending. But participants thought that
several factors would likely continue to restrain economic growth for a while, including a high degree of
caution exhibited by consumers and businesses, persistent weakness in the residential and commercial real
estate sectors of the economy, and still-tight credit
conditions. Somewhat more than half of the participants judged that, in the absence of any additional
shocks to the economy, the economy would converge
fully to its longer-run rates of output growth, unemployment, and inflation within about five or six years;
the rest indicated that it could take longer for unemployment to fall back to its longer-run rate or for inflation to rise back to the level they deemed desirable in
the longer run. Participants continued to attach an unusually high degree of uncertainty to their projections
Table 1. Economic projections of Federal Reserve Governors and Reserve Bank presidents, November 2010
Percent
Variable
Range2
Central tendency1
2013
Longer run
2012
2013
Longer run
Change in real GDP . . 2.4 to 2.5
June projection. . . 3.0 to 3.5
2010
3.0 to 3.6 3.6 to 4.5
3.5 to 4.2 3.5 to 4.5
2011
2012
3.5 to 4.6
n.a.
2.5 to 2.8
2.5 to 2.8
2.3 to 2.5 2.5 to 4.0
2.9 to 3.8 2.9 to 4.5
2010
2011
2.6 to 4.7
2.8 to 5.0
3.0 to 5.0
n.a.
2.4 to 3.0
2.4 to 3.0
Unemployment rate. . . 9.5 to 9.7
June projection. . . 9.2 to 9.5
8.9 to 9.1 7.7 to 8.2
8.3 to 8.7 7.1 to 7.5
6.9 to 7.4
n.a.
5.0 to 6.0
5.0 to 5.3
9.4 to 9.8 8.2 to 9.3
9.0 to 9.9 7.6 to 8.9
7.0 to 8.7
6.8 to 7.9
5.9 to 7.9
n.a.
5.0 to 6.3
5.0 to 6.3
PCE inflation. . . . . . . .
June projection. . .
Core PCE inflation3. .
June projection. . .
1.2 to 1.4
1.0 to 1.1
1.1 to 1.7 1.1 to 1.8
1.1 to 1.6 1.0 to 1.7
1.2 to 2.0
n.a.
1.6 to 2.0
1.7 to 2.0
1.1 to 1.5 0.9 to 2.2
0.9 to 1.8 0.8 to 2.4
0.6 to 2.2
0.5 to 2.2
0.4 to 2.0
n.a.
1.5 to 2.0
1.5 to 2.0
1.0 to 1.1
0.8 to 1.0
0.9 to 1.6 1.0 to 1.6
0.9 to 1.3 1.0 to 1.5
1.1 to 2.0
n.a.
0.9 to 1.4 0.7 to 2.0
0.7 to 1.5 0.6 to 2.4
0.6 to 2.0
0.4 to 2.2
0.5 to 2.0
n.a.
NOTE: Projections of change in real gross domestic product (GDP) and in inflation are from the fourth quarter of the previous year to the fourth quarter of
the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index for personal consumption expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the
fourth quarter of the year indicated. Each participant’s projections are based on his or her assessment of appropriate monetary policy. Longer-run projections
represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of
further shocks to the economy. The June projections were made in conjunction with the meeting of the Federal Open Market Committee on June 22–23, 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, 2010–13 and over the longer run
Percent
Change in real GDP
5
Central tendency of projections
Range of projections
4
3
2
Actual
1
+
0
_
1
2
2005
2006
2007
2008
2009
2010
2011
2012
2013
Longer
run
Percent
Unemployment rate
10
9
8
7
6
5
2005
2006
2007
2008
2009
2010
2011
2012
2013
Longer
run
Percent
PCE inflation
3
2
1
2005
2006
2007
2008
2009
2010
2011
2012
2013
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.
2013
Summary of Economic Projections of the Meeting of November 2-3, 2010
Page 3
_____________________________________________________________________________________________
relative to longer-run norms. While many participants
judged the risks surrounding their projections of each
variable to be broadly balanced, a similar number indicated that the combination of downside risks to growth
and upside risks to unemployment predominated.
The Outlook
The central tendency of participants’ projections of real
GDP growth in 2010 was a narrow band from 2.4 to
2.5 percent, down from 3.0 to 3.5 percent in June. Participants stated that incoming economic data had
weighed heavily on their forecasts for growth this year.
The Bureau of Economic Analysis published its comprehensive annual revisions and advance estimate of
second-quarter GDP after participants submitted their
June projections, and these data showed that the expansion in real GDP in the first half of the year had
been slower than the participants had expected. The
most recent data on output growth in the third quarter
indicated that the economy had continued to expand
modestly. Participants noted that consumer spending
appeared restrained by lower household wealth, relatively tight credit conditions in some markets, and
households’ ongoing desire to repair their balance
sheets. In addition, participants generally viewed the
incoming data on housing, manufacturing, trade, and
labor market activity as weaker than they had expected
at the time of the June meeting. Participants also noted
that the support to growth from earlier fiscal stimulus
and inventory investment had waned.
Participants continued to expect a modest pickup in the
pace of the recovery over the next couple of years. The
central tendency of their projections for output growth
in 2011 was 3.0 to 3.6 percent, followed by central tendencies of 3.6 to 4.5 percent in 2012 and 3.5 to 4.6 percent in 2013. Participants noted that factors such as
previously deferred spending on consumer durables
and business equipment and software, stabilization in
residential investment, accommodative conditions in
financial markets, and some easing in credit conditions
would likely provide impetus to economic growth
going forward. However, participants cited several
forces that were likely to weigh on the pace of the economic expansion over the next few years, including the
ongoing poor performance of the commercial real estate sector, the uneven pace of the recovery in housing
markets, the potential effects of the home mortgage
documentation problems that had recently surfaced,
the restraint in government spending resulting from the
strained fiscal conditions of many states and municipalities, and credit conditions at banks that were likely to
ease fairly slowly. Participants anticipated that, in the
absence of further shocks, the economy would converge over time to a longer-run rate of real GDP
growth of 2.5 to 2.8 percent, unchanged from June.
Participants expected that conditions in labor markets
would improve gradually beginning next year. The central tendency of their projections of the average unemployment rate in the fourth quarter of this year was
9.5 to 9.7 percent. Uncertainty on the part of employers about the sustainability of the recovery was generally anticipated to ebb over the forecast period, and participants expected that hiring would gradually pick up
and unemployment would decline slowly. The central
tendency of their unemployment rate projections for
the end of the forecast period in 2013 was 6.9 to
7.4 percent. On the whole, the projections suggest a
more gradual decline in unemployment over the next
few years than had been expected in June, consistent
with the participants’ assessments of somewhat weaker
growth prospects. Participants noted that the more
gradual recovery was reflected in improvements in the
labor market to date that had been slower to materialize
than previously anticipated. Some participants attributed a portion of the upward revision in their projections of unemployment over the next two years to
longer-lived structural adjustments in labor markets,
and they raised their estimates of the unemployment
rate that would prevail in the longer run accordingly.
As a result, participants’ longer-run projections of unemployment exhibited a central tendency of 5.0 to
6.0 percent, substantially wider than the central tendency of 5.0 to 5.3 percent reported in June.
Participants’ inflation projections edged up since June
but continued to indicate that inflation was expected to
remain subdued over the next several years. Participants noted that the high degree of slack in resource
markets would help keep inflation relatively low over
the forecast horizon. At the same time, appropriate
monetary policy, combined with well-anchored inflation expectations, was seen as likely to result in a modest level of inflation, avoiding either an undesirable increase or a further decrease in inflation. The central
tendency of participants’ projections for personal consumption expenditures (PCE) inflation was 1.2 to
1.4 percent in 2010, 1.1 to 1.7 percent in 2011, 1.1 to
1.8 percent in 2012, and 1.2 to 2.0 percent in 2013.
Increases in energy and other commodity prices were
expected to boost headline PCE inflation over the
forecast period, with core inflation likely to run at a
somewhat lower pace. Most participants’ projections
of inflation over the next several years did not exceed
the rate of longer-run inflation that they individually
Page 4
Federal Open Market Committee
_____________________________________________________________________________________________
considered most consistent with the Federal Reserve’s
dual mandate for maximum employment and stable
prices. Participants’ projections of this mandateconsistent rate of inflation exhibited a central tendency
of 1.6 to 2.0 percent, little changed from June.
Uncertainty and Risks
As they did in June, most participants attached a higher
degree of uncertainty to their projections of output
growth and unemployment over the forecast horizon
than is historically typical.1 While a majority of participants judged the risks to output growth as broadly balanced, many participants viewed the risks to their forecast of output growth as weighted to the downside, the
risks to their forecast of unemployment as tilted to the
upside, or both. Some of these participants noted that
it would be more difficult than usual to address future
negative shocks to the real economy, should they materialize, because the Federal Reserve had already moved
nominal short-term interest rates close to zero, and
because they saw the likelihood of further fiscal stimulus as being quite limited. In addition, some of these
participants noted that the anticipated recovery of the
housing market might take longer than expected.
Regarding inflation, a few participants judged that the
uncertainty surrounding their projections was broadly
similar to historical norms, but most continued to attach an unusually high degree of uncertainty to these
projections. Most participants continued to assess the
risks to their inflation forecasts as broadly balanced,
although some judged that downside risks predominated and a couple judged that upside risks predominated. Participants citing downside risks noted concerns about the degree to which lingering resource
slack in the economy was putting downward pressure
on inflation, or about the possible effects that an extended period of low readings on actual inflation might
have in reducing inflation expectations. Those who
indicated upside risks to inflation generally pointed to
concerns relating to the unusual size of the Federal Reserve’s balance sheet, which, if left in place for too
long, might eventually begin to erode the stability of
longer-term inflation expectations.
Table 2 provides estimates of forecast uncertainty for the
change in real GDP, the unemployment rate, and total consumer price inflation over the period from 1989 to 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 risks attending participants’ projections.
1
Table 2. Average historical projection error ranges
Percentage points
Variable
Change in real GDP1 . . . . .
Unemployment
rate1
.....
Total consumer
prices2
....
2010
2011
2012
2013
±0.6
±1.4
±1.8
±1.8
±0.2
±0.9
±1.4
±1.5
±0.5
±1.0
±1.1
±1.1
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 fall by various private and government forecasters. As described in the box “Forecast Uncertainty,” under certain
assumptions, there is about a 70 percent probability that actual outcomes for real GDP, unemployment, and consumer prices will be in
ranges implied by the average size of projection errors made in the
past. Further information is in David Reifschneider and Peter Tulip
(2007), “Gauging the Uncertainty of the Economic Outlook from
Historical Forecasting Errors,” Finance and Economics Discussion
Series 2007-60 (Washington: Board of Governors of the Federal
Reserve System, November).
1. For definitions, refer to general note in table 1.
2. Measure is the overall consumer price index, the price measure
that has been most widely used in government and private economic
forecasts. Projection is percent change, fourth quarter of the previous year to the fourth quarter of the year indicated.
Diversity of Views
Information about the diversity of participants’ views
regarding the likely outcomes for real GDP growth and
the unemployment rate over the next few years is provided in figures 2.A and 2.B, respectively. The dispersion in these projections reflects differences in participants’ assessments of many factors, including the current degree of underlying momentum in economic activity, the amount of restraint on economic activity likely to result from low readings on consumer and business sentiment and relatively tight credit conditions,
how quickly and to what degree particularly hard-hit
sectors of the economy will recover, the degree of support for economic activity from conditions in financial
markets, and the form and degree of appropriate future
monetary policy and its effects on economic activity.
With much of the data for 2010 now in hand, the dispersion of participants’ projections of output growth
this year narrowed quite a bit relative to June. While
the distributions of participants’ projections of real
GDP growth in 2011 and 2012 shifted lower since
June, the degree of dispersion displayed in these projections was little changed. The dispersion associated with
participants’ longer-run projections of output growth
also changed little from June. Regarding unemployment, the distributions of participants’ projections of
this variable for 2010 through 2012 generally shifted up
somewhat, and the distribution of their forecasts for
2012 widened noticeably, relative to June. The distribution of their estimates of the longer-run rate of unemployment showed modest changes since June, and,
Summary of Economic Projections of the Meeting of November 2-3, 2010
Page 5
_____________________________________________________________________________________________
as noted previously, the central tendency of these projections widened.
Figures 2.C and 2.D provide corresponding information about the diversity of participants’ outlooks for
inflation. The distributions of participants’ projections
for overall and core PCE inflation in 2010 narrowed
somewhat and moved a bit higher compared with the
patterns these projections displayed in June. Most of
the distributions of the participants’ inflation projections for 2011 and 2012 also became somewhat more
concentrated relative to June. Participants’ forecasts of
overall inflation over the longer run remained in a relatively narrow band. In general, participants’ projections
of inflation over the next few years exhibit dispersion
because of differences in their judgments regarding the
determinants of inflation, including their estimates of
the degree of resource slack and their assessments of
the extent to which such slack influences inflation outcomes and expectations. By contrast, the relatively
concentrated distribution of participants’ longer-run
inflation projections shows the substantial similarity in
the participants’ assessments of the approximate level
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
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Figure 2.A. Distribution of participants’ projections for the change in real GDP, 2010–13 and over the longer run
Number of participants
2010
2.22.3
November projections
June projections
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
16
14
12
10
8
6
4
2
5.05.1
Percent range
Number of participants
16
14
12
10
8
6
4
2
2011
2.22.3
2.42.5
2.62.7
2.82.9
3.03.1
3.23.3
3.43.5
3.63.7
3.83.9
4.04.1
4.24.3
4.44.5
4.64.7
4.84.9
5.05.1
Percent range
Number of participants
16
14
12
10
8
6
4
2
2012
2.22.3
2.42.5
2.62.7
2.82.9
3.03.1
3.23.3
3.43.5
3.63.7
3.83.9
4.04.1
4.24.3
4.44.5
4.64.7
4.84.9
5.05.1
Percent range
Number of participants
16
14
12
10
8
6
4
2
2013
2.22.3
2.42.5
2.62.7
2.82.9
3.03.1
3.23.3
3.43.5
3.63.7
3.83.9
4.04.1
4.24.3
4.44.5
4.64.7
4.84.9
5.05.1
Percent range
Number of participants
16
14
12
10
8
6
4
2
Longer run
2.22.3
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 November 2-3, 2010
Page 7
_____________________________________________________________________________________________
Figure 2.B. Distribution of participants’ projections for the unemployment rate, 2010–13 and over the longer run
Number of participants
16
14
12
10
8
6
4
2
2010
November projections
June projections
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
16
14
12
10
8
6
4
2
2011
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
16
14
12
10
8
6
4
2
2012
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
16
14
12
10
8
6
4
2
2013
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
16
14
12
10
8
6
4
2
Longer run
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, 2010–13 and over the longer run
Number of participants
16
14
12
10
8
6
4
2
2010
November projections
June projections
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
16
14
12
10
8
6
4
2
2011
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
16
14
12
10
8
6
4
2
2012
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
16
14
12
10
8
6
4
2
2013
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
16
14
12
10
8
6
4
2
Longer run
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
Summary of Economic Projections of the Meeting of November 2-3, 2010
Page 9
_____________________________________________________________________________________________
Figure 2.D. Distribution of participants’ projections for core PCE inflation, 2010–13
Number of participants
16
14
12
10
8
6
4
2
2010
November projections
June projections
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
16
14
12
10
8
6
4
2
2011
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
16
14
12
10
8
6
4
2
2012
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
16
14
12
10
8
6
4
2
2013
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 2.4 to 3.6 percent in the current year, 1.6 to 4.4 percent in
the second year, and 1.2 to 4.8 percent in the
third and fourth years. The corresponding
70 percent confidence intervals for overall inflation would be 1.5 to 2.5 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 and fourth
years.
Because current conditions may differ
from those that prevailed, on average, over history, participants provide judgments as to
whether the uncertainty attached to their projections of each variable is greater than, smaller
than, or broadly similar to typical levels of
forecast uncertainty in the past as shown in
table 2. Participants also provide judgments as
to whether the risks to their projections are
weighted to the upside, are weighted to the
downside, or are broadly balanced. That is,
participants judge whether each variable is
more likely to be above or below their projections of the most likely outcome. These judgments about the uncertainty and the risks attending each participant’s projections are distinct from the diversity of participants’ views
about the most likely outcomes. Forecast uncertainty is concerned with the risks associated
with a particular projection rather than with
divergences across a number of different projections.
Cite this document
Federal Reserve (2010, October 14). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_20101015
@misc{wtfs_fomc_minutes_20101015,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {2010},
month = {Oct},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_20101015},
note = {Retrieved via When the Fed Speaks corpus}
}