FOMC Minutes

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Minutes of the Federal Open Market Committee

December 14, 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, December 14, 2010, at

8:30 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

Nathan Sheets, Economist

David J. Stockton, Economist

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

Connors, Jeff Fuhrer, Steven B. Kamin, 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

David Reifschneider and William Wascher, Senior

Associate Directors, Division of Research and

Statistics, Board of Governors

Andrew T. Levin, Senior Adviser, Office of Board

Members, Board of Governors

Michael G. Palumbo and Joyce K. Zickler, Deputy

Associate Directors, Division of Research and

Statistics, Board of Governors; Gretchen C.

Weinbach, Deputy Associate Director, Division of Monetary Affairs, Board of Governors

Fabio M. Natalucci, Assistant Director, Division of

Monetary Affairs, Board of Governors

Randall A. Williams, Records Management Analyst,

Division of Monetary Affairs, Board of Governors

Dale Roskom, First Vice President, Federal Reserve Bank of Cleveland

Harvey Rosenblum, Daniel G. Sullivan, and John

C. Williams, Executive Vice Presidents, Federal

Reserve Banks of Dallas, Chicago, and San

Francisco, respectively

David Altig, Richard P. Dzina, Mark E. Schweitzer,

and Kei-Mu Yi, Senior Vice Presidents, Feder-

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al Reserve Banks of Atlanta, New York, Cleveland, and Minneapolis, respectively

Tobias Adrian, Vice President, Federal Reserve

Bank of New York

Satyajit Chatterjee, Senior Economic Adviser, Federal Reserve Bank of Philadelphia

Alexander L. Wolman, Senior Economist, Federal

Reserve Bank of Richmond

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 Federal Open Market Committee (FOMC) met on November 2–3, 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 agencyguaranteed mortgage-backed securities (MBS) as well as

the ongoing purchases of additional Treasury securities

authorized at the November 2–3 FOMC meeting.

Since the last meeting, the Open Market Desk at the

Federal Reserve Bank of New York purchased a total

of about $105 billion of Treasury securities, reflecting

about $30 billion of purchases with the proceeds of

principal payments and about $75 billion as part of the

authorized expansion of the Federal Reserve’s securities holdings. Purchases were concentrated in nominal

Treasury securities with maturities of 2 to 10 years,

though some longer-term securities were purchased

along with some Treasury inflation-protected securities

(TIPS). The Manager also discussed the Desk’s intention to place additional limits on its purchases of individual securities, as the Federal Reserve’s holdings of

such securities increased beyond 35 percent of the total

outstanding; these limits were intended to help ensure

that Federal Reserve purchases do not impair the liquidity in Treasury markets. In addition, the Manager

updated the Committee on the SOMA’s holdings of

foreign-currency instruments. 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.

In light of ongoing strains in some foreign financial

markets, the Committee considered a proposal to extend its dollar liquidity swap arrangements with foreign

central banks past January 31, 2011. After discussing

possible alternative periods for such an extension, the

Committee unanimously approved the following resolution:

The Federal Open Market Committee directs

the Federal Reserve Bank of New York to

extend the existing temporary reciprocal currency arrangements (“swap arrangements”)

for the System Open Market Account with

the Bank of Canada, the Bank of England,

the Bank of Japan, the European Central

Bank, and the Swiss National Bank. The

swap arrangements shall now terminate on

August 1, 2011, unless further extended by

the Committee.

Staff Review of the Economic Situation

The information reviewed at the December 14 meeting

indicated that economic activity was increasing at a

moderate rate, but that the unemployment rate remained elevated. The pace of consumer spending

picked up in October and November, exports rose rapidly in October, and the recovery in business spending

on equipment and software (E&S) appeared to be continuing. In contrast, residential and nonresidential construction activity was still depressed. Manufacturing

production registered a solid gain in October. Nonfarm businesses continued to add workers in October

and November, and the average workweek moved up.

Longer-run inflation expectations were stable, but core

inflation continued to trend lower.

Labor demand rose further in recent months, but unemployment stayed at a high level. The average increase in private nonfarm payroll employment in October and November was close to the pace over the preceding six months, while the average workweek for all

employees edged higher. The bulk of the private-sector

job gains continued to be in the services industries;

employment in manufacturing, construction, and retail

trade declined, on average, in October and November.

Employment at state and local governments rose

slightly over the two-month period. A number of indicators of job openings and hiring plans improved in

October and November, and initial claims for unemployment insurance trended steadily lower through

November and early December. However, the unemployment rate, which remained at 9.6 percent during

the preceding three months, increased to 9.8 percent in

Minutes of the Meeting of December 14, 2010

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November, while the labor force participation rate and

the employment-population ratio remained depressed.

Industrial production in the manufacturing sector increased at a solid pace in October, with advances widespread across industries; total industrial production was

unchanged due to an offsetting weather-related drop in

the output of utilities. The manufacturing capacity utilization rate continued to move up in October, although

it remained significantly below its 1972–2009 average.

Most indicators of near-term industrial activity, such as

the new orders diffusion indexes in the national and

regional manufacturing surveys, were at levels consistent with moderate gains in industrial production in the

near term. Motor vehicle assemblies, which rose in

October, fell back in November but were scheduled to

move up again in coming months.

The pace of consumer spending picked up in recent

months from the modest rate that prevailed earlier in

the year. Nominal retail sales, excluding purchases at

motor vehicles and parts outlets, posted a strong gain

in November, and revised estimates showed larger increases in September and October than previously reported. In addition, sales of new light motor vehicles

stepped up in October and remained at that higher level in November. A number of factors supporting consumer spending also improved. Revised data on personal income indicated that it was stronger last spring

and summer than previously reported. Household net

worth rose further in the third quarter, as an increase in

equity values more than offset the effect of a drop in

house prices. Consumer sentiment turned more positive in November and early December, retracing most

of the decline that occurred during the summer. However, while consumer credit outstanding showed signs

of stabilizing after two years of runoffs, credit terms

were still noticeably less favorable than in the past, and

demand for credit appeared to remain weak.

Activity in the housing market was still quite depressed.

In October, starts of new single-family homes remained at the very low level that had prevailed since

August. Moreover, the level of permit issuance, which

is typically a near-term indicator of new homebuilding,

continued to run below starts. The persistence of a

large excess supply of existing homes on the market

and tight credit conditions for construction appeared to

constitute a significant restraint on new homebuilding.

Demand for housing also remained very weak: Sales of

new homes in October were at the lowest level in the

48-year history of the series. Purchases of existing

homes edged lower in October; in part, the still-low

level of sales likely reflected the payback from the earlier surge in sales associated with the homebuyer tax credit and also the moratoriums on sales of bank-owned

properties. Measures of house prices declined recently,

and households’ concerns that home values might continue to fall, their pessimism about the outlook for employment and income, and the tight standards faced by

many mortgage borrowers appeared to be weighing on

demand.

Real business investment in equipment and software

appeared to be increasing, although the pace of spending seemed to have moderated from the rapid rate of

the first half of the year. The rise in E&S spending

during the third quarter, while somewhat slower than

earlier in the year, remained solid and broad based, but

the available data for the fourth quarter were mixed.

Nominal orders and shipments of nondefense capital

goods excluding aircraft declined in October, and business purchases of new vehicles in October and November were down a bit from their third-quarter level.

In contrast, sales of software still appeared to be on a

solid uptrend, and deliveries of completed aircraft

picked up in November. Surveys of purchasing managers reported plans to step up capital spending in

2011; however, reports from small businesses on their

planned expenditures remained downbeat. Business

outlays on nonresidential structures appeared to be declining further, with a drop in spending on building

construction offset only slightly by increased investment in drilling and mining structures. Overall borrowing by nonfinancial corporations was robust again

in November, indicators of credit quality continued to

improve, and small businesses noted some easing in

credit availability. However, financing conditions for

commercial real estate remained tight.

Real inventory investment rose sharply in the third

quarter, but book-value data for October suggested

that the pace of accumulation was slowing. Although

inventory-sales ratios rose during the third quarter, survey data implied that few businesses perceived inventory stocks as being too high.

Consumer price inflation trended lower in October.

The 12-month change in the total personal consumption expenditures (PCE) price index reached its lowest

level of the past year; the 12-month change in the PCE

price index for core goods and services also moved

down. In October, core PCE prices were unchanged

for a second month, as goods prices declined and prices of non-energy services posted a small increase. The

broad-based deceleration in underlying inflation was

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also apparent in other measures, such as the trimmedmean PCE price index and a diffusion index of PCE

price changes. Despite the rise in agricultural commodity prices, the increase in retail food prices was modest.

In contrast, consumer energy prices continued to rise

rapidly in October, and spot prices of imported crude

oil moved higher, on net, during November and early

December. The rise in prices of nonfuel industrial

commodities moderated over the intermeeting period

as spot prices of metals declined, but the producer

price index for domestically manufactured intermediate

goods accelerated in October and November. In November and early December, survey measures of

households’ short- and long-term inflation expectations

remained in the ranges that have prevailed since the

spring of 2009.

Available measures of labor compensation showed that

labor cost pressures were still restrained. The 12month change in average hourly earnings for all employees remained low in November. In the third quarter, the modest rise in hourly compensation in the nonfarm business sector was matched by a similar increase

in productivity.

The U.S. international trade deficit narrowed considerably in October, shrinking to its lowest level since the

beginning of the year, as exports surged and imports

edged down. The strength in exports was relatively

broad based. Exports of industrial supplies and agricultural goods registered the largest increases, although

rising prices accounted for some of those gains. Exports of machinery and automotive products also rose

strongly. The decrease in imports was concentrated in

petroleum products, reflecting lower volumes, and in

computers. In contrast, imports of consumer goods

posted a noticeable increase.

Recent data releases confirmed that, in the aggregate,

the rise in foreign real gross domestic product (GDP)

slowed sharply in the third quarter from the very rapid

pace earlier in the year. The slowdown was most pronounced in the emerging market economies (EMEs),

where economic activity was restrained by the abatement of inventory rebuilding and the associated waning

of the rebound in global trade, the unwinding of fiscal

stimulus measures, and a continued tightening of monetary policies in several countries. More recent indicators for the EMEs, including purchasing managers indexes (PMIs), pointed to a rebound in economic activity in the fourth quarter. The advanced foreign economies (AFEs) also saw a slower rise in real economic

activity in the third quarter than occurred earlier in the

year. In the euro area, economic performance continued to diverge across countries. The increase in German economic activity in the third quarter was nearly

twice the euro-area average rate, and recent indicators,

including PMIs and consumer and business sentiment,

showed further solid performance. In contrast, Spanish economic activity stagnated in the third quarter,

Greek GDP extended its decline, and more-recent indicators point to continued weakness in peripheral European economies. Headline inflation rates generally

picked up in the foreign economies, driven largely by

food and energy prices; measures of inflation excluding

food and energy prices were relatively steady.

Staff Review of the Financial Situation

The decision by the FOMC at its November meeting to

maintain the 0 to ¼ percent target range for the federal

funds rate was widely anticipated. The decision to expand its holdings of longer-term securities by $600 billion by the end of the second quarter of 2011 was also

roughly in line with market expectations, although

market participants appeared to expect the purchase

program would be increased over time. In the weeks

following the November meeting, yields on nominal

Treasury securities increased significantly, as investors

reportedly revised down their estimates of the ultimate

size of the FOMC’s new asset-purchase program. Incoming economic data that were viewed, on balance, as

favorable to the outlook and news of a tentative

agreement between the Administration and some

members of the Congress regarding a package of fiscal

measures also reportedly contributed to the backup in

yields. Market participants pointed to abrupt changes

in investor positions, the effects of the approaching

year-end on market liquidity, and hedging flows associated with investors’ holdings of MBS as factors that

may have amplified the rise in yields. Futures quotes

suggested that the path for the federal funds rate expected by market participants rose over the intermeeting period.

The increase in yields on nominal Treasury coupon

securities was accompanied by increases in yields on

TIPS. TIPS-based inflation compensation moved up at

the 5-year horizon amid rising energy prices, but forward inflation compensation 5 to 10 years ahead was

about unchanged. Yields on investment-grade corporate bonds rose about in line with those on comparable-maturity Treasury securities, leaving risk spreads

about unchanged; spreads on speculative-grade corporate bonds moved down somewhat. Secondary-market

prices for leveraged loans rose slightly over the inter-

Minutes of the Meeting of December 14, 2010

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meeting period, while bid-asked spreads in that market

continued to drift down.

dit quality of nonfinancial corporations continued to

improve.

Some signs of modest stress emerged in certain shortterm funding markets over the intermeeting period as

investors focused increasingly on the evolving situation

in Europe. The spread of the three-month London

interbank offered rate (or Libor) forward rate agreement over the three-month forward overnight index

swap (OIS) rate moved a bit higher, on balance, perhaps pointing to heightened concerns about future

funding conditions. In the commercial paper market,

spreads increased on paper issued by financial institutions with parents in peripheral European countries,

and the amount outstanding of such paper declined.

Spreads on asset-backed commercial paper were

somewhat volatile over the intermeeting period. Nonetheless, spreads on nonfinancial commercial paper remained at low levels, as did the spreads of dollar Libor

over OIS rates at one- and three-month maturities.

Conditions in the commercial real estate market remained tight. Commercial mortgage debt was estimated to have declined in the third quarter, and the

delinquency rates for securitized commercial mortgages

and those for existing properties at commercial banks

increased further. However, some modest signs of

improvement continued to surface. Prices of commercial real estate changed little, on balance, over September and October, holding in the relatively narrow range

that had prevailed since the spring when the steep decline in these prices ended. Issuance of commercial

mortgage-backed securities increased in November but

was still far below pre-crisis levels.

Broad U.S. equity price indexes increased moderately,

on net, over the intermeeting period, in part reflecting

incoming economic data that were read by investors as

suggesting that the recovery could be gaining traction,

at least outside the housing sector. Stock prices for

domestic commercial banks were volatile but outperformed broad indexes on balance. Option-implied volatility on the S&P 500 index fell modestly, and the

spread between the staff’s estimate of the expected real

return on equity for S&P 500 firms and the real 10-year

Treasury yield—a rough measure of the equity risk

premium—narrowed a bit, although it remained elevated relative to longer-run norms.

In the December 2010 Senior Credit Officer Opinion

Survey on Dealer Financing Terms, dealers reported an

easing of credit terms over the preceding three months

with respect to securities financing transactions and

across a range of counterparties. Dealers also noted

that demand for funding of all types of securities increased over the same reference period.

Net debt financing by U.S. nonfinancial corporations

continued to be robust in November. Gross issuance

of corporate bonds was very heavy, particularly for

speculative-grade firms. Investor demand for syndicated leveraged loans also appeared to have remained

high. Nonfinancial commercial paper outstanding declined noticeably during October and November, in

part because some firms reportedly shifted to bond

financing. Gross public equity issuance by nonfinancial

firms through seasoned and initial public offerings was

particularly strong in November. Measures of the cre-

Residential mortgage rates rose considerably over the

intermeeting period, though not by as much as rates on

longer-term Treasury securities. The spread between

mortgage rates and MBS yields dropped back, reversing

the widening of the spread that occurred over the preceding several months. Refinancing activity declined in

response to the higher mortgage rates. Outstanding

residential mortgage debt was estimated to have contracted in the third quarter at about the average rate of

decline seen over the preceding year. Delinquency

rates on prime and subprime mortgages ticked down

but remained extremely elevated.

In contrast, the consumer credit market exhibited continued signs of stabilization. Although consumer credit

contracted in the third quarter, the decline was the

smallest since late 2008, and consumer credit edged

higher in October. The pace of issuance of consumer

asset-backed securities in November was slightly above

the average for the year to date, and the delinquency

rate on consumer loans at banks declined further in the

third quarter.

Commercial bank credit was about flat, on average,

during October and November. Banks continued to

increase their holdings of securities, while core loans—

the sum of commercial and industrial (C&I), real estate,

and consumer loans—decreased moderately. The declines were attributable to a drop in consumer loans as

well as to continued runoffs in commercial real estate

and home equity loans. In contrast, C&I loans edged

up, ending a nearly two-year string of monthly declines.

In addition, the Survey of Terms of Business Lending

conducted in the first week of November showed that

interest rates on C&I loans were generally little changed

while spreads remained extremely wide.

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According to the latest Call Report data, bank profitability was little changed in the third quarter, remaining

positive but well below pre-crisis levels. As in the

second quarter, banks’ net incomes were supported by

declines in loan loss provisioning, while revenues declined. Banks continued to boost regulatory capital

ratios, likely, at least in part, in anticipation of the need

to eventually meet stricter Basel III standards.

M2 expanded at a moderate rate in November. Interest rates available on all M2 assets remained very low,

and households continued to shift their holdings of M2

assets toward liquid deposits, which continued to rise

rapidly, and away from small time deposits and retail

money market mutual funds. Currency increased

strongly, with indicators suggesting robust demand

from abroad.

The foreign exchange value of the dollar, which depreciated immediately following the FOMC’s November

announcement of further asset purchases, subsequently

appreciated amid intensifying concerns about stresses

in the euro area and some apparent reassessment by

investors of the monetary policy outlook in the United

States. On net, the dollar ended the intermeeting period up against most currencies, with particularly large

gains against the euro. The announcement of the European Union (EU)–International Monetary Fund

(IMF) financial aid package for Ireland on November

28 did little to reverse the depreciation of the euro, as

investors reportedly became increasingly concerned

about other euro-area economies and the adequacy of

resources available to support them should they come

under stress. Spreads of sovereign yields in some peripheral euro-area countries over those on German

bunds rose to new highs, although they fell back near

the end of the intermeeting period amid reports that

the European Central Bank (ECB) had increased its

purchases of Irish and Portuguese sovereign debt.

Banks in the euro-area periphery continued to rely

heavily on funding from the ECB, and some signs of

increased dollar funding pressures emerged. Implied

short-term interest rates for the coming year shifted

down in the euro area, as market participants apparently scaled back the pace at which they expected the ECB

to normalize policy, but rose in some other AFEs.

Ten-year sovereign yields increased significantly

throughout the AFEs, although by less than yields in

the United States. Headline stock price indexes in the

AFEs generally ended the period higher, whereas bank

stocks in Europe declined.

The People’s Bank of China raised the required reserve

ratio for banks a cumulative 150 basis points over the

intermeeting period, and other central banks in emerging Asia increased policy rates. China’s Shanghai

Composite Index fell in the wake of Chinese policy

actions, while other emerging market stock indexes

were mixed over the period. In Latin America, Brazil’s

central bank also raised reserve requirements late in the

period. The dollar appreciated slightly, on average,

against the emerging market currencies, although it

edged down against the Chinese renminbi.

Staff Economic Outlook

With the recent data on production and spending

stronger, on balance, than the staff anticipated at the

time of the November FOMC meeting, the staff revised up its projected increase in real GDP in the near

term. However, the staff’s outlook for real economic

activity over the medium term was little changed, on

net, relative to the projection prepared for the November meeting. The staff forecast incorporated the assumption that new fiscal actions, some of which had

not been anticipated in its previous forecast, were likely

to boost the level of real GDP in 2011 and 2012. But,

compared with the November forecast, a number of

other conditioning assumptions were less favorable:

House prices and housing activity were likely to be

lower, while interest rates, oil prices, and the foreign

exchange value of the dollar were projected to be higher, on average, than previously assumed. As a result,

although the staff projection showed a higher level of

real GDP, the average pace of growth over 2011 and

2012 was little changed from the November forecast,

and the unemployment rate was still projected to decline slowly.

The underlying rate of consumer price inflation in recent months was lower than the staff expected at the

time of the November meeting, and the staff forecast

anticipated that core PCE prices would rise a bit more

slowly in 2011 and 2012 than previously projected. As

in earlier forecasts, the persistent wide margin of economic slack in the projection was expected to sustain

downward pressure on inflation, but the ongoing stability in inflation expectations was anticipated to stem

further disinflation. The staff anticipated that relatively

rapid increases in energy prices would raise total consumer price inflation above the core rate in the near

term, but that this upward pressure would dissipate by

2012.

Minutes of the Meeting of December 14, 2010

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Participants’ Views on Current Conditions and the

Economic Outlook

In their discussion of the economic situation and outlook, meeting participants saw the information received

during the intermeeting period as pointing to some

improvement in the near-term outlook, and they expected that economic growth, which had been moderate, would pick up somewhat going forward. Indicators of production and household spending had strengthened, and the tone of the labor market was a little

better on balance. The new fiscal package was generally expected to support the pace of recovery next year.

However, a number of factors were seen as likely to

continue restraining growth, including the depressed

housing market, employers’ continued reluctance to

add to payrolls, and ongoing efforts by some households and businesses to delever. Moreover, the recovery remained subject to some downside risks, such as

the possibility of a more extended period of weak activity and lower prices in the housing sector and potential

financial and economic spillovers if the banking and

sovereign debt problems in Europe were to worsen. In

light of recent readings on consumer inflation, participants noted that underlying inflation had continued

trending downward, but several saw the risk of deflation as having receded somewhat.

In the household sector, incoming data on retail sales

were somewhat stronger than expected, and there were

some reasonably upbeat reports from business contacts

regarding holiday spending. Consumer confidence appeared to be improving. Financial obligations and debt

service costs had been declining as a share of household income, and that process was seen as providing

greater latitude for a pickup in discretionary purchases.

Nonetheless, there were indications that retail spending

by middle- and lower-income households had risen less

than spending by high-income households, suggestive

of ongoing financial pressures on those of more modest means. Furthermore, the housing sector, including

residential construction and home sales, continued to

be depressed. Some participants noted that the elevated supply of available homes and the overhang of

foreclosed homes were contributing to a further decline

in house prices. The lower house prices, in turn, were

seen as reducing household wealth and thus restraining

growth in consumer spending.

A number of participants noted that their business contacts had become more optimistic about the outlook

for sales and production. Nonetheless, many contacts

remained cautious about hiring and investment, with

some reportedly concerned about the potential effects

of government policies. The manufacturing, agriculture, and energy sectors showed particular signs of

strength, and the high-tech sector appeared to be improving. However, nonresidential construction remained very weak, apart from drilling and mining. It

was noted that credit conditions had eased further, although nonfinancial corporations continued to hold

very high levels of cash.

Conditions in the labor market appeared to be improving on balance. That improvement was reflected in a

range of recent indicators, including a declining number

of new jobless claims, an increase in job openings, and

an uptick in the average workweek. Nonetheless, participants noted that the pace of hiring was still sluggish;

indeed, the unemployment rate had edged higher in

November, and the employment-population ratio remained very low.

Interest rates at intermediate and longer maturities rose

substantially over the intermeeting period, while credit

spreads were roughly unchanged and equity prices rose

moderately. Participants pointed to a number of factors that appeared to have contributed to the significant

backup in yields, including an apparent downward reassessment by investors of the likely ultimate size of the

Federal Reserve’s asset-purchase program, economic

data that were seen as suggesting an improved economic outlook, and the announcement of a package of fiscal measures that was expected to bolster economic

growth and increase the deficit over coming quarters.

It was noted that the backup in rates may have been

amplified by year-end positioning, as well as by some

reported mortgage-related hedging flows. A number of

participants indicated that, because the backup in rates

appeared to importantly reflect changes in investors’

expectations about the size of Federal Reserve asset

purchases, the backup was consistent with purchases

helping to keep longer-term yields lower than would

otherwise be the case. Several meeting participants

mentioned the communications challenges faced in

conducting effective policy, including the need to clearly convey the Committee’s views while appropriately

airing individual perspectives.

Measures of underlying inflation continued to trend

downward over the intermeeting period, with the slowdown in price increases evident across categories of

goods and services and across different inflation measures. Although the prices of some commodities and

imported goods had risen appreciably, several participants noted that businesses seemed to have little ability

to pass these increases on to their customers, given the

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significant slack in the economy. Also, the high level of

unemployment was limiting gains in wages and thereby

contributing to the low level of inflation. TIPS-based

measures of inflation compensation had risen modestly

over the intermeeting period, while surveys of households and professional forecasters continued to suggest

that longer-term inflation expectations remained stable.

Regarding their overall outlook for economic activity,

participants generally agreed that, even with the positive news received over the intermeeting period, the

most likely outcome was a gradual pickup in growth

with slow progress toward maximum employment.

However, they held a range of views about the risks to

that outlook. A few mentioned the possibility that

growth could pick up more rapidly than expected, particularly in light of the very accommodative stance of

monetary policy currently in place. It was noted that

such an acceleration would likely be accompanied by

significantly more rapid growth in bank lending and in

the monetary aggregates, suggesting that such indicators might prove to be useful sources of information.

Others pointed to downside risks to growth. One

common concern was that the housing sector could

weaken further in light of the considerable supply of

houses either on the market or likely to come to market. Another concern was the ongoing deterioration in

the fiscal position of U.S. states and localities, which

could lead to sharp cuts in spending and increases in

taxes. In addition, participants expressed concerns

about a possible worsening of the banking and financial

strains in Europe, which could spill over to U.S. financial markets and institutions, and so to the broader U.S.

economy. They observed that market stresses in Europe intensified during the intermeeting period, requiring an assistance package for Ireland from the EU and

the IMF, and that after that package was announced,

market attention appeared to shift to other European

countries. Participants noted, however, that the European authorities were taking steps to stabilize conditions in the euro area.

Regarding the outlook for inflation, participants generally anticipated that inflation would remain for some

time below levels judged to be most consistent, over

the longer run, with maximum employment and price

stability. In particular, most participants expected that

underlying measures of inflation would bottom out

around current levels and then move gradually higher

as the recovery progresses. A few participants pointed

to the risk that the ongoing expansion of the Federal

Reserve’s balance sheet and the sustained low level of

short-term interest rates could trigger undesirable in-

creases in inflation expectations and so in actual inflation. To minimize such risks, it was noted that the

Committee should continue its planning for the eventual exit from the current exceptionally accommodative

stance of policy. Other participants noted that, with

substantial resource slack persisting, underlying inflation might fall further below the levels that the Committee sees as consistent with its mandate. Nonetheless, several participants saw the risk of deflation as

having receded somewhat over recent months.

Committee Policy Action

Members noted that, while incoming information over

the intermeeting period had increased their confidence

in the economic recovery, progress toward the Committee’s dual objectives of maximum employment and

price stability was disappointingly slow. In addition,

members generally expected that progress was likely to

remain modest, with unemployment and inflation deviating from the Committee’s objectives for some time.

Accordingly, in their discussion of monetary policy for

the period immediately ahead, nearly all Committee

members agreed to continue expanding the Federal

Reserve’s holdings of longer-term securities as announced in November in order 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. The Committee decided to maintain

its existing policy of reinvesting principal payments

from its securities holdings into longer-term Treasury

securities. In addition, the Committee agreed to continue buying longer-term Treasury securities with the

intention of purchasing $600 billion of such securities

by the end of the second quarter of 2011, a pace of

about $75 billion per month. While the economic outlook was seen as improving, members generally felt

that the change in the outlook was not sufficient to

warrant any adjustments to the asset-purchase program,

and some noted that more time was needed to accumulate information on the economy before considering

any adjustment. Members emphasized that the pace

and overall size of the purchase program would be contingent on economic and financial developments; however, some indicated that they had a fairly high threshold for making changes to the program. The Committee also decided to maintain the target range for the

federal funds rate at 0 to ¼ percent and to reiterate its

expectation that economic conditions are likely to warrant exceptionally low levels for the federal funds rate

for an extended period. One member dissented from

the Committee’s policy decision, judging that, in light

of the improving economy, a continued high level of

Minutes of the Meeting of December 14, 2010

Page 9

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monetary accommodation would increase the risks of

future economic and financial imbalances. Members

agreed that the Committee should continue to regularly

review the pace of its securities purchases and the

overall size of the program in light of incoming information—including information on the economic outlook, the efficacy of the program, and any unintended

consequences that might arise—and make adjustments

as needed to best foster maximum employment and

price stability. With respect to the statement to be released following the meeting, members agreed that only

small changes were necessary to reflect the modest improvement in the near-term economic 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 execute

purchases of longer-term Treasury securities

in order to increase the total face value of

domestic securities held in the System Open

Market Account to approximately $2.6 trillion by the end of June 2011. 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 November

confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment.

Household spending is increasing at a moderate pace, 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. The

housing sector continues to be depressed.

Longer-term inflation expectations have remained stable, but measures of underlying

inflation have continued to trend downward.

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 continue

expanding its holdings of securities as announced in November. The Committee will

maintain its existing policy of reinvesting

principal payments from its securities holdings. In addition, the Committee intends to

purchase $600 billion of longer-term 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 asset-purchase 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.

Page 10

Federal Open Market Committee

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The Committee will continue to monitor the

economic outlook and financial developments and 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.”

tion of policy accommodation would become more

difficult the longer the first step in that process was

delayed. In Mr. Hoenig’s view, the Committee should

begin preparing markets for a reduction in policy accommodation. Accordingly, he thought the press

statement should indicate that sufficient monetary stimulus was in place to support the recovery.

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.

It was agreed that the next meeting of the Committee

would be held on Tuesday–Wednesday, January 25–26,

2011. The meeting adjourned at 12:55 p.m. on December 14, 2010.

Voting against this action: Thomas M. Hoenig.

Notation Vote

By notation vote completed on November 22, 2010,

the Committee unanimously approved the minutes of

the FOMC meeting held on November 2–3, 2010.

Mr. Hoenig dissented because he judged that economic

conditions were improving, and that the current highly

accommodative stance of monetary policy was inconsistent with the Committee’s long-run mandate. Mr.

Hoenig noted that the economic recovery was shifting

from transitory to more sustainable sources of growth

and was picking up momentum. In his assessment,

maintaining highly accommodative monetary policy in

the current economic environment would increase the

risk of future imbalances and, over time, cause an increase in longer-term inflation expectations. Mr. Hoenig also was concerned that the eventual orderly reduc-

_____________________________

William B. English

Secretary