FOMC Minutes

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Minutes of the Federal Open Market Committee

March 15, 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, March 15, 2011, at 8:30 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

Janet L. Yellen

Jeffrey M. Lacker, Dennis P. Lockhart, Sandra Pianalto, and John C. Williams, 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

Matthew M. Luecke, Assistant Secretary

David W. Skidmore, Assistant Secretary

Michelle A. Smith, Assistant Secretary

Scott G. Alvarez, General Counsel

Nathan Sheets, Economist

David J. Stockton, Economist

James A. Clouse, Thomas A. Connors, Steven B.

Kamin, Loretta J. Mester, David Reifschneider,

Harvey Rosenblum, Daniel G. Sullivan, and

David W. Wilcox, Associate Economists

Brian Sack, Manager, System Open Market Account

Nellie Liang, Director, Office of Financial Stability

Policy and Research, Board of Governors

Maryann F. Hunter, Deputy Director, Division of

Banking Supervision and Regulation, Board of

Governors; William Nelson, Deputy Director,

Division of Monetary Affairs, Board of Governors

Linda Robertson, Assistant to the Board, Office of

Board Members, Board of Governors

Charles S. Struckmeyer, 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; Stephen A.

Meyer, Senior Adviser, Division of Monetary

Affairs, Board of Governors

Joyce K. Zickler, Visiting Senior Adviser, Division

of Monetary Affairs, Board of Governors

Michael G. Palumbo, Associate Director, Division

of Research and Statistics, Board of Governors

David H. Small, Project Manager, Division of

Monetary Affairs, Board of Governors

Andrea L. Kusko, Senior Economist, Division of

Research and Statistics, Board of Governors

Randall A. Williams, Records Management Analyst,

Division of Monetary Affairs, Board of Governors

Blake Prichard, First Vice President, Federal Reserve Bank of Philadelphia

Jeff Fuhrer and Robert H. Rasche, Executive Vice

Presidents, Federal Reserve Banks of Boston

and St. Louis, respectively

David Altig, Richard P. Dzina, Ron Feldman, Craig

S. Hakkio, Richard Peach, Glenn D. Rudebusch, Mark E. Schweitzer, and John A. Weinberg, Senior Vice Presidents, Federal Reserve

Banks of Atlanta, New York, Minneapolis,

Kansas City, New York, San Francisco, Cleveland, and Richmond, respectively

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In the agenda for this meeting, it was reported that advices of the election of John C. Williams as an alternate

member of the Federal Open Market Committee had

been received by the Secretariat, and that he had executed his oath of office.

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 January 25–26, 2011. He also reported on System open

market operations, including the ongoing 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) that the Committee authorized in August 2010,

as well as the purchase of additional longer-term Treasury securities to increase the face value of such securities held in the SOMA that the FOMC first authorized

in November 2010. Since November, purchases by the

Open Market Desk of the Federal Reserve Bank of

New York had increased the SOMA’s holdings by $310

billion. The Manager reported that achieving an increase of $600 billion in SOMA holdings by the end of

June 2011 would require continuing to purchase additional securities at an unchanged pace of about $80

billion per month. There were no open market operations in foreign currencies for the System’s account

over the intermeeting period. By unanimous vote, the

Committee ratified the Desk’s transactions over the

intermeeting period.

The Manager also discussed the possible benefits of

gradually reducing the pace of the Federal Reserve’s

purchases of Treasury securities when the current asset

purchase program nears completion. As its earlier program of agency MBS purchases drew to a close, the

Federal Reserve tapered its purchases during the first

quarter of 2010 in order to avoid disruptions in the

market for those securities. However, the Manager

indicated that the greater depth and liquidity of the

Treasury securities market suggested that it would not

be necessary to taper purchases in this market. The

Manager noted that market participants appeared to

have reached the same conclusion, as they generally did

not seem to expect the Federal Reserve to taper its

purchases of Treasury securities. In light of the Manager’s report, almost all meeting participants indicated

that they saw no need to taper the pace of the Committee’s purchases of Treasury securities when its current

program of asset purchases approaches its end.

Staff Review of the Economic Situation

The information reviewed at the March 15 meeting

indicated that the economic recovery continued to proceed at a moderate pace, with a further gradual improvement in labor market conditions. Sizable increases in prices of crude oil and other commodities pushed

up headline inflation, but measures of underlying inflation were subdued and longer-run inflation expectations remained stable.

The labor market continued to show signs of firming.

Private nonfarm payroll employment rose noticeably in

February after a small increase in January, with the

swing in hiring likely magnified by widespread snowstorms, which may have held down the employment

figure for January. Initial claims for unemployment

insurance trended lower through early March, and surveys of hiring plans had improved this year. The unemployment rate dropped markedly in January after a

similar decrease in the preceding month, then ticked

down to 8.9 percent in February; the labor force participation rate was roughly flat in January and February.

The share of workers employed part time for economic

reasons declined further over the past two months, but

long-duration unemployment was still elevated.

Total industrial production was little changed in January after a strong rise in December. Manufacturing

output posted a relatively subdued gain in January, likely held down somewhat by the extensive snowfalls during that month; in addition, a scheduled step-up in assemblies of motor vehicles reportedly was restrained in

part by some temporary bottlenecks in the supply

chain. As a result, the rate of capacity utilization in

manufacturing was essentially unchanged in January,

and it remained well below its 1972–2010 average. In

February, indicators of near-term industrial production,

such as the new orders diffusion indexes in the national

and regional manufacturing surveys, were at levels consistent with solid increases in factory output in the

coming months. Moreover, motor vehicle assemblies

picked up in February and were scheduled to rise further through the second quarter of this year.

Consumer spending appeared to have increased at a

modest pace in early 2011 after rising briskly in the

fourth quarter of 2010. In January, total real personal

consumption expenditures (real PCE) were essentially

flat. In February, nominal retail sales, excluding purchases of motor vehicles and parts, rose moderately;

sales of light motor vehicles posted a robust gain.

Consumer spending was supported by a solid increase

in real disposable income in January, reflecting in part

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the temporary cut in payroll taxes. Household net

worth rose in the fourth quarter, as the increase in equity values during that period more than offset the further fall in house prices. However, consumer sentiment dropped back in early March, retracing its increase over the preceding four months.

Activity in the housing market continued to be depressed, held down by the large inventory of foreclosed

or distressed properties on the market and by weak

demand. In January, starts and permits for new singlefamily homes remained near the low levels that had

prevailed since the middle of 2010. New home sales

moved down in January; existing home sales stepped

up somewhat but still were quite low by historical

standards. Measures of house prices softened again in

December and January.

Real business investment in equipment and software

(E&S) appeared to rise further in recent months. Nominal shipments of nondefense capital goods excluding

aircraft increased, on net, in December and January,

and the expanding backlog of unfilled orders pointed to

further gains in shipments in subsequent months. In

addition, readings on business conditions and sentiment remained consistent with solid near-term advances in outlays for E&S. Credit conditions continued to improve for many firms, though they reportedly

were still tight for small businesses. In contrast to the

apparent increase in E&S outlays, nonresidential construction expenditures dropped further in December

and January, constrained by high vacancy rates, low

prices for commercial real estate, and persistently tight

borrowing conditions for construction loans for commercial properties.

Real nonfarm inventory investment appeared to have

picked up in early 2011 after slowing markedly in the

fourth quarter. In the motor vehicles sector, inventories rose slightly, on net, in January and February after

having been drawn down in the fourth quarter. Outside of motor vehicles, the rise in the book value of

business inventories was somewhat larger in January

than the average monthly increase in the fourth quarter,

while inventory-to-sales ratios for most industries covered by these data were similar to their pre-recession

norms. Survey data also suggested that inventory positions were generally in a comfortable range.

In the government sector, the available information

suggested that real defense spending in January and

February was below its average level in the fourth quarter. At the state and local level, ongoing fiscal pressures were reflected in further job cuts in January and

February. Construction outlays by these governments

fell again in January.

The U.S. international trade deficit widened in December and again in January, with rapid gains in both exports and imports. The largest increases in exports

were in capital goods, industrial supplies, and automotive products. Nominal imports of petroleum products

rose sharply, reflecting both higher prices and greater

volumes; imports in other major categories rose solidly

on net.

Overall consumer prices in the United States rose

somewhat faster in December and January than in earlier months, as consumer energy prices posted further

sizable increases and consumer food prices responded

to the recent upturn in farm commodity prices. The

price index for PCE excluding food and energy (the

core PCE price index) rose slightly in January, boosted

by an uptick in prices of core goods after four months

of declines; the 12-month change in this core price index stayed near the very low levels seen in late 2010.

Recent surveys showed further hefty increases in retail

gasoline prices in February and early March, and prices

of nonfuel industrial commodities also rose sharply on

net. According to the Thomson Reuters/University of

Michigan Surveys of Consumers, households’ nearterm inflation expectations increased substantially in

early March, likely because of the run-up in gasoline

prices; longer-term inflation expectations moved up

somewhat in the early March survey but were still

within the range that prevailed over the preceding few

years.

Labor cost pressures remained muted in the fourth

quarter, as hourly compensation continued to be restrained by the wide margin of slack in the labor market

and as productivity rose further. Average hourly earnings posted a modest increase, on net, in January and

February.

Growth in real activity in the advanced foreign economies appeared to pick up after a lackluster performance

in the fourth quarter. In the euro area, monthly indicators of activity, such as retail sales and purchasing managers indexes, were generally positive in January and

February. But the divergence in economic performance across euro-area countries remained large, as

economic activity appeared to have expanded strongly

in Germany but to have contracted in Greece and Portugal. Prior to the earthquake and tsunami in midMarch, economic activity in Japan had shown signs of

firming. The upbeat tenor of the incoming data for the

emerging market economies suggested that the eco-

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nomic expansion in these countries continued to outpace that in the advanced economies. Foreign consumer price inflation, which stepped up noticeably in

the fourth quarter, remained elevated in early 2011,

largely because of higher food and energy prices.

Staff Review of the Financial Situation

The decisions by the FOMC at its January meeting to

continue its asset purchase program and to maintain

the 0 to ¼ percent target range for the federal funds

rate were largely in line with market expectations, as

was the accompanying statement; they elicited only a

modest market reaction. Over the weeks following the

FOMC meeting, nominal Treasury yields and the expected path of the federal funds rate in coming quarters

moved higher, as market participants apparently read

the incoming economic data as, on balance, somewhat

better than expected. After mid-February, however,

Treasury yields and policy expectations retraced their

earlier rise amid concerns about the possible economic

fallout from events in the Middle East and North Africa (MENA) region. In the days leading up to the

March FOMC meeting, the tragic developments in Japan spurred a further decline in Treasury yields. On

net, expectations for the federal funds rate, along with

yields on nominal Treasury securities, were little

changed over the intermeeting period.

Measures of inflation compensation over the next 5

years rose, on net, over the intermeeting period, with

most of the increase concentrated at the front end of

the curve, likely reflecting the jump in oil prices. In

contrast, measures of forward inflation compensation 5

to 10 years ahead were little changed, suggesting that

longer-term inflation expectations remained stable.

Over the intermeeting period, yields on investmentand speculative-grade corporate bonds edged down

relative to those on comparable-maturity Treasury securities. The secondary-market prices of syndicated

loans continued to move up. Strains in the municipal

bond market eased as concerns about the budgetary

problems of state and local governments seemed to

diminish somewhat. Conditions in short-term funding

markets were little changed.

Broad U.S. stock price indexes were about unchanged,

on net, over the intermeeting period. Option-implied

volatility on the S&P 500 index rose sharply in midFebruary in response to events in the MENA region

and remained somewhat elevated thereafter. The

staff’s estimate of the spread between the expected real

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

Treasury yield—a measure of the equity risk pre-

mium—narrowed a bit more over the intermeeting

period but continued to be quite elevated relative to

longer-term norms.

In the March 2011 Senior Credit Officer Opinion Survey on Dealer Financing Terms, dealers reported a further easing, over the previous three months, in the

price and nonprice terms they offered to different types

of counterparties for all of the categories of transactions covered in the survey. Dealers noted that the

demand for funding had increased for a broad range of

securities over the same period. In response to special

questions, dealers reported some increase in the use of

leverage over the prior six months by traditionally unlevered investors—in particular, asset managers, insurance companies, and pension funds. In addition, dealers reported an increase in leverage over the past six

months by hedge funds that pursue a variety of investment strategies. More broadly, while the availability

and use of dealer-intermediated leverage had increased

since its post-crisis nadir in mid-2009, a review of information from a variety of sources suggested that leverage generally remained well below the levels reached

prior to the recent financial crisis.

Net debt financing by nonfinancial corporations was

solid in January and February, although it did not

match the sizable amount seen in the fourth quarter.

Net issuance of investment- and speculative-grade

bonds was robust in the first two months of this year.

Commercial and industrial (C&I) loans outstanding

also increased, on balance, while the amount of nonfinancial commercial paper outstanding was little

changed. Gross public equity issuance by nonfinancial

firms was relatively subdued in January and February.

Measures of the credit quality of nonfinancial firms

continued to improve.

Financing conditions for commercial real estate generally remained tight. So far this year, issuance of commercial mortgage-backed securities (CMBS) appeared

to have maintained its modest fourth-quarter pace.

Data on delinquency rates for commercial real estate

loans were mixed.

Rates on conforming fixed-rate residential mortgages,

and their spreads relative to the 10-year Treasury yield,

were about unchanged over the intermeeting period.

With mortgage rates remaining above the low levels

seen last fall, refinancing activity was tepid. Outstanding residential mortgage debt was estimated to have

contracted again in the fourth quarter. Rates of serious

delinquency for subprime and prime mortgages were

little changed in December and January.

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Consumer credit markets showed further signs of improvement. Total consumer credit expanded moderately in January. As was the case in the fourth quarter, nonrevolving credit expanded while revolving credit ran off. Delinquency rates on credit card loans in

securitized pools and on auto loans at finance companies continued to decline through January, nearly returning to their longer-run averages. The issuance of

consumer asset-backed securities, which had weakened

around the turn of the year, posted a moderate gain in

February.

Bank credit declined, on average, in January and February as a result of a contraction in core loans—the sum

of C&I, real estate, and consumer loans; holdings of

securities were about flat on net. The Survey of Terms

of Business Lending conducted in the first week of

February showed that spreads of interest rates on C&I

loans over comparable-maturity Eurodollar and swap

rates decreased somewhat but remained elevated.

M2 increased at a moderate rate, on average, over January and February. Liquid deposits, the largest component of M2, expanded somewhat less rapidly than in

the fourth quarter of 2010. Nonetheless, as has been

the case for some time, the composition of M2 shifted

toward liquid deposits, likely reflecting their higher

yields relative to other M2 components. Currency continued to advance at a relatively fast rate in January and

February, likely boosted by a strong expansion in foreign holdings of U.S. bank notes.

In financial markets abroad, equity prices in the advanced economies rose early in the intermeeting period,

but they turned down in mid-February as oil prices increased and then fell sharply in mid-March in the aftermath of the earthquake and tsunami in Japan. On

net over the intermeeting period, stock prices were

down in most of the advanced economies, with Japan’s

index having fallen most significantly. Emerging market equity price indexes, which had been underperforming in previous months, generally ended the period

lower as well, and emerging market equity funds experienced outflows. Movements in 10-year sovereign

bond yields in Europe and Canada mirrored those in

equity prices, climbing early in the intermeeting period

but falling later.

In part because of downgrades by credit rating agencies, yields on the 10-year sovereign bonds of Greece,

Ireland, and Portugal rose sharply, relative to those on

German bonds, through early March. These spreads

subsequently declined somewhat in response to a general agreement among euro-area leaders to expand the

capacity of the area’s backstop funding facility, to extend the maturity of the facility’s loans to Greece, and

to lower the interest rates on those loans.

The European Central Bank (ECB) left its benchmark

policy rate unchanged at its March meeting, but the

emphasis on upside risks to inflation at the postmeeting

press conference led market participants to infer that

the ECB might well tighten policy at its meeting in

April. In the United Kingdom, market-based readings

on expected policy rates indicated that investors anticipated some tightening of policy before the end of this

year. In addition, authorities in several emerging market economies took steps to tighten policy. The broad

nominal index of the U.S. dollar declined about

1 percent, on balance, over the intermeeting period.

Staff Economic Outlook

The pace of economic activity appeared to have been a

little slower around the turn of the year than the staff

had anticipated at the time of the January FOMC meeting, and the near-term forecast for growth of real gross

domestic product (GDP) was revised down modestly.

However, the outlook for economic activity over the

medium term was broadly similar to the projection

prepared for the January FOMC meeting. Changes to

the conditioning assumptions underlying the staff projection were mostly small and offsetting: Crude oil

prices had risen sharply and federal fiscal policy seemed

likely to be marginally more restrictive than the staff

had judged in January, but these negative factors were

counterbalanced by higher household net worth and a

slightly lower foreign exchange value of the dollar. As

a result, as in the January forecast, real GDP was expected to rise at a moderate pace over 2011 and 2012,

supported by accommodative monetary policy, increasing credit availability, and greater household and business confidence. Reflecting the recent labor market

data, the projection for the unemployment rate was

lower throughout the forecast period than in the staff’s

January forecast, but the jobless rate was still expected

to decline slowly and to remain elevated at the end of

2012.

The staff revised up its projection for consumer price

inflation in the near term, largely because of the recent

increases in the prices of energy and food. However, in

light of the projected persistence of slack in labor and

product markets and the anticipated stability in longterm inflation expectations, the increase in inflation was

expected to be mostly transitory if oil and other commodity prices did not rise significantly further. As a

result, the forecast for consumer price inflation over

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the medium run was little changed relative to that prepared for the January meeting.

Participants’ Views on Current Conditions and the

Economic Outlook

In discussing intermeeting developments and their implications for the economic outlook, participants

agreed that the information received since their previous meeting was broadly consistent with their expectations and suggested that the economic recovery was

on a firmer footing. Looking through weather-related

distortions in various indicators, measures of consumer

spending, business investment, and employment

showed continued expansion. Housing, however, remained depressed. Meeting participants took note of

the significant decline in the unemployment rate over

the past few months but observed that other indicators

pointed to a more gradual improvement in overall labor

market conditions. They continued to expect that economic growth would strengthen over coming quarters

while remaining moderate. Participants noted that recent increases in the prices of oil and other commodities were putting upward pressure on headline inflation,

but that measures of underlying inflation remained

subdued. They anticipated that the effects on inflation

of the recent run-up in commodity prices would prove

transitory, in part because they saw longer-term inflation expectations remaining stable. Moreover, a number of participants expected that slack in resource utilization would continue to restrain increases in labor

costs and prices. Nonetheless, participants observed

that rapidly rising commodity prices posed upside risks

to the stability of longer-term inflation expectations,

and thus to the outlook for inflation, even as they

posed downside risks to the outlook for growth in consumer spending and business investment. In addition,

participants noted that unfolding events in the Middle

East and North Africa, along with the recent earthquake, tsunami, and subsequent developments in Japan,

had further increased uncertainty about the economic

outlook.

Participants’ judgment that the recovery was gaining

traction reflected both the incoming economic indicators and information received from business contacts.

Spending by households, which had picked up noticeably in the fourth quarter, rose further during the early

part of 2011, with auto sales showing particular

strength. Although some participants noted that

growth in consumer spending so far this year had not

been as vigorous as they had anticipated, they attributed the shortfall in part to unusually bad weather.

While participants expected that household spending

would continue to expand, the pace of expansion was

uncertain. On the one hand, labor market conditions

were improving, though gradually, and the temporary

cut in payroll taxes was contributing to rising after-tax

incomes. Some easing of credit conditions for households, particularly for auto loans, also appeared to be

supporting growth in consumer spending. On the other hand, declining house prices remained a drag on

household wealth and thus on consumer spending. In

addition, sizable recent increases in oil and gasoline

prices had reduced real incomes and weighed on consumer confidence. Business contacts in a variety of

industries had expressed concern that consumers might

pull back if gasoline prices rose significantly further and

persisted at those elevated levels.

A further increase in business activity also indicated

that the economic recovery remained on track. Industrial production posted solid gains, supported in part by

continuing growth in U.S. exports. Business contacts

in a number of regions reported they were more confident about the recovery; a growing number of contacts

indicated they were planning for an expansion in hiring

and production to meet an anticipated rise in sales.

Manufacturing firms were particularly upbeat. Some

contacts reported they were increasing capital budgets

to undertake investment that had been postponed during the recession and early stages of the recovery; in

some cases, firms were planning to expand capacity.

Consistent with the anecdotal evidence, indicators of

current and planned business investment in equipment

and software continued to rise and surveys showed a

further improvement in business sentiment. In addition, although residential construction remained weak,

investment in energy extraction was growing and

spending on commercial construction projects appeared to be bottoming out.

Meeting participants judged that overall conditions in

labor markets had continued to improve gradually. The

unemployment rate had decreased significantly in recent months; other labor market indicators, including

measures of job growth and hours worked, showed

more-modest improvements.

Several participants

noted that the drop in unemployment was attributable

more to people withdrawing from the labor force and

to fewer layoffs than to increased hiring. Even so, participants agreed that gains in employment seemed to be

on a gradually rising trajectory, although the recent data

had been somewhat erratic and distorted by worsethan-usual weather in many parts of the country. In

addition, surveys of employers showed that an increasing number of firms were planning to hire. Participants

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noted regional differences in the speed of improvement

in labor markets; scattered reports indicated that firms

in some regions were having difficulty hiring some

types of highly skilled workers. Participants generally

judged that there was still substantial slack in the labor

market, though estimates of the degree of slack were

admittedly imprecise and depended in part on judgments about a number of factors, including the extent

to which labor force participation would increase as the

recovery progresses and employment expands.

Credit conditions remained uneven. Bankers again reported improving credit quality and generally weak loan

demand. Large firms that have access to financial markets continued to find credit, including bank loans,

available on relatively attractive terms; however, credit

conditions reportedly remained tight for smaller, bankdependent firms. Participants noted evidence that the

availability of student loans and of consumer loans—

particularly auto loans—was increasing. Indeed, bank

and nonbank lenders reported that terms and conditions for auto loans had returned to historical norms.

In contrast, terms for commercial and residential real

estate loans remained tight and the volume of outstanding loans continued to decline, though there was some

issuance of CMBS backed by loans on high-quality

properties in selected large metropolitan areas. A few

participants expressed concern that the easing of credit

conditions in some sectors was becoming or might become excessive as investors took on more risk in order

to obtain higher yields.

Participants observed that headline inflation was being

boosted by higher prices for energy and other commodities, and that prices of other imported goods also

had risen by a substantial, though smaller, amount. A

number of business contacts indicated that they were

passing on at least a portion of these higher costs to

their customers or that they planned to try to do so

later this year; however, contacts were uncertain about

the extent to which they could raise prices, given current market conditions and the cautious attitudes toward spending still held by households and businesses.

Other participants noted that commodity and energy

costs accounted for a relatively small share of production costs for most firms and that labor costs accounted for the bulk of such costs; moreover, they observed that unit labor costs generally had declined in

recent years as productivity growth outpaced wage

gains. Several participants noted that even large commodity price increases have had only limited effects on

underlying inflation in recent decades.

In contrast to headline inflation, core inflation and other measures of underlying inflation remained subdued,

though they appeared to have bottomed out. A number of participants noted that, with significant slack in

resource utilization and with longer-term inflation expectations stable, underlying inflation likely would remain subdued for some time. However, the importance of resource slack as a factor influencing inflation

was debated. Some participants pointed to research

indicating that measures of slack were useful in predicting inflation. Others argued that, historically, such

measures were only modestly helpful in explaining large

movements in inflation; one noted the 2003–04 episode in which core inflation rose rapidly over a few

quarters even though there appeared to be substantial

resource slack.

Participants expected that the boost to headline inflation from recent increases in energy and other commodity prices would be transitory and that underlying

inflation trends would be little affected as long as

commodity prices did not continue to rise rapidly and

longer-term inflation expectations remained stable.

However, a significant increase in longer-term inflation

expectations could contribute to excessive wage and

price inflation, which would be costly to eradicate.

Accordingly, participants considered it important to

pay close attention to the evolution not only of headline and core inflation but also of inflation expectations. In this regard, participants observed that measures of longer-term inflation compensation derived

from financial instruments had remained stable of late,

suggesting that longer-term inflation expectations had

not changed appreciably, although measures of oneyear inflation compensation had risen notably. Surveybased measures of inflation expectations also indicated

that longer-term expected inflation had risen much less

than near-term inflation expectations. A few participants noted that the adoption by the Committee of an

explicit numerical inflation objective could help keep

longer-term inflation expectations well anchored.

Participants generally judged the risks to their forecasts

of growth in economic activity to be roughly balanced.

They continued to see some downside risks from the

banking and fiscal strains in the European periphery,

the continuing fiscal adjustments by U.S. state and local

governments, and the ongoing weakness in the housing

market. Several also noted the possibility of largerthan-anticipated near-term cuts in federal government

spending. Moreover, the economic implications of the

tragedy in Japan—for example, with respect to global

supply chains—were not yet clear. On the upside, the

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improvement in labor market conditions in recent

months raised the possibility that household spending—and subsequently business investment—might

expand more rapidly than anticipated; if so, the recovery could be stronger than currently projected. Participants judged that the potential for more-widespread

disruptions in oil production, and thus for a larger

jump in energy prices, posed both downside risks to

growth and upside risks to inflation. Several of them

indicated, in light of recent developments, that the risks

to their forecasts of inflation had shifted somewhat to

the upside. Finally, a few participants noted that if the

large size of the Federal Reserve’s balance sheet were to

lead the public to doubt the Committee’s ability to

withdraw monetary accommodation when appropriate,

the result could be upward pressure on inflation expectations and so on actual inflation. To mitigate such

risks, participants agreed that the Committee would

continue its planning for the eventual exit from the

current, exceptionally accommodative stance of monetary policy. In light of uncertainty about the economic

outlook, it was seen as prudent to consider possible exit

strategies for a range of potential economic outcomes.

A few participants indicated that economic conditions

might warrant a move toward less-accommodative

monetary policy this year; a few others noted that exceptional policy accommodation could be appropriate

beyond 2011.

Committee Policy Action

In their discussion of monetary policy for the period

ahead, Committee 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. The information received over the intermeeting period indicated that the economic recovery was on

a firmer footing and that overall conditions in the labor

market were gradually improving. Although the unemployment rate had declined in recent months, it remained elevated relative to levels that the Committee

judged to be consistent, over the longer run, with its

statutory mandate to foster maximum employment and

price stability. Similarly, measures of underlying inflation continued to be somewhat low relative to levels

seen as consistent with the dual mandate over the longer run. With longer-term inflation expectations remaining stable and measures of underlying inflation subdued, members anticipated that recent increases in the

prices of energy and other commodities would result in

only a transitory increase in headline inflation. Given

this economic outlook, 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. Specifically, the Committee maintained its existing policy of reinvesting

principal payments from its securities holdings and

reaffirmed its intention to purchase $600 billion of

longer-term Treasury securities by the end of the

second quarter of 2011. A few members remained uncertain about the benefits of the asset purchase program but judged that making changes to the program at

this time was not appropriate. The Committee continued to anticipate that economic conditions, including

low rates of resource utilization, subdued inflation

trends, and stable inflation expectations, were likely to

warrant exceptionally low levels for the federal funds

rate for an extended period.

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 evidence of a

stronger recovery, or of higher inflation or rising inflation expectations, could make it appropriate to reduce

the pace or overall size of the purchase program. Several others indicated that they did not anticipate making

adjustments to the program before its intended completion.

With respect to the statement to be released following

the meeting, members decided to note the further improvement in economic activity and in labor markets.

The Committee also decided to summarize its current

thinking about inflation pressures and to emphasize

that it will closely monitor the evolution of overall inflation and inflation expectations.

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 Open Market 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

Minutes of the Meeting of March 15, 2011

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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 objectives of maximum employment and price

stability.”

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

“Information received since the Federal

Open Market Committee met in January

suggests that the economic recovery is on a

firmer footing, and overall conditions in the

labor market appear to be improving gradually. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the

housing sector continues to be depressed.

Commodity prices have risen significantly

since the summer, and concerns about global

supplies of crude oil have contributed to a

sharp run-up in oil prices in recent weeks.

Nonetheless, longer-term inflation expectations have remained stable, and measures of

underlying inflation have been subdued.

Consistent with its statutory mandate, the

Committee seeks to foster maximum employment and price stability. Currently, the

unemployment rate remains elevated, and

measures of underlying inflation continue to

be somewhat low, relative to levels that the

Committee judges to be consistent, over the

longer run, with its dual mandate. The recent increases in the prices of energy and

other commodities are currently putting upward pressure on inflation. The Committee

expects these effects to be transitory, but it

will pay close attention to the evolution of

inflation and inflation expectations. The

Committee continues to anticipate a gradual

return to higher levels of resource utilization

in a context of price stability.

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 program as needed to best foster maximum employment and price stability.

The Committee will maintain the target

range for the federal funds rate at 0 to

¼ percent and continues to anticipate that

economic conditions, including low rates of

resource utilization, subdued inflation trends,

and stable inflation expectations, are likely to

warrant exceptionally low levels for the federal funds rate for an extended period.

The Committee will continue to monitor the

economic outlook and financial developments and will employ its policy tools as 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, and Janet L.

Yellen.

Voting against this action: None.

The Committee then discussed a recommendation,

from its subcommittee on communications, that the

Chairman conduct regular press conferences. Participants generally saw such press conferences as a potentially useful way to enhance transparency and strengthen the Committee’s policy communications. They dis-

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Federal Open Market Committee

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cussed various implications of, and alternative arrangements for, such press conferences. They generally

endorsed holding press conferences after the four

FOMC meetings each year for which participants provide numerical projections of several key economic

variables, conditional on appropriate monetary policy.

While those projections already are made public in the

minutes of the relevant FOMC meetings, press conferences could be helpful in explaining how the Committee’s monetary policy strategy is informed by participants’ projections of the rates of output growth, unemployment, and inflation likely to prevail during each of

the next few years, and by their assessments of the values of those variables that will prove most consistent,

over the longer run, with the Committee’s mandate to

promote both maximum employment and stable prices.

The outcome of the discussion was a decision that the

Chairman would begin holding press conferences effective with the April 26–27, 2011, meeting.

It was agreed that the next meeting of the Committee

would be held on Tuesday–Wednesday, April 26–27,

2011. The meeting adjourned at 2:35 p.m. on March

15, 2011.

Notation Vote

By notation vote completed on February 15, 2011, the

Committee unanimously approved the minutes of the

FOMC meeting held on January 25–26, 2011.

_____________________________

William B. English

Secretary