FOMC Minutes

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Minutes of the Federal Open Market Committee

September 20–21, 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, September 20,

2011, at 10:30 a.m., and continued on Wednesday, September 21, 2011, at 9:00 a.m.

Jennifer J. Johnson, Secretary of the Board, Office

of the Secretary, Board of Governors

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

Nellie Liang, Director, Office of Financial Stability

Policy and Research, 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

James Bullard and Eric Rosengren, Presidents of

the Federal Reserve Banks of St. Louis and

Boston, respectively

Esther L. George, First Vice President, Federal Reserve Bank of Kansas City

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

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

Kamin, Loretta J. Mester, Simon Potter, David

Reifschneider, Harvey Rosenblum, and

David W. Wilcox, Associate Economists

Brian Sack, Manager, System Open Market Account

Patrick M. Parkinson, Director, Division of Banking Supervision and Regulation, 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

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

Michael P. 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

Andrew T. Levin, Senior Adviser, Office of Board

Members, Board of Governors; Stephen A.

Meyer and Joyce K. Zickler, Senior Advisers,

Division of Monetary Affairs, Board of Governors

Daniel M. Covitz and David E. Lebow, Associate

Directors, Division of Research and Statistics,

Board of Governors

David H. Small, Project Manager, Division of

Monetary Affairs, Board of Governors

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

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

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Federal Open Market Committee

Jeff Fuhrer, Executive Vice President, Federal Reserve Bank of Boston

David Altig, Alan D. Barkema, Spencer Krane,

Mark E. Schweitzer, Christopher J. Waller, and

John A. Weinberg, Senior Vice Presidents,

Federal Reserve Banks of Atlanta, Kansas City,

Chicago, Cleveland, St. Louis, and Richmond,

respectively

Julie Ann Remache, Assistant Vice President, Federal Reserve Bank of New York

Eric T. Swanson, Senior Research Advisor, Federal

Reserve Bank of San Francisco

Jonathan Heathcote, Senior Economist, Federal

Reserve Bank of Minneapolis

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 August 9, 2011. He also reported on System open market

operations, including the continuing reinvestment into

longer-term Treasury securities of principal payments

received on SOMA holdings of agency debt and agency-guaranteed mortgage-backed securities (MBS). By

unanimous vote, the Committee ratified the Desk’s

domestic transactions over the intermeeting period.

Staff Presentation on Policy Tools

The staff gave a presentation on several tools that

could be used, within the Committee’s current policy

framework, to provide additional monetary policy accommodation to support the economic recovery. The

presentation first reviewed three options for managing

the size and composition of the SOMA portfolio: a

reinvestment maturity extension program, a SOMA

portfolio maturity extension program, and a large-scale

asset purchase program. Under the first of these options, the Federal Reserve would reinvest the principal

payments it receives on its holdings of agency securities

exclusively in long-term Treasury securities. Under the

second option, the Committee would purchase longterm Treasury securities and sell the same amount of

shorter-term Treasury securities; these transactions

would significantly increase the average maturity of the

SOMA portfolio, but the size of the Federal Reserve’s

balance sheet and the level of reserve balances would

be largely unaffected in the near term. Under the third

option, the Committee would purchase longer-term

Treasury securities, increasing the size of its balance

sheet and the supply of reserve balances. The staff also

summarized a set of options for clarifying, for the public, the Committee’s longer-run objectives under its

dual mandate as well as the Committee’s forward guidance about the likely future stance of monetary policy.

The options focused on ways to elucidate the economic

conditions that could warrant raising the level of shortterm interest rates. Finally, the staff presentation

summarized the potential implications of reducing the

interest rate that the Federal Reserve pays on reserve

balances that depository institutions hold in accounts at

the Federal Reserve Banks (the IOR rate).

Meeting participants expressed a range of views on the

potential efficacy of policy tools tied to the size and

composition of the Federal Reserve’s balance sheet.

Many judged that these policies could provide additional monetary policy accommodation by lowering

longer-term interest rates and easing financial conditions at a time when further reductions in the federal

funds rate are infeasible. However, a number saw the

potential effects on real economic activity as limited or

only transitory, particularly in the current environment

of balance sheet deleveraging, credit constraints, and

household and business uncertainty about the economic outlook. Participants noted that a SOMA maturity

extension program would not expand the Federal Reserve’s balance sheet or the level of reserve balances,

and that the scale of such a program was necessarily

limited by the size of the Federal Reserve’s holdings of

shorter-term securities so that it could not be repeated

to provide further stimulus. A number of participants

saw large-scale asset purchases as potentially a more

potent tool that should be retained as an option in the

event that further policy action to support a stronger

economic recovery was warranted. Some judged that

large-scale asset purchases and the resulting expansion

of the Federal Reserve’s balance sheet would be more

likely to raise inflation and inflation expectations than

to stimulate economic activity and argued that such

tools should be reserved for circumstances in which the

risk of deflation was elevated. In commenting on the

implications of a maturity extension program or another large-scale asset purchase program, several participants noted that the System should avoid holding a

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very large proportion of the outstanding stock of longer-term Treasury securities in its portfolio because the

result could be a deterioration in market functioning.

A number of participants suggested directing some

purchases or reinvestments into agency MBS; however,

a couple of participants saw such actions as unlikely to

have benefits, or as a form of credit allocation.

Most participants indicated that they favored taking

steps to increase further the transparency of monetary

policy, including providing more information about the

Committee’s longer-run policy objectives and about the

factors that influence the Committee’s policy decisions.

Participants generally agreed that a clear statement of

the Committee’s longer-run policy objectives could be

helpful; some noted that it would also be useful to clarify the linkage between these longer-run objectives and

the Committee’s approach to setting the stance of

monetary policy in the short and medium run. That

said, a number of participants expressed concerns

about the conceptual issues associated with establishing

and communicating explicit longer-run objectives for

the unemployment rate or other measures of labor

market conditions, inasmuch as the long-run equilibrium levels of such measures are influenced importantly by nonmonetary factors, are subject to change

over time, and are estimated with considerable uncertainty. In contrast, participants noted that the long-run

level of inflation is determined primarily by monetary

policy. Accordingly, many felt that if the Committee

were to reach a consensus on more explicit statements

of its longer-run objectives, it would need to provide an

in-depth explanation to the public of how those objectives were determined and how they fit into the policymaking framework. Participants generally saw the

Committee’s post-meeting statements as not well suited

to communicate fully the Committee’s thinking about

its objectives and its policy framework, and agreed that

the Committee would need to use other means to

communicate that information or to supplement information in the statement.

Most participants also indicated that they saw advantages in being more transparent about the conditionality in the Committee’s forward guidance by providing

more information about the economic conditions to

which the guidance refers. They judged that such a

step could make the Committee’s forward guidance

more effective and increase the likelihood that financial

markets would respond to incoming economic information in ways that would help monetary policy

achieve its goals. However, several participants saw a

risk that any explicit statement of economic conditions

specified in the Committee’s forward guidance could be

mistaken for a statement of its longer-run objectives.

Others thought this risk of misinterpretation could be

managed through careful communications. A number

of participants suggested that the Committee’s periodic

Summary of Economic Projections could be used to

provide more information about their views on the

longer-run objectives and the likely evolution of monetary policy.

Participants discussed whether to reduce the IOR rate,

weighing potential benefits and costs. A number of

participants judged that a reduction would result in at

least marginally lower money market rates and could

help stimulate bank lending. Several noted that reducing the IOR rate could help signal the Committee’s

intention to keep the federal funds rate low. Some participants observed that keeping the IOR rate noticeably

above the market rate on other safe, short-term instruments could be perceived as subsidizing some

banking institutions. However, some others noted that

a recent change in deposit insurance assessments had

the effect of significantly reducing the net return that

many banks receive from holding reserve balances.

Moreover, many participants voiced concerns that reducing the IOR rate risked costly disruptions to money

markets and to the intermediation of credit, and that

the magnitude of such effects would be difficult to

predict in advance. In addition, the federal funds market could contract as a result and the effective federal

funds rate could become less reliably linked to other

short-term interest rates. Participants generally agreed

that they needed more information on the likely effects

of a reduction in the IOR rate in order to judge its usefulness as a policy tool in the current environment.

Staff Review of the Economic Situation

The information reviewed at the September 20–21

meeting indicated that economic activity continued to

expand at a slow pace and that labor market conditions

remained weak. Consumer price inflation appeared to

have moderated since earlier in the year, and measures

of long-run inflation expectations remained stable.

Private nonfarm employment rose only slightly in August, and job gains were weak even after adjusting for

the effects of a strike by communications workers during the month. Meanwhile, employment at state and

local governments declined further, reflecting their

tight budget conditions. The unemployment rate remained at 9.1 percent in August, and both longduration unemployment and the share of workers employed part time for economic reasons were still ele-

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vated. Initial claims for unemployment insurance

edged up, on net, over the previous few weeks, and

many indicators of firms’ hiring plans deteriorated

somewhat in recent months.

Industrial production expanded solidly but unevenly in

July and August, and the manufacturing capacity utilization rate moved up. Output increased markedly at

both motor vehicle manufacturers and their upstream

suppliers as the supply chain disruptions associated

with the earthquake in Japan eased. In contrast, the

pace of factory production softened among industries

unlikely to have been affected by the supply disruptions. Motor vehicle assemblies were scheduled to rise

noticeably in September and then increase further in

the fourth quarter, but broader indicators of near-term

manufacturing activity, such as the diffusion indexes of

new orders from the national and regional manufacturing surveys, remained at levels consistent with only

meager gains in output in the coming months.

Real consumer spending posted a solid gain in July, in

part reflecting a rebound in motor vehicle purchases

from their low level in the spring when the availability

of some models was limited. However, nominal retail

sales, excluding purchases at motor vehicles and parts

outlets, only inched up in August, and sales of new

light motor vehicles ticked down. Real disposable income edged lower in July, as gains in nominal income

were offset by the rise in consumer prices. Consumer

sentiment deteriorated significantly further in August

and stayed downbeat in early September.

Activity in the housing market continued to be depressed by weak demand, uncertainty about future

home prices, tight credit conditions for mortgages and

construction loans, and a substantial inventory of foreclosed and distressed properties. Starts and permits for

new single-family homes in July and August stayed near

the very low levels seen since the middle of last year.

Sales of new and existing homes remained subdued in

recent months, and home prices edged down further.

Real business spending on equipment and software

appeared to expand further. Nominal shipments of

nondefense capital goods increased in July, and business purchases of new motor vehicles trended higher.

New orders of nondefense capital goods continued to

run ahead of shipments in July, and the expanding

backlog of unfilled orders pointed toward further gains

in outlays for business equipment in subsequent

months. In contrast, survey measures of business conditions and sentiment remained at muted levels in August and September. Real business expenditures for

office and commercial buildings moved up in recent

months, but outlays were still at a very low level and

continued to be restrained by high vacancy rates and

tight credit conditions for construction loans. Meanwhile, spending for drilling and mining structures increased further. Businesses seemed to be adding to

inventories at a more modest pace in July, as the restocking of motor vehicle inventories depleted by the

earlier production disruptions was offset by slowing

accumulation in other sectors. In most industries, inventories looked to be reasonably well aligned with

sales.

Real federal government purchases appeared to increase in recent months as defense expenditures continued to rise from unusually low levels early in the

year. At the state and local level, real government purchases seemed set to decline further as payrolls were

reduced and construction spending decreased.

The nominal U.S. international trade deficit widened in

June but narrowed significantly in July. Exports rose

briskly in July, particularly in industrial supplies and

capital goods, after having decreased in June. Imports

moved down in both months, as declines in petroleum

products—reflecting both lower prices and decreased

volumes—more than offset large gains in automotive

products following the easing of supply chain disruptions in Japan. Trade data for July suggested that net

exports continued to boost U.S. real gross domestic

product (GDP) growth in the third quarter.

Monthly U.S. consumer price inflation picked up in

July and August after slowing in May and June, but remained a bit lower than earlier in the year. Consumer

energy prices stepped up in July and August but only

partially retraced their decline over the previous two

months, and the increases in food prices were somewhat below the pace seen early in the year. The consumer price index excluding food and energy rose at

about the same average monthly rate in July and August as in the second quarter. Near-term inflation expectations from the Thomson Reuters/University of

Michigan Surveys of Consumers in August and September stayed well below the elevated level seen in the

spring, and longer-term inflation expectations remained

stable.

Available measures of labor compensation indicated

that wage increases continued to be restrained by the

large margin of slack in the labor market. Average

hourly earnings for all employees posted a small gain,

on net, over July and August, and their rate of increase

from 12 months earlier remained subdued.

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Foreign economic growth declined in the second quarter. Growth slowed notably in Europe; economic activity also decelerated in the emerging market economies. Real GDP contracted in Canada due to a large

decline in exports. Output also fell in Japan, reflecting

the dislocations caused by the March earthquake. Part

of the downshift in global economic growth appeared

to have been driven by temporary supply chain disruptions caused by Japan’s earthquake. Although the waning of these disruptions seemed to be supporting a rebound in foreign GDP growth in the third quarter, recent indicators suggested only sluggish gains in underlying economic activity. With the intensification of fiscal

and financial stress in the euro area, measures of consumer and business confidence declined in August, and

indicators of manufacturing activity in the region deteriorated. For many emerging market economies, the

recent slowing in growth of economic activity was most

evident in exports, industrial production, and other

indicators of manufacturing activity. Inflation abroad

eased in the second quarter as the effects of earlier increases in food and energy prices began to fade. More

recently, however, increases in domestic food prices

appeared to be pushing up consumer price inflation in

some economies.

Staff Review of the Financial Situation

Financial markets were volatile over the intermeeting

period as investors responded to mostly downbeat

news on economic activity in the United States and

abroad. Fluctuations in investors’ level of concern

about European fiscal and financial prospects also contributed to market volatility.

The expected path of the federal funds rate moved

down appreciably over the intermeeting period. Investors initially focused on the firmer forward guidance in

the August FOMC statement indicating that the Committee anticipated that economic conditions were likely

to warrant exceptionally low levels of the federal funds

rate at least through mid-2013. Over subsequent

weeks, weak economic data contributed to rising expectations of additional monetary accommodation; those

expectations and increasing concerns about the financial situation in Europe led to an appreciable decline in

intermediate- and longer-term nominal Treasury yields.

Partly in reaction to the softer economic outlook,

measures of inflation compensation for the next 5 years

as well as 5 to 10 years ahead derived from nominal

and inflation-protected Treasury securities each fell to

the low end of their ranges for this year.

Since early August, the equity prices of large U.S. financial institutions fell and their credit default swap (CDS)

spreads widened. More-pronounced declines in equity

prices and larger increases in CDS spreads occurred for

some European financial institutions. Though many

large European banks found it increasingly difficult, in

recent weeks, to get unsecured dollar funding beyond

the very short term, the conditions faced by U.S. financial institutions in these markets were little changed. In

secured funding markets, term financing reportedly

remained readily available for both domestic and European financial institutions through repurchase agreements backed by Treasury and agency collateral. However, some strains emerged late in the intermeeting period in the market for repurchase agreements backed

by lower-quality, nontraditional collateral. In response

to dollar funding pressures abroad, the Bank of England, the European Central Bank (ECB), and the Swiss

National Bank announced that they would offer banks

in their jurisdictions dollar loans for periods of approximately three months as well as continue to offer dollar

loans for one-week periods; the Bank of Japan added to

its previously announced program of three-month and

seven-day dollar loans.

Broad stock price indexes were volatile but increased,

on net, since the August FOMC meeting, following

sharp declines in the days just preceding that meeting.

Gross public equity issuance by nonfinancial firms

weakened substantially in recent weeks, and a large

number of planned initial public offerings were shelved

amid the heightened market volatility.

Spreads of yields on investment- and speculative-grade

corporate bonds over those on comparable-maturity

Treasury securities rose significantly over the intermeeting period, reaching levels last registered in late 2009,

and average bid prices in the secondary market for syndicated leveraged loans declined. Credit flows in August offered additional evidence that debt markets had

become less hospitable to lower-rated nonfinancial

firms. Bond issuance by speculative-grade firms nearly

came to a halt, and the volume of new leveraged loans

financed by institutional investors appeared to drop

sharply after having moved down in July. However,

net bond issuance by investment-grade companies remained robust in August despite wider spreads, and

nonfinancial commercial paper outstanding increased

slightly.

In the September 2011 Senior Credit Officer Opinion

Survey on Dealer Financing Terms, dealers reported

only small changes in credit terms across major classes

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of counterparties over the past three months. Respondents noted that the use of financial leverage by hedge

funds decreased somewhat over the same period.

Dealers also indicated that their clients’ willingness to

bear risk generally had declined somewhat; that was

particularly true of hedge funds.

Financing conditions for commercial real estate remained weak. Issuance of commercial mortgagebacked securities (CMBS) slowed further in July and

August, and investors appeared to demand greater

compensation for risk. Prices of most types of commercial properties remained depressed despite a slight

decline in vacancy rates in the second quarter. Delinquency rates on loans that back existing CMBS hovered

at an elevated level in August, but delinquency rates on

commercial real estate loans held by banks decreased in

the second quarter.

Residential MBS yields and residential mortgage interest rates declined, on net, over the intermeeting period

to historically low levels, but their spreads to yields on

long-term Treasury securities increased. However, low

mortgage rates spurred little refinancing activity, in part

because of tight underwriting standards and low levels

of home equity for many households. Residential

mortgage debt contracted further in the second quarter,

and the volume of mortgage applications to purchase

homes moved down so far in the third quarter. Rates

of serious mortgage delinquency continued to moderate but remained high, while the rate at which prime

mortgages moved into delinquency stepped up, on balance, in recent months.

Consumer credit increased at a solid pace in July, as a

sizable increase in nonrevolving credit—driven by a

surge in federally funded student loans—more than

offset a decrease in revolving credit. Issuance of consumer asset-backed securities moved down in August,

but spreads on these securities remained low. Delinquency rates for several categories of consumer loans

moved down further in recent months, with some

reaching levels not seen since the 2008–09 recession

began.

Core commercial bank loans—the sum of commercial

and industrial (C&I), real estate, and consumer loans—

expanded slightly in July and August. C&I loans grew

strongly, consumer loans showed tepid growth, and

real estate loans continued to decline. The upturn in

lending was concentrated at large domestic and foreign

institutions; at smaller banks, core loans declined in July

and August at about the same pace as in recent quarters.

M2 surged in July and August, as investors and asset

managers sought the relative safety and liquidity of

bank deposits and other assets that make up the M2

aggregate. Notably, institutional investors, concerned

about exposures of money funds to European financial

institutions, shifted from prime money funds to bank

deposits, and money fund managers accumulated sizable bank deposits in anticipation of potentially large

redemptions by investors. In addition, retail investors

evidently placed redemptions from equity and bond

mutual funds into bank deposits and retail money market funds.

The foreign exchange value of the dollar increased over

the intermeeting period, reflecting a flight to safety that

also contributed to lower benchmark sovereign yields

in Germany, the United Kingdom, and Canada. In

contrast, the yield on two-year Greek sovereign bonds

rose sharply as market participants became increasingly

concerned that Greece might default on its sovereign

debt. Equity prices in the euro area decreased over the

intermeeting period, following sharp declines in early

August. After falling steeply before the August FOMC

meeting, emerging market equity prices were little

changed, on net, over the period.

The European Central Bank continued to purchase, in

the secondary market, sovereign debt of euro-area

countries. Yields on Italian and Spanish debt, which

declined following reported ECB purchases in early

August, drifted higher during the intermeeting period.

Prices of money market futures contracts indicated that

monetary policy was expected to become more accommodative in both the euro area and the United

Kingdom. The Swiss National Bank took several steps

to ease monetary policy, including intervening in the

foreign exchange market to counter further appreciation of its currency and eventually announcing that it is

prepared to buy unlimited quantities of foreign currency to prevent the Swiss franc from trading in the foreign exchange market at a rate below 1.2 Swiss francs

per euro. Citing concerns over the global economic

outlook, the central bank of Brazil reduced its policy

rate after having raised it several times earlier this year.

In contrast, China continued to tighten its monetary

policy, extending reserve requirements to a wider range

of bank liabilities as it attempted to rein in off-balancesheet lending by its banks.

Staff Economic Outlook

In the economic forecast prepared for the September

FOMC meeting, the staff lowered its projection for the

increase in real GDP in the second half of 2011 and in

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the medium term. The incoming data on household

and business spending were about as expected, on balance, but labor market conditions and indicators of

near-term economic activity, such as consumer and

business sentiment, were weaker than anticipated. In

addition, financial conditions deteriorated since the

time of the previous forecast as investors pulled back

from riskier assets. Nevertheless, the staff continued to

forecast that economic activity would increase more

rapidly in the second half of this year than over the first

half, as supply chain disruptions in the motor vehicle

sector eased. In the medium term, the staff still projected real GDP to accelerate gradually, supported by

accommodative monetary policy, further increases in

credit availability, and improvements in consumer and

business confidence from their current low levels. The

increase in real GDP was expected to be sufficient to

reduce the unemployment rate only slowly over the

projection period, and the jobless rate was anticipated

to remain elevated at the end of 2013.

The staff’s projection for inflation was little changed

from its forecast at the time of the August FOMC

meeting. The upward pressure on consumer prices

from increases in import and commodity prices earlier

in the year, along with the temporary boost to motor

vehicle prices from low inventories, were expected to

recede further in the coming quarters. With stable

long-run inflation expectations and considerable slack

in labor and product markets anticipated to persist over

the forecast period, the staff continued to project that

inflation would be subdued in 2012 and 2013.

Participants’ Views on Current Conditions and the

Economic Outlook

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

received during the intermeeting period indicated that

economic growth remained slow but did not suggest a

contraction in activity. Temporary factors that had

contributed to slower growth during the first half of

the year had partly reversed, contributing to some rebound in final sales and production, particularly in the

manufacturing sector where progress had been made in

resolving supply chain disruptions. But stresses in

global financial markets, sluggish growth in households’

real incomes, and heightened uncertainty about economic prospects seemed to have contributed to lower

consumer and business sentiment and to be weighing

on economic growth. Recent indicators pointed to

continuing weakness in overall labor market conditions,

and the unemployment rate remained elevated. Inflation appeared to have moderated since earlier in the

year as prices of energy and some commodities declined from their peaks, but inflation had not yet come

down as much as participants had expected earlier this

year. Labor costs remained subdued.

Looking ahead, participants continued to expect some

pickup in the pace of recovery over coming quarters

but anticipated that the unemployment rate would decline only gradually. They generally judged that risks to

the growth outlook, including strains in global financial

markets, were significant and tilted to the downside;

moreover, slow growth left the recovery more vulnerable to negative shocks. With longer-term inflation expectations remaining stable and the effects of past increases in energy and commodity prices continuing to

dissipate, most participants saw both core and headline

inflation as likely to settle, over coming quarters, at or

below the levels they see as most consistent with their

dual mandate. Participants continued to see the outlook for growth and inflation as more uncertain than

usual.

Participants noted modest growth in consumer spending on average in recent months, with some rebound in

purchases of new motor vehicles as manufacturers

made progress in resolving supply chain disruptions

and increased the availability of popular models. Surveys suggested that households were pessimistic about

their future incomes, and consumer confidence had

dropped to historically low levels. Low confidence,

continuing efforts to repair balance sheets, and heightened caution in the face of an uncertain economic environment were seen as factors likely to weigh on household spending. Several participants pointed to depressed home prices and financial constraints, including

still-tight credit conditions for many households, as

also likely to restrain consumer spending for a time.

However, household debt-service burdens had declined, indicating that there had been further progress

in repairing household balance sheets.

Business sentiment had worsened, seemingly in response to weaker economic prospects and increased

downside risks to the outlook for U.S. and global

growth. Contacts at communications, technology, and

transportation firms indicated that growth had slowed

in those sectors; surveys also indicated that growth in

the manufacturing sector had weakened during the

summer. One participant suggested that hurricanes

and subsequent flooding had contributed to the slowing in some parts of the country. In contrast, business

contacts reported that commodity-related sectors such

as energy, agriculture, and mining continued to show

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strong gains; tourism also appeared to be doing well.

Exports remained a bright spot for U.S. manufacturers

and commodity producers. Business investment in

equipment and software had continued to expand in

recent months, but some contacts expressed concern

that firms would cut capital spending if their sales

slowed further.

The housing sector remained depressed, with construction at very low levels and seen as likely to remain so

given the weakness in new home sales and the continuing flow of foreclosed properties into the market.

Though mortgage rates were very low, spreads between

mortgage rates and yields on Treasury securities were

unusually wide. Moreover, still-tight credit standards

meant that many households were unable to qualify for

loans to buy a home, and the drop in house prices in

recent years left others unable to refinance an existing

higher-rate mortgage. Nonresidential construction

generally remained weak, apart from investment in extractive industries, and forward-looking indicators of

nonresidential construction had dropped.

Meeting participants generally noted that overall labor

market conditions had shown no improvement or had

deteriorated in recent months and the unemployment

rate remained elevated. Even after adjusting for the

effects of strikes on reported payrolls, the employment

report for August showed weak job gains. Moreover,

both the average workweek and aggregate hours

worked declined.

Contacts reported that slower

growth, depressed business confidence, and uncertainty

about the economic outlook were restraining hiring as

well as capital investment; many also cited uncertainty

about regulatory and tax policies as contributing to

businesses’ reluctance to spend. Some business contacts reported that their firms had made contingency

plans to reduce output and employment if demand for

their products were to turn down. Participants generally agreed that sluggish job growth and the elevated unemployment rate reflected both weak demand for

goods and services and a mismatch between the characteristics of the unemployed and the needs of the employers that currently have jobs available, but they had

varying views about the relative importance of these

two factors. Many participants judged that weak demand was of most importance, while a few argued that

structural and geographic mismatches were key. A few

commented that business contacts reported receiving

large numbers of applications for relatively low-skilled

positions but having difficulty finding and hiring candidates for some highly skilled positions. Several participants again noted that the exceptionally high level of

long-duration unemployment could lead to permanent

negative effects on the skills and employment prospects

of those affected and so reduce the economy’s longerrun productive potential.

Participants noted that financial markets were volatile

over the intermeeting period and that financial conditions were strained at times, as investors reacted to the

incoming economic data and to news about European

fiscal and financial developments. Several participants

argued that broader financial conditions had become

less accommodative over the intermeeting period: Risk

spreads had widened appreciably, likely reflecting a reduced willingness of investors to bear risk, a weaker

outlook for growth in the United States and globally,

and greater uncertainty about economic prospects. On

the positive side, some participants noted that the reduction in leverage and increase in financial firms’ liquidity cushions since the height of the financial crisis

likely had attenuated the adverse effects of heightened

risk aversion. Contacts in the banking sector reported

that U.S. banks remained willing to lend to qualified

customers, but that loan demand was weak. While noting that conditions in bank funding markets had tightened, particularly for European banks, participants observed that the capital and liquidity positions of U.S.

banks had strengthened in recent quarters and that the

credit quality of both business and household loans had

continued to improve. Nonetheless, some large U.S.

banks had seen further pressure on their stock prices

and CDS spreads. Participants agreed that, if European

policymakers did not respond effectively, European

sovereign debt and banking problems could intensify,

with potentially serious spillovers to the U.S. economy.

However, it was noted that the ECB was providing

ample liquidity to European banks, and that it had substantial capacity to provide additional liquidity through

its lending facilities if necessary.

Most participants agreed that inflation appeared to

have moderated in recent months compared with earlier in the year as prices of energy and some commodities declined from their peaks, though the moderation

was not as substantial as many participants had expected. Longer-term inflation expectations had remained stable. Most participants anticipated that, with

stable inflation expectations, significant slack in labor

and product markets, slow wage growth, and little evidence of pricing power among firms, inflation was likely to decline moderately over time. Several suggested

that slowing growth in the United States and abroad

made a new surge in commodity prices unlikely. However, some noted that core as well as headline inflation

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Minutes of the Meeting of September 20-21, 2011

Page 9

had moved up, on balance, since last fall. A few suggested that the juxtaposition of higher core inflation

and somewhat lower unemployment could mean that

the degree of slack in labor markets and the level of

potential output were lower than the Committee had

thought. Some argued that the rise in core inflation

from very low levels reflected the accommodative

stance of monetary policy and indicated that the largescale asset purchases the Committee undertook from

November through June had been a successful response to the deflation risks of a year ago. Many participants judged that the risks to the outlook for inflation were roughly balanced. Some saw medium-run

inflation risks as tilted to the downside, in light of persistent resource slack; some others argued that the accommodative stance of monetary policy and the upward trend in measures of core inflation this year suggested inflation risks were tilted to the upside. Participants generally judged that there was relatively little risk

of deflation. One commented that surveys showed

that forecasters saw a low likelihood of deflation; a

second, however, noted that a measure of the probability of deflation calculated from prices of Treasury inflation-protected securities (TIPS) had declined as the

Federal Reserve conducted its second large-scale asset

purchase program but more recently had been rising.

Participants saw considerable uncertainty surrounding

the outlook for a gradual pickup in economic growth.

It was again noted that the cyclical impetus to economic expansion appeared to be weaker than in past recoveries, but that the reasons for the weakness were unclear, contributing to greater uncertainty about the economic outlook. Several commented that, with households and businesses seeking to reduce leverage rather

than to borrow and with housing markets in distress,

some of the normal mechanisms through which monetary policy actions are transmitted to the real economy

appeared to be attenuated. Many participants saw significant downside risks to economic growth. While

they did not anticipate a downturn in economic activity,

several remarked that, with growth slow, the recovery

was more vulnerable to adverse shocks. Risks included

the possibility of more pronounced or more protracted

deleveraging by households, the chance of a largerthan-expected near-term fiscal tightening, and potential

spillovers to the United States if the financial situation

in Europe were to worsen appreciably. Participants

agreed to consider further how best to use their monetary policy and liquidity tools to deal with such shocks

if they were to occur.

Committee Policy Action

In the discussion of monetary policy for the period

ahead, most members agreed that the revisions to the

economic outlook warranted some additional monetary

policy accommodation to support a stronger recovery

and to help ensure that inflation, over time, was at a

level consistent with the Committee’s dual mandate.

While they recognized that monetary policy alone could

not completely address the economy’s ills, most members judged that additional accommodation could contribute importantly to better outcomes in terms of the

Committee’s dual mandate of maximum employment

and price stability. Those viewing greater policy accommodation as appropriate at this meeting generally

supported a maturity extension program that would

combine asset purchases and sales to extend the average maturity of securities held in the SOMA without

generating a substantial expansion of the Federal Reserve’s balance sheet or reserve balances. Specifically,

those members supported a program under which the

Committee would announce its intention to purchase,

by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years

and to sell an equal amount of Treasury securities with

remaining maturities of 3 years or less. They expected

this program to put downward pressure on longer-term

interest rates and to help make broader financial conditions more accommodative. While the scale of such a

maturity extension program was necessarily limited by

the amount of shorter-term securities in the SOMA

portfolio, most members judged the action as appropriate, given economic conditions and the outlook.

Two members said that current conditions and the outlook could justify stronger policy action, but they supported undertaking the maturity extension program at

this meeting as it did not rule out additional steps at

future meetings. Three members concluded that additional accommodation was not appropriate at this time.

The Committee discussed whether to specify the parameters of the maturity extension program by stating its

intention to complete the full set of transactions by

June 2012 or by stating that it would undertake these

transactions at a specified monthly pace. Members saw

benefits to both approaches: The former would provide the public greater clarity about the likely scale of

the program and the latter might allow the Committee

greater flexibility to adjust the scale of the program in

response to unexpected economic developments. A

majority favored the first approach. Members noted,

however, that the Committee will continue to regularly

review the size and composition of its securities hold-

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Federal Open Market Committee

ings and that it is prepared to adjust those holdings as

appropriate.

Most members also supported a change in the Committee’s reinvestment policy. To help support conditions in mortgage markets, the Committee decided to

reinvest principal received from its holdings of agency

debt and agency MBS in agency MBS rather than continuing to reinvest in longer-term Treasury securities as

had been the Committee’s practice for more than a

year. The effect of this change will be to keep the

SOMA’s holdings of agency securities at an approximately constant level; under the previous practice,

those holdings were declining on an ongoing basis.

This change in reinvestment policy was expected to

help reduce the spread between yields on mortgagebacked securities and those on comparable-maturity

Treasury securities seen this year and so contribute to

lower mortgage rates. Members also noted that the

change in reinvestment policy could help prevent the

shares of outstanding longer-term Treasury securities

held by the Federal Reserve from reaching levels high

enough to result in a deterioration in Treasury market

functioning. One member who opposed the maturity

extension program also opposed the change in reinvestment policy because he judged that it would not

benefit housing markets. At the same time, the Committee decided to maintain its existing policy of rolling

over maturing Treasury securities at auction.

The Committee also decided to keep the target range

for the federal funds rate at 0 to ¼ percent and to reaffirm its anticipation 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. A couple of

members noted that they would prefer to change the

Committee’s forward guidance to provide greater clarity about the economic conditions that would be likely

to warrant maintaining exceptionally low levels of the

target federal funds rate, but no decision was taken on

this point.

The Committee agreed that it was important to acknowledge, in the statement to be released following

the meeting, that economic growth remained slow and

that indicators pointed to continuing weakness in overall labor market conditions. It also agreed to note that

inflation appeared to have moderated since earlier in

the year as prices of energy and some commodities had

declined from their recent peaks, and that longer-term

inflation expectations remained stable. Members gen-

erally continued to expect some pickup in the pace of

the economic recovery over coming quarters but anticipated that the unemployment rate would decline only

gradually and agreed that there were significant downside risks to the economic outlook, including strains in

global financial markets. The Committee again anticipated that inflation would settle, over coming quarters,

at levels at or below those consistent with the Committee’s mandate as the effects of past energy and commodity price increases dissipate further.

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 purchase, by the end of June 2012, Treasury securities with remaining maturities of approximately 6 years to 30 years with a total face

value of $400 billion, and to sell Treasury securities with remaining maturities of 3 years

or less with a total face value of $400 billion.

The Committee also directs the Desk to

maintain its existing policy of rolling over

maturing Treasury securities into new issues

and to reinvest principal payments on all

agency debt and agency mortgage-backed securities in the System Open Market Account

in agency mortgage-backed securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion. The Committee directs the Desk to engage in dollar roll transactions as necessary to

facilitate settlement of the Federal Reserve’s

agency MBS transactions. 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.:

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Minutes of the Meeting of September 20-21, 2011

Page 11

“Information received since the Federal

Open Market Committee met in August indicates that economic growth remains slow.

Recent indicators point to continuing weakness in overall labor market conditions, and

the unemployment rate remains elevated.

Household spending has been increasing at

only a modest pace in recent months despite

some recovery in sales of motor vehicles as

supply-chain disruptions eased. Investment

in nonresidential structures is still weak, and

the housing sector remains depressed. However, business investment in equipment and

software continues to expand. Inflation appears to have moderated since earlier in the

year as prices of energy and some commodities have declined from their peaks. Longerterm inflation expectations have remained

stable.

Consistent with its statutory mandate, the

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

continues to expect some pickup in the pace

of recovery over coming quarters but anticipates that the unemployment rate will decline only gradually toward levels that the

Committee judges to be consistent with its

dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial

markets. 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 support a stronger economic recovery

and to help ensure that inflation, over time,

is at levels consistent with the dual mandate,

the Committee decided today to extend the

average maturity of its holdings of securities.

The Committee intends to purchase, by the

end of June 2012, $400 billion of Treasury

securities with remaining maturities of

6 years to 30 years and to sell an equal

amount of Treasury securities with remaining

maturities of 3 years or less. This program

should put downward pressure on longer-

term interest rates and help make broader financial conditions more accommodative.

The Committee will regularly review the size

and composition of its securities holdings

and is prepared to adjust those holdings as

appropriate.

To help support conditions in mortgage

markets, the Committee will now reinvest

principal payments from its holdings of

agency debt and agency mortgage-backed securities in agency mortgage-backed securities.

In addition, the Committee will maintain its

existing policy of rolling over maturing

Treasury securities at auction.

The Committee also decided to keep the target range for the federal funds rate at 0 to

¼ percent and 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 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 its 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 did not support additional policy accommodation at this time. Mr. Fisher saw a maturity extension program as providing few, if any, benefits in support of job creation or economic growth, while it could

potentially constrain or complicate the timely removal

of policy accommodation. In his view, any reduction in

long-term Treasury rates resulting from this policy action would likely lead to further hoarding by savers,

with counterproductive results on business and consumer confidence and spending behaviors. He felt that

policymakers should instead focus their attention on

improving the monetary policy transmission mechanism, particularly with regard to the activity of community banks, which are vital to small business lending

and job creation. Mr. Kocherlakota’s perspective on

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Federal Open Market Committee

the policy decision was again 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, and

the one-year-ahead forecast for inflation, had risen,

while unemployment, and the one-year-ahead forecast

for unemployment, had fallen. He did not believe that

providing more monetary accommodation was the appropriate response to those changes in the economy,

given the current policy framework. Mr. Plosser felt

that a maturity extension program would do little to

improve near-term growth or employment, in light of

the ongoing structural adjustments and fiscal challenges

both in the United States and abroad. Moreover, in his

view, with inflation continuing to run above earlier

forecasts, such a program could risk adding unwanted

inflationary pressures and complicate the eventual exit

from the period of extraordinarily accommodative

monetary policy.

Following the policy vote, the Manager of the System

Open Market Account summarized how the Desk

would implement the Committee’s decisions. To implement the maturity extension program, the Desk

would distribute purchases about evenly across nominal

Treasury securities with 6 to 8 years to maturity, with 8

to 10 years to maturity, and with 10 to 30 years to maturity; the Desk would also buy a small amount of TIPS

with remaining maturities of 6 to 30 years. This distribution would allocate a much larger share of purchases

to longer maturities than was the case in the Committee’s previous asset purchase programs. At the same

time, the Desk would sell, from the SOMA portfolio,

Treasury securities with remaining maturities of 3

months to 3 years. All Treasury purchases and sales

would be conducted using competitive auctions. With

respect to the MBS reinvestment program, the Desk

would concentrate purchases in newly issued agencybacked MBS and would conduct purchases through a

competitive bidding process.

It was agreed that the next meeting of the Committee

would be held on Tuesday–Wednesday, November 1-2,

2011. The meeting adjourned at 12:30 p.m. on September 21, 2011.

Secretary’s Note: The following information

regarding the June 21–22, 2011 FOMC

meeting was inadvertently omitted from previous minutes. By unanimous vote at that

meeting, the Committee ratified the Desk’s

domestic transactions since the April 26-27,

2011 meeting, and by notation vote completed on July 11, 2011, the Committee unanimously approved the minutes of the June

21–22 FOMC meeting.

_____________________________

William B. English

Secretary