FOMC Minutes

Page 1

_____________________________________________________________________________________________

Minutes of the Federal Open Market Committee

November 1–2, 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, November 1,

2011, at 10:30 a.m. and continued on Wednesday, November 2, 2011, at 8:30 a.m.

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

Robert deV. Frierson, Deputy Secretary, Office of

the Secretary, 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, Esther L. George, and Eric Rosengren, Presidents of the Federal Reserve Banks

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

William B. English, Secretary and Economist

Deborah J. Danker, Deputy Secretary

Matthew M. Luecke, Assistant Secretary

David W. Skidmore, Assistant Secretary

Michelle A. Smith, Assistant Secretary

Scott G. Alvarez, General Counsel

David W. Wilcox, Economist

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

Kamin, Loretta J. Mester, Simon Potter, David

Reifschneider, Harvey Rosenblum, Lawrence

Slifman, Daniel G. Sullivan, 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

Nellie Liang, Director, Office of Financial Stability

Policy and Research, Board of Governors

William Nelson, Deputy Director, Division of

Monetary Affairs, Board of Governors

Andrew T. Levin, Special Adviser to the Board,

Office of Board Members, 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

Michael P. Leahy, Senior Associate Director, Division of International Finance, Board of Governors; William Wascher, Senior Associate Director, Division of Research and Statistics,

Board of Governors

Ellen E. Meade, Senior Adviser, Division of Monetary Affairs, Board of Governors

Daniel M. Covitz and Michael T. Kiley,¹ Associate

Directors, Division of Research and Statistics,

Board of Governors

Christopher J. Erceg,¹ Deputy Associate Director,

Division of International Finance, Board of

Governors; Fabio M. Natalucci, Deputy Associate Director, Division of Monetary Affairs,

Board of Governors

Brian J. Gross,¹ Special Assistant to the Board, Office of Board Members, Board of Governors

__________________

¹ Attended the portion of the meeting relating to monetary policy strategies and communication.

Page 2

Federal Open Market Committee

_____________________________________________________________________________________________

David Lopez-Salido,¹ Assistant Director, Division

of Monetary Affairs, Board of Governors

David H. Small, Project Manager, Division of

Monetary Affairs, Board of Governors

Mark A. Carlson, Senior Economist, Division of

Monetary Affairs, Board of Governors

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

Sarah G. Green, First Vice President, Federal Reserve Bank of Richmond

Glenn D. Rudebusch, Executive Vice President,

Federal Reserve Bank of San Francisco

David Altig, Geoffrey Tootell, and Christopher J.

Waller, Senior Vice Presidents, Federal Reserve

Banks of Atlanta, Boston, and St. Louis, respectively

Todd E. Clark, Edward S. Knotek II, and Nathaniel Wuerffel, Vice Presidents, Federal Reserve

Banks of Cleveland, Kansas City, and New

York, respectively

Deborah L. Leonard, Assistant Vice President,

Federal Reserve Bank of New York

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

__________________

¹ Attended the portion of the meeting relating to monetary policy strategies and communication.

By unanimous vote, the Committee selected David W.

Wilcox to serve as Economist, and Lawrence Slifman

to serve as Associate Economist, effective November 1, 2011, until the selection of their successors at the

first regularly scheduled meeting of the Committee in

2012.

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 markets during the period since the Federal

Open Market Committee (FOMC) met on September 20–21, 2011. He also discussed the developments

in connection with the bankruptcy filing of MF Global

Holdings Ltd. and its finance subsidiary, MF Global

Finance USA Inc., and with the termination of MF

Global Inc. as a primary dealer. The Manager reported

on System open market operations, including the ongoing reinvestment into agency-guaranteed mortgagebacked securities (MBS) of principal payments received

on SOMA holdings of agency debt and agencyguaranteed MBS as well as the operations related to the

maturity extension program authorized at the September 20–21 FOMC meeting. By unanimous vote, the

Committee ratified the Desk’s domestic transactions

over the intermeeting period. There were no intervention operations in foreign currencies for the System’s

account over the intermeeting period.

Monetary Policy Strategies and Communication

The staff gave a presentation on alternative monetary

policy strategies, and meeting participants discussed

those alternatives as well as potential approaches for

enhancing the clarity of their public communications.

No decision was made at this meeting to change the

Committee’s policy strategy or communications. It was

noted that many central banks around the world pursue

an explicit inflation objective, maintain flexibility to

stabilize economic activity, and seek to communicate

their forecasts and policy plans as clearly as possible.

Many participants pointed to the merits of specifying

an explicit longer-run inflation goal, but it was noted

that such a step could be misperceived as placing greater weight on price stability than on maximum employment; consequently, some suggested that a numerical

inflation goal would need to be set forth within a context that clearly underscored the Committee’s commitment to fostering both parts of its dual mandate. More

broadly, a majority of participants agreed that it could

be beneficial to formulate and publish a statement that

would elucidate the Committee’s policy approach, and

participants generally expressed interest in providing

additional information to the public about the likely

future path of the target federal funds rate. The

Chairman asked the subcommittee on communications

to give consideration to a possible statement of the

Committee’s longer-run goals and policy strategy, and

he also encouraged the subcommittee to explore potential approaches for incorporating information about

participants’ assessments of appropriate monetary policy into the Summary of Economic Projections.

Committee participants shared their views regarding

the potential merits and pitfalls of making conditional

commitments regarding the future course of monetary

policy. As noted in the staff briefing, economic theory

and model simulations suggested that a policy strategy

Minutes of the Meeting of November 1–2, 2011

Page 3

_____________________________________________________________________________________________

involving such commitments could foster better macroeconomic outcomes than a discretionary approach of

reoptimizing policy at every meeting, so long as the

public understood the central bank’s strategy and believed that policymakers would follow through on

those commitments. Some participants noted that

conditional commitments might be particularly helpful

in providing additional accommodation and mitigating

downside risks when the policy rate is close to its effective lower bound, because a central bank can commit

to a shallower interest rate trajectory than investors

would expect if policymakers followed a purely discretionary approach. However, many pointed out that the

implementation of such a strategy could pose substantial communication challenges and that the benefits

would be diminished if the strategy was not fully credible. Indeed, one participant suggested that additional

purchases of longer-term securities would be a clearer

and more effective way to provide additional monetary

accommodation when the federal funds rate was near

its lower bound.

Given the potential pitfalls of pursuing commitment

strategies extending far out into the future, many participants thought that the Committee should consider

policies intended to accrue some of the gains from

conditional commitments and to perform well in a

wide range of alternative scenarios. In this vein, a

number of participants expressed support for the possibility of clarifying the conditionality of the Committee’s forward guidance about the trajectory of the federal funds rate through setting numerical thresholds for

unemployment and inflation that would warrant exceptionally low levels for the policy rate. However, several

participants noted that such thresholds could be confusing in the absence of a clear expression of the

Committee’s longer-term goals. Moreover, others suggested that such an approach could be problematic in

light of significant uncertainties about the longer-run

normal rate of unemployment.

One participant

pointed to those uncertainties as instead supporting the

use of thresholds as a way of managing potential inflation risks associated with additional accommodation.

The Committee also considered policy strategies that

would involve the use of an intermediate target such as

nominal gross domestic product (GDP) or the price

level. The staff presented model simulations that suggested that nominal GDP targeting could, in principle,

be helpful in promoting a stronger economic recovery

in a context of longer-run price stability. Other simulations suggested that the single-minded pursuit of a

price-level target would not be very effective in foster-

ing maximum sustainable employment; it was noted,

however, that price-level targeting where the central

bank maintained flexibility to stabilize economic activity over the short term could generate economic outcomes that would be more consistent with the dual

mandate. More broadly, a number of participants expressed concern that switching to a new policy framework could heighten uncertainty about future monetary

policy, risk unmooring longer-term inflation expectations, or fail to address risks to financial stability. Several participants observed that the efficacy of nominal

GDP targeting depended crucially on some strong assumptions, including the premise that the Committee

could make a credible commitment to maintaining such

a strategy over a long time horizon and that policymakers would continue adhering to that strategy even in the

face of a significant increase in inflation. In addition,

some participants noted that such an approach would

involve substantial operational hurdles, including the

difficulty of specifying an appropriate target level. In

light of the significant challenges associated with the

adoption of such frameworks, participants agreed that

it would not be advisable to make such a change under

present circumstances.

Staff Review of the Economic Situation

The information reviewed at the November 1–2 meeting indicated that the pace of economic activity strengthened somewhat in the third quarter, reflecting in part

a reversal of the temporary factors that weighed on

economic growth in the first half of the year. However, labor market conditions continued to be weak.

Overall consumer price inflation was more moderate

than earlier in the year, as prices of energy and some

commodities declined from their recent peaks. Inflation for other goods and services also appeared to have

moderated, and measures of longer-run inflation expectations remained stable.

Private nonfarm employment rose modestly in September, boosted in part by the return of communications workers who were on strike in August. Nonetheless, the pace of private-sector job gains in the third

quarter as a whole was less than it was in the first half

of the year. Meanwhile, employment in the state and

local government sector continued to trend lower. The

unemployment rate held at 9.1 percent in September,

and both long-duration unemployment and the share

of workers employed part time for economic reasons

were still high. Initial claims for unemployment insurance have edged down since the middle of September

but have remained at a level consistent with only mod-

Page 4

Federal Open Market Committee

_____________________________________________________________________________________________

est employment growth, and most indicators of businesses’ hiring plans have showed no improvement.

Industrial production rose modestly in September, and

the manufacturing capacity utilization rate edged up.

Output in the motor vehicle–related sectors continued

to step up following the disruptions associated with the

earthquake in Japan earlier in the year, but the pace of

factory production outside of those sectors was sluggish. Motor vehicle assemblies were scheduled to rise

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 modest increases in production in the coming

months.

Real personal consumption expenditures (PCE) rose

briskly in September but posted a more moderate gain

for the third quarter as a whole. Motor vehicle purchases increased significantly in September to a level

well above that in the spring (when availability of some

models was limited by supply chain disruptions), and

sales of new light motor vehicles stepped up further in

October. However, real disposable income declined in

the third quarter, as increases in consumer prices more

than offset small gains in nominal income. Moreover,

consumer sentiment continued to be downbeat in October.

Housing market activity remained very weak, held

down by the large overhang of foreclosed and distressed properties along with limited demand in an environment of uncertainty about future home prices and

tight underwriting standards for mortgage loans. Although starts and permits for new single-family homes

edged up in September, they stayed near the depressed

levels seen since the middle of last year. Sales of new

and existing homes continued to be soft in recent

months, and home prices trended lower.

Real business purchases of equipment and software

expanded appreciably in the third quarter. Moreover,

new orders for nondefense capital goods continued to

run ahead of shipments in August and September; the

buildup of unfilled orders pointed toward further increases in spending for business equipment in subsequent months. Nevertheless, survey measures of business conditions and sentiment in October suggested

that firms remained cautious. Real business expenditures for nonresidential construction also rose appreciably in the third quarter, but spending was still at a relatively low level and continued to be held back by elevated vacancy rates and tight credit conditions for con-

struction loans. In the third quarter, businesses increased their inventories at a much slower pace than in

the second quarter, and inventory-to-sales ratios in

most industries appeared to be in a comfortable range.

Real federal purchases increased in the third quarter, as

defense expenditures continued to rise from unusually

low levels early in the year, more than offsetting a decrease in nondefense spending. At the state and local

level, real purchases declined in the third quarter at a

noticeably slower rate than in the first half of the year

as the pace of reductions in payrolls eased and construction spending rose slightly.

The U.S. international trade deficit was virtually the

same in August as it was in July, as both exports and

imports moved down only by small amounts. The decrease in exports reflected lower sales of automotive

products and capital goods, which more than offset

increases in exports of industrial supplies and consumer

goods. The dip in imports was the result of lower purchases of capital goods, automotive products, and consumer goods, which outweighed an increase in petroleum imports. The advance release of the third-quarter

data for the national income and product accounts

showed real exports of goods and services expanding

faster than real imports. As a result, net exports were

estimated to have made a small positive contribution to

real GDP growth in the third quarter, a contribution of

about the same size as in the second quarter.

Overall U.S. consumer price inflation, as measured by

the PCE price index, was more moderate in the third

quarter than in the first half of the year. Consumer

prices for food and energy increased last quarter at a

slower pace than earlier in the year, and consumer prices excluding food and energy rose a bit less than in the

preceding quarter. Near-term inflation expectations

from the Thomson Reuters/University of Michigan

Surveys of Consumers in October continued to be well

below the elevated level seen in the spring, and longerterm inflation expectations in the survey remained stable.

Measures of labor compensation showed that wage

increases continued to be subdued. The employment

cost index increased at a modest rate over the year ending in the third quarter, and compensation per hour in

the nonfarm business sector appeared to have decalerated somewhat last quarter. Similarly, the 12-month

change in average hourly earnings for all employees

remained subdued in September.

Minutes of the Meeting of November 1–2, 2011

Page 5

_____________________________________________________________________________________________

Foreign economic activity appeared to have largely recovered from the effects of the Japanese disaster in

March, as production in Japan rebounded and supply

disruptions waned. However, recent data pointed to

considerable weakness in the euro-area economy.

Elsewhere, indicators were somewhat more upbeat,

with employment in Canada continuing to rise through

September, while GDP growth in China over the year

ending in the third quarter was a little less than in the

first half of the year but still quite robust. Foreign inflation remained contained, although the reversal of

earlier increases in energy prices appeared to be passing

through to consumer price inflation relatively slowly in

some countries.

Staff Review of the Financial Situation

Financial markets were quite volatile over the period

since the September FOMC meeting. Investor sentiment was strongly influenced by prospects for Europe,

as market participants remained highly attuned to developments regarding possible steps to contain the fiscal and banking problems there. Economic data releases that were, on balance, somewhat better than market

participants expected provided some support to financial markets.

Longer-term Treasury yields declined appreciably following the release of the September FOMC statement.

Investors reportedly viewed the Committee’s assessment of the economic outlook as more downbeat than

anticipated. In addition, the announcement that the

Federal Reserve would lengthen the average maturity of

its portfolio by purchasing longer-term Treasury securities and selling an equivalent amount of shorter-term

Treasury securities reportedly contributed to the decline in longer-term yields on the day. Yields on current-coupon agency MBS also moved lower on the announcement that the Federal Reserve would begin to

reinvest principal payments on agency securities in

agency MBS. Over the following weeks, movements in

yields were driven by shifts in investors’ assessments of

the ongoing efforts to address the European fiscal and

banking situation and by somewhat stronger-thanexpected U.S. economic data. On balance since the

September FOMC meeting, Treasury yields on shorterdated securities and the expected path of the federal

funds rate implied by money market futures quotes

were not much changed. Yields on Treasury securities

with maturities beyond 10 years moved down. Measures of near-term inflation compensation derived from

nominal and inflation-protected Treasury securities

rose slightly over the intermeeting period, while similar

measures of longer-term inflation compensation were

about unchanged.

Credit default swap (CDS) spreads and equity prices of

large U.S. banking organizations were again volatile

over the period. Investor sentiment toward these financial institutions was strongly influenced by changes

in investors’ assessments of the risks associated with

the European fiscal and banking problems and the exposure of various financial institutions to Europe.

Third-quarter U.S. bank earnings reports generally met

investors’ expectations. On net, equity prices for U.S.

banking firms were not much changed over the period

since the last FOMC meeting, while their CDS spreads

were a bit higher. European bank CDS spreads remained elevated, and these institutions continued to

face somewhat strained conditions in short-term bank

funding markets.

Although equity markets were volatile, broad U.S. equity price indexes ended the intermeeting period little

changed. Earnings reports for nonfinancial firms generally came in somewhat better than investors expected

and about in line with second-quarter levels. Gross

public equity issuance by nonfinancial firms continued

to be very weak in September and October, with a large

number of firms shelving planned initial public offerings amid the volatility in equity markets.

Yields on investment- and speculative-grade corporate

bonds edged lower, on net, over the period, leaving

their spreads to Treasury securities slightly narrower.

Credit flows for nonfinancial firms were mixed in September and October. The pace of bond financing by

investment-grade nonfinancial corporations slowed

some in October from its robust September pace, while

bond issuance by speculative-grade firms was limited.

Nonfinancial commercial paper outstanding posted

solid growth in October. In the leveraged loan market,

issuance financed by institutional investors slowed significantly in the third quarter.

Financing conditions for commercial real estate (CRE)

markets appeared to have deteriorated in some respects. Issuance of commercial mortgage-backed securities (CMBS) slowed further in the third quarter

amid widening CMBS spreads, and only a small number of deals were in the pipeline for the rest of the year.

Prices of most types of commercial properties remained depressed, and aggregate vacancy and delinquency rates for commercial properties were close to

their recent highs.

Page 6

Federal Open Market Committee

_____________________________________________________________________________________________

Interest rates on residential mortgages changed little,

on net, over the intermeeting period but remained at

historically low levels. The recent low rates appeared

to have only a modest effect on the pace of mortgage

refinancing, as tight underwriting standards and low

home equity continued to limit the access of many

households to the mortgage market. However, in October, the Federal Housing Finance Agency announced

changes to the Home Affordable Refinance Program to

expand eligibility and take-up among borrowers with

mortgages backed by Fannie Mae and Freddie Mac.

Indicators of home prices remained weak, reflecting a

large inventory of unsold properties and modest demand for homes. The pace at which performing prime

mortgages became newly delinquent rose over the

summer but remained below last year’s levels.

Consumer credit decreased in August. Growth in nonrevolving credit, which had been volatile due to a shift

in the timing of student loan originations, stepped

down from the pace seen earlier in the year but remained solid in recent months. Issuance of consumer

credit asset-backed securities continued at a moderate

pace through mid-October. Delinquency rates for several categories of consumer loans remained low, a reflection in part of tighter underwriting standards that

shifted the composition of borrowers toward those

with stronger credit histories.

Core commercial bank loans expanded slightly in the

third quarter. Commercial and industrial (C&I) loans

accelerated following the already strong increases seen

over the first half of the year. That growth was concentrated among large domestic banks and nonEuropean foreign institutions. Consumer loans on

banks’ books advanced modestly in the third quarter,

ending a two-year string of quarterly declines. Closedend residential mortgage loans held by banks also increased amid the modest pickup in refinancing activity,

while CRE loans contracted. The October Senior Loan

Officer Opinion Survey on Bank Lending Practices

showed less net easing of lending standards by domestic banks than in the past few surveys. In particular,

domestic banks reported little change in their standards

on C&I loans over the third quarter, on net, compared

with more widespread reports of easing in the previous

several quarters. Demand for loans reportedly was little changed, on balance, over the third quarter.

M2 grew at a modest pace in September and October,

well below the rapid rate seen in July and August.

Some of the factors that contributed to M2 growth

over the summer, such as concerns about European

financial developments and equity market volatility,

persisted and supported elevated levels of M2 deposits

but did not trigger additional sizable inflows. The

monetary base also grew moderately as its major components—reserve balances and currency—increased

over the period.

Foreign financial markets remained volatile over the

intermeeting period, and funding pressures for many

European financial institutions continued. After falling

sharply in August and early September, foreign equity

prices rose, with stocks in the euro area outperforming

those in most other economies. For most of the period, market participants seemed heartened by European leaders’ efforts to address the fiscal and financial

challenges present in the euro area, although the news

late in the period on a possible Greek referendum sent

stock prices down sharply. Benchmark sovereign yields

increased over the period, but spreads of yields on

10-year sovereign bonds of the most vulnerable euroarea countries over yields on German bunds were little

changed on net. Some reversal of safe-haven flows in

October reportedly led the dollar to give back most of

the gains it registered in late September, leaving the

broad nominal foreign exchange value of the dollar

little changed, on balance, relative to its level at the

time of the September FOMC meeting. At the end of

October, Japanese officials intervened in foreign exchange markets through sales of yen.

The first round of the three-month U.S. dollar auctions

that major foreign central banks announced on September 15 was held in October; demand was quite limited, and only the European Central Bank (ECB) drew

on its swap line with the Federal Reserve. Korea and

Japan announced that they would increase the size and

scope of their bilateral currency swap arrangements,

expanding the size of their existing won–yen swap arrangement and establishing a $30 billion facility in

which dollars could be swapped for either won or yen.

A number of central banks announced additional

measures to stimulate economic activity. The Bank of

England and Bank of Japan each announced expansions of their respective asset purchase programs, and

the ECB announced that it would conduct two refinancing operations with maturities of slightly more

than a year and launched a new covered bond purchase

program. The central banks of Brazil, Indonesia, and

Israel lowered their policy rates, citing a potential slowdown in global growth.

Minutes of the Meeting of November 1–2, 2011

Page 7

_____________________________________________________________________________________________

Staff Economic Outlook

With the recent data on spending, particularly for consumer expenditures and business outlays for capital

goods and nonresidential construction, stronger than

the staff anticipated at the time of the September

FOMC meeting, the staff’s near-term projection for the

rate of increase in real GDP was revised up. However,

other important near-term indicators of economic activity remained downbeat: Measures of consumer sentiment were still very low, business surveys pointed to

continued caution by firms, conditions in the labor

market remained weak, and gains in manufacturing

production outside of the motor vehicle–related sectors

were sluggish. Moreover, many of the factors that have

been restraining the recovery, such as the large overhang of vacant houses, tight credit conditions, and elevated risk premiums, remained in place. Consequently,

the staff’s outlook for economic activity over the medium term was similar to the projection prepared for

the September FOMC meeting. The staff continued to

project that real GDP would accelerate gradually in

2012 and 2013, supported by accommodative monetary

policy, further improvements in credit conditions, and

a pickup in consumer and business sentiment from

their current low levels. Over the forecast period, the

increase in real GDP was projected to be sufficient to

reduce the slack in product and labor markets only

slowly, and the unemployment rate was expected to

remain elevated at the end of 2013.

The staff’s forecast for inflation was essentially unchanged from the projection prepared for the September FOMC meeting. The upward pressure on consumer prices from the rise in commodity and import prices

early in the year was anticipated to ease further in the

current quarter. With longer-run inflation expectations

stable and significant slack anticipated to persist in labor and product markets, the staff continued to expect

prices to rise at a subdued pace in 2012 and 2013.

Participants’ Views on Current Conditions and the

Economic Outlook

In conjunction with this FOMC meeting, all participants—the five members of the Board of Governors

and the presidents of the 12 Federal Reserve Banks—

provided projections of output growth, the unemployment rate, and inflation for each year from 2011

through 2014 and over the longer run. Longer-run

projections represent each participant’s assessment of

the rate to which each variable would be expected to

converge, over time, under appropriate monetary policy

and in the absence of further shocks to the economy.

Although participants had revised downward their pro-

jections for growth since their previous forecasts in

June, they continued to anticipate that economic

growth would pick up and the unemployment rate

would decline gradually through 2014. They also continued to project that inflation would settle at or below

levels consistent with the Committee’s dual mandate.

Participants’ forecasts are described in more detail in

the Summary of Economic Projections, which is attached as an addendum to these minutes.

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

received during the intermeeting period as indicating

that economic growth had strengthened somewhat in

the third quarter, reflecting in part a reversal of temporary factors that had weighed on the economic recovery

in the first half of the year. Participants noted that

global supply chain disruptions associated with the natural disaster in Japan had diminished, and that the prices of energy and some commodities had come down

from their recent peaks, easing strains on household

budgets and likely contributing to a somewhat stronger

pace of consumer spending in recent months. More

broadly, final demand from consumers and businesses

was stronger than had been expected at the time of the

September FOMC meeting. Nonetheless, most participants anticipated that the pace of economic growth

would remain moderate over coming quarters. While

they believed that the economic recovery would continue to be supported by accommodative monetary

policy, ongoing improvements in households’ and

businesses’ financial positions, and pent-up demand for

goods and services, a number of factors were seen as

likely to continue to restrain the pace of economic

growth. Those included persistent weakness in the

labor and housing markets, still-tight credit conditions

for many households and small businesses, low consumer and business confidence, fiscal consolidation at

all levels of government, and elevated volatility in financial markets. Moreover, the recovery was still subject to significant downside risks, including strains in

global financial markets. With longer-term inflation

expectations remaining stable, the effects of earlier increases in the prices of energy and other commodities

continuing to wane, and low levels of resource utilization restraining increases in prices and wages, most participants anticipated that inflation would settle, over

coming quarters, at or below levels they judged to be

most consistent with their dual mandate.

In the household sector, incoming data on retail sales

were somewhat stronger than expected, and participants reported scattered optimism among their con-

Page 8

Federal Open Market Committee

_____________________________________________________________________________________________

tacts regarding the prospects for holiday spending.

Some participants thought that the effects of balance

sheet deleveraging might be running their course or

that such effects could be less powerful than had been

thought. Others noted that the recent pickup in consumer spending outpaced growth in after-tax incomes

and was accompanied by a decline in the saving rate,

raising doubts about its sustainability unless income

growth picked up. In addition, households appeared to

remain pessimistic about the prospects for their future

income, the job market was still weak, consumer confidence was historically very low, and credit conditions

for many households were still tight. The housing sector continued to be depressed, and some meeting participants indicated that the elevated supply of available

homes and the overhang of foreclosures, together with

limited access to mortgage credit, were continuing to

put downward pressure on house prices and housing

construction. A few participants noted that recent

government initiatives aimed at helping high-loan-tovalue borrowers refinance could be useful steps toward

stabilizing the housing market.

Business contacts in many parts of the country were

reported to be cautious and uncertain about the economic and political outlook and so remained reluctant

to hire or expand capacity. However, production in the

manufacturing, agriculture, and energy sectors continued to increase, and the auto sector was rebounding

from earlier supply chain disruptions. In addition,

businesses in a number of regions reported ongoing

capital investment to increase productivity. Input cost

pressures were said to have abated somewhat, while

labor costs remained subdued. Overall, credit costs

were low, and profits and balance sheets at nonfinancial

corporations were healthy, with many firms continuing

to hold very high levels of cash.

Despite some signs of improvement of late, the available indicators pointed to continued weakness in overall

labor market conditions, and the unemployment rate

remained elevated. Some participants suggested that

the persistently high level of unemployment reflected

the impact of structural factors, including mismatches

between the skills of the unemployed and the skills

demanded in sectors in which jobs were currently available. Consistent with this view, some business contacts

reportedly were concerned about the low quality of

many job applicants, while other contacts noted that

workers with some specialized skills continued to be in

short supply. However, other participants indicated

that such concerns were not new and that much of the

current elevated level of unemployment reflected cyc-

lical factors, with one pointing to the lack of wage pressures as evidence. As a result, they expected that unemployment would fall back as the economy recovered.

Some participants again warned that the exceptionally

high level of long-term unemployment could ultimately

lead to permanent negative effects on the skills and

employment prospects of the unemployed.

Meeting participants observed that financial markets

continued to be particularly volatile during the intermeeting period as investors responded to incoming

economic data and to news regarding fiscal and financial developments in Europe. Liquidity in many markets worsened, in part because financial institutions

more reliant on short-term funding markets reportedly

pulled back from risk-taking and became somewhat less

willing to make markets. Participants noted the announcement by European policymakers of a new package of measures to address Greece’s fiscal situation as

well as the vulnerabilities of European banks and sovereigns. However, participants indicated that many

details of the new plan had not yet been worked out

and that a number of important issues remained unresolved. Participants took note of the possible adverse

effects on U.S. financial markets and the broader U.S.

economy if European sovereign debt and banking

problems intensified. Participants observed, however,

that the capital and liquidity positions of U.S. banks

had strengthened in recent quarters and that the credit

quality of loans to businesses and households had improved further. Contacts in the banking sector reported that U.S. banks continued to be willing to extend loans to creditworthy borrowers, but loan demand

remained weak and competition for such borrowers

was putting pressure on net interest margins. It was

noted that very low interest rates were negatively affecting pension funds and the profitability of the life insurance industry. Participants also discussed the events

surrounding the bankruptcy filing of MF Global Holdings Ltd. and saw the financial stability implications of

this development as limited to date.

Participants generally agreed that measures of total inflation appeared to have moderated since earlier in the

year as prices of energy and some commodities declined from their peaks. Measures of core inflation also

seemed to have declined in recent months, and longerterm inflation expectations remained well anchored.

Nonetheless, some participants noted that core inflation had not come down as quickly or by as much as

they had expected in light of the reduction in commodity prices, perhaps suggesting that the level of potential

output was lower than had been thought. However,

Minutes of the Meeting of November 1–2, 2011

Page 9

_____________________________________________________________________________________________

other participants pointed to the subdued pace of gains

in labor costs as a factor damping inflation, and reports

from contacts suggested that upward pressure on wages

remained limited.

Regarding their overall outlook for economic activity,

participants generally agreed that, even with the positive news received over the intermeeting period, the

most probable outcome was a moderate pace of economic growth over the medium run with only a gradual

decline in the unemployment rate. While some factors

were seen as likely to support growth going forward—

such as pent-up demand, improvements in household

and business balance sheets, and accommodative monetary policy—participants observed that the pace of

economic recovery would likely continue to be held

down for some time by persistent headwinds. In particular, they pointed to very low levels of consumer and

business confidence, further efforts by households to

deleverage, cutbacks at all levels of government, elevated financial market volatility, still-tight credit conditions for some households and small businesses, and

the ongoing weakness in the labor and housing markets. While recent incoming data suggested reduced

odds that the economy would slide back into recession,

participants still saw significant downside risks to the

outlook for economic growth. Risks included potential

spillovers to U.S. financial markets and institutions, and

so to the broader U.S. economy, if the European debt

and banking crisis were to worsen significantly. In addition, participants noted the risk of a larger-thanexpected fiscal tightening and the possibility that structural problems in the housing market had attenuated

the transmission of monetary policy actions to the real

economy. It was also noted that the extended period

of highly accommodative monetary policy could eventually lead to a buildup of financial imbalances. A few

participants, however, mentioned the possibility that

economic growth could be more rapid than currently

expected, particularly if gains in output and employment led to a virtuous cycle of improvements in

household balance sheets, increased confidence, and

easier credit conditions.

With respect to the outlook for inflation, participants

generally anticipated that inflation would recede further

over coming quarters and would settle over the medium run at levels at or below those judged to be most

consistent with the Committee’s dual mandate. They

pointed to the further dissipation of the effects of earlier increases in the prices of energy and some commodities, the significant slack in resource utilization, the

continued subdued growth in labor compensation, and

well-anchored inflation expectations as factors likely to

contribute to the moderation in inflation over time. A

number of participants saw the risks to the outlook for

inflation as roughly balanced. A few participants felt

that the continuation of the current stance of monetary

policy, coupled with the possibility of a rebound in

energy and commodity prices, posed some upside risks

to inflation. Other participants instead saw inflation

risks as tilted to the downside, in light of their expectations for persistent resource slack. It was noted that

U.S. inflation had been influenced relatively more by

commodity price fluctuations in recent years; because

commodity prices reflect global economic conditions,

U.S. inflation might be less affected by domestic factors

and more linked to the global outlook than in the past.

Committee Policy Action

Members noted that information received over the intermeeting period pointed to somewhat stronger economic growth in the third quarter, partly reflecting a

reversal of temporary factors that had depressed economic growth in the first half of the year. However,

overall labor market conditions remained weak. Members generally anticipated that unemployment would

decline only gradually from levels significantly above

those that the Committee would expect to prevail in

the longer run, with inflation likely to settle at levels at

or below those consistent with the Committee’s dual

mandate. Accordingly, in the discussion of monetary

policy for the period ahead, all Committee members

agreed to continue the program of extending the average maturity of the Federal Reserve’s holdings of securities as announced in September. The Committee decided to maintain its existing policy of reinvesting principal payments from its holdings of agency debt and

agency MBS in agency MBS and of rolling over maturing Treasury securities at auction. In addition, the

Committee agreed to keep the target range for the federal funds rate at 0 to ¼ percent and to reiterate its expectation 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 few members expressed

interest in using language specifying a period of time

during which the federal funds rate was expected to

remain exceptionally low, rather than a calendar date,

arguing that such language might be better to indicate a

constant stance of monetary policy over time. However, members generally preferred to retain the existing

forward guidance, at least for now. A few members

indicated that they believed the economic outlook

Page 10

Federal Open Market Committee

_____________________________________________________________________________________________

might warrant additional policy accommodation.

However, it was noted that any such accommodation

would likely be more effective if it were provided in the

context of a future communications initiative, and most

of these members agreed that they could support retention of the current policy stance at this meeting. One

member dissented from the policy decision on the

grounds that additional monetary policy accommodation was warranted at this time. With the Committee in

the process of reviewing its monetary policy strategies

and communication, and no additional accommodation

being provided at this meeting, a few members indicated that they could support the Committee’s decision

even though they had not favored recent policy actions.

The Committee reiterated that it will regularly review

the size and composition of its securities holdings and

that it is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in the

context of price stability. With respect to the statement

to be released following the meeting, members agreed

that only relatively small changes were needed to reflect

the modest improvement in the economic outlook and

to note that the Committee would continue to implement its policy steps from recent meetings.

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 continue

the maturity extension program it began in

September 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 policies of

rolling over maturing Treasury securities into

new issues and of reinvesting 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 12:30 p.m.:

“Information received since the Federal

Open Market Committee met in September

indicates that economic growth strengthened

somewhat in the third quarter, reflecting in

part a reversal of the temporary factors that

had weighed on growth earlier in the year.

Nonetheless, recent indicators point to continuing weakness in overall labor market

conditions, and the unemployment rate remains elevated. Household spending has increased at a somewhat faster pace in recent

months. Business investment in equipment

and software has continued to expand, but

investment in nonresidential structures is still

weak, and the housing sector remains depressed. Inflation appears to have moderated since earlier in the year as prices of

energy and some commodities have declined

from their peaks. Longer-term 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 a moderate pace of economic growth over coming quarters and

consequently 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

Minutes of the Meeting of November 1–2, 2011

Page 11

_____________________________________________________________________________________________

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 continue its

program to extend the average maturity of its

holdings of securities as announced in September. The Committee is maintaining its

existing policies of reinvesting principal

payments from its holdings of agency debt

and agency mortgage-backed securities in

agency mortgage-backed securities and of

rolling over maturing Treasury securities at

auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those

holdings as appropriate.

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 will continue to assess the

economic outlook in light of incoming information and is prepared to employ its tools

to promote a stronger economic recovery in

a context of price stability.”

Voting for this action: Ben Bernanke, William C.

Dudley, Elizabeth Duke, Richard W. Fisher, Narayana

Kocherlakota, Charles I. Plosser, Sarah Bloom Raskin,

Daniel K. Tarullo, and Janet L. Yellen.

Voting against this action: Charles L. Evans.

Mr. Evans dissented because he saw the high unemployment rate and the outlook for only weak economic

growth as calling for additional policy accommodation

at this meeting. Moreover, the longer the current situation of low resource utilization lasted, the more the

economy’s longer-term growth potential could be impaired. Furthermore, given current policy, his outlook

was for inflation to come in below levels consistent

with the Committee’s dual mandate, bolstering the case

for additional monetary easing at this time. He also

believed policies with more-explicit forward guidance

about the economic conditions under which exceptionally low levels of the funds rate could be maintained

would improve the prospects for growth and employment and, while possibly admitting somewhat higher

inflation for a time, would still safeguard price stability.

It was agreed that the next meeting of the Committee

would be held on Tuesday, December 13, 2011. The

meeting adjourned at 10:30 a.m. on November 2, 2011.

Notation Vote

By notation vote completed on October 11, 2011, the

Committee unanimously approved the minutes of the

FOMC meeting held on September 20–21, 2011.

_____________________________

William B. English

Secretary

Page 1

_____________________________________________________________________________________________

Summary of Economic Projections

In conjunction with the November 1–2, 2011, Federal

Open Market Committee (FOMC) meeting, the members of the Board of Governors and the presidents of

the Federal Reserve Banks, all of whom participate in

the deliberations of the FOMC, submitted projections

for growth of real output, the unemployment rate, and

inflation for the years 2011 to 2014 and over the longer

run. The projections were based on information available at the time of the meeting and on each participant’s assumptions about factors likely to affect economic outcomes, including his or her assessment of

appropriate monetary policy. “Appropriate monetary

policy” is defined as the future path of policy that each

participant deems most likely to foster outcomes for

economic activity and inflation that best satisfy his or

her interpretation of the Federal Reserve’s dual objectives of maximum employment and stable prices.

Longer-run projections represent each participant’s

assessment of the rate to which each variable would be

expected to converge over time under appropriate

monetary policy and in the absence of further shocks.

As depicted in figure 1, FOMC participants expected

the economic recovery to continue at a moderate pace,

with the growth of real gross domestic product (GDP)

slowing this year compared with its pace in 2010 but

then picking up gradually through 2014. With expectations that the pace of economic growth will modestly

exceed participants’ estimates of the longer-run sustainable rate of increase in real GDP, the unemploy-

ment rate is projected to decline only gradually over

this projection period. As a result, participants anticipated that, at the end of 2014, the unemployment rate

would remain well above their estimates of the unemployment rate that they see as consistent, over the

longer run, with the Committee’s dual mandate of maximum employment and price stability. Most participants anticipated that the factors underlying the noticeable rise in overall inflation in 2011 would be largely

transitory and that inflation would move lower in 2012;

thereafter, inflation was expected to remain at levels

roughly consistent with or below rates that they see as

consistent with the Committee’s dual mandate. Participants generally viewed the rate of core inflation as likely to remain at or somewhat below its 2011 level

throughout the projection period.

On balance, as indicated in table 1, participants anticipated somewhat slower economic growth and somewhat higher unemployment relative to their projections

in June; they raised their projections for inflation in

2011 but left their projections for inflation from 2012

onward about unchanged since the June meeting. All

of the participants made substantial downward revisions to their projections for GDP growth in 2011, and

most marked down their projections for economic

growth in 2012 and 2013; however, participants did not

materially alter their expectations for the normal rate of

economic growth that would prevail in the longer run.

Although participants continue to expect a gradual de-

Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, November 2011

Percent

Variable

Range2

Central tendency1

2014

Longer run

2013

2014

Longer run

Change in real GDP . . 1.6 to 1.7

June projection. . . 2.7 to 2.9

2011

2.5 to 2.9 3.0 to 3.5

3.3 to 3.7 3.5 to 4.2

2012

2013

3.0 to 3.9

n.a.

2.4 to 2.7

2.5 to 2.8

1.6 to 1.8 2.3 to 3.5

2.5 to 3.0 2.2 to 4.0

2011

2012

2.7 to 4.0

3.0 to 4.5

2.7 to 4.5

n.a.

2.2 to 3.0

2.4 to 3.0

Unemployment rate. . . 9.0 to 9.1

June projection. . . 8.6 to 8.9

8.5 to 8.7 7.8 to 8.2

7.8 to 8.2 7.0 to 7.5

6.8 to 7.7

n.a.

5.2 to 6.0

5.2 to 5.6

8.9 to 9.1 8.1 to 8.9

8.4 to 9.1 7.5 to 8.7

7.5 to 8.4

6.5 to 8.3

6.5 to 8.0

n.a.

5.0 to 6.0

5.0 to 6.0

PCE inflation. . . . . . . . 2.7 to 2.9

June projection. . . 2.3 to 2.5

1.4 to 2.0 1.5 to 2.0

1.5 to 2.0 1.5 to 2.0

1.5 to 2.0

n.a.

1.7 to 2.0

1.7 to 2.0

2.5 to 3.3 1.4 to 2.8

2.1 to 3.5 1.2 to 2.8

1.4 to 2.5

1.3 to 2.5

1.5 to 2.4

n.a.

1.5 to 2.0

1.5 to 2.0

Core PCE inflation3. . 1.8 to 1.9

June projection. . . . 1.5 to 1.8

1.5 to 2.0 1.4 to 1.9

1.4 to 2.0 1.4 to 2.0

1.5 to 2.0

n.a.

1.7 to 2.0 1.3 to 2.1

1.5 to 2.3 1.2 to 2.5

1.4 to 2.1

1.3 to 2.5

1.4 to 2.2

n.a.

NOTE: Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are from the fourth quarter of the previous

year to the fourth quarter of the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index for personal consumption expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated. Each participant’s projections are based on his or her assessment of appropriate monetary

policy. Longer-run projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate

monetary policy and in the absence of further shocks to the economy. The June projections were made in conjunction with the meeting of the Federal Open

Market Committee on June 21–22, 2011.

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

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

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

Page 2

Federal Open Market Committee

_____________________________________________________________________________________________

Figure 1. Central tendencies and ranges of economic projections, 2011–14 and over the longer run

Percent

Change in real GDP

4

Central tendency of projections

Range of projections

3

2

1

+

0

_

1

Actual

2

3

2006

2007

2008

2009

2010

2011

2012

2013

2014

Longer

run

Percent

Unemployment rate

10

9

8

7

6

5

2006

2007

2008

2009

2010

2011

2012

2013

2014

Longer

run

Percent

PCE inflation

3

2

1

2006

2007

2008

2009

2010

2011

2012

2013

2014

Longer

run

Percent

Core PCE inflation

3

2

1

2006

2007

2008

2009

2010

2011

2012

2013

NOTE: Definitions of variables are in the notes to table 1. The data for the actual values of the variables are annual.

2014

Summary of Economic Projections of the Meeting of November 1–2, 2011

Page 3

_____________________________________________________________________________________________

cline in the unemployment rate over time, most participants revised up their projections for the path of the

unemployment rate over the forecast period, and some

participants also raised their projections of the longerrun rate of unemployment compared with June. Participants’ projections for overall and core inflation this

year were slightly higher than in June, but their projections for 2012, 2013, and over the longer run were

broadly similar to those made in June.

As indicated in figure 2, a sizable majority of participants continued to attach an unusually high level of

uncertainty to their projections for economic growth,

the unemployment rate, and inflation relative to historical norms. Most participants viewed the risks to output growth as being weighted to the downside and the

risks to the unemployment rate as being weighted to

the upside. Most participants saw the risks to overall

and core inflation as broadly balanced.

The Outlook

Participants marked their forecasts down significantly

for real GDP growth in 2011, with the central tendency

of their projections forming a narrow band from 1.6 to

1.7 percent, down from 2.7 to 2.9 percent in June. Participants stated that the downward revision reflected

the body of economic data received since June, particularly the comprehensive annual revisions and the estimate of second-quarter GDP published by the Bureau

of Economic Analysis, which showed that the expansion in real GDP in the first half of the year had been

considerably slower than the participants had expected

at the time of their June projections. More-recent data

indicated that output growth strengthened during the

third quarter, reflecting in part a reversal of the temporary factors that had weighed on real activity earlier in

the year, 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 disaster in Japan. However, several participants indicated that some of the factors contributing to

the slowdown in GDP growth earlier in the year, including reduced spending by state and local governments, were likely to be more persistent. Participants

also noted that heightened uncertainty regarding economic and financial developments, as well as low confidence among businesses and consumers, continued to

restrain economic activity.

Looking further ahead, participants continued to expect

a moderate pickup in the pace of the economic recovery over the next couple of years, albeit to growth rates

somewhat below those previously projected. The cen-

tral tendency of participants’ projections for output

growth in 2012 was 2.5 to 2.9 percent, followed by central tendencies of 3.0 to 3.5 percent in 2013 and 3.0 to

3.9 percent in 2014. Participants anticipated that the

economic expansion would be supported by continued

monetary policy accommodation, reduced commodity

cost pressures, strengthening household balance sheets,

and improving financial conditions. However, in

downgrading the trajectory of their projections compared with those in June, participants cited a number of

forces that were likely to restrain the pace of output

growth over the next few years, including tighter fiscal

policy at all levels of government, ongoing drag from

the troubled housing sector, volatility in financial markets, and possibly reduced external demand. Many also

pointed to the additional headwinds of still-tight credit

conditions for some households and smaller businesses, weak consumer and business sentiment, persistently

high unemployment, and slow income growth. In addition, some participants noted that although energy and

commodity prices had fallen back, they remain at elevated levels that might weigh on spending for a time.

The central tendency of participants’ projections for

the longer-run rate of real GDP growth, in the absence

of further shocks, was 2.4 to 2.7 percent, a bit slower

than projected in June.

In response to the ongoing weakness in labor market

conditions and the downward revisions to their assessments of the economic outlook, participants

marked up their forecasts for the unemployment rate

over the forecast period. For the fourth quarter of this

year, the central tendency of participants’ projections

rose to 9.0 to 9.1 percent from 8.6 to 8.9 percent reported in June. Similar upward revisions were made

for 2012 and 2013, with the central tendencies of the

unemployment rate projections for those years now at

8.5 to 8.7 percent and 7.8 to 8.2 percent, respectively.

The central tendency of their unemployment rate projections for the end of 2014 was 6.8 to 7.7 percent, indicating expectations for an ongoing, gradual improvement in the employment situation, but one that

continued to leave the unemployment rate well above

the 5.2 to 6.0 percent central tendency of participants’

estimates of the unemployment rate that would prevail

over the longer run in the absence of further shocks.

The upper bound of the central tendency of participants’ longer-run projections was higher than in June,

although the range of participants’ estimates was unchanged.

Participants noted that measures of consumer price

inflation had increased this year relative to both their

Page 4

Federal Open Market Committee

_____________________________________________________________________________________________

Figure 2. Uncertainty and risks in economic projections

Number of participants

Uncertainty about GDP growth

18

November projections

June projections

Lower

Broadly

similar

16

Number of participants

Risks to GDP growth

14

12

12

10

10

8

8

6

6

4

4

2

2

Weighted to

downside

Broadly

balanced

Number of participants

Lower

Broadly

similar

18

Number of participants

Risks to the unemployment rate

Broadly

similar

16

14

12

12

10

10

8

8

6

6

4

4

2

2

Weighted to

downside

18

Broadly

balanced

Number of participants

Risks to PCE inflation

Broadly

similar

Higher

18

16

14

14

12

12

10

10

8

8

6

6

4

4

2

2

Weighted to

downside

Broadly

balanced

Number of participants

Lower

Weighted to

upside

16

Higher

Uncertainty about core PCE inflation

18

14

Number of participants

Lower

Weighted to

upside

16

Higher

Uncertainty about PCE inflation

16

14

Higher

Uncertainty about the unemployment rate

18

November projections

June projections

18

Weighted to

upside

Number of participants

Risks to core PCE inflation

18

16

16

14

14

12

12

10

10

8

8

6

6

4

4

2

2

Weighted to

downside

Broadly

balanced

Weighted to

upside

NOTE: For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.” Definitions of variables are in the general

note to table 1.

Summary of Economic Projections of the Meeting of November 1–2, 2011

Page 5

_____________________________________________________________________________________________

levels in 2010 and the projections made in June, reflecting in part higher prices of oil and other commodities

that had larger effects than previously expected. The

central tendency of their estimates for total personal

consumption expenditures (PCE) inflation in 2011 rose

to 2.7 to 2.9 percent compared with 2.3 to 2.5 percent

in June. Most participants anticipated that the influence of higher commodity prices and supply chain disruptions from Japan would be temporary and that inflation pressures in the next several years would be subdued as commodity prices stabilized, inflation expectations remained well anchored, and large margins of

slack in labor markets kept labor costs in check. As a

result, the central tendency of participants’ projections

of total PCE inflation was about 1.5 to 2.0 percent in

2012, 2013, and 2014, similar to their forecasts in June

and at or slightly below the 1.7 to 2.0 percent central

tendency of their estimates of the longer-run, mandateconsistent rate of inflation. The central tendency of

participants’ projections of core PCE inflation in 2011

shifted up to 1.8 to 1.9 percent, compared with 1.5 to

1.8 percent in June, as some of this year’s run-up in

commodity prices passed through to core prices.

However, the central tendencies of the projections of

core inflation for the next three years were approximately 1.5 to 2.0 percent, essentially unchanged from

their June levels and roughly similar to participants’

projections for headline inflation.

Uncertainty and Risks

In their assessments of the uncertainty and risks associated with their projections, a substantial majority of

participants continued to judge that the levels of uncertainty associated with their projections for economic

growth, the unemployment rate, and inflation were

greater than the average levels that had prevailed over

the past 20 years.1 They pointed to a number of factors

that raised their assessments of uncertainty regarding

output growth and unemployment, including concerns

about the ongoing developments in Europe, the severity of the recent recession, and the pace at which the

numerous financial and economic headwinds buffeting

the economy will recede. However, slightly fewer participants reported a higher-than-average degree of unTable 2 provides estimates of forecast uncertainty for the

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

the end of this summary, the box “Forecast Uncertainty”

discusses the sources and interpretation of uncertainty in the

economic forecasts and explains the approach used to assess

the uncertainty and risks attending the participants’ projections.

1

Table 2. Average historical projection error ranges

Percentage points

2011

2012

2013

2014

Change in real GDP1 . . . . .

Variable

±0.6

±1.4

±1.7

±1.8

Unemployment rate1 . . . . .

±0.2

±0.9

±1.5

±1.8

Total consumer prices2 . . . .

±0.5

±0.9

±1.0

±1.0

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

root mean squared error of projections for 1991 through 2010 that

were released in the fall by various private and government forecasters. As described in the box “Forecast Uncertainty,” under certain

assumptions, there is about a 70 percent probability that actual outcomes for real GDP, unemployment, and consumer prices will be in

ranges implied by the average size of projection errors made in the

past. Further information is in David Reifschneider and Peter Tulip

(2007), “Gauging the Uncertainty of the Economic Outlook from

Historical Forecasting Errors,” Finance and Economics Discussion

Series 2007-60 (Washington: Board of Governors of the Federal

Reserve System, November).

1. For definitions, refer to general note in table 1.

2. Measure is the overall consumer price index, the price measure that has been most widely used in government and private economic forecasts. Projection is percent change, fourth quarter of the

previous year to the fourth quarter of the year indicated.

certainty around their inflation projections than in June.

Participants noted that uncertainties about the pace of

economic recovery and the effects of the Federal Reserve’s extraordinary monetary policy accommodation,

as well as the timing of exit from it, were significant

sources of uncertainty in the outlook for inflation.

However, a number of participants highlighted that

inflation currently remains anchored by stable longerterm inflation expectations.

Although several participants noted that the risks of a

near-term recession had likely diminished, most participants continued to judge that the balance of risks to

economic growth was weighted to the downside (that

is, they judged that economic growth was more likely to

be below their projection of its most likely outcome

than above it). The remaining participants saw the

risks as balanced. The most frequently cited downside

risks to growth included possible financial market and

economic spillovers from an intensification of the financial strains in Europe, vulnerabilities related to weak

consumer and business confidence, the possible effects

on spending of uncertainties about regulatory policy,

and the potential consequences of larger-than-expected

near-term fiscal consolidation. The risks surrounding

participants’ forecasts of the unemployment rate

shifted higher, with a larger number of participants relative to June viewing the risks to their projections as

weighted to the upside, and the remaining participants

seeing the risks as broadly balanced.

A majority of the participants continued to judge the

risks to their projections of overall and core inflation to

Page 6

Federal Open Market Committee

_____________________________________________________________________________________________

be broadly balanced. Compared with their assessments

in June, a smaller number of participants viewed the

risks to inflation as being weighted to the upside, and

more participants indicated that the risks were weighted

to the downside; the changes left the number of participants who saw a skew in either direction more evenly

distributed. Some participants saw a risk that elevated

resource slack could put more downward pressure on

inflation than expected. Nevertheless, some participants noted the risk that commodity prices could experience renewed volatility or have a longer-lasting influence than expected. A few participants pointed to the

possibility that the current highly accommodative

stance of monetary policy, if it were maintained for

longer than is appropriate, could lead to higher inflation expectations and actual inflation; some also

thought that fiscal imbalances could have a similar effect.

Diversity of Views

Figures 3.A and 3.B provide further details on the diversity of participants’ views regarding the likely outcomes for real GDP growth and the unemployment

rate over the next few years and over the longer run.

The dispersion in these projections continued to reflect

differences in participants’ assessments of many factors, including the underlying momentum in economic

activity, appropriate future monetary policy and its effects on economic activity, the effects of the European

situation, and the future path of U.S. fiscal policy.

With much of the data for 2011 now in hand, the dispersion of participants’ projections of output growth

and the unemployment rate this year narrowed substantially relative to June. The range of participants’ projections for these variables in 2012 and 2013 also narrowed somewhat; however, the range of projections for

real GDP growth in each of those years shifted to the

lower end of the range of their June projections, and

the range of projections for the unemployment rate

shifted to the higher end of the June distribution. The

dispersion associated with participants’ longer-run projections of output growth and the unemployment rate

changed very little, although the dispersion of their

projections in 2014 exceeded the dispersion of their

longer-run ranges, suggesting greater agreement among

policymakers about the economy’s longer-run performance than the path of convergence toward it. A sizable majority of the participants judged that, in the absence of any additional shocks, the economy would

converge fully to its longer-run rates of GDP growth,

unemployment, and inflation within about five or six

years; a few participants indicated that convergence

might take a longer period of time, and one participant

believed convergence could occur more rapidly.

Figures 3.C and 3.D provide corresponding information about the diversity of participants’ outlooks for

inflation. The center of mass of the distributions of

participants’ projections for overall and core PCE inflation in 2011 shifted to the right relative to the ranges of

these projections provided in June. The dispersion of

projections for total PCE inflation in 2012 and 2013

changed little, although the top end of the range of participants’ projections was somewhat higher than that of

their projections for core inflation, suggesting that a

few participants are concerned that elevated price increases for food and energy will persist for a time. The

dispersion of projections for core inflation narrowed

somewhat, driven predominantly by a decline in the

upper end of the ranges. The ranges of inflation projections for 2014 were similar to those for 2012 and

2013. In general, the dispersion of participants’ inflation forecasts for the next few years represented differences in judgments regarding the fundamental determinants of inflation, including the degree of resource

slack and the extent to which resource slack influences

inflation outcomes and expectations, as well as estimates of how the stance of monetary policy may influence inflation expectations. By contrast, the unchanged

and relatively concentrated distribution of participants’

projections for overall inflation over the longer run

continued to reflect broad similarity in participants’

assessments of the approximate level of inflation that is

consistent with the Federal Reserve’s dual objectives of

maximum employment and price stability.

Summary of Economic Projections of the Meeting of November 1–2, 2011

Page 7

_____________________________________________________________________________________________

Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2011–14 and over the longer run

Number of participants

18

16

14

12

10

8

6

4

2

2011

November projections

June projections

0.80.9

1.01.1

1.21.3

1.41.5

1.61.7

1.81.9

2.02.1

2.22.3

2.42.5

2.62.7

2.82.9

3.03.1

3.23.3

3.43.5

3.63.7

3.83.9

4.04.1

4.24.3

4.44.5

Percent range

Number of participants

18

16

14

12

10

8

6

4

2

2012

0.80.9

1.01.1

1.21.3

1.41.5

1.61.7

1.81.9

2.02.1

2.22.3

2.42.5

2.62.7

2.82.9

3.03.1

3.23.3

3.43.5

3.63.7

3.83.9

4.04.1

4.24.3

4.44.5

Percent range

Number of participants

18

16

14

12

10

8

6

4

2

2013

0.80.9

1.01.1

1.21.3

1.41.5

1.61.7

1.81.9

2.02.1

2.22.3

2.42.5

2.62.7

2.82.9

3.03.1

3.23.3

3.43.5

3.63.7

3.83.9

4.04.1

4.24.3

4.44.5

Percent range

Number of participants

18

16

14

12

10

8

6

4

2

2014

0.80.9

1.01.1

1.21.3

1.41.5

1.61.7

1.81.9

2.02.1

2.22.3

2.42.5

2.62.7

2.82.9

3.03.1

3.23.3

3.43.5

3.63.7

3.83.9

4.04.1

4.24.3

4.44.5

Percent range

Number of participants

18

16

14

12

10

8

6

4

2

Longer run

0.80.9

1.01.1

1.21.3

1.41.5

1.61.7

1.81.9

2.02.1

2.22.3

2.42.5

2.62.7

Percent range

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

2.82.9

3.03.1

3.23.3

3.43.5

3.63.7

3.83.9

4.04.1

4.24.3

4.44.5

Page 8

Federal Open Market Committee

_____________________________________________________________________________________________

Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2011–14 and over the longer run

Number of participants

18

16

14

12

10

8

6

4

2

2011

November projections

June projections

5.05.1

5.25.3

5.45.5

5.65.7

5.85.9

6.06.1

6.26.3

6.46.5

6.66.7

6.86.9

7.07.1

7.27.3

7.47.5

7.67.7

7.87.9

8.08.1

8.28.3

8.48.5

8.68.7

8.88.9

9.09.1

Percent range

Number of participants

18

16

14

12

10

8

6

4

2

2012

5.05.1

5.25.3

5.45.5

5.65.7

5.85.9

6.06.1

6.26.3

6.46.5

6.66.7

6.86.9

7.07.1

7.27.3

7.47.5

7.67.7

7.87.9

8.08.1

8.28.3

8.48.5

8.68.7

8.88.9

9.09.1

Percent range

Number of participants

18

16

14

12

10

8

6

4

2

2013

5.05.1

5.25.3

5.45.5

5.65.7

5.85.9

6.06.1

6.26.3

6.46.5

6.66.7

6.86.9

7.07.1

7.27.3

7.47.5

7.67.7

7.87.9

8.08.1

8.28.3

8.48.5

8.68.7

8.88.9

9.09.1

Percent range

Number of participants

18

16

14

12

10

8

6

4

2

2014

5.05.1

5.25.3

5.45.5

5.65.7

5.85.9

6.06.1

6.26.3

6.46.5

6.66.7

6.86.9

7.07.1

7.27.3

7.47.5

7.67.7

7.87.9

8.08.1

8.28.3

8.48.5

8.68.7

8.88.9

9.09.1

Percent range

Number of participants

18

16

14

12

10

8

6

4

2

Longer run

5.05.1

5.25.3

5.45.5

5.65.7

5.85.9

6.06.1

6.26.3

6.46.5

6.66.7

6.86.9

7.07.1

Percent range

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

7.27.3

7.47.5

7.67.7

7.87.9

8.08.1

8.28.3

8.48.5

8.68.7

8.88.9

9.09.1

Summary of Economic Projections of the Meeting of November 1–2, 2011

Page 9

_____________________________________________________________________________________________

Figure 3.C. Distribution of participants’ projections for PCE inflation, 2011–14 and over the longer run

Number of participants

18

16

14

12

10

8

6

4

2

2011

November projections

June projections

1.11.2

1.31.4

1.51.6

1.71.8

1.92.0

2.12.2

2.32.4

2.52.6

2.72.8

2.93.0

3.13.2

3.33.4

3.53.6

Percent range

Number of participants

18

16

14

12

10

8

6

4

2

2012

1.11.2

1.31.4

1.51.6

1.71.8

1.92.0

2.12.2

2.32.4

2.52.6

2.72.8

2.93.0

3.13.2

3.33.4

3.53.6

Percent range

Number of participants

18

16

14

12

10

8

6

4

2

2013

1.11.2

1.31.4

1.51.6

1.71.8

1.92.0

2.12.2

2.32.4

2.52.6

2.72.8

2.93.0

3.13.2

3.33.4

3.53.6

Percent range

Number of participants

18

16

14

12

10

8

6

4

2

2014

1.11.2

1.31.4

1.51.6

1.71.8

1.92.0

2.12.2

2.32.4

2.52.6

2.72.8

2.93.0

3.13.2

3.33.4

3.53.6

Percent range

Number of participants

18

16

14

12

10

8

6

4

2

Longer run

1.11.2

1.31.4

1.51.6

1.71.8

1.92.0

2.12.2

2.32.4

Percent range

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

2.52.6

2.72.8

2.93.0

3.13.2

3.33.4

3.53.6

Page 10

Federal Open Market Committee

_____________________________________________________________________________________________

Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2011–14

Number of participants

18

16

14

12

10

8

6

4

2

2011

November projections

June projections

1.11.2

1.31.4

1.51.6

1.71.8

1.92.0

2.12.2

2.32.4

2.52.6

Percent range

Number of participants

18

16

14

12

10

8

6

4

2

2012

1.11.2

1.31.4

1.51.6

1.71.8

1.92.0

2.12.2

2.32.4

2.52.6

Percent range

Number of participants

18

16

14

12

10

8

6

4

2

2013

1.11.2

1.31.4

1.51.6

1.71.8

1.92.0

2.12.2

2.32.4

2.52.6

Percent range

Number of participants

18

16

14

12

10

8

6

4

2

2014

1.11.2

1.31.4

1.51.6

1.71.8

Percent range

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

1.92.0

2.12.2

2.32.4

2.52.6

Summary of Economic Projections of the Meeting of November 1–2, 2011

Page 11

_____________________________________________________________________________________________

Forecast Uncertainty

The economic projections provided by

the members of the Board of Governors and

the presidents of the Federal Reserve Banks

inform discussions of monetary policy among

policymakers and can aid public understanding of the basis for policy actions. Considerable uncertainty attends these projections,

however. The economic and statistical models

and relationships used to help produce economic forecasts are necessarily imperfect descriptions of the real world, and the future

path of the economy can be affected by myriad unforeseen developments and events.

Thus, in setting the stance of monetary policy,

participants consider not only what appears to

be the most likely economic outcome as embodied in their projections, but also the range

of alternative possibilities, the likelihood of

their occurring, and the potential costs to the

economy should they occur.

Table 2 summarizes the average historical

accuracy of a range of forecasts, including

those reported in past Monetary Policy Reports

and those prepared by the Federal Reserve

Board’s staff in advance of meetings of the

Federal Open Market Committee. The projection error ranges shown in the table illustrate the considerable uncertainty associated

with economic forecasts. For example, suppose a participant projects that real gross domestic product (GDP) and total consumer

prices will rise steadily at annual rates of, respectively, 3 percent and 2 percent. If the

uncertainty attending those projections is similar to that experienced in the past and the risks

around the projections are broadly balanced,

the numbers reported in table 2 would imply a

probability of about 70 percent that actual

GDP would expand within a range of 2.4 to

3.6 percent in the current year, 1.6 to 4.4 percent in the second year, 1.3 to 4.7 percent in the

third year, and 1.2 to 4.8 percent in the fourth

year. The corresponding 70 percent confidence

intervals for overall inflation would be 1.5 to

2.5 percent in the current year, 1.1 to 2.9 percent in the second year, and 1.0 to 3.0 percent

in the third and fourth years.

Because current conditions may differ

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

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

than, or broadly similar to typical levels of

forecast uncertainty in the past, as shown in

table 2. Participants also provide judgments as

to whether the risks to their projections are

weighted to the upside, are weighted to the

downside, or are broadly balanced. That is,

participants judge whether each variable is

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

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

with a particular projection rather than with

divergences across a number of different projections.