FOMC Minutes
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Minutes of the Federal Open Market Committee
January 25–26, 2011
A meeting of the Federal Open Market Committee was
held in the offices of the Board of Governors in Washington, D.C., on Tuesday, January 25, 2011, at
1:00 p.m. and continued on Wednesday, January 26,
2011, at 9:00 a.m.
PRESENT:
Ben Bernanke, Chairman
William C. Dudley, Vice Chairman
Elizabeth Duke
Charles L. Evans
Richard W. Fisher
Narayana Kocherlakota
Charles I. Plosser
Sarah Bloom Raskin
Daniel K. Tarullo
Kevin Warsh
Janet L. Yellen
Jeffrey M. Lacker, Dennis P. Lockhart, John F.
Moore, and Sandra Pianalto, Alternate Members of the Federal Open Market Committee
James Bullard, Thomas M. Hoenig, and Eric Rosengren, Presidents of the Federal Reserve
Banks of St. Louis, Kansas City, and Boston,
respectively
William B. English, Secretary and Economist
Deborah J. Danker, Deputy Secretary
Matthew M. Luecke, Assistant Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Thomas C. Baxter, Deputy General Counsel
Nathan Sheets, Economist
David J. Stockton, Economist
James A. Clouse, Thomas A. Connors, Steven B.
Kamin, Loretta J. Mester, Simon Potter, David
Reifschneider, Harvey Rosenblum, Daniel G.
Sullivan, David W. Wilcox, and Kei-Mu Yi,
Associate Economists
Brian Sack, Manager, System Open Market Account
Patrick M. Parkinson, Director, Division of Banking 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,¹ Deputy Staff Director,
Office of the Staff Director, Board of Governors
Lawrence Slifman 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
Joyce K. Zickler, Visiting Senior Adviser, Division
of Monetary Affairs, Board of Governors
Daniel M. Covitz, Associate Director, Division of
Research and Statistics, Board of Governors
Gretchen C. Weinbach, Deputy Associate Director, Division of Monetary Affairs, Board of
Governors
Beth Anne Wilson,² Assistant Director, Division of
International Finance, Board of Governors
Bruce Fallick,² Group Manager, Division of Research and Statistics, Board of Governors
David H. Small, Project Manager, Division of
Monetary Affairs, Board of Governors
¹ Attended Wednesday’s session only.
² Attended Tuesday’s session only.
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David M. Arseneau, Senior Economist, Division of
International Finance, Board of Governors;
Stefania D’Amico and Edward M. Nelson,
Senior Economists, Division of Monetary Affairs, Board of Governors; Norman J. Morin,
Senior Economist, Division of Research and
Statistics, 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
Patrick K. Barron, First Vice President, Federal
Reserve Bank of Atlanta
Mark S. Sniderman, Executive Vice President, Federal Reserve Bank of Cleveland
David Altig, Alan D. Barkema, Glenn D. Rudebusch, Geoffrey Tootell, and Christopher J.
Waller, Senior Vice Presidents, Federal Reserve
Banks of Atlanta, Kansas City, San Francisco,
Boston, and St. Louis, respectively
Julie Ann Remache, Assistant Vice President, Federal Reserve Bank of New York
Ayşegül Şahin,² Officer, Federal Reserve Bank of
New York
R. Jason Faberman² and Robert L. Hetzel, Senior
Economists, Federal Reserve Banks of Philadelphia and Richmond, respectively
² Attended Tuesday’s session only.
William C. Dudley, President of the Federal Reserve
Bank of New York, with Christine Cumming, First
Vice President of the Federal Reserve Bank of New
York, as alternate.
Charles I. Plosser, President of the Federal Reserve
Bank of Philadelphia, with Jeffrey M. Lacker, President
of the Federal Reserve Bank of Richmond, as alternate.
Charles L. Evans, President of the Federal Reserve
Bank of Chicago, with Sandra Pianalto, President of the
Federal Reserve Bank of Cleveland, as alternate.
Richard W. Fisher, President of the Federal Reserve
Bank of Dallas, with Dennis P. Lockhart, President of
the Federal Reserve Bank of Atlanta, as alternate.
Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis, with John F. Moore, First
Vice President of the Federal Reserve Bank of San
Francisco, as alternate.
By unanimous vote, the following officers of the Federal Open Market Committee were selected to serve
until the selection of their successors at the first regularly scheduled meeting of the Committee in 2012:
Ben Bernanke
William C. Dudley
William B. English
Deborah J. Danker
Matthew M. Luecke
David W. Skidmore
Michelle A. Smith
Scott G. Alvarez
Thomas Baxter
Richard M. Ashton
Annual Organizational Matters
In the agenda for this meeting, it was reported that advices of the election of the following members and alternate members of the Federal Open Market Committee for a term beginning January 25, 2011, had been
received and that these individuals had executed their
oaths of office.
The elected members and alternate members were as
follows:
Nathan Sheets
David J. Stockton
James A. Clouse
Thomas A. Connors
Steven B. Kamin
Loretta J. Mester
Simon Potter
David Reifschneider
Harvey Rosenblum
Daniel G. Sullivan
David W. Wilcox
Chairman
Vice Chairman
Secretary and
Economist
Deputy Secretary
Assistant Secretary
Assistant Secretary
Assistant Secretary
General Counsel
Deputy General
Counsel
Assistant General
Counsel
Economist
Economist
Minutes of the Meeting of January 25-26, 2011
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Kei-Mu Yi
Associate
Economists
By unanimous vote, the Federal Reserve Bank of New
York was selected to execute transactions for the System Open Market Account.
By unanimous vote, Brian Sack was selected to serve at
the pleasure of the Committee as Manager, System
Open Market Account, on the understanding that his
selection was subject to being satisfactory to the Federal Reserve Bank of New York.
Secretary’s note: Advice subsequently was
received that the selection of Mr. Sack as
Manager was satisfactory to the Board of Directors of the Federal Reserve Bank of New
York.
By unanimous vote, the Committee adopted its Program for Security of FOMC Information with amendments to the section on ongoing responsibility for
maintaining confidentiality and with a number of technical updates.
By unanimous vote, the Authorization for Domestic
Open Market Operations was reaffirmed in the form
shown below. The Guidelines for the Conduct of System Open Market Operations in Federal-Agency Issues
remained suspended.
AUTHORIZATION FOR DOMESTIC OPEN
MARKET OPERATIONS
(Reaffirmed January 25, 2011)
1. The Federal Open Market Committee authorizes
and directs the Federal Reserve Bank of New York, to
the extent necessary to carry out the most recent domestic policy directive adopted at a meeting of the
Committee:
A. To buy or sell U.S. government securities, including securities of the Federal Financing Bank, and
securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of
the United States in the open market, from or to securities dealers and foreign and international accounts maintained at the Federal Reserve Bank of
New York, on a cash, regular, or deferred delivery
basis, for the System Open Market Account at market prices, and, for such Account, to exchange maturing U.S. government and federal agency securities
with the Treasury or the individual agencies or to allow them to mature without replacement; and
B. To buy or sell in the open market U.S. government securities, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, for the System Open Market Account under agreements to resell or repurchase such securities or obligations (including such transactions as are commonly referred
to as repo and reverse repo transactions) in 65 business days or less, at rates that, unless otherwise expressly authorized by the Committee, shall be determined by competitive bidding, after applying reasonable limitations on the volume of agreements with
individual counterparties.
2. In order to ensure the effective conduct of open
market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York
to use agents in agency MBS-related transactions.
3. In order to ensure the effective conduct of open
market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York
to lend on an overnight basis U.S. government securities and securities that are direct obligations of any
agency of the United States, held in the System Open
Market Account, to dealers at rates that shall be determined by competitive bidding. The Federal Reserve
Bank of New York shall set a minimum lending fee
consistent with the objectives of the program and apply
reasonable limitations on the total amount of a specific
issue that may be auctioned and on the amount of securities that each dealer may borrow. The Federal Reserve Bank of New York may reject bids that could
facilitate a dealer’s ability to control a single issue as
determined solely by the Federal Reserve Bank of New
York.
4. In order to ensure the effective conduct of open
market operations, while assisting in the provision of
short-term investments for foreign and international
accounts maintained at the Federal Reserve Bank of
New York and accounts maintained at the Federal Reserve Bank of New York as fiscal agent of the United
States pursuant to section 15 of the Federal Reserve
Act, the Federal Open Market Committee authorizes
and directs the Federal Reserve Bank of New York:
A. For the System Open Market Account, to sell
U.S. government securities, and securities that are direct obligations of, or fully guaranteed as to principal
and interest by, any agency of the United States, to
such accounts on the bases set forth in paragraph 1.A
under agreements providing for the resale by such
accounts of those securities in 65 business days or
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less on terms comparable to those available on such
transactions in the market; and
B. For the New York Bank account, when appropriate, to undertake with dealers, subject to the conditions imposed on purchases and sales of securities
in paragraph l.B, repurchase agreements in U.S. government securities, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, and to arrange corresponding sale and repurchase agreements
between its own account and such foreign, international, and fiscal agency accounts maintained at the
Bank.
Transactions undertaken with such accounts under the
provisions of this paragraph may provide for a service
fee when appropriate.
5. In the execution of the Committee’s decision regarding policy during any intermeeting period, the
Committee authorizes and directs the Federal Reserve
Bank of New York, upon the instruction of the Chairman of the Committee, to adjust somewhat in exceptional circumstances the degree of pressure on reserve
positions and hence the intended federal funds rate and
to take actions that result in material changes in the
composition and size of the assets in the System Open
Market Account other than those anticipated by the
Committee at its most recent meeting. Any such adjustment shall be made in the context of the Committee’s discussion and decision at its most recent meeting
and the Committee’s long-run objectives for price stability and sustainable economic growth, and shall be
based on economic, financial, and monetary developments during the intermeeting period. Consistent with
Committee practice, the Chairman, if feasible, will consult with the Committee before making any adjustment.
By unanimous vote, the Authorization for Foreign Currency Operations, the Foreign Currency Directive, and
the Procedural Instructions with Respect to Foreign
Currency Operations were reaffirmed in the form
shown below. The vote to reaffirm these documents
included approval of the System’s warehousing agreement with the U.S. Treasury.
AUTHORIZATION FOR FOREIGN CURRENCY
OPERATIONS
(Reaffirmed January 25, 2011)
1. The Federal Open Market Committee authorizes
and directs the Federal Reserve Bank of New York, for
the System Open Market Account, to the extent necessary to carry out the Committee’s foreign currency di-
rective and express authorizations by the Committee
pursuant thereto, and in conformity with such procedural instructions as the Committee may issue from
time to time:
A. To purchase and sell the following foreign currencies in the form of cable transfers through spot or
forward transactions on the open market at home
and abroad, including transactions with the U.S.
Treasury, with the U.S. Exchange Stabilization Fund
established by section 10 of the Gold Reserve Act of
1934, with foreign monetary authorities, with the
Bank for International Settlements, and with other
international financial institutions:
Australian dollars
Brazilian reais
Canadian dollars
Danish kroner
euro
Japanese yen
Korean won
Mexican pesos
New Zealand dollars
Norwegian kroner
Pounds sterling
Singapore dollars
Swedish kronor
Swiss francs
B. To hold balances of, and to have outstanding
forward contracts to receive or to deliver, the foreign
currencies listed in paragraph A above.
C. To draw foreign currencies and to permit foreign banks to draw dollars under the reciprocal currency arrangements listed in paragraph 2 below, provided that drawings by either party to any such arrangement shall be fully liquidated within 12 months
after any amount outstanding at that time was first
drawn, unless the Committee, because of exceptional
circumstances, specifically authorizes a delay.
D. To maintain an overall open position in all foreign currencies not exceeding $25.0 billion. For this
purpose, the overall open position in all foreign currencies is defined as the sum (disregarding signs) of
net positions in individual currencies, excluding
changes in dollar value due to foreign exchange rate
movements and interest accruals. The net position in
a single foreign currency is defined as holdings of
balances in that currency, plus outstanding contracts
for future receipt, minus outstanding contracts for
future delivery of that currency, i.e., as the sum of
these elements with due regard to sign.
Minutes of the Meeting of January 25-26, 2011
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2. The Federal Open Market Committee directs the
Federal Reserve Bank of New York to maintain reciprocal currency arrangements (“swap” arrangements) for
the System Open Market Account for periods up to a
maximum of 12 months with the following foreign
banks, which are among those designated by the Board
of Governors of the Federal Reserve System under
section 214.5 of Regulation N, Relations with Foreign
Banks and Bankers, and with the approval of the
Committee to renew such arrangements on maturity:
Foreign bank
Bank of Canada
Bank of Mexico
Amount of arrangement
(millions of dollars equivalent)
2,000
3,000
Any changes in the terms of existing swap arrangements, and the proposed terms of any new arrangements that may be authorized, shall be referred for review and approval to the Committee.
3. All transactions in foreign currencies undertaken
under paragraph 1.A above shall, unless otherwise expressly authorized by the Committee, be at prevailing
market rates. For the purpose of providing an investment return on System holdings of foreign currencies
or for the purpose of adjusting interest rates paid or
received in connection with swap drawings, transactions with foreign central banks may be undertaken at
nonmarket exchange rates.
4. It shall be the normal practice to arrange with foreign central banks for the coordination of foreign currency transactions. In making operating arrangements
with foreign central banks on System holdings of foreign currencies, the Federal Reserve Bank of New York
shall not commit itself to maintain any specific balance,
unless authorized by the Federal Open Market Committee. Any agreements or understandings concerning
the administration of the accounts maintained by the
Federal Reserve Bank of New York with the foreign
banks designated by the Board of Governors under
section 214.5 of Regulation N shall be referred for review and approval to the Committee.
5. Foreign currency holdings shall be invested to
ensure that adequate liquidity is maintained to meet
anticipated needs and so that each currency portfolio
shall generally have an average duration of no more
than 18 months (calculated as Macaulay duration).
Such investments may include buying or selling outright obligations of, or fully guaranteed as to principal
and interest by, a foreign government or agency thereof; buying such securities under agreements for re-
purchase of such securities; selling such securities under
agreements for the resale of such securities; and holding various time and other deposit accounts at foreign
institutions. In addition, when appropriate in connection with arrangements to provide investment facilities
for foreign currency holdings, U.S. government securities may be purchased from foreign central banks under
agreements for repurchase of such securities within 30
calendar days.
6. All operations undertaken pursuant to the preceding paragraphs shall be reported promptly to the Foreign Currency Subcommittee and the Committee. The
Foreign Currency Subcommittee consists of the
Chairman and Vice Chairman of the Committee, the
Vice Chairman of the Board of Governors, and such
other member of the Board as the Chairman may designate (or in the absence of members of the Board
serving on the Subcommittee, other Board members
designated by the Chairman as alternates, and in the
absence of the Vice Chairman of the Committee, the
Vice Chairman’s alternate). Meetings of the Subcommittee shall be called at the request of any member, or
at the request of the Manager, System Open Market
Account (“Manager”), for the purposes of reviewing
recent or contemplated operations and of consulting
with the Manager on other matters relating to the Manager’s responsibilities. At the request of any member
of the Subcommittee, questions arising from such reviews and consultations shall be referred for determination to the Federal Open Market Committee.
7. The Chairman is authorized:
A. With the approval of the Committee, to enter
into any needed agreement or understanding with the
Secretary of the Treasury about the division of responsibility for foreign currency operations between
the System and the Treasury;
B. To keep the Secretary of the Treasury fully advised concerning System foreign currency operations,
and to consult with the Secretary on policy matters
relating to foreign currency operations;
C. From time to time, to transmit appropriate reports and information to the National Advisory
Council on International Monetary and Financial
Policies.
8. Staff officers of the Committee are authorized to
transmit pertinent information on System foreign currency operations to appropriate officials of the Treasury Department.
9. All Federal Reserve Banks shall participate in the
foreign currency operations for System Account in accordance with paragraph 3G(1) of the Board of Governors’ Statement of Procedure with Respect to For-
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eign Relationships of Federal Reserve Banks dated January 1, 1944.
FOREIGN CURRENCY DIRECTIVE
(Reaffirmed January 25, 2011)
1. System operations in foreign currencies shall generally be directed at countering disorderly market conditions, provided that market exchange rates for the
U.S. dollar reflect actions and behavior consistent with
IMF Article IV, Section 1.
2. To achieve this end the System shall:
A. Undertake spot and forward purchases and sales
of foreign exchange.
B. Maintain reciprocal currency (“swap”) arrangements with selected foreign central banks.
C. Cooperate in other respects with central banks
of other countries and with international monetary
institutions.
3. Transactions may also be undertaken:
A. To adjust System balances in light of probable
future needs for currencies.
B. To provide means for meeting System and
Treasury commitments in particular currencies, and
to facilitate operations of the Exchange Stabilization
Fund.
C. For such other purposes as may be expressly
authorized by the Committee.
4. System foreign currency operations shall be conducted:
A. In close and continuous consultation and cooperation with the United States Treasury;
B. In cooperation, as appropriate, with foreign
monetary authorities; and
C. In a manner consistent with the obligations of
the United States in the International Monetary Fund
regarding exchange arrangements under IMF Article
IV.
PROCEDURAL INSTRUCTIONS WITH RESPECT
TO FOREIGN CURRENCY OPERATIONS
(Reaffirmed January 25, 2011)
In conducting operations pursuant to the authorization
and direction of the Federal Open Market Committee
as set forth in the Authorization for Foreign Currency
Operations and the Foreign Currency Directive, the
Federal Reserve Bank of New York, through the Manager, System Open Market Account (“Manager”), shall
be guided by the following procedural understandings
with respect to consultations and clearances with the
Committee, the Foreign Currency Subcommittee, and
the Chairman of the Committee, unless otherwise directed by the Committee. All operations undertaken
pursuant to such clearances shall be reported promptly
to the Committee.
1. The Manager shall clear with the Subcommittee
(or with the Chairman, if the Chairman believes that
consultation with the Subcommittee is not feasible in
the time available):
A. Any operation that would result in a change in
the System’s overall open position in foreign currencies exceeding $300 million on any day or $600 million since the most recent regular meeting of the
Committee.
B. Any operation that would result in a change on
any day in the System’s net position in a single foreign currency exceeding $150 million, or $300 million
when the operation is associated with repayment of
swap drawings.
C. Any operation that might generate a substantial
volume of trading in a particular currency by the System, even though the change in the System’s net position in that currency might be less than the limits
specified in 1.B.
D. Any swap drawing proposed by a foreign bank
not exceeding the larger of (i) $200 million or
(ii) 15 percent of the size of the swap arrangement.
2. The Manager shall clear with the Committee (or
with the Subcommittee, if the Subcommittee believes
that consultation with the full Committee is not feasible
in the time available, or with the Chairman, if the
Chairman believes that consultation with the Subcommittee is not feasible in the time available):
A. Any operation that would result in a change in
the System’s overall open position in foreign currencies exceeding $1.5 billion since the most recent regular meeting of the Committee.
B. Any swap drawing proposed by a foreign bank
exceeding the larger of (i) $200 million or (ii) 15 percent of the size of the swap arrangement.
3. The Manager shall also consult with the Subcommittee or the Chairman about proposed swap
drawings by the System and about any operations that
are not of a routine character.
Developments in Financial Markets and the Federal Reserve’s Balance Sheet
The Manager of the System Open Market Account
(SOMA) reported on developments in domestic and
foreign financial markets during the period since the
Federal Open Market Committee (FOMC) met on De-
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cember 14, 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) as well as the ongoing purchases of additional
Treasury securities authorized at the November 2–3,
2010, FOMC meeting. Since the first purchase schedule was released after the November FOMC meeting,
the Open Market Desk at the Federal Reserve Bank of
New York purchased a total of $236 billion of Treasury
securities. These purchases included $69 billion associated with the reinvestment of principal payments on
agency debt and MBS and $167 billion associated with
the expansion of the Federal Reserve’s securities holdings. The maturity distribution of the Desk’s purchases
resulted in an average duration of about 5½ years for
the securities obtained. The Manager reported that
given the purchases completed thus far, achieving a
$600 billion expansion of the SOMA portfolio by the
end of June 2011 would require purchasing the additional securities at a pace of about $80 billion per
month. In addition, the Manager provided projections
of the Federal Reserve’s balance sheet and income under alternative assumptions. 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.
Structural Unemployment
A staff presentation on structural unemployment summarized a broad range of economic research on the
topic conducted across the Federal Reserve System.
Among the factors cited that could affect the level of
structural unemployment were demographics, changes
in the intensity of job search and worker screening,
differences in the geographic locations of potential
workers and vacant jobs, and mismatches in characteristics between potential workers and available jobs.
Most of the research reviewed suggested that structural
unemployment had likely risen in recent years, but by
less than actual unemployment had increased.
In discussing the staff presentation, meeting participants mentioned various factors that were seen as influencing the path of the unemployment rate. Several
participants noted that estimates of the contributions
of the individual factors depended importantly on the
approach taken by researchers, including the models
used and the assumptions made. Participants noted
that many of the factors that contributed to the recent
apparent rise in structural unemployment were likely to
recede over time. Some participants stressed that certain determinants of the unemployment rate, such as
mismatches in the labor market and firms’ hiring practices, were both difficult to measure in real time and
not directly affected by monetary policy. Others emphasized that in the current situation, monetary policy
could still play an important role in reducing unemployment.
Staff Review of the Economic Situation
The information reviewed at the January 25–26 meeting indicated that the economic recovery was firming,
though the expansion had not yet been sufficient to
bring about a significant improvement in labor market
conditions. Consumer spending rose strongly late last
year, and the ongoing expansion in business outlays for
equipment and software appeared to have been sustained in recent months. However, construction activity in both the residential and nonresidential sectors
remained weak. Industrial production increased solidly
in November and December. Modest gains in employment continued, and the unemployment rate remained elevated. Despite further increases in commodity prices, measures of underlying inflation remained subdued and longer-run inflation expectations
were stable.
The labor market situation continued to improve gradually. Private nonfarm payroll employment increased
in December at a pace roughly the same as its average
for 2010 as a whole, and the average workweek for all
employees was unchanged. Services industries continued to add most of the new jobs in the private sector.
Initial claims for unemployment insurance trended
lower in December and early January, and some indicators of job openings and firms’ hiring plans improved.
The unemployment rate decreased to 9.4 percent in
December, but this decline in part reflected a further
drop in the labor force participation rate. Longduration unemployment remained elevated, and the
employment-to-population ratio was still at a very low
level at the end of the year.
Total industrial production posted solid increases in
November and December, in part because colder
weather boosted the output of utilities. Although motor vehicle assemblies dropped back in those months,
production in the manufacturing sector outside of motor vehicles posted solid gains that were fairly widespread across industries; as a result, capacity utilization
in manufacturing increased further, although it remained below its long-run average. Most indicators of
near-term industrial activity, such as the new orders
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diffusion indexes in the national and regional manufacturing surveys, were at levels consistent with further
increases in industrial production in the near term; in
addition, motor vehicle production was scheduled to
move up again in early 2011.
Growth in consumer spending appeared to have picked
up in the fourth quarter from the more modest pace
seen earlier in the year. Nominal retail sales, excluding
purchases of motor vehicles and parts, rose again in
December, following substantial increases in the previous four months. In addition, sales of new light motor vehicles climbed further in December after stepping
up to a higher level during the preceding two months.
The available data suggested that consumer spending
was supported by gains in personal income in the
fourth quarter of 2010. Moreover, household net
worth appeared to have risen in the fourth quarter, as
the large increase in equity prices more than offset further declines in house values. Consumer credit started
to increase again in October and November after having generally declined since the fall of 2008. However,
consumer sentiment only edged up, on net, in December and early January, and it was still at a relatively subdued level.
Activity in the housing market remained weak in an
environment characterized by soft demand, a large inventory of foreclosed or distressed properties on the
market, and tight credit conditions for construction
loans and mortgages. Starts and permits for new
single-family homes in November and December were
still near the very low levels recorded since midyear.
Sales of new homes rose in December but remained
historically low. Sales of existing homes increased in
November and December from the more depressed
levels seen during the summer and early autumn, but
these sales stayed relatively weak as well. Moreover,
measures of house prices declined further in recent
months, and survey responses indicated that households remained concerned that home values might continue to fall.
Real business investment in equipment and software
appeared to have increased further in the fourth quarter, although likely at a more moderate rate than in the
first three quarters of 2010. After declining in October,
nominal orders and shipments of nondefense capital
goods excluding aircraft rose in November, and the
level of new orders remained above the level of shipments, indicating that the backlog of unfilled orders
was still rising. Available indicators suggested that
business purchases of software stayed on a solid up-
trend, and outlays for computing and communications
equipment appeared to have risen briskly. However,
business spending for transportation equipment, including aircraft and motor vehicles, likely declined in
the fourth quarter of 2010 after expanding rapidly earlier in the year. Surveys of purchasing managers reported that firms planned to increase their capital
spending this year. Reports on planned capital expenditures by small businesses showed some signs of improvement in recent months, although they remained
relatively subdued. Business outlays for nonresidential
structures stayed weak, reflecting high vacancy rates
and low property values for office and commercial
properties, as well as tight credit conditions for commercial real estate. In contrast, investment in drilling
and mining structures increased, buoyed by rising energy prices.
Real nonfarm inventory investment appeared to have
slowed substantially in the fourth quarter after a sizable
increase in the previous quarter. Much of the fourthquarter downswing was likely associated with a drawdown of motor vehicle stocks after an accumulation in
the third quarter. Book-value data for October and
November suggested that the pace of inventory accumulation also was slowing outside of the motor vehicle
sector. Inventory-to-sales ratios toward the end of
2010 were close to their pre-recession norms, and most
purchasing managers surveyed in December reported
that their customers’ inventories were not too high.
Measures of underlying consumer price inflation remained low. In December, the core consumer price
index (CPI) edged up, as goods prices were unchanged
and prices of non-energy services rose slightly. The
12-month change in the core CPI remained near the
very low readings of the previous two months. Other
measures of underlying inflation, such as the trimmedmean and median CPIs, also remained subdued. Despite the steep run-up in agricultural commodity prices
over the second half of last year, increases in retail food
prices remained modest. However, consumer energy
prices moved up sharply in December, and prices of
most types of crude oil increased during December and
into January. The prices of nonfuel industrial commodities also continued to rise over the intermeeting
period. In December and early January, survey measures of households’ long-term inflation expectations
stayed in the range that has prevailed for some time.
Available measures of labor compensation showed that
labor cost pressures were still restrained, as wage increases slowed along with inflation and productivity
Minutes of the Meeting of January 25-26, 2011
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gains appeared to remain substantial. The 12-month
change in average hourly earnings for all employees
continued to be low in December.
The U.S. international trade deficit narrowed slightly in
November, as both nominal exports and imports
moved up by almost the same amount. The increase in
exports was driven by agricultural goods, in part reflecting higher prices, as well as by consumer goods. In
contrast, exports of machinery and automotive products fell, reversing their October gains. The rise in imports reflected an increase in the value of imported
petroleum products, mostly explained by higher prices,
and of capital goods, which was supported importantly
by a jump in computers. At the same time, noticeable
decreases were registered for imports of automotive
products, services, and consumer goods, which were
primarily due to pharmaceuticals. These developments,
combined with the substantial narrowing in the trade
deficit in October, implied that the trade deficit likely
shrank considerably in the fourth quarter of 2010.
Recent indicators of foreign economic activity suggested that the global recovery was strengthening.
Much of this strength was centered in the emerging
market economies (EMEs), where widespread increases
in exports and in manufacturing purchasing managers
indexes (PMIs) pointed to a resurgence in economic
growth following a slowdown in the third quarter of
2010. For China and Singapore, real gross domestic
product (GDP) data for the fourth quarter confirmed a
rebound in economic growth. In contrast, the rise in
economic activity in the advanced foreign economies
(AFEs) remained at a subdued pace. In the euro area,
the incoming economic data were mixed: Industrial
production, manufacturing PMIs, and industrial confidence firmed, but retail sales and consumer confidence
softened. The data also pointed to an uneven expansion across the euro area, suggesting that economic
growth in Germany continued to outpace that in the
euro-area periphery. In Japan, exports and household
spending were soft, although industrial production
firmed. Foreign inflation picked up noticeably in the
fourth quarter of 2010, mostly because of an acceleration of energy and food prices. Measures of core inflation remained much more subdued, although they also
moved up in some countries. In the EMEs, concerns
about inflation prompted a number of central banks to
tighten policy. Some EMEs reportedly took steps to
limit the appreciation of their currencies by intervening
in foreign exchange markets, and some acted to discourage capital inflows.
Staff Review of the Financial Situation
The decision by the FOMC at its December meeting to
maintain the 0 to ¼ percent target range for the federal
funds rate was widely anticipated. Both the accompanying statement and the minutes of the meeting were
broadly in line with market expectations and elicited
limited price action in financial markets. Yields on medium- and longer-term nominal Treasury securities increased slightly, on net, over the intermeeting period.
Yields rose in response to data releases that generally
pointed to some firming of the economic recovery, but
the upward pressure on yields apparently was tempered
by expectations of only a gradual pace of improvement
in the labor market, the belief that the Federal Reserve
was likely to maintain an accommodative policy stance,
and ongoing concerns about fiscal and banking pressures in the euro area. Futures quotes indicated that
the expected path for the federal funds rate did not
change appreciably over the intermeeting period. Market-based measures of uncertainty about longer-term
Treasury yields, which had risen ahead of year-end, declined on balance, likely in part reflecting solidifying
market expectations regarding the ultimate size of the
FOMC’s asset purchase program. The purchases of
longer-term Treasury securities by the Desk during the
intermeeting period reportedly had no significant effects on measures of day-to-day Treasury market functioning.
Inflation compensation over the next 5 years based on
Treasury inflation-protected securities (TIPS) moved
up, likely pushed higher by rising prices for oil and other commodities and by the firming of the economic
outlook. Further out, TIPS-based inflation compensation 5 to 10 years ahead edged down slightly on net.
Yields on investment-grade corporate bonds were little
changed over the intermeeting period, while those on
speculative-grade corporate bonds declined a little,
leaving both investment- and speculative-grade spreads
over yields on comparable-maturity Treasury securities
somewhat narrower. In the secondary market for leveraged loans, the average bid price moved up further
over the intermeeting period. The municipal bond
market appeared to continue to price in an atypically
high level of default risk. The ratios of yields on longterm general obligation bonds to those on comparablematurity Treasury securities moved up to a very high
level. Despite these strains, gross issuance of long-term
municipal bonds remained strong in December.
Conditions in short-term funding markets remained
stable over the intermeeting period. Spreads of dollar
London interbank offered rates, or Libor, over over-
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night index swap rates held fairly steady across the term
structure, as the year-end passed without incident.
Some modest year-end pressures were observed in repurchase agreement markets, but they dissipated by
early January. On net, spreads on unsecured nonfinancial commercial paper remained low, and spreads on
asset-backed commercial paper appeared to have stabilized after having been somewhat volatile across yearend. Anecdotal reports suggested that the modestly
rising trend in the use of dealer-intermediated leverage
evident in 2010 had continued into 2011, but information from a variety of sources indicated that leverage
remained well below the levels reached before the crisis.
Broad U.S. stock price indexes rose, on net, over the
intermeeting period, extending their recent strong performance; bank stock prices modestly outperformed
the broader market. The increase in equity prices reflected the apparent firming of the economic recovery
and favorable early reports on fourth-quarter corporate
earnings. Option-implied volatility on the S&P 500
index remained at a relatively low level. The spread
between the staff’s estimate of the expected real equity
return for S&P 500 firms and the real 10-year Treasury
yield—a rough measure of the equity risk premium—
narrowed further over the period but remained elevated
relative to longer-run norms.
Overall, net debt financing by U.S. nonfinancial corporations was robust in the fourth quarter of 2010. Net
issuance of bonds was particularly strong, supported by
heavy issuance in both the speculative- and investmentgrade sectors. Meanwhile, nonfinancial commercial
paper outstanding decreased slightly over the quarter.
Issuance of syndicated leveraged loans, especially those
funded by institutional investors, stayed strong. Measures of the credit quality of nonfinancial corporations
continued to improve. Gross public equity issuance by
nonfinancial firms dropped back in December to its
average pace in 2010.
Financing conditions for most types of commercial real
estate remained tight over the intermeeting period, and
delinquency rates for broad categories of commercial
real estate loans stayed elevated. However, for larger
nonresidential properties in strong markets, credit appeared to have become somewhat less restricted, and
prices moved up, on net, from their lows at the beginning of 2010; at the same time, prices of other nonresidential properties continued to trend down. Issuance
of commercial mortgage-backed securities increased in
the fourth quarter of 2010 but was still only a fraction
of its pre-crisis level.
Rates on conforming fixed-rate residential mortgages
edged down a bit during the intermeeting period after
having risen appreciably in November and early December, leaving their spreads over the 10-year Treasury
yield down slightly. Refinancing activity, which had
fallen in response to the increase in mortgage rates in
November, remained at a low level during the period.
Outstanding residential mortgage debt declined further
in the third quarter of 2010, reflecting weak housing
activity and tight lending standards. Serious delinquency rates on prime and subprime mortgages flattened
out in October and November after having moved
down earlier in the year. Signs of improvement were
evident in the consumer credit market, where issuance
of consumer asset-backed securities was strong early in
the fourth quarter. In addition, delinquency rates on
consumer loans continued to trend down toward their
longer-run norms.
Banks made a sizable reduction in their holdings of
securities in December. Core loans on banks’ books—
the sum of commercial and industrial (C&I), real estate,
and consumer loans—edged down again, but the rate
of contraction appeared to be abating. C&I loans expanded at a robust pace in December. Despite continued weakness in many residential real estate indicators,
closed-end residential mortgage loans held by large
banks rose noticeably for the fifth consecutive month
in December. By contrast, commercial real estate
loans, home equity loans, and consumer loans decreased during that month. The behavior of the components of core loans in recent months was broadly
consistent with the results of the Senior Loan Officer
Opinion Survey on Bank Lending Practices conducted
in January. The survey responses indicated that, during
the fourth quarter of 2010, modest net fractions of
banks continued to ease standards for C&I loans and
that larger net fractions eased some terms on such
loans. Changes in banks’ lending policies for other
categories of loans were reportedly mixed and generally
small. Meanwhile, moderate net fractions of respondents indicated that demand for C&I loans had strengthened over the preceding three months, and that inquiries from business borrowers for new or increased
credit lines had picked up. In contrast, demand reportedly weakened somewhat, on balance, for residential
real estate loans and was little changed for consumer
loans. Respondents indicated that the recent increase
in their holdings of closed-end residential mortgage
loans reflected the relative attractiveness of such loans
Minutes of the Meeting of January 25-26, 2011
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_____________________________________________________________________________________________
compared with other assets and, for some, a desire to
expand their balance sheets by adding to this loan category.
In December, M2 expanded at a rate a bit below its
pace in November. Liquid deposits, the largest component of M2, continued to increase rapidly, while the
contraction in small time deposits and retail money
market mutual funds persisted. The ongoing compositional shift within M2 toward liquid deposits likely reflected the relatively high yields on liquid deposits
compared with yields on many other components of
M2. Currency growth slowed in December, due in part
to weather-related transportation difficulties that delayed flows of U.S. bank notes to international destinations.
The broad nominal index of the U.S. dollar declined
more than 1 percent over the intermeeting period, depreciating by roughly similar amounts, on average,
against the currencies of the AFEs and the EMEs. The
dollar’s decline appeared to reflect a variety of factors:
signs of stronger economic activity abroad, particularly
in the EMEs; actual and prospective monetary policy
tightening in foreign economies; and increases in the
prices of oil and other commodities, which lent support
to the currencies of commodity-exporting countries.
Benchmark 10-year sovereign yields moved higher in
the core euro-area economies and the United Kingdom
but were little changed in Japan and Canada. Equity
prices increased in the AFEs and in many EMEs as
market participants appeared to revise upward their
outlook for the global economy.
Financial market strains in the euro area continued during the intermeeting period. Greek, Irish, and Portuguese sovereign debt spreads over German bunds rose
in December and early January as credit rating agencies
downgraded the sovereign debt of Ireland and Portugal. Subsequently, though, spreads narrowed following
some relatively successful sovereign debt auctions by
countries in the euro-area periphery, evidence of
stepped-up purchases of peripheral sovereign bonds by
the European Central Bank (ECB), and reports that the
European Union was considering expanding the backstop capacity of the European Financial Stability Facility. Some modest dollar funding pressures developed as
year-end approached, but they did not persist into January. To continue to support liquidity conditions in
global money markets, on December 21, the Federal
Reserve announced an extension through August 1,
2011, of its swap line arrangements with the ECB and
the central banks of Japan, Canada, Switzerland, and
the United Kingdom. In addition, the Bank of England established a temporary liquidity swap facility with
the ECB designed to provide Ireland’s central bank
with sterling to help meet the potential needs of the
Irish banking system.
Staff Economic Outlook
Because the incoming data on production and spending
were stronger, on balance, than the staff’s expectations
at the time of the December FOMC meeting, the nearterm forecast for the increase in real GDP was revised
up. However, the staff’s outlook for the pace of economic growth over the medium term was adjusted only
slightly relative to the projection prepared for the December meeting. Compared with the December forecast, the conditioning assumptions underlying the forecast were little changed and roughly offsetting: Although higher equity prices and a lower foreign exchange value of the dollar were expected to be slightly
more supportive of economic growth, the staff anticipated that these influences would be about offset by
lower house prices and higher oil prices. In addition,
the staff’s assumptions about fiscal policy changed little—the fiscal package enacted in December was close
to what the staff had already incorporated in their previous projection. In the medium term, the recovery in
economic activity was expected to receive support from
accommodative monetary policy, further improvements
in financial conditions, and greater household and
business confidence. Over the projection period, the
rise in real GDP was expected to be sufficient to slowly
reduce the rate of unemployment, but the jobless rate
was anticipated to remain elevated at the end of 2012.
The underlying rate of consumer price inflation in recent months was in line with what the staff anticipated
at the time of the December meeting, and the staff
continued to project that increases in core PCE prices
would remain subdued in 2011 and 2012. As in previous projections, the persistent wide margin of economic slack in the forecast was expected to maintain
downward pressure on inflation, but this influence was
anticipated to be counterbalanced by the continued
stability of inflation expectations and by increases in
the prices of imported goods. The staff anticipated
that brisk increases in energy prices would raise total
consumer price inflation above core inflation this year,
but that upward pressure from energy prices would
wane by next year.
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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 presidents of the 12 Federal Reserve
Banks—provided projections of output growth, the
unemployment rate, and inflation for each year from
2011 through 2013 and over the longer run. Longerrun 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.
In the discussion of intermeeting developments and
their implications for the outlook, the participants generally expressed greater confidence that the economic
recovery would be sustained and would gradually
strengthen over coming quarters. Their more positive
assessment reflected both the tenor of the incoming
economic data and information received from business
contacts since the previous meeting. Spending by
households picked up noticeably in the fourth quarter,
business outlays continued to grow at a moderate pace,
and conditions in labor and financial markets improved
somewhat over the intermeeting period. Although
business contacts remained somewhat cautious about
the economic outlook, they generally indicated greater
optimism regarding their own prospects for sales and
hiring than at the time of the previous meeting. While
participants viewed the downside risks to their forecasts of economic activity over the projection period as
having diminished, their assessment of the most likely
outcomes for economic activity and inflation over the
projection period was not greatly changed. Most participants raised their forecast of real GDP growth in
2011 somewhat and continued to anticipate stronger
growth this year than in 2010, with a further gradual
acceleration during 2012 and 2013. The unemployment rate was still projected to decline gradually over
the forecast period but to remain elevated. Total inflation was still expected to remain subdued, and core
inflation was projected to trend up slowly over the next
few years as economic activity picks up but inflation
expectations remain well anchored.
Participants’ judgment that the economic recovery was
on a firmer footing was supported by the strength in
household spending in the fourth quarter. The incoming data indicated that households stepped up sharply
their purchases of durable goods, particularly automo-
biles, last quarter. Spending on luxury goods also increased, and the pace of holiday sales was better than in
recent years. However, some participants noted that it
was not clear whether the recent pace of consumer
spending would be sustained. On the one hand, the
additional spending could reflect pent-up demand following the downturn or greater confidence on the part
of households about the future, in which case it might
be expected to continue. On the other hand, the additional spending could prove short lived given that a
good portion of it appeared to have occurred in relatively volatile categories such as autos.
Activity in the business sector also indicated that the
economic recovery remained on track. For instance,
indicators of business investment in equipment and
software continued to rise. Industrial production posted solid gains, supported in part by U.S. exports that
appeared to have been noticeably stronger in the fourth
quarter. A wide range of business contacts expressed
cautious optimism about the durability and strength of
the recovery, and some were planning for an expansion
in production in order to meet an anticipated rise in
sales. In addition, although residential construction
spending remained weak, spending on commercial construction projects showed some tentative signs of bottoming out.
Participants noted that conditions in labor markets
continued to improve gradually. Payroll employment
increased at a modest pace, and, although the data had
been somewhat erratic, a slight downward trend was
apparent in the recent pattern of weekly initial claims
for unemployment insurance. In addition, some surveys of employers suggested a somewhat more upbeat
outlook for employment. Business contacts provided a
range of information regarding hiring intentions, with
some indicating that workers at all skill levels were
readily obtainable, while others reported that they had
upgraded skill requirements and that some of the currently unemployed did not meet those new requirements. Some businesses remained reluctant to add
permanent positions and were planning to meet their
labor requirements with temporary workers. Overall,
meeting participants continued to express disappointment in both the pace and the unevenness of the improvements in labor markets and noted that they would
monitor labor market developments closely.
Conditions in financial markets improved somewhat
further over the intermeeting period. Broad equity
prices rose, adding to their substantial gains since the
middle of 2010. Yields on longer-term nominal Treas-
Minutes of the Meeting of January 25-26, 2011
Page 13
_____________________________________________________________________________________________
ury securities were little changed, on balance, over the
period, but they had increased quite a bit in recent
months, leaving the Treasury yield curve noticeably
steeper. Some participants noted that a steep yield
curve is a typical feature of an economy in recovery,
and that much of the steepening appeared to have occurred in response to stronger-than-expected economic
data. Market-based measures of inflation compensation over the next few years increased further over the
intermeeting period, extending the rise that occurred
over recent months. Some participants suggested that
the increase likely reflected, in part, a decline in investors’ perceptions of the near-term risk of further disinflation. At the same time, longer-term inflation expectations had remained stable. Credit spreads on the debt
of nonfinancial corporations continued to narrow over
the period, reaching levels noticeably lower than those
posted several months ago, with the largest declines
coming on speculative-grade bonds. However, credit
conditions remained tight for smaller, bank-dependent
firms, although bank loan growth had clearly picked up
in some sectors. Some participants noted that, taken
together, these financial developments were consistent
with a more accommodative stance of monetary policy
since last summer or a reduction in risk aversion on the
part of market participants.
Meeting participants noted that headline inflation had
been boosted by higher prices for energy and other
commodities, as well as by increases in the prices of
imported goods. Some participants indicated that while
unit labor costs generally had declined and profit margins were wide, the higher commodity prices were
boosting costs of production for many firms. Some
business contacts indicated that they were going to try
to pass a portion of these higher costs through to their
customers but were uncertain about whether that
would be possible given current market conditions.
Many participants expected that, with significant slack
in resource markets and longer-term inflation expectations stable, measures of core inflation would remain
close to current levels in coming quarters. However,
the importance of resource slack as a factor influencing
inflation was debated, and some participants suggested
that other variables, such as current and expected rates
of economic growth, could be useful indicators of inflation pressures.
Overall, most participants indicated that the somewhat
better-than-expected economic data and anecdotal information from business contacts had importantly increased their confidence in the continuation of a moderate recovery in activity this year. Accordingly, partic-
ipants generally agreed that the downside risks to their
forecasts of both economic growth and inflation―as
well as the odds of a period of deflation―had diminished. Participants also generally agreed that the recent data had not led them to significantly change their
outlooks for the most likely rates of economic growth
and inflation in coming quarters. Participants noted
that some of the strength in the recent data reflected
factors that could prove temporary, such as the large
contribution from net exports, a volatile category, and
the sharp step-up in auto sales. Most participants continued to anticipate that the recovery in economic activity was likely to be restrained by a variety of economic factors, including still-high unemployment, modest
income growth, lower housing wealth, high rates of
mortgage foreclosure, elevated inventories of unsold
homes, and tight credit conditions in a number of sectors. In addition, although many business contacts expressed more optimism about the economic recovery, a
number had aimed their recent investments primarily at
enhancing productivity rather than expanding employment, and hiring for some businesses reportedly was
focused on temporary workers. Some participants
noted that incoming data on production, spending, and
employment would need to be solid for a while longer
to justify a significant upward revision to their outlook
for the likely pace of the recovery.
Participants generally saw the risks to their outlook for
economic growth and employment as having become
broadly balanced, but they continued to see significant
risks to both sides of the outlook. On the downside,
participants remained worried about the possible effects of spillovers from the banking and fiscal strains in
peripheral Europe, the ongoing fiscal adjustments by
U.S. state and local governments, and the continued
weakness in the housing market. On the upside, the
recent strength in household spending raised the possibility that domestic final demand could snap back more
rapidly than anticipated. If so, a considerably stronger
recovery could take hold, more in line with the sorts of
recoveries seen following deep economic recessions in
the past.
Regarding risks to the inflation outlook, some participants noted that increases in energy and other commodity prices as well as in the prices of imported goods
from EMEs posed upside risks. Others, however,
noted that the pass-through from increases in commodity prices to broad measures of consumer price
inflation in the United States had generally been fairly
small. Some participants expressed concern that in a
situation in which businesses had been unable to raise
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_____________________________________________________________________________________________
prices in response to higher costs for some time, firms
might increase them substantially once they found
themselves with sufficient pricing power. In any case,
the factors affecting the ability of businesses to pass
through higher prices to consumers were viewed as
complex and hard to monitor in real time. Most participants saw the large degree of resource slack in the
economy as likely to remain a force restraining inflation, and while the risk of further disinflation had declined, a number of participants cited concerns that
inflation was below its mandate-consistent level and
was expected to remain so for some time. Finally,
some participants noted that if the very large size of the
Federal Reserve’s balance sheet led the public to doubt
the Committee’s ability to withdraw monetary accommodation when doing so becomes appropriate, the result could be upward pressure on inflation expectations
and so on actual inflation. To mitigate such risks, it
was noted that the Committee should continue its
planning for the eventual exit from the current exceptionally accommodative stance of policy.
Committee Policy Action
In their discussion of monetary policy for the period
ahead, members agreed that no changes to the Committee’s asset purchase program or to its target range
for the federal funds rate were warranted at this meeting. While the information received over the intermeeting period increased members’ confidence in the
sustainability of the economic recovery, the pace of the
recovery was insufficient to bring about a significant
improvement in labor market conditions, and measures
of underlying inflation had trended downward. Moreover, the economic projections submitted for this
meeting indicated that unemployment was expected to
remain above, and inflation to remain somewhat below,
levels consistent with the Committee’s objectives for
some time. Accordingly, the Committee agreed to continue to expand its holdings of longer-term Treasury
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 and reaffirmed its intention to purchase $600 billion of longerterm Treasury securities by the end of the second quarter of 2011. A few members remained unsure of the
likely effects of the asset purchase program on the
economy, but felt that making changes to the program
at this time was not appropriate. Members emphasized
that the Committee would continue to regularly review
the pace of its securities purchases and the overall size
of the asset purchase program in light of incoming information—including information on the outlook for
economic activity, developments in financial markets,
and the efficacy of the purchase program and any unintended consequences that might arise—and would adjust the program as needed to best foster maximum
employment and price stability. A few members noted
that additional data pointing to a sufficiently strong
recovery could make it appropriate to consider reducing the pace or overall size of the purchase program.
However, others pointed out that it was unlikely that
the outlook would change by enough to substantiate
any adjustments to the program before its completion.
In addition, the Committee reiterated its expectation
that economic conditions were likely to warrant exceptionally low levels for the federal funds rate for an extended period. With respect to the statement to be
released following the meeting, members agreed that
only small changes were necessary to reflect the improvement in the near-term economic outlook and to
make clear that the policy decision reflected a continuation of the asset purchase program announced in November.
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 longerterm 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 objec-
Minutes of the Meeting of January 25-26, 2011
Page 15
_____________________________________________________________________________________________
tives of maximum employment and price
stability.”
the program as needed to best foster maximum employment and price stability.
The vote encompassed approval of the statement below to be released at 2:15 p.m.:
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.
“Information received since the Federal
Open Market Committee met in December
confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions. Growth in
household spending picked up late last year,
but remains constrained by high unemployment, modest income growth, lower housing
wealth, and tight credit. Business spending
on equipment and software is rising, while
investment in nonresidential structures is still
weak. Employers remain reluctant to add to
payrolls. The housing sector continues to be
depressed. Although commodity prices have
risen, longer-term inflation expectations have
remained stable, and measures of underlying
inflation have been trending 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. In particular, the
Committee is maintaining its existing policy
of reinvesting principal payments from its
securities holdings and intends to purchase
$600 billion of longer-term Treasury securities by the end of the second quarter of
2011. 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 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.”
Voting for this action: Ben Bernanke, William C.
Dudley, Elizabeth Duke, Charles L. Evans, Richard W.
Fisher, Narayana Kocherlakota, Charles I. Plosser,
Sarah Bloom Raskin, Daniel K. Tarullo, Kevin Warsh,
and Janet L. Yellen.
Voting against this action: None.
Next, the Committee turned to a discussion of its external communications, specifically the importance of
communicating both broadly and effectively. FOMC
participants noted the importance of fair and equal
access by the public to information that could be informative about future policy decisions, and they considered approaches to address this issue. Several participants noted that increased clarity of communications
was a key objective, and some referred to the central
role of communications in the monetary policy transmission process. A focus of the discussion was on how
to encourage dialogue with the public in an appropriate
and transparent manner. The subcommittee on communications agreed to consider whether further guidance in this area would be useful.
It was agreed that the next meeting of the Committee
would be held on Tuesday, March 15, 2011. The meeting adjourned at 2:40 p.m. on January 26, 2011.
Notation Vote
By notation vote completed on January 3, 2011, the
Committee unanimously approved the minutes of the
FOMC meeting held on December 14, 2010.
_____________________________
William B. English
Secretary
Page 1
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Summary of Economic Projections
In conjunction with the January 25–26, 2011, Federal
Open Market Committee (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 growth of real output, the unemployment rate, and
inflation for the years 2011 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
for the next three years indicated that they expect a
sustained recovery in real economic activity, marked by
a step-up in the rate of increase in real gross domestic
product (GDP) in 2011 followed by further modest
acceleration in 2012 and 2013. They anticipated that,
over this period, the pace of the recovery would exceed
their estimates of the longer-run sustainable rate of
increase in real GDP by enough to gradually lower the
unemployment rate. However, by the end of 2013,
participants projected that the unemployment rate
would still exceed their estimates of the longer-run unemployment rate. Most participants expected that inflation would likely move up somewhat over the forecast period but would remain at rates below those they
see as consistent, over the longer run, with the Committee’s dual mandate of maximum employment and
price stability.
As indicated in table 1, relative to their previous projections in November 2010, participants anticipated
somewhat more rapid growth in real GDP this year,
but they did not significantly alter their expectations for
the pace of the expansion in 2012 and 2013 or for the
longer run. Participants made only minor changes to
their forecasts for the path of the unemployment rate
and for the rate of inflation over the next three years.
Although most participants anticipated that the economy would likely converge to sustainable rates of increase in real GDP and prices over five or six years, a
number of participants indicated that they expected
that the convergence of the unemployment rate to its
longer-run level would require additional time.
As they did in November, participants judged the level
of uncertainty associated with their projections for real
economic activity and inflation as unusually high rela-
Table 1. Economic projections of Federal Reserve Governors and Reserve Bank presidents, January 2011
Percent
Variable
Central tendency1
2011
Range2
2012
2013
Longer run
2011
2012
2013
Longer run
Change in real GDP. . . . . . 3.4 to 3.9
November projection. . 3.0 to 3.6
3.5 to 4.4
3.6 to 4.5
3.7 to 4.6
3.5 to 4.6
2.5 to 2.8
2.5 to 2.8
3.2 to 4.2
2.5 to 4.0
3.4 to 4.5
2.6 to 4.7
3.0 to 5.0
3.0 to 5.0
2.4 to 3.0
2.4 to 3.0
Unemployment rate. . . . . . 8.8 to 9.0
November projection. . 8.9 to 9.1
7.6 to 8.1
7.7 to 8.2
6.8 to 7.2
6.9 to 7.4
5.0 to 6.0
5.0 to 6.0
8.4 to 9.0
8.2 to 9.3
7.2 to 8.4
7.0 to 8.7
6.0 to 7.9
5.9 to 7.9
5.0 to 6.2
5.0 to 6.3
PCE inflation. . . . . . . . . . . 1.3 to 1.7
November projection. . 1.1 to 1.7
1.0 to 1.9
1.1 to 1.8
1.2 to 2.0
1.2 to 2.0
1.6 to 2.0
1.6 to 2.0
1.0 to 2.0
0.9 to 2.2
0.7 to 2.2
0.6 to 2.2
0.6 to 2.0
0.4 to 2.0
1.5 to 2.0
1.5 to 2.0
Core PCE inflation3. . . . . . 1.0 to 1.3
November projection. . 0.9 to 1.6
1.0 to 1.5
1.0 to 1.6
1.2 to 2.0
1.1 to 2.0
0.7 to 1.8
0.7 to 2.0
0.6 to 2.0
0.6 to 2.0
0.6 to 2.0
0.5 to 2.0
NOTE: Projections of change in real gross domestic product (GDP) and in inflation are from the fourth quarter of the previous year to the fourth quarter of
the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index for personal consumption expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in
the fourth quarter of the year indicated. Each participant’s projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the
absence of further shocks to the economy. The November projections were made in conjunction with the meeting of the Federal Open Market Committee on
November 2–3, 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
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Figure 1. Central tendencies and ranges of economic projections, 2011–13 and over the longer run
Percent
Change in real GDP
5
Central tendency of projections
Range of projections
4
3
2
1
+
0
_
1
Actual
2
2006
2007
2008
2009
2010
2011
2012
2013
Longer
run
Percent
Unemployment rate
10
9
8
7
6
5
2006
2007
2008
2009
2010
2011
2012
2013
Longer
run
Percent
PCE inflation
3
2
1
2006
2007
2008
2009
2010
2011
2012
2013
Longer
run
Percent
Core PCE inflation
3
2
1
2006
2007
2008
2009
2010
2011
2012
2013
NOTE: Definitions of variables are in the notes to table 1. The data for the actual values of the variables are annual. The data for the change in real
GDP, PCE inflation, and core PCE inflation shown for 2010 incorporate the advance estimate of GDP for the fourth quarter of 2010, which the Bureau
of Economic Analysis released on January 28, 2011. This information was not available to FOMC meeting participants at the time of their meeting.
Summary of Economic Projections of the Meeting of January 25-26, 2011
Page 3
_____________________________________________________________________________________________
tive to historical norms. Most continued to see the
risks surrounding their forecasts of GDP growth, the
unemployment rate, and inflation over the next three
years to be generally balanced. However, fewer noted
downside risks to the likely pace of the expansion and,
accordingly, upside risks to the unemployment rate
than in November; fewer also saw downside risks to
inflation.
The Outlook
The central tendency of participants’ forecasts for the
change in real GDP in 2011 was 3.4 to 3.9 percent,
somewhat higher than in the November projections.
Participants stated that the economic information received since November indicated that consumer spending, business investment, and net exports increased
more strongly at the end of 2010 than expected earlier;
industrial production also expanded more rapidly than
they previously anticipated. In addition, after the November projections were prepared, the Congress approved fiscal stimulus measures that were expected to
provide further impetus to household and business
spending in 2011. Moreover, participants noted that
financial conditions had improved since November,
including a rise in equity prices, a pickup in activity in
capital markets, reports of easing of credit conditions in
some markets, and an upturn in bank lending in some
sectors. Many participants viewed the stronger tenor
of the recent information, along with the additional
fiscal stimulus, as suggesting that the recovery had
gained some strength—a development seen as likely to
carry into 2011—and that the expansion was on firmer
footing. Participants expected that the expansion in
real economic activity this year would continue to be
supported by accommodative monetary policy and by
ongoing improvement in credit and financial market
conditions. The strengthening in private demand was
anticipated to be led by increases in consumer and
business spending; over time, improvements in household and business confidence and in labor market conditions would likely reinforce the rise in domestic demand. Nonetheless, participants recognized that the
information available since November also indicated
that the expansion remained uneven across sectors of
the economy, and they expected that the pace of economic activity would continue to be moderated by the
weakness in residential and nonresidential construction,
the still relatively tight credit conditions in some sectors, an ongoing desire by households to repair their
balance sheets, business caution about hiring, and the
budget difficulties faced by state and local governments.
Participants expected that the economic expansion
would strengthen further in 2012 and 2013, with the
central tendencies of their projections for the growth in
real GDP moving up to 3.5 to 4.4 percent in 2012 and
then to 3.7 to 4.6 percent in 2013. Participants cited, as
among the likely contributors to a sustained pickup in
the pace of the expansion, a continued improvement in
financial market conditions, further expansion of credit
availability to households and businesses, increasing
household and business confidence, and a favorable
outlook for U.S. exports. Several participants noted
that, in such an environment, and with labor market
conditions anticipated to improve gradually, the restraints on household spending from past declines in
wealth and the desire to rebuild savings should abate.
A number of participants saw such conditions fostering
a broader and stronger recovery in business investment,
with a few noting that the market for commercial real
estate had recently shown signs of stabilizing. Nonetheless, participants saw a number of factors that would
likely continue to moderate the pace of the expansion.
Most participants expected that the recovery in the
housing market would remain slow, restrained by the
overhang of vacant properties, prospects for weak
house prices, and the difficulties in resolving foreclosures. In addition, some participants expected that the
fiscal strains on the budgets of state and local governments would damp their spending for a time and that
the federal government sector would likely be a drag on
economic activity after 2011.
Participants anticipated that a gradual but steady reduction in the unemployment rate would accompany the
pickup in the pace of the economic expansion over the
next three years. The central tendency of their forecasts for the unemployment rate at the end of 2011 was
8.8 to 9.0 percent—a decline of less than 1 percentage
point from the actual rate in the fourth quarter of 2010.
Although participants generally expected further declines in the unemployment rate over the subsequent
two years—to a central tendency of 6.8 to 7.2 percent
at the end of 2013—they anticipated that, at the end of
that period, unemployment would remain noticeably
higher than their estimates of the longer-run rate.
Many participants thought that, with appropriate
monetary policy and in the absence of further shocks,
the unemployment rate would continue to converge
gradually toward its longer-run rate within five to six
years, but a number of participants indicated that the
convergence process would likely be more extended.
While participants viewed the projected pace of the
expansion in economic activity as the principal factor
Page 4
Federal Open Market Committee
_____________________________________________________________________________________________
underlying their forecasts for the path of the unemployment rate, they also indicated that their projections
were influenced by a number of other factors that were
likely to contribute to a relatively gradual recovery in
the labor market. In that regard, several participants
noted that dislocations associated with the uneven recovery across sectors of the economy might retard the
matching of workers and jobs. In addition, a number
of participants viewed the modest pace of hiring in
2010 as, in part, the result of business caution about the
durability of the recovery and of employers’ efforts to
achieve additional increases in productivity; several participants also cited the particularly slow recovery in
demand experienced by small businesses as a factor
restraining new job creation. With demand expected to
strengthen across a range of businesses and with business confidence expected to improve, participants anticipated that hiring would pick up over the forecast
period.
Participants continued to expect that inflation would be
relatively subdued over the next three years and kept
their longer-run projections of inflation unchanged.
Many participants indicated that the persistence of large
margins of slack in resource utilization should contribute to relatively low rates of inflation over the forecast
horizon. In addition, participants noted that appropriate monetary policy, combined with stable longer-run
inflation expectations, should help keep inflation in
check. The central tendency of their projections for
overall personal consumption expenditures (PCE) inflation in 2011 was 1.3 to 1.7 percent, while the central
tendency of their forecasts for core PCE inflation was
lower—1.0 to 1.3 percent. Increases in the prices of
energy and other commodities, which were very rapid
in 2010, were anticipated to continue to push headline
PCE inflation above the core rate this year. The central
tendency of participants’ forecasts for inflation in 2012
and 2013 widened somewhat relative to 2011 and
showed that inflation was expected to drift up modestly. In 2013, the central tendency of forecasts for both
the total and core inflation rates was 1.2 to 2.0 percent.
For most participants, inflation in 2013 was not expected to have converged to the longer-run rate of inflation that they individually considered most consistent with the Federal Reserve’s dual mandate for maximum employment and stable prices. However, a
number of participants anticipated that inflation would
reach its longer-run rate within the next three years.
Table 2. Average historical projection error ranges
Percentage points
Variable
Change in real
2011
2012
2013
......
±1.3
±1.7
±1.8
.......
±0.7
±1.3
±1.5
±1.0
±1.0
±1.1
GDP1
Unemployment
rate1
Total consumer
prices2
.....
NOTE: Error ranges shown are measured as plus or minus the root
mean squared error of projections for 1990 through 2009 that were
released in the winter by various private and government forecasters. As
described in the box “Forecast Uncertainty,” under certain assumptions,
there is about a 70 percent probability that actual outcomes for real
GDP, unemployment, and consumer prices will be in ranges implied by
the average size of projection errors made in the past. Further information is in David Reifschneider and Peter Tulip (2007), “Gauging the
Uncertainty of the Economic Outlook from Historical Forecasting
Errors,” Finance and Economics Discussion Series 2007-60 (Washington: Board of Governors of the Federal Reserve System, November).
1. For definitions, refer to general note in table 1.
2. Measure is the overall consumer price index, the price measure
that has been most widely used in government and private economic
forecasts. Projection is percent change, fourth quarter of the previous
year to the fourth quarter of the year indicated.
Uncertainty and Risks
Most participants continued to share the view that their
projections for economic activity and inflation were
subject to a higher level of uncertainty than was the
norm during the previous 20 years.1 They identified a
number of uncertainties that compounded the inherent
difficulties in forecasting output growth, unemployment, and inflation. Among them were uncertainties
about the nature of economic recoveries from recessions associated with financial crises, the effects of unconventional monetary policies, the persistence of
structural dislocations in the labor market, the future
course of federal fiscal policy, and the global economic
outlook.
Almost all participants viewed the risks to their forecasts for the strength of the recovery in real GDP as
broadly balanced. By contrast, in November, the distribution of views had been somewhat skewed to the
downside. In weighing the risks to the projected
growth rate of real economic activity, some participants
noted the upside risk that the recent strengthening of
aggregate spending might mark the beginning of a
more normal cyclical rebound in economic activity in
which consumer spending might be spurred by pent-up
Table 2 provides estimates of forecast uncertainty for the
change in real GDP, the unemployment rate, and total consumer price inflation over the period from 1990 to 2009. At
the end of this summary, the box “Forecast Uncertainty”
discusses the sources and interpretation of uncertainty in the
economic forecasts and explains the approach used to assess
the uncertainty and risks attending the participants’ projections.
1
Summary of Economic Projections of the Meeting of January 25-26, 2011
Page 5
_____________________________________________________________________________________________
demand for household durables and in which business
investment might be accelerated by the desire to rebuild stocks of fixed capital. A more-rapid-thanexpected easing of credit availability was also seen as a
factor that might boost the pickup in private demand.
As to the downside risks, many participants pointed to
the recent declines in house prices and the potential for
a slower resolution of existing problems in mortgage
and real estate markets as factors that could have moreadverse-than-expected consequences for household
spending and bank balance sheets. In addition, several
participants expressed concerns that, in an environment of only gradual improvement in labor market and
credit conditions, households might be unusually focused on reducing debt and boosting saving. A number of participants also saw a downside risk in the possibility that the fiscal problems of some state and local
governments might lead to a greater retrenchment in
their spending than currently anticipated. Finally, several participants expressed concerns that the financial
and fiscal strains in the euro area might spill over to
U.S. financial markets.
The risks surrounding participants’ forecasts of the
unemployment rate were also broadly balanced and
generally reflected the risks attending participants’
views of the likely strength of the expansion in real activity. However, a number of participants noted that
the unemployment rate might decline less than they
projected if businesses were to remain hesitant to expand their workforces because of uncertainty about the
durability of the expansion or about employment costs
or if mismatches of workers and jobs were more persistent than anticipated.
Most participants judged the risks to their inflation outlook over the period from 2011 to 2013 to be broadly
balanced as well. Compared with their views in November, several participants no longer saw the risks as
tilted to the downside, and an additional participant
viewed the risks as weighted to the upside. In assessing
the risks, a number of participants indicated that they
saw the risks of deflation or further unwanted disinflation to have diminished. Many participants identified
the persistent gap between their projected unemployment rate and its longer-run rate as a risk that inflation
could be lower than they projected. A few of those
who indicated that inflation risks were skewed to the
upside expressed concerns that the expansion of the
Federal Reserve’s balance sheet, if left in place for too
long, might erode the stability of longer-run inflation
expectations. Alternatively, several participants noted
that upside risks to inflation could arise from persistently rapid increases in the costs of energy and other
commodities.
Diversity of Views
Figures 2.A and 2.B detail the diversity of participants’
views regarding the likely outcomes for real GDP
growth and the unemployment rate in 2011, 2012,
2013, and over the longer run. The dispersion in these
projections reflected differences in participants’ assessments of many factors, including the likely evolution of conditions in credit and financial markets, the
timing and the degree to which various sectors of the
economy and the labor market will recover from the
dislocations associated with the deep recession, the
outlook for economic and financial developments
abroad, and appropriate future monetary policy and its
effects on economic activity. For 2011 and 2012, the
dispersions of participants’ forecasts for the strength in
the expansion of real GDP and for the unemployment
rate were somewhat narrower than they were last November, while the ranges of views for 2013 and for the
longer run were little changed.
Figures 2.C and 2.D provide the corresponding information about the diversity of participants’ views regarding the outlook for total and core PCE inflation. These
distributions were somewhat more tightly concentrated
for 2011, but for 2012 and 2013, they were much the
same as they were in November. In general, the dispersion in the participants’ inflation forecasts for the
next three years represented differences in judgments
regarding the fundamental determinants of inflation,
including estimates of the degree of resource slack and
the extent to which such slack influences inflation outcomes and expectations as well as estimates of how the
stance of monetary policy may influence inflation expectations. Although the distributions of participants’
inflation forecasts for 2011 through 2013 continued to
be relatively wide, the distribution of projections of the
longer-run rate of overall inflation remained tightly
concentrated. The narrow range illustrates the broad
similarity in participants’ assessments of the approximate level of inflation that is consistent with the Federal Reserve’s dual objectives of maximum employment
and price stability.
Page 6
Federal Open Market Committee
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Figure 2.A. Distribution of participants’ projections for the change in real GDP, 2011–13 and over the longer run
Number of participants
2011
14
January projections
November projections
12
10
8
6
4
2
2.42.5
2.62.7
2.82.9
3.03.1
3.23.3
3.43.5
3.63.7
3.83.9
4.04.1
4.24.3
4.44.5
4.64.7
4.84.9
5.05.1
Percent range
Number of participants
2012
14
12
10
8
6
4
2
2.42.5
2.62.7
2.82.9
3.03.1
3.23.3
3.43.5
3.63.7
3.83.9
4.04.1
4.24.3
4.44.5
4.64.7
4.84.9
5.05.1
Percent range
Number of participants
2013
14
12
10
8
6
4
2
2.42.5
2.62.7
2.82.9
3.03.1
3.23.3
3.43.5
3.63.7
3.83.9
4.04.1
4.24.3
4.44.5
4.64.7
4.84.9
5.05.1
Percent range
Number of participants
Longer run
14
12
10
8
6
4
2
2.42.5
2.62.7
2.82.9
3.03.1
3.23.3
3.43.5
3.63.7
Percent range
NOTE: Definitions of variables are in the general note to table 1.
3.83.9
4.04.1
4.24.3
4.44.5
4.64.7
4.84.9
5.05.1
Summary of Economic Projections of the Meeting of January 25-26, 2011
Page 7
_____________________________________________________________________________________________
Figure 2.B. Distribution of participants’ projections for the unemployment rate, 2011–13 and over the longer run
Number of participants
2011
14
January projections
November projections
12
10
8
6
4
2
5.05.1
5.25.3
5.45.5
5.65.7
5.85.9
6.06.1
6.26.3
6.46.5
6.66.7
6.86.9
7.07.1
7.27.3
7.47.5
7.67.7
7.87.9
8.08.1
8.28.3
8.48.5
8.68.7
8.88.9
9.09.1
9.29.3
Percent range
Number of participants
2012
14
12
10
8
6
4
2
5.05.1
5.25.3
5.45.5
5.65.7
5.85.9
6.06.1
6.26.3
6.46.5
6.66.7
6.86.9
7.07.1
7.27.3
7.47.5
7.67.7
7.87.9
8.08.1
8.28.3
8.48.5
8.68.7
8.88.9
9.09.1
9.29.3
Percent range
Number of participants
2013
14
12
10
8
6
4
2
5.05.1
5.25.3
5.45.5
5.65.7
5.85.9
6.06.1
6.26.3
6.46.5
6.66.7
6.86.9
7.07.1
7.27.3
7.47.5
7.67.7
7.87.9
8.08.1
8.28.3
8.48.5
8.68.7
8.88.9
9.09.1
9.29.3
Percent range
Number of participants
Longer run
14
12
10
8
6
4
2
5.05.1
5.25.3
5.45.5
5.65.7
5.85.9
6.06.1
6.26.3
6.46.5
6.66.7
6.86.9
7.07.1
7.27.3
Percent range
NOTE: Definitions of variables are in the general note to table 1.
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
Page 8
Federal Open Market Committee
_____________________________________________________________________________________________
Figure 2.C. Distribution of participants’ projections for PCE inflation, 2011–13 and over the longer run
Number of participants
2011
14
January projections
November projections
12
10
8
6
4
2
0.30.4
0.50.6
0.70.8
0.91.0
1.11.2
1.31.4
1.51.6
1.71.8
1.92.0
2.12.2
Percent range
Number of participants
2012
14
12
10
8
6
4
2
0.30.4
0.50.6
0.70.8
0.91.0
1.11.2
1.31.4
1.51.6
1.71.8
1.92.0
2.12.2
Percent range
Number of participants
2013
14
12
10
8
6
4
2
0.30.4
0.50.6
0.70.8
0.91.0
1.11.2
1.31.4
1.51.6
1.71.8
1.92.0
2.12.2
Percent range
Number of participants
Longer run
14
12
10
8
6
4
2
0.30.4
0.50.6
0.70.8
0.91.0
1.11.2
Percent range
NOTE: Definitions of variables are in the general note to table 1.
1.31.4
1.51.6
1.71.8
1.92.0
2.12.2
Summary of Economic Projections of the Meeting of January 25-26, 2011
Page 9
_____________________________________________________________________________________________
Figure 2.D. Distribution of participants’ projections for core PCE inflation, 2011–13
Number of participants
2011
14
January projections
November projections
12
10
8
6
4
2
0.50.6
0.70.8
0.91.0
1.11.2
1.31.4
1.51.6
1.71.8
1.92.0
Percent range
Number of participants
2012
14
12
10
8
6
4
2
0.50.6
0.70.8
0.91.0
1.11.2
1.31.4
1.51.6
1.71.8
1.92.0
Percent range
Number of participants
2013
14
12
10
8
6
4
2
0.50.6
0.70.8
0.91.0
1.11.2
Percent range
NOTE: Definitions of variables are in the general note to table 1.
1.31.4
1.51.6
1.71.8
1.92.0
Page 10
Federal Open Market Committee
_____________________________________________________________________________________________
Forecast Uncertainty
The economic projections provided by
the members of the Board of Governors and
the presidents of the Federal Reserve Banks
inform discussions of monetary policy among
policymakers and can aid public understanding of the basis for policy actions. Considerable uncertainty attends these projections,
however. The economic and statistical models
and relationships used to help produce economic forecasts are necessarily imperfect descriptions of the real world. And the future
path of the economy can be affected by myriad unforeseen developments and events.
Thus, in setting the stance of monetary policy,
participants consider not only what appears to
be the most likely economic outcome as embodied in their projections, but also the range
of alternative possibilities, the likelihood of
their occurring, and the potential costs to the
economy should they occur.
Table 2 summarizes the average historical
accuracy of a range of forecasts, including
those reported in past Monetary Policy Reports
and those prepared by Federal Reserve Board
staff in advance of meetings of the Federal
Open Market Committee. The projection
error ranges shown in the table illustrate the
considerable uncertainty associated with economic forecasts. For example, suppose a participant projects that real gross domestic
product (GDP) and total consumer prices will
rise steadily at annual rates of, respectively,
3 percent and 2 percent. If the uncertainty
attending those projections is similar to that
experienced in the past and the risks around
the projections are broadly balanced, the numbers reported in table 2 would imply a probability of about 70 percent that actual GDP
would expand within a range of 1.7 to 4.3 percent in the current year, 1.3 to 4.7 percent in
the second year, and 1.2 to 4.8 percent in the
third year. The corresponding 70 percent confidence intervals for overall inflation would be
1.0 to 3.0 percent in the current and second
years, and 0.9 to 3.1 percent in the third year.
Because current conditions may differ
from those that prevailed, on average, over history, participants provide judgments as to
whether the uncertainty attached to their projections of each variable is greater than, smaller
than, or broadly similar to typical levels of
forecast uncertainty in the past as shown in
table 2. Participants also provide judgments as
to whether the risks to their projections are
weighted to the upside, are weighted to the
downside, or are broadly balanced. That is,
participants judge whether each variable is
more likely to be above or below their projections of the most likely outcome. These judgments about the uncertainty and the risks attending each participant’s projections are distinct from the diversity of participants’ views
about the most likely outcomes. Forecast uncertainty is concerned with the risks associated
with a particular projection rather than with
divergences across a number of different projections.
Cite this document
Federal Reserve (2011, January 25). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_20110126
@misc{wtfs_fomc_minutes_20110126,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {2011},
month = {Jan},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_20110126},
note = {Retrieved via When the Fed Speaks corpus}
}