fomc minutes · April 26, 2011

FOMC Minutes

_____________________________________________________________________________________________

Page 1

Minutes of the Federal Open Market Committee

April 26–27, 2011

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve

System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, April 26, 2011,

at 10:30 a.m. and continued on Wednesday, April 27,

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

Christine Cumming, 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

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, David Reifschneider,

Harvey Rosenblum, David W. Wilcox, and

Kei-Mu Yi, Associate Economists

Brian Sack, Manager, System Open Market Account

Jennifer J. Johnson, Secretary of the Board, Office

of the Secretary, Board of Governors

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

Robert deV. Frierson, Deputy Secretary, Office of

the Secretary, 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

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; Trevor A. Reeve,¹ Associate Director,

Division of International Finance, Board of

Governors

Fabio M. Natalucci, Assistant Director, Division of

Monetary Affairs, Board of Governors

David H. Small, Project Manager, Division of

Monetary Affairs, Board of Governors

_______________________

¹ Attended Tuesday’s session only.

_____________________________________________________________________________________________

Page 2

Federal Open Market Committee

Jeremy B. Rudd, Senior Economist, Division of

Research and Statistics, Board of Governors

James M. Lyon, First Vice President, Federal Reserve Bank of Minneapolis

Jamie J. McAndrews and Mark S. Sniderman, Executive Vice Presidents, Federal Reserve Banks

of New York and Cleveland, respectively

David Altig, Alan D. Barkema, Richard P. Dzina,

David Marshall, Christopher J. Waller, and

John A. Weinberg, Senior Vice Presidents,

Federal Reserve Banks of Atlanta, Kansas City,

New York, Chicago, St. Louis, and Richmond,

respectively

John Fernald and Giovanni Olivei, Vice Presidents,

Federal Reserve Banks of San Francisco and

Boston, respectively

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

March 15, 2011. 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 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 $422 billion. The

Manager reported on the U.S. authorities’ participation

in the coordinated foreign exchange intervention announced by the Group of Seven (G-7) finance ministers and central bank governors on March 17, 2011. By

unanimous votes, the Committee ratified the Desk’s

domestic and foreign exchange market transactions

over the intermeeting period.

By unanimous vote, the Committee agreed to extend

the reciprocal currency (swap) arrangements with the

Bank of Canada and the Banco de México for an additional year beginning in mid-December 2011; these

arrangements are associated with the Federal Reserve’s

participation in the North American Framework

Agreement of 1994. The arrangement with the Bank of

Canada is in the amount of $2 billion equivalent, and

the arrangement with the Banco de México is in the

amount of $3 billion equivalent. The vote to renew the

System’s participation in these swap arrangements was

taken at this meeting because of a provision in the arrangements that requires each party to provide six

months’ prior notice of an intention to terminate its

participation.

The staff next gave a presentation on strategies for

normalizing the stance and conduct of monetary policy

over time as the economy strengthens. Normalizing

the stance of policy would entail the withdrawal of the

current extraordinary degree of accommodation at the

appropriate time, while normalizing the conduct of policy

would involve draining the large volume of reserve balances in the banking system and shrinking the overall

size of the balance sheet, as well as returning the

SOMA to its historical composition of essentially only

Treasury securities. The presentation noted a few key

issues that the Committee would need to address in

deciding on its approach to normalization. The first

key issue was the extent to which the Committee would

want to tighten policy, at the appropriate time, by increasing short-term interest rates, by decreasing its

holdings of longer-term securities, or both. Because

the two policies would restrain economic activity by

tightening financial conditions, they could be combined

in various ways to achieve similar outcomes. For example, in principle, the Committee could accomplish

essentially the same degree of monetary tightening by

selling assets sooner and faster but raising the target for

the federal funds rate later and more slowly, or by selling assets later and more slowly but increasing the federal funds rate target sooner and faster. The SOMA

portfolio could be reduced by selling securities outright,

by ceasing the reinvestment of principal payments on

its securities holdings, or both. A second key issue was

the extent to which the Committee might choose to

vary the pace of any asset sales it undertakes in response to economic and financial conditions. If it

chose to make the pace of sales quite responsive to

conditions, the FOMC would be able to actively use

two policy instruments—asset sales and the federal

funds rate target—to pursue its economic objectives,

which could increase the scope and flexibility for adjusting financial conditions. In contrast, sales at a pace

that varied less with changes in economic and financial

conditions and was preannounced and largely predetermined would leave the federal funds rate target as

the Committee’s primary active policy instrument,

_____________________________________________________________________________________________

Minutes of the Meeting of April 26-27, 2011

Page 3

which could result in policy that is more straightforward for the Committee to calibrate and to communicate. Finally, the staff presentation noted that the

Committee would need to decide if and when to use

the tools that it has developed to temporarily reduce

reserve balances—reverse repurchase agreements and

term deposits—in order to tighten the correspondence

between any changes in the interest rate the Federal

Reserve pays on excess reserves and the changes in the

federal funds rate.

Meeting participants agreed on several principles that

would guide the Committee’s strategy for normalizing

monetary policy. First, with regard to the normalization of the stance of monetary policy, the pace and sequencing of the policy steps would be driven by the

Committee’s monetary policy objectives for maximum

employment and price stability. Participants noted that

the Committee’s decision to discuss the appropriate

strategy for normalizing the stance of policy at the current meeting did not mean that the move toward such

normalization would necessarily begin soon. Second,

to normalize the conduct of monetary policy, it was

agreed that the size of the SOMA’s securities portfolio

would be reduced over the intermediate term to a level

consistent with the implementation of monetary policy

through the management of the federal funds rate rather than through variation in the size or composition

of the Federal Reserve’s balance sheet. Third, over the

intermediate term, the exit strategy would involve returning the SOMA to holding essentially only Treasury

securities in order to minimize the extent to which the

Federal Reserve portfolio might affect the allocation of

credit across sectors of the economy. Such a shift was

seen as requiring sales of agency securities at some

point. And fourth, asset sales would be implemented

within a framework that had been communicated to the

public in advance, and at a pace that potentially could

be adjusted in response to changes in economic or financial conditions.

In addition, nearly all participants indicated that the

first step toward normalization should be ceasing to

reinvest payments of principal on agency securities and,

simultaneously or soon after, ceasing to reinvest principal payments on Treasury securities. Most participants viewed halting reinvestments as a way to begin to

gradually reduce the size of the balance sheet. It was

noted, however, that ending reinvestments would constitute a modest step toward policy tightening, implying

that that decision should be made in the context of the

economic outlook and the Committee’s policy objectives. In addition, changes in the statement language

regarding forward policy guidance would need to accompany the normalization process.

Participants expressed a range of views on some aspects of a normalization strategy. Most participants

indicated that once asset sales became appropriate,

such sales should be put on a largely predetermined

and preannounced path; however, many of those participants noted that the pace of sales could nonetheless

be adjusted in response to material changes in the economic outlook. Several other participants preferred

instead that the pace of sales be a key policy tool and

be varied actively in response to changes in the outlook. A majority of participants preferred that sales of

agency securities come after the first increase in the

FOMC’s target for short-term interest rates, and many

of those participants also expressed a preference that

the sales proceed relatively gradually, returning the

SOMA’s composition to all Treasury securities over

perhaps five years. Participants noted that, for any given degree of policy tightening, more-gradual sales that

commenced later in the normalization process would

allow for an earlier increase of the federal funds rate

target from its effective lower bound than would be the

case if asset sales commenced earlier and at a more rapid pace. As a result, the Committee would later have

the option of easing policy with an interest rate cut if

economic conditions then warranted. An earlier increase in the federal funds rate was also mentioned as

helpful to limit the potential for the very low level of

that rate to encourage financial imbalances. A few participants expressed a preference that sales begin before

any increase in the federal funds rate target, and a few

other participants indicated that sales and increases in

the federal funds rate target should commence at the

same time. The participants who favored earlier sales

also generally indicated a preference for relatively rapid

sales, with some suggesting that agency securities in the

SOMA be reduced to zero over as little as one or two

years. Such an approach was viewed as allowing for a

faster return to a normal policy environment, potentially reducing any upside risks to inflation stemming from

outsized reserve balances, and more quickly eliminating

any effects of SOMA holdings of agency securities on

the allocation of credit.

Most participants saw changes in the target for the federal funds rate as the preferred active tool for tightening monetary policy when appropriate. A number of

participants noted that it would be advisable to begin

using the temporary reserves-draining tools in advance

of an increase in the Committee’s federal funds rate

target, in part because doing so would put the Federal

_____________________________________________________________________________________________

Page 4

Federal Open Market Committee

Reserve in a better position to assess the effectiveness

of the draining tools and judge the size of draining operations that might be required to support changes in

the interest on excess reserves (IOER) rate in implementing a desired increase in short-term rates. A number of participants also noted that they would be prepared to sell securities sooner if the temporary reservesdraining operations and the end of the reinvestment of

principal payments were not sufficient to support a

fairly tight link between increases in the IOER rate and

increases in short-term market interest rates.

In the discussion of normalization, some participants

also noted their preferences about the longer-run

framework for monetary policy implementation. Most

of these participants indicated that they preferred that

monetary policy eventually operate through a corridortype system in which the federal funds rate trades in the

middle of a range, with the IOER rate as the floor and

the discount rate as the ceiling of the range, as opposed

to a floor-type system in which a relatively high level of

reserve balances keeps the federal funds rate near the

IOER rate. A couple of participants noted that any

normalization strategy would likely involve an elevated

balance sheet with the federal funds rate target near the

IOER rate—as in floor-type systems—for some time,

and therefore the Committee would accumulate experience during the process of normalizing policy that

would allow it to make a more informed choice regarding the longer-term framework at a later date.

The Committee agreed that more discussion of these

issues was needed, and no decisions regarding the

Committee’s strategy for normalizing policy were made

at this meeting.

Staff Review of the Economic Situation

The information reviewed at the April 26–27 meeting

indicated, on balance, that economic activity expanded

at a moderate pace in recent months, and labor market

conditions continued to improve gradually. Headline

consumer price inflation was boosted by large increases

in food and energy prices, but measures of underlying

inflation were still subdued and longer-run inflation

expectations remained stable.

Private nonfarm payroll employment increased again in

March, and the gains in hiring for the first quarter as a

whole were somewhat above the pace seen in the

fourth quarter. A number of indicators of job openings and hiring plans improved in February and March.

Although initial claims for unemployment insurance

were flat, on net, from early March through the middle

of April, they remained lower than earlier in the year.

The unemployment rate edged down further to

8.8 percent in March, while the labor force participation rate was unchanged. However, both long-duration

unemployment and the share of workers employed part

time for economic reasons were still very high.

Industrial production in the manufacturing sector expanded at a robust pace in February and March. The

manufacturing capacity utilization rate moved up further, though it continued to be a good bit lower than its

longer-run average. Most forward-looking indicators

of industrial activity, such as the new orders indexes in

the national and regional manufacturing surveys, remained at levels consistent with solid gains in production in the near term. However, motor vehicle assemblies were expected to step down in the second quarter

from their level in March, reflecting emerging shortages

of specialized components imported from Japan.

The rise in consumer spending appeared to have

slowed to a moderate rate in the first quarter from the

stronger pace posted in the fourth quarter of last year.

Total real personal consumption expenditures picked

up in February after being about unchanged in January.

Nominal retail sales, excluding purchases at motor vehicles and parts outlets, posted a sizable gain in March,

but sales of new light motor vehicles declined somewhat. Real disposable income edged down in February

following an increase in January that reflected the temporary reduction in payroll taxes. In addition, consumer sentiment declined noticeably in March and remained relatively downbeat in early April.

Activity in the housing market remained very weak, as

the large overhang of foreclosed and distressed properties continued to restrain new construction. Starts and

permits of new single-family homes inched down, on

net, in February and March, and they have been essentially flat since around the middle of last year. Demand

for housing also continued to be depressed. Sales of

new and existing homes moved lower, on net, in February and March, while measures of home prices slid

further in February.

Real business investment in equipment and software

(E&S) appeared to have increased more robustly in the

first quarter than in the fourth quarter of last year.

Nominal shipments of nondefense capital goods rose

in February and March, and businesses’ purchases of

new vehicles trended higher. New orders of nondefense capital goods continued to run ahead of shipments in February and March, and this expanding

backlog of unfilled orders pointed to further increases

in shipments in subsequent months. In addition, sur-

_____________________________________________________________________________________________

Minutes of the Meeting of April 26-27, 2011

Page 5

vey measures of business conditions and sentiment in

recent months were consistent with continued robust

gains in E&S spending. In contrast, business outlays

for nonresidential construction remained extremely

weak in February, restrained by high vacancy rates, low

prices for office and commercial properties, and tight

credit conditions for commercial real estate lending.

Real nonfarm inventory investment appeared to have

moved up to a moderate pace in the first quarter after

slowing sharply in the preceding quarter. Motor vehicle inventories were drawn down more slowly in the

first quarter than in the fourth quarter, while data

through February suggested that the pace of stockbuilding outside of motor vehicles had picked up a bit.

Book-value inventory-to-sales ratios in February were

in line with their pre-recession norms, and survey data

in March provided little evidence that businesses perceived that their inventories were too high.

The available data on government spending indicated

that real federal purchases fell in the first quarter, led by

a reduction in defense outlays. Real expenditures by

state and local governments also appeared to have declined, as outlays for construction projects decreased

further in February to a level well below that in the

fourth quarter, and state and local employment continued to contract in March.

The U.S. international trade deficit narrowed slightly in

February after widening sharply in January. Following

a solid increase in January, exports fell back some in

February, with declines widespread across categories.

Imports also declined in February after posting large

gains in January. On average, the trade deficit in January and February was wider than in the fourth quarter.

Overall U.S. consumer price inflation moved up further

in February and March, as increases in the prices of

energy and food commodities continued to be passed

through to the retail level. More recently, survey data

through the middle of April pointed to additional increases in retail gasoline prices, while increases in the

prices of food commodities appeared to have moderated somewhat. Excluding food and energy, core

consumer price inflation remained relatively subdued.

Although core consumer price inflation over the first

three months of the year stepped up somewhat, the

12-month change in the core consumer price index

through March was essentially the same as it was a year

earlier. Near-term inflation expectations from the

Thomson Reuters/University of Michigan Surveys of

Consumers remained elevated in early April. But

longer-term inflation expectations moved down in early

April—reversing their uptick in March—and stayed

within the range that has prevailed over the past several

years.

Available measures of labor compensation suggested

that wage increases continued to be restrained by the

presence of a large margin of slack in the labor market.

Average hourly earnings for all employees were flat in

March, and their average rate of increase over the preceding 12 months remained low.

The pace of recovery abroad appeared to have

strengthened earlier this year, but the disaster in Japan

raised uncertainties about foreign activity in the near

term. In the euro area, production expanded at a solid

pace, though indicators of consumer spending

weakened. While measures of economic activity in

Germany posted strong gains, economic conditions in

Greece and Portugal deteriorated further. The damage

caused by the earthquake and tsunami in Japan appeared to be sharply curtailing Japanese economic activity and posed concerns about disruptions to supply

chains and production in other economies. Emerging

market economies (EMEs) continued to expand rapidly. Rising prices of oil and other commodities boosted

inflation in foreign economies. However, core inflation

remained subdued in most of the advanced foreign

economies, and inflation in the EMEs seemed to have

declined as food price inflation slowed.

Staff Review of the Financial Situation

The decisions by the FOMC at its March meeting to

continue its asset purchase program and to maintain

the 0 to ¼ percent target range for the federal funds

rate were in line with market expectations; nonetheless,

the accompanying statement prompted a modest rise in

nominal yields, as market participants reportedly perceived a somewhat more optimistic tone in the Committee’s economic outlook, as well as heightened concern about inflation risks. Over the intermeeting period, yields on nominal Treasury securities changed

little, on net, amid swings in investors’ assessments of

global risks. Short-term funding rates, including the

effective federal funds rate, shifted down several basis

points in early April following a change in the Federal

Deposit Insurance Corporation’s deposit insurance

assessment system. On net, the expected path of the

federal funds rate over the next two years was little

changed over the intermeeting period.

Measures of inflation compensation over the next

5 years based on nominal and inflation-protected

Treasury securities increased slightly, on net, over the

intermeeting period, partly reflecting the ongoing rise in

_____________________________________________________________________________________________

Page 6

Federal Open Market Committee

commodity prices. Staff models suggested that the

modest increase in inflation compensation 5 to 10 years

ahead was mostly attributable to increases in liquidity

and inflation-risk premiums rather than higher expected inflation.

Over the intermeeting period, yields on corporate

bonds were generally little changed, on net, and spreads

of investment- and speculative-grade corporate bonds

relative to comparable-maturity Treasury securities narrowed slightly. Average secondary-market prices for

syndicated leveraged loans moved up further. However, conditions in the municipal bond market remained

somewhat strained.

Broad U.S. stock price indexes rose, on net, over the

intermeeting period, as initial reports of better-thanexpected first-quarter earnings lifted stock prices in late

April. Option-implied volatility on the S&P 500 index

was moderately lower, on net, ending the intermeeting

period at the low end of its recent range.

Net debt financing by nonfinancial corporations remained robust in March. Net issuance of investmentand speculative-grade bonds by nonfinancial corporations continued to be strong, and outstanding amounts

of commercial and industrial (C&I) loans and nonfinancial commercial paper increased noticeably. Gross

public equity issuance by nonfinancial firms was robust

in March, and indicators of the credit quality of nonfinancial firms improved further.

Commercial mortgage markets showed some signs of

stabilization. Delinquency rates for commercial real

estate loans appeared to have leveled off in recent

months. Issuance of commercial mortgage-backed

securities picked up in the first quarter, although commercial real estate loans at banks continued to run off.

In commercial real estate markets, property sales remained tepid, and prices stayed at depressed levels.

Rates on conforming fixed-rate residential mortgages

rose modestly during the intermeeting period, and their

spreads relative to 10-year Treasury yields narrowed

slightly. Mortgage refinancing activity remained near its

lowest level in more than two years. The Treasury Department’s announcement in late March that it would

begin selling its holdings of agency MBS at a gradual

pace had little lasting effect on MBS spreads. The Federal Reserve began competitive sales of the non-agency

residential MBS held by Maiden Lane II LLC; initial

sales met with strong demand, but market prices of

non-agency residential MBS were reportedly little

changed overall. The rates of serious delinquencies for

subprime and prime mortgages were nearly unchanged

but remained at elevated levels. However, the rate of

new delinquencies on prime mortgages declined further.

Conditions in consumer credit markets continued to

improve gradually. Total consumer credit growth

picked up in February, as a gain in nonrevolving credit

more than offset a further contraction in revolving credit. Delinquency and charge-off rates for credit card

debt moved down in recent months and approached

pre-crisis levels. Issuance of consumer asset-backed

securities remained steady in the first quarter of the

year.

Bank credit was about unchanged in March after declining, on average, in January and February. Core

loans—the sum of C&I, real estate, and consumer

loans—continued to contract, while holdings of securities increased moderately. The Senior Loan Officer

Opinion Survey on Bank Lending Practices conducted

in April indicated that, on net, bank lending standards

and terms had eased somewhat further during the first

quarter of the year and demand for C&I loans, commercial mortgages, and auto loans had increased, while

demand for residential mortgages continued to decline.

M2 expanded at a moderate pace in March. Liquid

deposits, the largest component of M2, advanced at a

solid pace likely reflecting very low opportunity costs

of holding such deposits. Currency advanced significantly, supported by robust foreign demand for U.S.

bank notes.

Foreign sovereign bond yields generally were little

changed and equity prices rose, on net, over the intermeeting period, although equity prices in Japan remained below their pre-earthquake levels despite the

record amounts of liquidity injected by the Bank of

Japan and the expansion of its asset purchase program.

The European Central Bank raised its main policy rate

25 basis points to 1¼ percent during the intermeeting

period, and markets appeared to have priced in additional rate increases over the rest of the year. The Bank

of England and the Bank of Canada left their policy

rates unchanged, but quotes from futures markets continued to suggest that both central banks would raise

rates later this year. China’s monetary authority further

increased banks’ lending rates and deposit rates and

continued to tighten reserve requirements; monetary

policy in a number of other EMEs was also tightened

over the intermeeting period.

_____________________________________________________________________________________________

Minutes of the Meeting of April 26-27, 2011

Page 7

The broad nominal index of the U.S. dollar declined

more than 2 percent over the intermeeting period,

though the dollar appreciated, on net, against the Japanese yen. The yen strengthened to an all-time high

against the dollar after the earthquake in Japan, but this

move was more than reversed when the G-7 countries

intervened to sell yen.

In early April, the Portuguese government requested

financial support from the European Union and the

International Monetary Fund, but market participants

reportedly remained concerned about whether the Portuguese government would reach agreement on an associated fiscal consolidation plan. Later in the intermeeting period, yields on Greece’s and other peripheral

European countries’ sovereign debt jumped, reflecting

heightened market focus on a possible restructuring of

Greek sovereign debt.

Staff Economic Outlook

With the recent data on spending somewhat weaker, on

balance, than the staff had expected at the time of the

March FOMC meeting, the staff revised down its projection for the rate of increase in real gross domestic

product (GDP) over the first half of 2011. The effects

from the disaster in Japan were also anticipated to temporarily hold down real GDP growth in the near term.

Over the medium term, the staff’s outlook for the pace

of economic growth was broadly similar to its previous

forecast: As in the March projection, the staff expected

real GDP to increase at a moderate rate through 2012,

with the ongoing recovery in activity receiving continued support from accommodative monetary policy,

increasing credit availability, and further improvements

in household and business confidence. The average

pace of GDP growth was expected to be sufficient to

gradually reduce the unemployment rate over the projection period, though the jobless rate was anticipated

to remain elevated at the end of 2012.

Recent increases in consumer food and energy prices,

together with the small uptick in core consumer price

inflation, led the staff to raise its near-term projection

for consumer price inflation. However, inflation was

expected to recede over the medium term, as food and

energy prices were anticipated to decelerate. As in previous forecasts, the staff expected core consumer price

inflation to remain subdued over the projection period,

reflecting stable longer-term inflation expectations and

persistent slack in labor and product markets.

Participants’ Views on Current Conditions and the

Economic Outlook

In conjunction with this FOMC meeting, all meeting

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

agreed that the information received since their previous meeting was broadly consistent with continuation

of a moderate economic recovery, despite an unexpected slowing in the pace of economic growth in the

first quarter. While construction activity remained

anemic, measures of consumer spending and business

investment continued to expand and labor market conditions continued to improve gradually. Participants

viewed the weakness in first-quarter economic growth

as likely to be largely transitory, influenced by unusually

severe weather, increases in energy and other commodity prices, and lower-than-expected defense spending.

As a result, they saw economic growth picking up later

this year.

Participants’ forecasts for economic growth for 2012

and 2013 were largely unchanged from their January

projections and continued to indicate expectations that

the recovery will strengthen somewhat over time.

Nonetheless, the pickup in the pace of the economic

expansion was expected to be limited, reflecting the

effects of high energy prices, modest changes in housing wealth, subdued real income gains, and fiscal contraction at the federal, state, and local levels. Participants continued to project the unemployment rate to

decline gradually over the forecast period but to remain

elevated compared with their assessments of its longerrun level. Participants revised up their projections for

total inflation in 2011, reflecting recent increases in

energy and other commodity prices, but they generally

anticipated that the recent increase in inflation would

be transitory as commodity prices stabilize and inflation

expectations remain anchored. However, they all

agreed on the importance of closely monitoring developments regarding inflation and inflation expectations.

_____________________________________________________________________________________________

Page 8

Federal Open Market Committee

Participants’ judgment that the recovery was continuing

at a moderate pace reflected both the incoming economic indicators and information received from business contacts. Growth in consumer spending remained

moderate despite the effects of higher gasoline and

food prices, which appeared to have largely offset the

increase in disposable income from the payroll tax cut.

Participants noted that these higher prices had weighed

on consumer sentiment about near-term economic

conditions but that underlying fundamentals for continued moderate growth in spending remained in place.

These underlying factors included continued improvement in household balance sheets, easing credit conditions, and strengthening labor markets.

Activity in the industrial sector also expanded further.

Industrial production posted solid gains, and, while the

most recent readings from some of the regional manufacturing surveys showed small declines, in some cases

these were from near-record highs. Manufacturers remained upbeat, although automakers were reporting

some difficulties in obtaining parts normally produced

in Japan, which might weigh on motor vehicle production in the current quarter. Investment in equipment

and software was fairly robust. In contrast, the housing

sector remained distressed, with house prices flat to

down and a large overhang of vacant properties restraining new construction, although reports indicated

that sales volumes and traffic were higher in a few

areas. Activity in the commercial real estate sector continued to be weak.

Several participants indicated that, in contrast to the

somewhat weaker recent economic data, their business

contacts were more positive about the economy’s

prospects, which supported the participants’ view that

the recent weakness was likely to prove temporary.

They acknowledged, however, that sentiment can

change quickly; indeed, one participant noted that his

contacts had recently turned more pessimistic, and several participants indicated that their business contacts

expressed concern about the effects of higher commodity prices on their own costs and on the purchasing

power of households.

Participants judged that overall conditions in labor

markets had continued to improve, albeit gradually.

The unemployment rate had decreased further and payroll employment had risen again in March. Some participants reported that more of their business contacts

have plans to increase their payrolls later this year. A

few participants noted that firms may be poised to accelerate their pace of hiring because they have ex-

hausted potential productivity gains, but others indicated that some firms may be putting hiring plans on

hold until they are more certain of the future trend in

materials and other input costs. Signs of rising wage

pressures were reportedly limited to a few skilled job

categories for which workers are in short supply, while,

in general, increases in wages have been subdued. Participants discussed whether the significant drop in the

unemployment rate might be overstating the degree of

improvement in labor markets because many of the

unemployed have dropped out of the labor force or

have accepted jobs that are less desirable than their

former jobs.

Financial market conditions continued to improve over

the intermeeting period. Equity prices had risen, on

balance, since the previous meeting, reflecting an improved outlook for earnings, and were up more substantially since the start of the year. Bankers again reported improvements in credit quality, with the volume

of nonperforming assets declining at larger banks and

leveling off at smaller banks. In general, loan demand

remained weak. However, bank lending to mediumsized and larger companies increased, and lending to

small businesses picked up slightly. Banks reported an

easing of lending terms on C&I loans, usually prompted by increased competition in the face of still-weak

loan demand. Consumer credit conditions also eased

somewhat from the tight conditions seen during the

recession. However, demand for consumer credit other than auto loans reportedly changed little. A few participants expressed concern that the easing of credit

conditions was creating incentives for increased leverage and risk-taking in some areas, such as leveraged

syndicated loans and loans to finance land acquisition,

and that this trend, if it became widespread and excessive, could pose a risk to financial stability.

Participants discussed the recent rise in inflation, which

had been driven largely by significant increases in energy and, to a somewhat lesser extent, other commodity

prices. These commodity price increases, in turn, reflected robust global demand and geopolitical developments that had reduced supply. One participant

suggested that excess liquidity might be leading to

speculation in commodity markets, possibly putting

upward pressure on prices. Many participants reported

that an increasing number of business contacts expressed concerns about rising cost pressures and were

intending, or already attempting, to pass on at least a

portion of these higher costs to their customers in order to protect profit margins. This development was

also reflected in the rising indexes of prices paid and

_____________________________________________________________________________________________

Minutes of the Meeting of April 26-27, 2011

Page 9

received in several regional manufacturing surveys.

Some participants noted that higher commodity prices

were negatively affecting both business and consumer

sentiment. Core inflation and other indicators of underlying inflation over the medium term had increased

modestly in recent months, but their levels remained

subdued.

Participants generally anticipated that the higher level

of overall inflation would be transitory. This outlook

was based partly on a projected leveling-off of commodity prices and the belief that longer-run inflation

expectations would remain stable. Some participants

noted that pressures on labor costs continued to be

muted; if such circumstances continued, a large, persistent rise in inflation would be unusual. Measures of

near-term inflation expectations had risen along with

the recent rise in overall inflation. While some indicators of longer-term expectations had increased, others

were little changed or down, on net, since March.

Many participants had become more concerned about

the upside risks to the inflation outlook, including the

possibilities that oil prices might continue to rise, that

there might be greater pass-through of higher commodity costs into broader price measures, and that elevated overall inflation caused by higher energy and other commodity prices could lead to a rise in longer-term

inflation expectations. Participants agreed that monitoring inflation trends and inflation expectations closely

was important in determining whether action would be

needed to prevent a more lasting pickup in the rate of

general price inflation, which would be costly to reverse. Maintaining well-anchored inflation expectations

would depend on the credibility of the Committee’s

commitment to deliver on the price stability part of its

mandate. A few participants suggested that clearer

communication about the Committee’s inflation outlook, such as explaining the measures it uses to gauge

medium-term trends in general price inflation and announcing an explicit numerical inflation objective,

would be helpful in this regard.

While rising energy prices posed an upside risk to the

inflation forecast, they also posed a downside risk to

economic growth. Although most participants continued to see the risks to their outlooks for economic

growth as being broadly balanced, a number now

judged those risks to be tilted to the downside. These

downside risks included a larger-than-expected drag on

household and business spending from higher energy

prices, continued fiscal strains in Europe, larger-thananticipated effects from supply disruptions in the aftermath of the disaster in Japan, continuing fiscal ad-

justments at all levels of government in the United

States, financial disruptions that would be associated

with a failure to increase the federal debt limit, and the

possibility that the economic weakness in the first quarter was signaling less underlying momentum going forward. However, participants also noted that the rapid

decline in the unemployment rate over the past several

months suggested the possibility of stronger-thananticipated economic growth over coming quarters.

In their discussion of monetary policy, some participants expressed the view that in the context of increased inflation risks and roughly balanced risks to

economic growth, the Committee would need to be

prepared to begin taking steps toward lessaccommodative policy. A few of these participants

thought that economic conditions might warrant action

to raise the federal funds rate target or to sell assets in

the SOMA portfolio later this year, but noted that even

with such steps, monetary policy would remain accommodative for some time to come. However, some

participants indicated that underlying inflation remained subdued; that longer-term inflation expectations were likely to remain anchored, partly because

modest changes in labor costs would constrain inflation

trends; and that given the downside risks to economic

growth, an early exit could unnecessarily damp the ongoing economic recovery.

Committee Policy Action

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

proceeding at a moderate pace, albeit somewhat slower

than had been anticipated earlier in the year. Overall

conditions in the labor market were gradually improving, and the unemployment rate continued to decline,

although it remained elevated relative to levels that the

Committee judged to be consistent, over the longer

run, with its statutory mandate of maximum employment and price stability. Significant increases in energy

and other commodity prices had boosted overall inflation, but members expected this increase to be transitory and to unwind when commodity price increases

abated. Notwithstanding recent modest increases, indicators of medium-term inflation remained subdued and

somewhat below the levels seen as consistent with the

dual mandate as indicated by the Committee’s longerrun inflation projections. Near-term inflation expectations had increased with energy prices and overall inflation. Recent movements in measures of longer-term

_____________________________________________________________________________________________

Page 10

Federal Open Market Committee

inflation expectations were discussed. While some

measures of longer-term inflation expectations had risen, others were little changed or down, on net, since

March, and members agreed that longer-term inflation

expectations had remained stable. 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 affirmed that it

will complete purchases of $600 billion of longer-term

Treasury securities by the end of the current quarter. A

few members remained uncertain about the benefits of

the asset purchase program but, with the program nearly completed, 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. That said, a few

members viewed the increase in inflation risks as suggesting that economic conditions might well evolve in a

way that would warrant the Committee taking steps

toward less-accommodative policy sooner than currently anticipated.

Members agreed that the Committee will regularly review the size and composition of its securities holdings

in light of incoming information and that they are prepared to adjust those holdings as needed to best foster

maximum employment and price stability. Some

members pointed out that there would need to be a

significant change in the economic outlook, or the risks

to that outlook, before another program of asset purchases would be warranted; in their view, absent such

changes, the benefits of additional purchases would be

unlikely to outweigh the costs.

In the statement to be released following the meeting,

members decided to indicate that the economic recovery was proceeding at a moderate pace and that overall

conditions in the labor market were gradually improving. The Committee also decided to summarize its current thinking about inflation pressures and to emphasize that it will closely monitor the evolution of inflation and inflation expectations. Members anticipated

that the Chairman, who would deliver his first postmeeting press briefing later that afternoon, would pro-

vide additional context for the Committee’s policy decisions.

At the conclusion of the discussion, the Committee

voted to authorize and direct the Federal Reserve Bank

of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance

with the following domestic policy directive:

“The Federal Open Market Committee seeks

monetary and financial conditions that will foster price stability and promote sustainable

growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds

trading in a range from 0 to ¼ percent. The

Committee directs the Desk to execute purchases of longer-term Treasury securities in

order to increase the total face value of domestic securities held in the System Open Market

Account to approximately $2.6 trillion by the

end of June 2011. The Committee also directs

the Desk to reinvest principal payments from

agency debt and agency mortgage-backed securities in longer-term Treasury securities. The

System Open Market Account Manager and

the Secretary will keep the Committee informed of ongoing developments regarding

the System’s balance sheet that could affect the

attainment over time of the Committee’s objectives of maximum employment and price

stability.”

The vote encompassed approval of the statement below to be released at 12:30 p.m.:

“Information received since the Federal Open

Market Committee met in March indicates that

the economic recovery is proceeding at a moderate pace and overall conditions in the labor

market are 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 last summer, and concerns

about global supplies of crude oil have contributed to a further increase in oil prices since

the Committee met in March. Inflation has

picked up in recent months, but longer-term

inflation expectations have remained stable

and measures of underlying inflation are still

subdued.

_____________________________________________________________________________________________

Minutes of the Meeting of April 26-27, 2011

Page 11

Consistent with its statutory mandate, the

Committee seeks to foster maximum employment and price stability. 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. Increases in the prices of energy and

other commodities have pushed up inflation in

recent months. 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 will complete purchases of $600 billion of

longer-term Treasury securities by the end of

the current quarter. The Committee will regularly review the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings 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 condi

tions, 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.

It was agreed that the next meeting of the Committee

would be held on Tuesday–Wednesday, June 21–22,

2011. The meeting adjourned at 10:15 a.m. on April

27, 2011.

Notation Vote

By notation vote completed on April 4, 2011, the

Committee unanimously approved the minutes of the

FOMC meeting held on March 15, 2011.

_____________________________

William B. English

Secretary

_____________________________________________________________________________________________

Page 1

Summary of Economic Projections

In conjunction with the April 26–27, 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 expected

the economic recovery to continue at a moderate pace,

with growth of real gross domestic product (GDP)

picking up modestly this year (relative to 2010) and

strengthening further in 2012 and a bit more in 2013.

With the pace of economic growth exceeding their

estimates of the longer-run sustainable rate of increases

in real GDP, the unemployment rate is projected to

gradually trend lower over this projection period.

However, participants anticipated that, at the end of

2013, the unemployment rate would still be well above

their estimates of the longer-run unemployment rate.

Most participants expected that overall inflation would

move up this year, but they projected this increase to

be temporary, with overall inflation moving back in line

with core inflation in 2012 and 2013 and remaining at

or below rates they see as consistent, over the longer

run, with the Committee’s dual mandate of maximum

employment and price stability. Participants generally

saw core inflation gradually edging higher over the next

two years from its current relatively low level.

On balance, as indicated in table 1, participants anticipated somewhat lower GDP growth and slightly higher inflation over the forecast period than they projected

in January. Participants marked down their forecasts

for real GDP growth this year, revised them down by

less for 2012 and 2013, and did not alter their expectations for economic growth in the longer run. Most

participants also lowered their forecasts for the average

unemployment rate at the end of this year, but they

continued to see the unemployment rate moving down

slowly in 2012 and 2013 to levels that were little

changed from the previous projections. Participants

raised their forecasts for overall inflation this year;

however, most expected that the increase would be

Table 1. Economic projections of Federal Reserve Governors and Reserve Bank presidents, April 2011

Percent

Variable

Range2

Central tendency1

2011

2012

2013

Longer run

2011

2012

2013

Longer run

Change in real GDP. . . . . .

January projection. . . .

3.1 to 3.3

3.4 to 3.9

3.5 to 4.2

3.5 to 4.4

3.5 to 4.3

3.7 to 4.6

2.5 to 2.8

2.9 to 3.7

3.2 to 4.2

2.9 to 4.4

3.4 to 4.5

3.0 to 5.0

2.4 to 3.0

Unemployment rate. . . . . .

January projection. . . .

8.4 to 8.7

8.8 to 9.0

7.6 to 7.9

7.6 to 8.1

6.8 to 7.2

5.2 to 5.6

5.0 to 6.0

8.1 to 8.9

8.4 to 9.0

7.1 to 8.4

7.2 to 8.4

6.0 to 8.4

6.0 to 7.9

5.0 to 6.0

5.0 to 6.2

PCE inflation. . . . . . . . . . .

January projection. . . .

2.1 to 2.8

1.3 to 1.7

1.2 to 2.0

1.0 to 1.9

1.4 to 2.0

1.2 to 2.0

1.7 to 2.0

1.6 to 2.0

2.0 to 3.6

1.0 to 2.0

1.0 to 2.8

0.7 to 2.2

1.2 to 2.5

0.6 to 2.0

1.5 to 2.0

Core PCE inflation3. . . . . .

January projection. . . .

1.3 to 1.6

1.0 to 1.3

1.3 to 1.8

1.0 to 1.5

1.4 to 2.0

1.2 to 2.0

1.1 to 2.0

0.7 to 1.8

1.1 to 2.0

0.6 to 2.0

1.2 to 2.0

0.6 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 January projections were made in conjunction with the meeting of the Federal Open Market Committee on

January 25-26, 2011.

1. The central tendency excludes the three highest and three lowest projections for each variable in each year.

2. The range for a variable in a given year consists of all participants’ projections, from lowest to highest, for that variable in that year.

3. Longer-run projections for core PCE inflation are not collected.

_____________________________________________________________________________________________

Page 2

Federal Open Market Committee

Figure 1. Central tendencies and ranges of economic projections, 2011–13 and over the longer run

Percent

Change in real GDP

Central tendency of projections

Range of projections

Actual

2006

2007

2008

2009

2010

2011

2012

2013

Longer

run

Percent

Unemployment rate

2006

2007

2008

2009

2010

2011

2012

2013

Longer

run

Percent

PCE inflation

2006

2007

2008

2009

2010

2011

2012

2013

Longer

run

Percent

Core PCE inflation

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.

_____________________________________________________________________________________________

Summary of Economic Projections of the Meeting of April 26-27, 2011

Page 3

transitory and made only minor changes to their forecasts for the rate of inflation in 2012 and 2013 or for

the longer run. Most participants anticipated that five

or six years would likely be required for the economy to

converge fully to its longer-run path characterized by

rates of output growth, unemployment, and inflation

consistent with their interpretation of the Federal Reserve’s dual objectives.

A sizable majority of participants continued to judge

the level of uncertainty associated with their projections

for real economic activity and inflation as unusually

high relative to historical norms. About one-half of the

participants viewed the risks to output growth as balanced, but a number now judged those risks to be

tilted to the downside. Meanwhile, a majority of participants viewed the risks to overall inflation as weighted

to the upside.

The Outlook

Participants marked down their forecasts for real GDP

growth in 2011, with the central tendency of their projections moving down to 3.1 to 3.3 percent from

3.4 to 3.9 percent in January. Participants stated that

the change reflected importantly the somewhat slowerthan-expected pace of expansion in the first quarter.

Participants generally thought that much of the unexpected weakness in the first quarter would prove temporary, but they viewed a number of recent developments as potential restraints on the pace of economic

recovery in the near term. Those developments included the effects of the rise in energy prices on real

income and consumer sentiment, indications that the

recovery in the housing market was further off, and

constraints on state and local government budgets.

Looking further ahead, participants’ revisions to their

forecasts for economic growth were modest, and they

continued to see the economic recovery strengthening

over the forecast period, with the central tendency of

their projections for growth in real GDP stepping up to

3.5 to 4.2 percent in 2012 and remaining near those

rates in 2013. Participants cited the effects of continued monetary policy accommodation, further improvements in banking and financial market conditions,

rising consumer confidence as labor market conditions

strengthen gradually, improved household balance

sheets, stabilizing commodity prices, continued expansion in business investment in equipment and software,

and gains in U.S. exports as being among the likely

contributors to a sustained pickup in the pace of expansion. However, participants also saw a number of

factors that would likely continue to hinder the pace of

expansion over the next two years. Most participants

anticipated that the recovery in the housing market

would remain slow, restrained by the overhang of vacant properties and depressed home values; most also

expected increasing fiscal drag at the federal, state, and

local levels. In addition, some participants noted the

negative impact on household purchasing power of the

elevated levels of energy and food prices. In the absence of further shocks, participants generally expected

that, over time, real GDP growth would eventually settle down at an annual rate of 2.5 to 2.8 percent, a pace

that appeared to be sustainable in view of expected

long-run trends in labor supply and labor productivity.

Reflecting the decline in the unemployment rate in recent months, participants lowered their forecasts for

the average unemployment rate in the fourth quarter of

this year, with the central tendency of their projections

at 8.4 to 8.7 percent, down from 8.8 to 9.0 percent in

January. Participants’ projections for the jobless rate at

the end of 2012 and 2013 were little changed from their

previous forecasts. Consistent with their expectations

of a moderate economic recovery, most participants

projected that the unemployment rate would be

6.8 to 7.2 percent even in late 2013—still well above

the 5.2 to 5.6 percent central tendency of their estimates of the unemployment rate that would prevail

over the longer run in the absence of further shocks.

The central tendency for the participants’ projections

of the unemployment rate in the longer run was somewhat narrower than the 5 to 6 percent interval reported

in January.

Participants noted that the prices of oil and other

commodities had risen significantly since the time of

their January projections, largely reflecting geopolitical

developments and robust global demand. Those increases had led to a sharp rise in consumer energy prices and, to a lesser extent, food prices, which had

boosted overall inflation. As a result, participants

raised their forecasts for total personal consumption

expenditures (PCE) inflation in 2011, with the central

tendency of their estimates significantly higher. With

the outlook for oil and other commodity prices uncertain, the dispersion of the projections was noticeably

wider than in January. Most participants expected that

overall inflation would run 2.1 to 2.8 percent this year,

compared with 1.3 to 1.7 percent in their January projections. However, many participants anticipated that

the pass-through of higher commodity prices into core

inflation would be contained by downward pressures

on inflation from large margins of slack in resource

utilization and consequent subdued labor costs. Partic-

_____________________________________________________________________________________________

Page 4

Federal Open Market Committee

ipants indicated that well-anchored inflation expectations, combined with the appropriate stance of monetary policy, should help keep inflation in check. As a

result, participants anticipated that the increase in total

PCE inflation would be temporary, with the central

tendency of their estimates moving down to

1.2 to 2.0 percent in 2012 and 1.4 to 2.0 percent in

2013—at or below the 1.7 to 2.0 percent central tendency for their estimates of the longer-run, mandateconsistent rate of inflation. Nonetheless, the central

tendencies of participants’ projections for core PCE

inflation for this year and next year shifted up a bit to

1.3 to 1.6 percent in 2011 and 1.3 to 1.8 percent in

2012. The central tendency of the core PCE inflation

projections in 2013 was 1.4 to 2.0 percent, little

changed from the January SEP.

Uncertainty and Risks

A sizable majority of participants continued to judge

that the levels of uncertainty associated with their projections for economic activity and inflation were greater

than the average levels that had prevailed over the past

20 years.1 They pointed to a number of factors contributing to their assessments of the uncertainty that they

attached to their projections, including structural dislocations in the labor market, the outlook for fiscal policy, the future path of energy and other commodity

prices, the global economic outlook, and the effects of

unconventional monetary policy.

About one-half of the participants continued to view

the risks to their outlooks for economic growth as balanced, but a number of participants now judged that

those risks had become tilted to the downside. The

most frequently mentioned downside risks to GDP

growth included the possibility of further increases in

energy and other commodity prices, a tighter-thananticipated stance of fiscal policy in the United States,

an even weaker-than-expected housing sector adversely

affecting consumer spending and the health of financial

institutions, and possible spillovers from the fiscal

strains in Europe. A few participants saw the risks to

growth as tilted to the upside; it was noted that the cyclical rebound in economic activity might prove stronger than anticipated. The risks surrounding particiTable 2 provides estimates of forecast uncertainty for the

change in real GDP, the unemployment rate, and total consumer price inflation over the period from 1991 to 2010. 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.

Table 2. Average historical projection error ranges

Percentage points

Variable

Change in real GDP1 . . . . . .

Unemployment

rate1

.......

Total consumer

prices2

.....

2011

2012

2013

±1.0

±1.6

±1.8

±0.5

±1.2

±1.8

±0.8

±1.0

NOTE: Error ranges shown are measured as plus or minus the root

mean squared error of projections for 1991 through 2010 that were

released in the spring 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.

pants’ forecasts of the unemployment rate remained

broadly balanced and continued to reflect in large part

the risks attending participants’ views of the likely

strength of the expansion in real activity.

Whereas most participants’ assessments of the risks

associated with their overall inflation projections over

the period from 2011 to 2013 were broadly balanced in

January, a majority of participants now judged the risks

as weighted to the upside. Although participants generally indicated that the amount of pass-through of

higher oil and other commodity prices into core inflation had so far remained limited and that inflation expectations continued to be stable, some participants

noted the risk that the extent of pass-through might

increase and that the resulting rise in inflation could

unmoor longer-term inflation expectations. A few participants noted the possibility that the current highly

accommodative stance of monetary policy could be

maintained for too long, leading to higher inflation expectations and actual inflation.

Diversity of Views

Figures 2.A and 2.B provide further details on 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 generally continued to

reflect differences in participants’ assessments of many

factors, including the likely evolution of conditions in

credit and financial markets, the current degree of underlying momentum in economic activity, the timing

and the degree to which the labor market will recover

from the dislocations associated with the deep recession, the outlook for economic and financial develop-

_____________________________________________________________________________________________

Summary of Economic Projections of the Meeting of April 26-27, 2011

Page 5

ments abroad, and appropriate future monetary policy

and its effects on economic activity. Regarding participants’ projections for real GDP growth, the distribution for this year shifted noticeably lower and was significantly more tightly concentrated than the distribution in January, with more than one-half of participants

expecting the change in real GDP in 2011 to be in the

3.2 to 3.3 percent interval. By contrast, the distributions for real GDP growth in 2012 and 2013 were little

changed. Regarding participants’ projections for the

unemployment rate, the distribution for this year

shifted down relative to the distribution in January,

with about one-half of participants anticipating the unemployment rate in the final quarter of 2011 to be 8.4

to 8.5 percent; this shift likely reflects the recent improvements in labor market conditions. The distributions of the unemployment rate for 2012 and 2013

were little changed. The distribution of participants’

estimates of the longer-run unemployment rate was

somewhat more tightly concentrated than in January,

while that for their estimates of longer-run GDP

growth was about unchanged.

Corresponding information about the diversity of participants’ views regarding the inflation outlook is provided in figures 2.C and 2.D. In general, the dispersion

in the participants’ inflation forecasts for the next few

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.

Regarding overall PCE inflation, the distribution of

participants’ projections for 2011 shifted noticeably

higher relative to the distribution in January, reflecting

the recent increases in energy and other commodity

prices, but the dispersion in forecasts was little

changed. The distributions for 2012 and 2013 were

generally little changed and remained fairly wide. Regarding core PCE inflation, the distribution of participants’ projections for 2011 shifted noticeably to the

right, but it remained about as wide as in January. The

distributions of core inflation for 2012 and 2013 also

shifted somewhat higher but were otherwise little

changed. 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 PCE 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

Figure 2.A. Distribution of participants’ projections for the change in real GDP, 2011–13 and over the longer run

Number of participants

2011

April projections

January projections

2.42.5

2.62.7

2.82.9

3.03.1

3.23.3

3.43.5

3.63.7

3.83.9

4.04.1

4.24.3

4.44.5

4.64.7

4.84.9

5.05.1

Percent range

Number of participants

2012

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

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

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 April 26-27, 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

April projections

January projections

5.05.1

5.25.3

5.45.5

5.65.7

5.85.9

6.06.1

6.26.3

6.46.5

6.66.7

6.86.9

7.07.1

7.27.3

7.47.5

7.67.7

7.87.9

8.08.1

8.28.3

8.48.5

8.68.7

8.88.9

9.09.1

Percent range

Number of participants

2012

5.05.1

5.25.3

5.45.5

5.65.7

5.85.9

6.06.1

6.26.3

6.46.5

6.66.7

6.86.9

7.07.1

7.27.3

7.47.5

7.67.7

7.87.9

8.08.1

8.28.3

8.48.5

8.68.7

8.88.9

9.09.1

Percent range

Number of participants

2013

5.05.1

5.25.3

5.45.5

5.65.7

5.85.9

6.06.1

6.26.3

6.46.5

6.66.7

6.86.9

7.07.1

7.27.3

7.47.5

7.67.7

7.87.9

8.08.1

8.28.3

8.48.5

8.68.7

8.88.9

9.09.1

Percent range

Number of participants

Longer run

5.05.1

5.25.3

5.45.5

5.65.7

5.85.9

6.06.1

6.26.3

6.46.5

6.66.7

6.86.9

7.07.1

Percent range

NOTE: Definitions of variables are in the general note to table 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

_____________________________________________________________________________________________

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

April projections

January projections

0.50.6

0.70.8

0.91.0

1.11.2

1.31.4

1.51.6

1.71.8

1.92.0

2.12.2

2.32.4

2.52.6

2.72.8

2.93.0

3.13.2

3.33.4

3.53.6

Percent range

Number of participants

2012

0.50.6

0.70.8

0.91.0

1.11.2

1.31.4

1.51.6

1.71.8

1.92.0

2.12.2

2.32.4

2.52.6

2.72.8

2.93.0

3.13.2

3.33.4

3.53.6

Percent range

Number of participants

2013

0.50.6

0.70.8

0.91.0

1.11.2

1.31.4

1.51.6

1.71.8

1.92.0

2.12.2

2.32.4

2.52.6

2.72.8

2.93.0

3.13.2

3.33.4

3.53.6

Percent range

Number of participants

Longer run

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

NOTE: Definitions of variables are in the general note to table 1.

2.12.2

2.32.4

2.52.6

2.72.8

2.93.0

3.13.2

3.33.4

3.53.6

_____________________________________________________________________________________________

Summary of Economic Projections of the Meeting of April 26-27, 2011

Page 9

Figure 2.D. Distribution of participants’ projections for core PCE inflation, 2011–13

Number of participants

2011

April projections

January projections

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

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

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 the Federal Reserve

Board’s 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 sim-

ilar to that experienced in the past and the risks

around the projections are broadly balanced,

the numbers reported in table 2 would imply a

probability of about 70 percent that actual

GDP would expand within a range of 2.0 to 4.0

percent in the current year, 1.4 to 4.6 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

1.2 to 2.8 percent in the current year, and 1.0 to

3.0 percent in the second and third years.

Because current conditions may differ

from those that prevailed, on average, over history, participants provide judgments as to

whether the uncertainty attached to their projections of each variable is greater than, smaller

than, or broadly similar to typical levels of

forecast uncertainty in the past as shown in

table 2. Participants also provide judgments as

to whether the risks to their projections are

weighted to the upside, are weighted to the

downside, or are broadly balanced. That is,

participants judge whether each variable is

more likely to be above or below their projections of the most likely outcome. These judgments about the uncertainty and the risks attending each participant’s projections are distinct from the diversity of participants’ views

about the most likely outcomes. Forecast uncertainty is concerned with the risks associated

with a particular projection rather than with

divergences across a number of different projections.

Cite this document

APA

Federal Reserve (2011, April 26). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_20110427

BibTeX

@misc{wtfs_fomc_minutes_20110427,
  author = {Federal Reserve},
  title = {FOMC Minutes},
  year = {2011},
  month = {Apr},
  howpublished = {Fomc Minutes, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/fomc_minutes_20110427},
  note = {Retrieved via When the Fed Speaks corpus}
}