FOMC Minutes

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Minutes of the Federal Open Market Committee

August 9, 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, August 9, 2011,

at 8:00 a.m.

PRESENT:

Ben Bernanke, Chairman

William C. Dudley, Vice Chairman

Elizabeth Duke

Charles L. Evans

Richard W. Fisher

Narayana Kocherlakota

Charles I. Plosser

Sarah Bloom Raskin

Daniel K. Tarullo

Janet L. Yellen

Robert deV. Frierson, Deputy Secretary, Office of

the Secretary, Board of Governors

Andreas Lehnert, Deputy Director, Office of Financial Stability Policy and Research, Board of

Governors

Linda Robertson, Assistant to the Board, Office of

Board Members, Board of Governors

Seth B. Carpenter, Senior Associate Director, Division of Monetary Affairs, Board of Governors;

Michael Leahy, Senior Associate Director, Division of International Finance, Board of Governors; Lawrence Slifman and William Wascher, Senior Associate Directors, Division of Research and Statistics, Board of Governors

Christine Cumming, Jeffrey M. Lacker, Dennis P.

Lockhart, Sandra Pianalto, and John C. Williams, Alternate Members of the Federal Open

Market Committee

Andrew T. Levin, Senior Adviser, Office of Board

Members, Board of Governors; Stephen A.

Meyer, Senior Adviser, Division of Monetary

Affairs, Board of Governors

James Bullard, Thomas M. Hoenig, and Eric Rosengren, Presidents of the Federal Reserve

Banks of St. Louis, Kansas City, and Boston,

respectively

Joyce K. Zickler, Visiting Senior Adviser, Division

of Monetary Affairs, Board of Governors

William B. English, Secretary and Economist

Matthew M. Luecke, Assistant Secretary

David W. Skidmore, Assistant Secretary

Michelle A. Smith, Assistant Secretary

Thomas C. Baxter, Deputy General Counsel

Richard M. Ashton, Assistant General Counsel

Thomas A. Connors, David Reifschneider, Daniel G. Sullivan, 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

David E. Lebow, Associate Director, Division of

Research and Statistics, Board of Governors

Joshua Gallin, Deputy Associate Director, Division

of Research and Statistics, Board of Governors; Fabio M. Natalucci, Deputy Associate

Director, Division of Monetary Affairs, Board

of Governors

Beth Anne Wilson, Assistant Director, Division of

International Finance, Board of Governors

Penelope A. Beattie, Assistant to the Secretary, Office of the Secretary, Board of Governors

John C. Driscoll, Senior Economist, Division of

Monetary Affairs, Board of Governors

Carol Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors

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Randall A. Williams, Records Management Analyst,

Division of Monetary Affairs, Board of Governors

David Sapenaro, First Vice President, Federal Reserve Bank of St. Louis

Mark S. Sniderman, Executive Vice President, Federal Reserve Bank of Cleveland

David Altig, Alan D. Barkema, and Geoffrey Tootell, Senior Vice Presidents, Federal Reserve

Banks of Atlanta, Kansas City, and Boston, respectively

Chris Burke, Fred Furlong, Tom Klitgaard,

Evan F. Koenig, and Daniel L. Thornton, Vice

Presidents, Federal Reserve Banks of New

York, San Francisco, New York, Dallas, and

St. Louis, respectively

Keith Sill, Assistant Vice President, Federal Reserve Bank of Philadelphia

Robert L. Hetzel, Senior Economist, Federal Reserve Bank of Richmond

Developments in Financial Markets and the Federal Reserve’s Balance Sheet

The Manager of the System Open Market Account

(SOMA) reported on developments in domestic and

foreign financial markets during the period since the

Federal Open Market Committee (FOMC) met on June

21–22, 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. By unanimous vote, the Committee ratified the transactions

by the Open Market Desk of the Federal Reserve Bank

of New York over the intermeeting period.

Staff Review of the Economic Situation

The information reviewed at the August 9 meeting indicated that the pace of the economic recovery remained slow in recent months and that labor market

conditions continued to be weak. In addition, revised

data for 2008 through 2010 from the Bureau of Economic Analysis indicated that the recent recession was

deeper than previously thought and that the level of

real gross domestic product (GDP) had not yet attained

its pre-recession peak by the second quarter of 2011.

Moreover, the downward revision to first-quarter GDP

growth and the slow growth reported for the second

quarter indicated that the recovery was quite sluggish in

the first half of this year. Overall consumer price inflation moderated in recent months, and survey measures

of long-run inflation expectations remained stable.

Private nonfarm employment rose at a considerably

slower pace in June and July than earlier in the year,

and employment in state and local governments continued to trend lower. The unemployment rate edged

up, on net, since the beginning of the year, and longduration unemployment remained very high. Meanwhile, the labor force participation rate moved down

further through July. Initial claims for unemployment

insurance stepped down some in recent weeks but remained elevated, and indicators of hiring showed no

improvement.

Manufacturing production was unchanged in June.

Supply chain disruptions associated with the earthquake

in Japan continued to hinder production at motor vehicle manufacturers and the firms that supply them.

Excluding motor vehicles and parts, factory output

posted only a modest increase. The manufacturing

capacity utilization rate held about flat in recent

months. With auto manufacturers expecting supply

chain disruptions to ease, motor vehicle assembly

schedules called for a substantial step-up in production

in the third quarter, and initial estimates of production

in June were consistent with such a step-up. But

broader indicators of near-term manufacturing activity,

such as the diffusion indexes of new orders from the

national and regional manufacturing surveys, softened

to levels consistent with only small gains in production

in the coming months.

Real consumer spending was nearly unchanged in the

second quarter. Motor vehicle purchases declined during the spring when the availability of some models was

limited, but rebounded somewhat in July as supplies

improved. Consumer spending on goods and services

other than motor vehicles also appeared soft through

June. Labor earnings rose in the second quarter, but

increases in consumer prices offset much of the gain in

nominal income. Consumer sentiment weakened

markedly in July, and the Thomson Reuters/University

of Michigan sentiment index fell to levels last seen in

early 2009.

The housing market remained depressed. Although

single-family housing starts moved up some in June,

permit issuance stayed low. Similarly, sales of new and

existing single-family homes were subdued in recent

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months, and home prices continued to trend lower.

New construction remained constrained by the overhang of foreclosed or distressed properties as well as by

weak demand in an environment of uncertainty about

future home prices and tight underwriting standards for

mortgage loans.

Real business spending on equipment and software

rose at a modest pace in the second quarter, reflecting

strong increases in outlays for high-tech equipment that

more than offset declines in spending in many other

equipment categories. Nominal new orders for nondefense capital goods excluding aircraft continued to rise

through June, and orders remained well above shipments, suggesting further gains in outlays for equipment and software in the near term. However, indicators of business conditions and sentiment weakened in

June and July. Business investment in nonresidential

structures appeared to have stabilized at a low level in

recent months, with vacancy rates elevated and construction financing conditions still tight. Outlays for

drilling and mining equipment continued to increase.

In the second quarter, businesses appeared to add to

inventories at a moderate rate, as a drawdown in motor

vehicle inventories associated with production disruptions was offset by higher accumulation elsewhere. In

most industries outside of the motor vehicle sector,

inventories seemed to be reasonably well aligned with

sales.

Real federal purchases turned up in the second quarter,

as defense expenditures rebounded after declining noticeably in the preceding quarter. At the state and local

level, real purchases continued to decline in response to

budgetary pressures; these governments continued to

reduce payrolls, and their real construction outlays fell

sharply.

The U.S. international trade deficit widened significantly in May in nominal terms, as exports edged down and

imports moved up strongly. Declines in exports were

concentrated in commodity-intensive categories such as

industrial supplies and agricultural goods; sales of capital goods and automotive products increased. The rise

in imports importantly reflected increases in spending

on petroleum products (mainly the result of higher

prices rather than increased volumes) and on capital

goods, especially computers. For the second quarter as

a whole, the advance release of the National Income

and Product Accounts (NIPA) indicated that real exports of goods and services increased more than real

imports, with the result that net exports added significantly to real GDP growth.

After decelerating in the preceding two months, indexes of U.S. consumer prices declined in June, reflecting a

substantial drop in consumer energy prices. However,

survey data indicated some backup in gasoline prices in

July. The price index for personal consumption expenditures (PCE) excluding food and energy posted a

small increase in June, and the PCE price index for

non-energy services was essentially unchanged. In contrast, prices of nonfood, non-energy goods were apparently boosted by upward pressure from earlier increases

in commodity and import prices, and motor vehicle

prices rose further, reflecting the extremely low levels

of vehicle inventories. Near-term expected inflation

from the Thomson Reuters/University of Michigan

Surveys of Consumers moved down again in July from

its elevated level in the spring, and longer-term inflation

expectations remained stable.

Nominal hourly labor compensation, as measured both

by compensation per hour in the nonfarm business

sector and by the employment cost index, increased at

a moderate rate over the year ending in the second

quarter. Similarly, the 12-month change in average

hourly earnings of all employees remained moderate in

July. Productivity in the nonfarm business sector rose

only slightly over the past four-quarter period, so unit

labor costs posted a modest increase.

Foreign economic growth appeared to have slowed

significantly in recent months. Real GDP growth declined sharply in the United Kingdom in the second

quarter, and industrial production data and purchasing

managers surveys pointed to a similar slowdown in

Canada. Retail sales and business sentiment for the

euro area also weakened in recent months amid intensified concerns over the fiscal situation of the peripheral

euro-area countries. Economic performance in the

emerging market economies was somewhat better, but

indicators for those economies also suggested some

cooling from the very rapid growth earlier this year. By

contrast, the Japanese economy has begun to recover

from the March disaster, with exports and production

both retracing much of their substantial losses. Foreign

inflation dipped in the second quarter as the effects of

previous increases in food and energy prices began to

dissipate.

Staff Review of the Financial Situation

Over the intermeeting period, U.S. financial markets

were strongly influenced by developments regarding

the fiscal situations in the United States and in Europe

and by generally weaker-than-expected readings on

economic activity. Throughout the period, waxing and

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waning concerns about the sovereign debt of peripheral

euro-area countries appeared to have an effect on investor appetite for risk, leading to volatility in many

asset markets. Late in the period, investor focus appeared to turn to the U.S. debt ceiling and the potential

for delayed debt service payments by the Treasury Department, the possibility of a downgrade of U.S. sovereign debt, and the prospects for significant long-term

fiscal consolidation. Liquidity and funding in money

markets deteriorated in the last week of July, and interest rates on a number of short-term funding instruments increased markedly. The strains in these markets

eased after legislation to raise the debt ceiling and to

cut the federal budget deficit was signed into law on

August 2. U.S. equity prices fell considerably in the last

week of July and the first week of August, reportedly

reflecting recent weaker-than-expected economic data

releases, and they declined further after the August 5

announcement by Standard & Poor’s of its downgrade

of long-term U.S. sovereign debt.

The decisions by the FOMC at its June meeting to

complete its asset purchase program and to maintain

the 0 to ¼ percent target range for the federal funds

rate were about in line with market expectations and

elicited little market reaction; the same was true of the

accompanying statement and the subsequent press

briefing by the Chairman. Over the intermeeting period, investors marked down the expected path for the

federal funds rate substantially, reflecting incoming

economic data that were weaker than expected and

concomitant concerns about the prospects for global

growth. Yields on nominal Treasury securities also fell

notably, on net, over the intermeeting period. The

Federal Reserve’s Treasury purchase program was

completed on schedule on June 30.

Broad U.S. stock price indexes fell sharply, on net, over

the intermeeting period, as increased concerns about

economic growth appeared to overshadow generally

strong second-quarter corporate earnings reports. Option-implied volatility on the S&P 500 index jumped

late in the period. Yields on both investment- and

speculative-grade corporate bonds fell a little less than

those on comparable-maturity Treasury securities, leaving risk spreads wider. Financial market indicators of

inflation expectations were mixed over the intermeeting

period.

Net debt financing by nonfinancial corporations was

solid in July, although below the elevated pace posted

in the second quarter. Gross bond issuance fell, and

the outstanding amount of commercial and industrial

(C&I) loans on banks’ books was about flat. Nonfinancial commercial paper (CP) posted a sizable gain.

The market for CP issued by financial firms experienced some strains late in the period as institutional

money market mutual funds reportedly increased their

cash positions and sought to decrease exposure to CP

issued by some entities perceived to be less creditworthy. Issuance of syndicated leveraged loans remained

strong in the second quarter. The pace of gross public

equity issuance by nonfinancial firms fell somewhat in

July from its solid pace in the second quarter. Most

indicators of business credit quality continued to improve.

Commercial real estate markets remained weak. Available data for the second quarter indicated that commercial mortgage debt contracted, prices of commercial

properties were generally depressed, and issuance of

commercial mortgage-backed securities (CMBS)

slowed. However, the delinquency rate in June for

loans that back existing CMBS stayed below its recent

peak, and vacancy rates for commercial properties,

while still high, generally continued to edge lower.

Rates on conforming fixed-rate residential mortgages

declined, on net, over the intermeeting period. Mortgage refinancing activity picked up but remained relatively subdued. Outstanding residential mortgage debt

is estimated to have contracted further in the second

quarter. Rates of serious mortgage delinquency continued to moderate but remained high, while the rate of

new delinquencies on prime mortgages flattened out in

recent months at an elevated level.

Conditions in consumer credit markets generally continued to improve. Total consumer credit expanded at

a moderate rate in May as both nonrevolving and revolving credit posted gains. Issuance of consumer

asset-backed securities remained solid in July, although

some deals later in the month were reportedly postponed a few days while issuers awaited the outcome of

the debt ceiling deliberations. Delinquency rates for

most types of consumer loans moved down in recent

months.

Core commercial bank loans—the sum of C&I, real

estate, and consumer loans—were about flat over the

months of June and July, as a slowdown in lending to

businesses was offset by a pickup in loans to households. The July Senior Loan Officer Opinion Survey

on Bank Lending Practices showed that respondents

again eased lending standards to some degree on all

major loan types other than residential real estate loans.

Nonetheless, banks also indicated that the current lev-

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els of their lending standards for all loan types were

between moderate and relatively tight when compared

with the range of standards that had prevailed since

2005. Nearly all second-quarter earnings reports from

large banking companies exceeded expectations.

M2 expanded rapidly in June and July. Liquid deposits,

the largest component of M2, increased robustly, likely

reflecting safe-haven flows from riskier assets along

with temporary increases in the amount of deposits

that money market mutual funds held at their custodian

banks. The rise in currency moderated over those two

months but remained robust.

Headline equity indexes abroad and foreign benchmark

sovereign yields declined over the intermeeting period

in apparent response to signs of a slowdown in the

pace of global economic activity and reduced demand

for risky assets. At the same time, concerns about fiscal deficits and debt sustainability drove yields on the

sovereign debt of Greece, Ireland, Portugal, Spain, and

Italy to record highs relative to yields on German

bunds, although later in the period, spreads fell back

somewhat. Stock prices of European banks, which are

significant investors in sovereign bonds issued by the

peripheral euro-area countries, declined appreciably,

and some of these banks reportedly faced tighter funding conditions toward the end of the intermeeting period. The broad nominal index of the U.S. dollar fluctuated over the period in response to changes in investors’ assessment of the outlook for the U.S. economy, prospects for the lifting of the U.S. debt ceiling,

and the situation in the European economies. On net

over the intermeeting period, the dollar rose modestly

after having depreciated earlier this year.

The European Central Bank (ECB) boosted its policy

rate in July, a move that was widely anticipated. As

indicated by money market futures quotes, however,

the expected pace of monetary policy tightening declined substantially for the ECB as well as for other

central banks in advanced foreign economies. Following its August meeting, the ECB expanded and extended its offerings of term liquidity and resumed purchases of sovereign debt in the secondary market. Central banks in several emerging market economies, including China, continued to tighten policy in response

to inflationary pressures. Authorities in some emerging

market economies also took measures to limit capital

inflows and credit growth.

Staff Economic Outlook

The information on economic activity received since

the June FOMC meeting was weaker than the staff had

anticipated, and the projection for real GDP growth in

the second half of 2011 and in 2012 was marked down

notably. Moreover, the lower estimates of real GDP in

recent years that were contained in the annual revisions

to the NIPA led the staff to lower its estimate of potential GDP growth, both during recent years and over

the forecast period, and to mark down further the staff

forecast. The staff continued to expect some rebound

in economic activity in the near term as the Japanrelated supply chain disruptions in the motor vehicle

sector eased. More generally, the staff still projected

real GDP to accelerate gradually over the next year and

a half, supported by accommodative monetary policy,

improved credit availability, and a pickup in consumer

and business sentiment. However, the increase in real

GDP was projected to be sufficient to reduce slack in

the labor market only slowly, and the unemployment

rate was expected to remain elevated at the end of

2012.

The staff raised slightly its projection for inflation during the second half of this year, as the upward pressure

on consumer prices from earlier increases in import

and commodity prices was expected to persist a little

longer than previously anticipated. But these influences were still expected to dissipate in coming quarters, as was the temporary upward pressure on motor

vehicle prices from low inventories. Moreover, the

large increases in consumer energy and food prices

seen earlier this year were not expected to be repeated.

With long-run inflation expectations stable and substantial slack expected to persist in labor and product

markets, the staff continued to expect prices to rise at a

subdued pace in 2012.

Participants’ Views on Current Conditions and the

Economic Outlook

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

received during the intermeeting period as indicating

that economic growth so far this year was considerably

slower than they had expected. Participants noted a

deterioration in labor market conditions, slower household spending, a drop in consumer and business confidence, and continued weakness in the housing sector.

Manufacturing activity was reported to be mixed. Participants judged that temporary factors affecting demand and production, including the damping effect of

higher energy and other commodity prices and the

supply disruptions from the Japanese earthquake, could

account for only some of the weakness in economic

growth over the first half of the year. While these effects appeared to be waning, the underlying strength of

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the economic recovery remained uncertain. In addition, many participants pointed to the recent downward

revision to estimates of economic activity over the past

three years, and some to the financial market strains

seen during the intermeeting period, as contributing to

a downgrade of the outlook for the economy. Moreover, many participants saw increased downside risks to

the outlook for economic growth.

Meeting participants generally noted that overall labor

market conditions had deteriorated in recent months.

While the employment report for July showed that hiring was somewhat better than in previous months, the

release was still seen as indicating relatively weak conditions. A couple of participants commented that the

exceptionally high level of long-term unemployment

could lead to permanent negative effects on the skills

and employment prospects of those affected. Another

participant, however, noted that it could instead reflect

a mismatch between the characteristics of the unemployed and the jobs currently available. Participants

also discussed the labor force participation rate, and it

was noted that extended unemployment benefits could

be increasing the measured unemployment rate by encouraging some workers to remain in the labor force

longer than they otherwise would have. Other participants remarked that the declines in the unemployment

rate that have occurred over the past year appeared to

reflect primarily declines in labor force participation

rather than significant gains in employment. Reports

from business contacts suggested that depressed business confidence as well as uncertainty regarding the

economic outlook, regulatory policy, and fiscal policy

continued to restrain hiring and also capital investment.

Inflation had moderated in recent months after having

been somewhat elevated earlier this year. Transitory

factors, including supply chain disruptions from the

earthquake in Japan and a surge in energy and other

commodity prices, had pushed up both headline and

core measures of inflation for a time. More recently,

however, as prices of energy and some commodities

have declined from their earlier peaks, headline inflation has moderated. Participants generally noted that,

with apparently significant slack in labor and product

markets, slow wage growth, and little evidence of pricing power among firms, inflation was likely to decline

somewhat over time. Measures of inflation expectations had remained stable. Nevertheless, a number of

participants noted that core inflation had moved up, on

balance, since last fall. Some indicated that the rise in

inflation from very low levels reflected the Committee’s

accommodative stance of monetary policy, which had

helped address the deflation risks of a year ago. A

couple of others, however, suggested that the juxtaposition of higher core inflation and somewhat lower unemployment could imply that the level of potential

output was lower than had been thought.

Most meeting participants indicated that the weakness

in consumer spending in recent months was unexpected. The flattening out of consumer spending was

seen as reflecting, in part, the modest pace of gains in

employment and labor income. In addition, household

spending on autos had been held back by low inventories, and participants generally expected a pickup in

sales of motor vehicles in coming months as production rebounded. Nonetheless, low consumer confidence, efforts to rebuild balance sheets, and heightened

caution on the part of households facing an uncertain

economic environment were seen as factors likely to

continue to weigh on household spending going forward. Several participants also pointed to financial

constraints, particularly depressed home prices and

still-tight credit conditions, as further restraining consumer spending for a time.

Business outlays on equipment and software continued

to advance, although at a slower pace than earlier in the

year. Business contacts in many parts of the country

reported that uncertainty about the pace of growth in

coming quarters and a general slump in business confidence had made some firms reluctant to expand capacity. With home prices depressed, housing construction

was quite subdued and seen as likely to remain so,

while investment in nonresidential structures remained

low.

The weakness in household and business spending was

accompanied by fiscal consolidation at the state and

local level. The shedding of state and local government

jobs contributed to the deterioration in overall labor

market conditions. Some policymakers noted that their

outlooks for economic activity were shaped in part by

an expectation of fiscal restraint at all levels of government.

Participants generally saw the degree of uncertainty

surrounding the outlook for economic growth as having risen appreciably. A couple noted that the cyclical

impetus to economic expansion appeared to be weaker

than it had been in past recoveries, but that the reasons

for the weakness were unclear, contributing to greater

uncertainty about the economic outlook. Many participants also saw an increase in the downside risks to

economic growth. While participants did not anticipate

a downturn in economic activity, several noted that,

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with the recovery still somewhat tentative, the economy

was vulnerable to adverse shocks. Potential shocks

included the possibility of a more protracted period of

weakness in household financial conditions, the chance

of a larger-than-expected near-term fiscal tightening,

and potential financial and economic spillovers if the

situation in Europe were to deteriorate.

Participants noted that financial markets were volatile

over the intermeeting period, as investors responded to

news on the European fiscal situation and the negotiations regarding the debt ceiling in the United States.

However, the broad declines in stock prices and interest rates over the intermeeting period were seen as

mostly reflecting the incoming data pointing to a weaker outlook for growth both in the United States and

globally as well as a reduced willingness of investors to

bear risk in light of the greater uncertainty about the

outlook. While conditions in funding markets had

tightened, it was noted that the condition of U.S. banks

had strengthened in recent quarters and that the credit

quality of both businesses and households had continued to improve.

Participants discussed the range of policy tools available to promote a stronger economic recovery should

the Committee judge that providing additional monetary accommodation was warranted. Reinforcing the

Committee’s forward guidance about the likely path of

monetary policy was seen as a possible way to reduce

interest rates and provide greater support to the economic expansion; a few participants emphasized that

guidance focusing solely on the state of the economy

would be preferable to guidance that named specific

spans of time or calendar dates. Some participants

noted that additional asset purchases could be used to

provide more accommodation by lowering longer-term

interest rates. Others suggested that increasing the average maturity of the System’s portfolio—perhaps by

selling securities with relatively short remaining maturities and purchasing securities with relatively long remaining maturities—could have a similar effect on

longer-term interest rates. Such an approach would not

boost the size of the Federal Reserve’s balance sheet

and the quantity of reserve balances. A few participants noted that a reduction in the interest rate paid on

excess reserve balances could also be helpful in easing

financial conditions. In contrast, some participants

judged that none of the tools available to the Committee would likely do much to promote a faster economic

recovery, either because the headwinds that the economy faced would unwind only gradually and that

process could not be accelerated with monetary policy

or because recent events had significantly lowered the

path of potential output. Consequently, these participants thought that providing additional stimulus at this

time would risk boosting inflation without providing a

significant gain in output or employment. Participants

noted that devoting additional time to discussion of the

possible costs and benefits of various potential tools

would be useful, and they agreed that the September

meeting should be extended to two days in order to

provide more time.

Committee Policy Action

In the discussion of monetary policy for the period

ahead, most members agreed that the economic outlook had deteriorated by enough to warrant a Committee response at this meeting. While all felt that monetary policy could not completely address the various

strains on the economy, most members thought that it

could contribute importantly to better outcomes in

terms of the Committee’s dual mandate of maximum

employment and price stability. In particular, some

members expressed the view that additional accommodation was warranted because they expected the unemployment rate to remain well above, and inflation to be

at or below, levels consistent with the Committee’s

mandate. Those viewing a shift toward more accommodative policy as appropriate generally agreed that a

strengthening of the Committee’s forward guidance

regarding the federal funds rate, by being more explicit

about the period over which the Committee expected

the federal funds rate to remain exceptionally low,

would be a measured response to the deterioration in

the outlook over the intermeeting period. A few members felt that recent economic developments justified a

more substantial move at this meeting, but they were

willing to accept the stronger forward guidance as a

step in the direction of additional accommodation.

Three members dissented because they preferred to

retain the forward guidance language employed in the

June statement.

The Committee agreed to keep the target range for the

federal funds rate at 0 to ¼ percent and to state that

economic conditions are likely to warrant exceptionally

low levels for the federal funds rate at least through

mid-2013. That anticipated path for the federal funds

rate was viewed both as appropriate in light of most

members’ outlook for the economy and as generally

consistent with some prescriptions for monetary policy

based on historical and model-based analysis. In

choosing to phrase the outlook for policy in terms of a

time horizon, members also considered conditioning

the outlook for the level of the federal funds rate on

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explicit numerical values for the unemployment rate or

the inflation rate. Some members argued that doing so

would establish greater clarity regarding the Committee’s intentions and its likely reaction to future economic developments, while others raised questions about

how an appropriate numerical value might be chosen.

No such references were included in the statement for

this meeting. One member expressed concern that the

use of a specific date in the forward guidance would be

seen by the public as an unconditional commitment,

and it could undermine Committee credibility if a

change in timing subsequently became appropriate.

Most members, however, agreed that stating a conditional expectation for the level of the federal funds rate

through mid-2013 provided useful guidance to the public, with some noting that such an indication did not

remove the Committee’s flexibility to adjust the policy

rate earlier or later if economic conditions do not

evolve as the Committee currently expects.

In the statement to be released following the meeting,

members generally agreed that it was important to acknowledge that the recovery had been considerably

slower than the Committee had expected. Although

some of the slowdown in the first half of the year reflected transitory factors, most members now judged

that only part of that weakness could be attributed to

those factors. The Committee decided to note that the

declines in energy and commodity prices from their

recent peaks had led to a moderation of inflation and

that longer-term inflation expectations remained stable.

The Committee also characterized the economic outlook in terms of its statutory mandate and indicated

that it expected the slower pace of economic expansion

to result in an unemployment rate that would decline

only gradually toward levels consistent with its dual

mandate and that it saw the downside risks to the economic outlook as having increased. Most members

also anticipated that inflation would settle, over coming

quarters, at levels at or below those consistent with the

Committee’s mandate. The Committee noted that it

had discussed the range of policy tools that were available to promote a stronger economic recovery in a context of price stability, and to indicate that those tools,

including adjustments to the Committee’s securities

holdings, would be employed as appropriate.

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 also directs the Desk to

maintain its existing policy of reinvesting

principal payments on all domestic securities

in the System Open Market Account in

Treasury securities in order to maintain the

total face value of domestic securities at approximately $2.6 trillion. 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 June indicates that economic growth so far this year

has been considerably slower than the

Committee had expected. Indicators suggest

a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However,

business investment in equipment and software continues to expand. Temporary factors, including the damping effect of higher

food and energy prices on consumer purchasing power and spending as well as supply

chain disruptions associated with the tragic

events in Japan, appear to account for only

some of the recent weakness in economic activity. Inflation picked up earlier in the year,

mainly reflecting higher prices for some

commodities and imported goods, as well as

the supply chain disruptions. More recently,

inflation has moderated as prices of energy

and some commodities have declined from

their earlier peaks. Longer-term inflation expectations have remained stable.

Minutes of the Meeting of August 9, 2011

Page 9

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Consistent with its statutory mandate, the

Committee seeks to foster maximum employment and price stability. The Committee

now expects a somewhat slower pace of recovery over coming quarters than it did at

the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the

Committee judges to be consistent with its

dual mandate. Moreover, downside risks to

the economic outlook have increased. The

Committee also anticipates that inflation will

settle, over coming quarters, at levels at or

below those consistent with the Committee’s

dual mandate as the effects of past energy

and other commodity price increases dissipate further. However, the Committee will

continue to pay close attention to the evolution of inflation and inflation expectations.

To promote the ongoing economic recovery

and to help ensure that inflation, over time,

is at levels consistent with its mandate, the

Committee decided today to keep the target

range for the federal funds rate at 0 to

¼ percent. The Committee currently anticipates that economic conditions—including

low rates of resource utilization and a subdued outlook for inflation over the medium

run—are likely to warrant exceptionally low

levels for the federal funds rate at least

through mid-2013. The Committee also will

maintain its existing policy of reinvesting

principal payments from its securities holdings. The Committee will regularly review

the size and composition of its securities

holdings and is prepared to adjust those

holdings as appropriate.

The Committee discussed the range of policy

tools available to promote a stronger economic recovery in a context of price stability.

It will continue to assess the economic outlook in light of incoming information and is

prepared to employ these tools as appropriate.”

Voting for this action: Ben Bernanke, William C.

Dudley, Elizabeth Duke, Charles L. Evans, Sarah

Bloom Raskin, Daniel K. Tarullo, and Janet L. Yellen.

Voting against this action: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser.

Messrs. Fisher, Kocherlakota, and Plosser dissented

because they would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an “extended period,” rather than characterizing that period

as “at least through mid-2013.” Mr. Fisher discussed

the fragility of the U.S. economy but felt that it was

chiefly nonmonetary factors, such as uncertainty about

fiscal and regulatory initiatives, that were restraining

domestic capital expenditures, job creation, and economic growth. He was concerned both that the Committee did not have enough information to be specific

on the time interval over which it expected low rates to

be maintained, and that, were it to do so, the Committee risked appearing overly responsive to the recent

financial market volatility. Mr. Kocherlakota’s perspective on the policy decision was shaped by his view that

in November 2010, the Committee had chosen a level

of accommodation that was well calibrated for the

condition of the economy. Since November, inflation

had risen and unemployment had fallen, and he did not

believe that providing more monetary accommodation

was the appropriate response to those changes in the

economy. Mr. Plosser felt that the reference to 2013

might well be misinterpreted as suggesting that monetary policy was no longer contingent on how the economic outlook evolved. Although financial markets

had been volatile and incoming information on growth

and employment had been weaker than anticipated, he

believed the statement conveyed an excessively negative assessment of the economy and that it was premature to undertake, or be perceived to signal, further

policy accommodation. He also judged that the policy

step would do little to improve near-term growth prospects, given the ongoing structural adjustments and

external challenges faced by the U.S. economy.

It was agreed that the next meeting of the Committee

would be held on Tuesday–Wednesday, September 20–

21, 2011. The meeting adjourned at 1:40 p.m. on August 9, 2011.

Videoconference Meeting of August 1

On August 1, 2011, the Committee met by videoconference to discuss issues associated with contingencies

in the event that the Treasury was temporarily unable

to meet its obligations because the statutory federal

debt limit was not raised or in the event of a downgrade of the U.S. sovereign credit rating. The staff

provided an update on the debt limit status, conditions

in financial markets, plans that the Federal Reserve and

the Treasury had developed regarding the processing of

federal payments, potential implications for bank su-

Page 10

Federal Open Market Committee

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pervision and regulatory policies, and possible actions

that the Federal Reserve could take if disruptions to

market functioning posed a threat to the Federal Reserve’s economic objectives. Participants generally anticipated that there would be no need to make changes

to existing bank regulations, the operation of the discount window, or the conduct of open market operations. A number of participants emphasized that the

Federal Reserve would continue to employ market values of securities in its transactions. With respect to

potential policy actions, participants agreed that the

appropriate response would depend importantly on the

actual conditions in markets and should generally consist of standard operations. Some participants noted

that such an approach would maintain the traditional

separation of the Federal Reserve’s actions from the

Treasury’s debt management decisions.

Notation Vote

By notation vote completed on August 29, 2011, the

Committee unanimously approved the minutes of the

FOMC meeting held on August 9, 2011.

_____________________________

William B. English

Secretary