FOMC Minutes

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Minutes of the Federal Open Market Committee

December 13, 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, December 13,

2011, at 8:30 a.m.

PRESENT:

Ben Bernanke, Chairman

William C. Dudley, Vice Chairman

Elizabeth Duke

Charles L. Evans

Richard W. Fisher

Narayana Kocherlakota

Charles I. Plosser

Sarah Bloom Raskin

Daniel K. Tarullo

Janet L. Yellen

Christine Cumming, Jeffrey M. Lacker, Dennis P.

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

Market Committee

James Bullard, 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

Thomas C. Baxter, Deputy General Counsel

Steven B. Kamin, Economist

David W. Wilcox, Economist

Thomas A. Connors, Loretta J. Mester, Simon Potter, David Reifschneider, Harvey Rosenblum,

and Lawrence Slifman, Associate Economists

Brian Sack, Manager, System Open Market Account

Jennifer J. Johnson, Secretary of the Board, Office

of the Secretary, Board of Governors

Robert deV. Frierson, Deputy Secretary, Office of

the Secretary, Board of Governors

Maryann F. Hunter, Deputy Director, Division of

Banking Supervision and Regulation, Board of

Governors; William Wascher, Deputy Director, Division of Research and Statistics, Board

of Governors

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

Governors

Andrew T. Levin, Special Advisor to the Board,

Office of Board Members, Board of Governors

Linda Robertson, Assistant to the Board, Office of

Board Members, Board of Governors

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

Michael P. Leahy, Senior Associate Director,

Division of International Finance, Board of

Governors

Ellen E. Meade, Stephen A. Meyer, and Joyce K.

Zickler, Senior Advisers, Division of Monetary

Affairs, Board of Governors

Eric M. Engen, Michael T. Kiley, and Michael G.

Palumbo, 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

Gordon Werkema, First Vice President, Federal

Reserve Bank of Chicago

Jeff Fuhrer and Mark S. Sniderman, Executive Vice

Presidents, Federal Reserve Banks of Boston

and Cleveland, respectively

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

Spencer Krane, and Christopher J. Waller,

Senior Vice Presidents, Federal Reserve Banks

of Atlanta, Kansas City, New York, Chicago,

and St. Louis, respectively

Mary C. Daly, Group Vice President, Federal Reserve Bank of San Francisco

Alexander L. Wolman, Senior Economist and Research Advisor, Federal Reserve Bank of

Richmond

Samuel Schulhofer-Wohl, Senior Economist, Federal Reserve Bank of Minneapolis

By unanimous vote, the Committee selected Steven B.

Kamin to serve as Economist until the selection of a

successor 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 financial markets during the period since the

Federal Open Market Committee (FOMC) met on November 1–2, 2011. He also reported on System open

market operations, including the ongoing reinvestment

into agency-guaranteed mortgage-backed securities

(MBS) of principal payments received on SOMA holdings of agency debt and agency-guaranteed 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.

Staff Review of the Economic Situation

The information reviewed at the December 13 meeting

indicated that U.S. economic activity expanded moderately despite some apparent slowing in the growth of

foreign economies and strains in global financial markets. Conditions in the labor market seemed to have

improved somewhat, while overall consumer price inflation continued to be more modest than earlier in the

year and measures of long-run inflation expectations

remained stable.

The unemployment rate dropped to 8.6 percent in November, and private nonfarm employment continued to

increase moderately during the past two months. Nevertheless, employment at state and local governments

declined further, and both long-duration unemployment and the share of workers employed part time for

economic reasons remained elevated. Initial claims for

unemployment insurance moved down, on net, since

early November but were still at a level consistent with

only modest employment gains, and indicators of job

openings and businesses’ hiring plans were little

changed.

Industrial production rose in October, reflecting in part

a rebound in motor vehicle production from the effects

of supply chain disruptions earlier in the year. Factory

output outside of the motor vehicle sector also continued to rise, and the rate of manufacturing capacity utilization moved up. However, motor vehicle assemblies

were scheduled to only edge higher, on balance, in the

coming months, and broader indicators of manufacturing activity, such as the diffusion indexes of new orders

from the national and regional manufacturing surveys,

were at levels that suggested only modest increases in

production in the near term.

Revised estimates indicated that households’ real disposable income declined in the second and third quarters, and the net wealth of households decreased in the

third quarter. Nonetheless, overall real personal consumption expenditures (PCE) rose modestly in October following significant gains in the previous month,

as spending for consumer goods continued to increase

at a strong pace while outlays for consumer services

were roughly flat. In November, nominal retail sales,

excluding purchases at motor vehicle and parts outlets,

expanded further, and sales of light motor vehicles

stepped up. But consumer sentiment was still at a subdued level in early December despite some improvement in recent months.

Activity in the housing market continued to be depressed by the substantial inventory of foreclosed and

distressed properties and by weak demand that reflected tight credit conditions for mortgage loans and uncertainty about future home prices. Starts and permits

for new single-family homes in October stayed around

the low levels that prevailed since the middle of last

year. Sales of new and existing homes remained slow

in recent months, and home prices moved down further.

Real business spending on equipment and software

seemed to be decelerating. Nominal orders and ship-

Minutes of the Meeting of December 13, 2011

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ments of nondefense capital goods excluding aircraft

edged down in October, and the slowing accumulation

of unfilled orders suggested that increases in outlays for

business equipment would be muted in subsequent

months. Also, survey measures of business conditions

and sentiment remained at relatively downbeat levels in

November. Real business spending for nonresidential

construction moved up in October but was still at a

low level, reflecting high vacancy rates and restricted

credit conditions for construction loans. Inventories in

most industries looked to be reasonably well aligned

with sales, although motor vehicle stocks continued to

be lean.

In the government sector, real federal defense purchases appeared to have stepped down in October and November from their level in the third quarter. At the

state and local level, real purchases seemed to be decreasing at a slower pace in recent months than earlier

in the year.

The U.S. international trade deficit narrowed in October, as imports decreased more than exports. Declines

in imports of petroleum products (reflecting lower

prices and lesser volumes), non-oil industrial supplies,

and automotive products more than offset increases in

capital goods, consumer goods, and food. Reductions

in exports of industrial supplies and consumer goods,

led by a few particularly volatile components, outweighed the gains in capital goods.

Inflation continued to decrease relative to earlier in the

year. Indeed, the PCE price index edged down in October. Consumer prices for energy decreased, and survey data indicated that gasoline prices declined further

in November. Increases in consumer food prices in

October were substantially slower than the average

pace in the preceding months of this year. Consumer

prices excluding food and energy also continued to rise

at a more modest pace in October than earlier in the

year. Near-term inflation expectations from the Thomson Reuters/University of Michigan Surveys of Consumers declined in early December, and longer-term

inflation expectations remained stable.

Measures of labor compensation indicated that nominal

wage gains continued to be subdued. Compensation

per hour in the nonfarm business sector increased

moderately over the year ending in the third quarter,

while the 12-month change in average hourly earnings

for all employees remained low in October and November. Unit labor costs edged up over the past four

quarters.

Foreign economic growth, especially in the euro area,

appeared to weaken in recent months. Real gross domestic product (GDP) in the euro area barely edged up

in the third quarter. Moreover, industrial production in

the region fell sharply in September, and indicators of

manufacturing activity in October and November

pointed to lower output. Measures of business and

consumer confidence in the euro area continued to

decline in recent months. In other advanced foreign

economies, real GDP in Japan rebounded in the third

quarter from the effects of the earthquake in March,

and real GDP recovered in Canada as oil production

picked up after several months of shutdowns; however,

available indicators of manufacturing activity in both of

these economies pointed to declines during the fourth

quarter. Among emerging market economies, real

GDP in Brazil was flat in the third quarter, while exports from China slowed in recent months, although

Chinese domestic demand appeared to remain strong.

Staff Review of the Financial Situation

The risks associated with the fiscal and financial difficulties in Europe remained the focus of attention in

financial markets over the intermeeting period and contributed to heightened volatility in a wide range of asset

markets. Investor concerns about developments in

Europe intensified early in the period but subsequently

eased a bit amid signs that European authorities were

moving toward agreement on a comprehensive framework to address fiscal and financial vulnerabilities and

after the Federal Reserve and five other major central

banks announced enhanced currency swap arrangements, including lower charges on existing dollar liquidity swap lines. Nevertheless, investors appeared to remain cautious.

Yields on nominal Treasury securities were little

changed following the release of the November FOMC

statement. Over the following weeks, movements in

yields were reportedly driven by shifts in investors’ assessments of the European situation and by U.S. economic data that were somewhat stronger than they expected. Both short-term nominal Treasury yields and

the expected path of the federal funds rate implied by

money market futures quotes were essentially unchanged, on balance, over the intermeeting period,

while longer-dated Treasury yields ended the period

slightly higher. Yields on current-coupon agency MBS

also ended the period about unchanged. Indicators of

inflation expectations derived from nominal and inflation-protected Treasury securities posted mixed

changes, on net, over the period and remained at the

low end of their recent ranges.

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Early in the intermeeting period, conditions in shortterm wholesale funding markets appeared to deteriorate

somewhat. Following the six major central banks’ currency swap announcement, some measures of shortterm funding costs moderated, but they remained elevated. In dollar funding markets, the spread of the

three-month London interbank offered rate (Libor)

over the overnight index swap (OIS) rate of the same

maturity widened noticeably during the intermeeting

period. Some European financial institutions reportedly faced significant pressures in unsecured dollar funding markets. By contrast, in secured funding markets,

spreads on asset-backed commercial paper were relatively steady for U.S. and most European-based issuers,

and rates on repurchase agreements across various

types of collateral were stable.

In the December 2011 Senior Credit Officer Opinion

Survey on Dealer Financing Terms, dealers reported a

moderate tightening of credit terms over the preceding

three months on securities financing transactions and

over-the-counter derivatives markets trades, particularly

for financial counterparties. Dealers also noted that

demand for funding all types of securities decreased

over the same reference period.

Credit default swap (CDS) spreads and equity prices of

large U.S. banking organizations remained volatile over

the intermeeting period. While the S&P 500 index

ended the period slightly higher, on net, equity prices

for most major U.S. banking firms were lower and their

CDS spreads widened. CDS spreads for European

banks remained elevated as these institutions faced increasingly strained conditions in short-term funding

markets. In the wake of the bankruptcy of MF Global,

market participants also expressed renewed concerns

about securities dealers that rely heavily on short-term

wholesale funding markets, particularly those institutions not affiliated with commercial banking institutions.

Yields on investment-grade and speculative-grade corporate bonds rose, on balance, over the period, and

their spreads over yields on comparable-maturity Treasury securities were somewhat wider. The debt of nonfinancial firms increased in November, with corporate

bond issuance particularly robust, as some firms reportedly were eager to issue bonds before year-end.

Nonfinancial commercial paper outstanding and commercial and industrial loans continued to expand at a

moderate pace. In the leveraged loan market, the extension of loans stepped up somewhat in November

but remained sluggish relative to its average pace earlier

in the year.

Financing conditions for commercial real estate appeared to remain strained over the intermeeting period.

Issuance of commercial mortgage-backed securities

(CMBS) was light amid deteriorating liquidity conditions in the CMBS market. Prices of most types of

commercial properties continued to be depressed,

while both vacancy rates and delinquency rates for

commercial properties stayed close to their recent

highs.

Interest rates on residential mortgages were little

changed, on net, over the intermeeting period and remained at historically low levels. But low mortgage

rates appeared to have only modest effects on the rate

of mortgage refinancing, likely because of tight underwriting standards and low levels of home equity. Indicators of home prices and the credit quality of older

mortgage loans remained weak. The rate of newly delinquent prime mortgages—the pace at which mortgages transition from “current” to delinquent—seemed to

have slowed, but overall delinquency rates on residential mortgages remained elevated. Market reaction to

the announcements by Fannie Mae and Freddie Mac

on November 15 regarding the expansion of the Home

Affordable Refinance Program was limited.

Consumer credit rose slightly in the third quarter. The

aggregate volume of credit card solicitations in recent

months remained at levels comparable to those before

the financial crisis in 2008, though the volume sent to

low-income households was still well below the levels

at that time. Meanwhile, consumer credit quality improved further in recent months, with delinquency

rates on credit card loans declining nearly to historical

lows and delinquency rates on nonrevolving credit at

commercial banks retreating to pre-crisis levels. Issuance of consumer credit asset-backed securities increased substantially in November.

M2 expanded at a solid pace in November, likely reflecting increased demand for safe and liquid assets,

given concerns over European financial developments.

In part, offshore deposits, which are no longer excluded from the Federal Deposit Insurance Corporation assessment base, appeared to be shifting to onshore offices. In contrast, the monetary base declined

in November. Although currency increased at a robust

pace, reserve balances declined by more, reflecting a

temporary decrease in the size of the SOMA as a result

of lags in the settlement of MBS reinvestment transactions.

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Over most of November, yields on many euro-area

sovereign bonds—including those of Italy, Spain, Belgium, and France—along with yields on debt issued by

the European Financial Stability Facility, rose sharply

relative to the yield on German government bonds.

But these spreads subsequently narrowed in anticipation of the European Union (EU) summit meeting on

December 9 and in reaction to the swap announcement

by the Federal Reserve and the other central banks on

November 30. Near the end of the period, sovereign

spreads widened again amid market participants’ apparent concerns that the actions announced at the EU

summit would prove to be less effective than they previously had anticipated. Spreads of yields on most peripheral euro-area countries’ debt over yields on German debt ended the period higher on net. German

sovereign yields increased as well.

Implied basis spreads from the foreign exchange swap

market rose substantially over November, but reversed

a portion of that increase immediately following the

central banks’ swap announcement. Against the background of higher dollar funding costs in the market and

the reduction in the charge on dollar liquidity swaps,

demand at the tender by the European Central Bank

(ECB) of three-month dollar liquidity in December

jumped to more than $50 billion from less than

$500 million at the November auction. Euro funding

pressures also moved higher over the period, with euro

Libor–OIS spreads continuing to rise. In addition, maturities for repurchase agreements involving sovereign

bonds of euro-area countries other than Germany reportedly shortened. Several European banks announced large declines in third-quarter profits, in part

reflecting write-downs of their holdings of Greek sovereign debt. Equity prices in both advanced and

emerging market economies fluctuated widely, with

advanced country equities little changed, on net, and

emerging market equities ending the period lower. The

foreign exchange value of the dollar appreciated, on

balance, over the intermeeting period.

With inflationary pressures waning and the downside

risks to the global economic outlook increasing, some

central banks eased policy. China’s central bank cut its

reserve requirements by 50 basis points, and the central

bank of Brazil lowered its policy rate by the same

amount. The ECB reduced its minimum bid rate by

25 basis points at both its November and December

meetings, relaxed its collateral and reserve requirements, and stated that it would begin to offer threeyear funds at fixed rates. As a precautionary measure,

the Bank of England announced a new liquidity facility

that will auction term sterling funds against a wide

range of collateral.

Staff Economic Outlook

In the economic forecast prepared for the December

FOMC meeting, the staff’s projection for the increase

in real GDP in the near term was little changed, as the

recent data on spending, production, and the labor

market were, on balance, in line with the staff’s expectations at the time of the previous forecast. However,

the medium-term projection for real GDP growth in

the December forecast was lower than the one presented in November, primarily reflecting revisions to

the staff’s view regarding developments in Europe and

their implications for the U.S. economy. Nonetheless,

the staff continued to project that the pace of economic activity would pick up gradually in 2012 and 2013,

supported by accommodative monetary policy, further

increases in credit availability, and improvements in

consumer and business sentiment. Over the forecast

period, the gains in real GDP were anticipated 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 projection for inflation was little changed

from the forecast prepared for the November FOMC

meeting. The upward pressure on consumer prices

from the increases in commodity and import prices

earlier in the year was expected to continue to subside

in the current quarter. With long-run inflation expectations stable and substantial 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 since their previous meeting indicated that

economic activity was expanding at a moderate rate,

notwithstanding some apparent slowing in global economic growth. Consumer spending continued to advance, but business fixed investment appeared to be

decelerating, and home sales and construction remained at very low levels. Labor market conditions

improved some in recent months, but the unemployment rate remained elevated despite a noticeable drop

in November. Inflation moderated from the rates earlier in the year, and longer-term inflation expectations

remained stable.

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Regarding the economic outlook, participants continued to anticipate that economic activity would expand

at a moderate rate in the coming quarters and that,

consequently, the unemployment rate would decline

only gradually. The factors that participants cited as

likely to restrain the pace of the economic expansion

included an expectation that financial markets would

remain unsettled until the fiscal and banking issues in

the euro area were more fully addressed. Other factors

that were expected to weigh on the pace of economic

activity were the slowdown of economic activity

abroad, fiscal tightening in the United States, high levels of uncertainty among households and businesses,

the weak housing market, and household deleveraging.

In assessing the economic outlook, participants judged

that strains in global financial markets continued to

pose significant downside risks. With the rate of increase in economic activity anticipated to remain moderate, most participants expected that inflation would

settle over coming quarters at or below levels consistent with their estimates of its longer-run mandateconsistent rate.

In discussing the household sector, meeting participants generally commented that consumer spending in

recent months had been stronger than expected, and

several reported cautious optimism among some of

their business contacts about prospects for the holiday

shopping season. A few participants thought that the

recent strength in motor vehicle sales and other consumer spending could reflect pent-up demand from

households for goods and services, and so thought that

it might persist for a time. However, others noted that

real disposable personal income had weakened and that

households remained pessimistic about their income

prospects and uncertain about the economic outlook.

As a result, a number of those participants suggested

that the recent stronger pace of consumer spending

might not be sustained. Moreover, some participants

mentioned that households were likely still adjusting to

the loss of wealth over the past few years, which would

weigh on consumer spending going forward. Participants generally saw few signs of recovery in the housing market, with house prices continuing to decline in

most areas and the overhang of foreclosed and distressed properties still substantial. Several participants

observed that the ongoing weakness in the housing

market came despite low borrowing rates and government initiatives to resolve problems in the foreclosure

process. However, one participant noted that some

homebuilders were reporting that land prices were edging up and that financing was available from nontradi-

tional sources, suggesting that conditions in the housing market could be improving.

Reports from business contacts indicated that, in addition to the rise in consumer spending, activity in the

manufacturing, energy, and agriculture sectors continued to advance in recent months. Nonetheless, businesses generally reported that they remained cautious

regarding capital spending and hiring because of a high

level of uncertainty about the economic outlook and

the political environment. In particular, some contacts

raised concerns about the uncertain fiscal outlook in

the United States or the possible drag on sales and production from an economic slowdown abroad, while

others cited uncertainty about the cost implications of

potential changes in regulatory policies. Several participants noted that their contacts had ready access to

credit at attractive rates. However, some participants

continued to view credit as tight, particularly in mortgage markets or among small businesses in their Districts that were facing difficulties meeting collateral requirements and obtaining bank loans.

A number of recent indicators showed some improvement in labor market conditions: Payroll employment

had posted moderate gains for five months, new claims

for unemployment insurance had drifted lower, and the

unemployment rate had turned down. One participant

noted that the series of upward revisions to the initial

estimates of payroll employment in recent months was

an encouraging sign of sustained hiring, although several participants remarked that they saw the labor market as still improving only slowly. Others indicated that

because part of the recent decline in the jobless rate

was associated with a reduction in labor force participation, the drop in the unemployment rate likely overstated the overall improvement in the labor market.

Moreover, unemployment, particularly longer-term

unemployment, remained high, and the number of involuntary part-time workers was still elevated. Some

participants again expressed concern that the persistence of high levels of long-duration unemployment

and the underutilization of the workforce could eventually lead to a loss of skills and an erosion of potential

output. Another participant suggested that the unemployment rate was a more useful indicator of cyclical

labor market developments than the level of employment relative to the size of the population, which was

more likely to be influenced by structural changes in

labor demand and supply. Participants expressed a

range of views on the current extent of slack in the labor market. It was noted that because of factors including ongoing changes in the composition of availa-

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ble jobs and workers’ skills, some part of the increase in

unemployment since the beginning of the recession had

been structural rather than cyclical. Others pointed out

that the very modest increases in labor compensation

of late suggested that underutilization of labor was still

significant.

Meeting participants observed that financial markets

remained volatile over the intermeeting period in large

part because of developments in Europe. Participants

noted the recent moves by the European authorities to

strengthen their commitment to fiscal discipline and to

provide greater resources to backstop sovereign debt

issuance. But many anticipated that further efforts to

implement and perhaps to augment these policies

would be necessary to fully resolve the area’s fiscal and

financial problems and commented that financial markets would remain focused on the situation in Europe

as it evolves. It was noted that the changes to the central bank currency swap lines announced in late November helped to ease dollar funding conditions facing

European institutions, but such conditions were still

strained. However, participants generally saw little evidence of significant new constraints on credit availability for domestic borrowers. The balance sheets of most

U.S. banks appeared to have improved somewhat, and

domestic banks reported increases in commercial lending, even as some European lenders were pulling back.

Several participants commented on strains affecting

some community banks, which reportedly had led to

tighter credit conditions for their small business clients.

Participants observed that inflation had moderated in

recent months as the effects of the earlier run-up in

commodity prices subsided. Retail prices of gasoline

had declined, and prices of non-oil imported goods had

softened. In addition, labor compensation had risen

only slowly, and productivity continued to rise. Some

business contacts suggested that pricing pressures had

diminished. Longer-run inflation expectations were

still well anchored. Most participants anticipated that

inflation would continue to moderate. Although some

energy prices had recently increased, many participants

judged that the favorable trends in commodity prices

might persist in the near term, particularly in light of

softer global activity, and one noted that expanded

crop production, if realized, would hold down agricultural prices. More broadly, many participants judged

that the moderate expansion in economic activity that

they were projecting and the associated gradual reduction in the current wide margins of slack in labor and

product markets would be consistent with subdued

inflation going forward. Indeed, some expressed the

concern that, with the persistence of considerable resource slack, inflation might run below mandateconsistent levels for some time. However, a couple of

participants noted that the rate of inflation over the

past year had not fallen as much as would be expected

if the gap in resource utilization were large, suggesting

that the level of potential output was lower than some

current estimates. Some participants were concerned

that inflation could rise as the recovery continued, and

some business contacts had reported that producers

expected to see an increase in pricing power over time.

A few participants argued that maintaining a highly

accommodative stance of monetary policy over the

medium run would erode the stability of inflation expectations.

Committee Policy Action

Members viewed the information on U.S. economic

activity received over the intermeeting period as suggesting that the economy was expanding moderately.

While overall labor market conditions had improved

some in recent months, the unemployment rate remained elevated relative to levels that the Committee

anticipated would prevail in the longer run. Inflation

had moderated, and longer-term inflation expectations

remained stable. However, available indicators pointed

to some slowing in the pace of economic growth in

Europe and in some emerging market economies.

Members continued to expect a moderate pace of economic growth over coming quarters, with the unemployment rate declining only gradually toward levels

consistent with the Committee’s dual mandate. Strains

in global financial markets continued to pose significant

downside risks to economic activity. Members also

anticipated that inflation would settle, over coming

quarters, at levels at or below those consistent with the

dual mandate.

In their discussion of monetary policy for the period

ahead, Committee members generally agreed that their

overall assessments of the economic outlook had not

changed greatly since their previous meeting. As a result, almost all members agreed to maintain the existing

stance of monetary policy at this meeting. In particular,

they agreed to continue the program of extending the

average maturity of the Federal Reserve’s holdings of

securities as announced in September, to retain the existing policies regarding the reinvestment of principal

payments from Federal Reserve holdings of securities,

and to keep the target range for the federal funds rate

at 0 to ¼ percent. With regard to the forward guidance to be included in the statement to be released following the meeting, several members noted that the

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reference to mid-2013 might need to be adjusted before long. A number of members noted their dissatisfaction with the Committee’s current approach for

communicating its views regarding the appropriate path

for monetary policy, and looked forward to considering

possible enhancements to the Committee’s communications. For now, however, the Committee agreed to

reiterate 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 number of

members indicated that current and prospective economic conditions could well warrant additional policy

accommodation, but they believed that any additional

actions would be more effective if accompanied by enhanced communication about the Committee’s longerrun economic goals and policy framework. A few others continued to judge that maintaining the current degree of policy accommodation beyond the near term

would likely be inappropriate given their outlook for

economic activity and inflation, or questioned the efficacy of additional monetary policy actions in light of

the nonmonetary headwinds restraining the recovery.

For this meeting, almost all members were willing to

support maintaining the existing policy stance while

emphasizing the importance of carefully monitoring

economic developments given the uncertainties and

risks attending the outlook. One member preferred to

undertake additional accommodation at this meeting

and dissented from the policy decision.

With respect to the statement, members agreed that

only relatively small modifications were needed to reflect the modest changes to economic conditions seen

in the recent data 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 2:15 p.m.:

“Information received since the Federal

Open Market Committee met in November

suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth. While indicators point to some improvement in overall

labor market conditions, the unemployment

rate remains elevated. Household spending

has continued to advance, but business fixed

investment appears to be increasing less rapidly and the housing sector remains depressed. Inflation has moderated since earlier in the year, and 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

Minutes of the Meeting of December 13, 2011

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levels that the Committee judges to be consistent with its dual mandate. Strains in

global financial markets continue to pose

significant downside risks to the economic

outlook. The Committee also anticipates

that inflation will settle, over coming quarters, at levels at or below those consistent

with the Committee’s dual mandate. 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 continued to view additional policy accommodation as appropriate in circumstances where his outlook was for growth to be too

slow to make sufficient progress in reducing the unem-

ployment rate and for inflation to drop below levels

consistent with the Committee’s dual mandate. He

continued to support the use of more-explicit forward

guidance about the economic conditions under which

the federal funds rate could be maintained in its current

range, and he suggested that the Committee also consider additional asset purchases.

Monetary Policy Communications

After the Committee’s vote, participants turned to a

further consideration of ways in which the Committee

might enhance the clarity and transparency of its public

communications. The subcommittee on communications recommended an approach for incorporating information about participants’ projections of appropriate future monetary policy into the Summary of Economic Projections (SEP), which the FOMC releases

four times each year. In the SEP, participants’ projections for economic growth, unemployment, and inflation are conditioned on their individual assessments of

the path of monetary policy that is most likely to be

consistent with the Federal Reserve’s statutory mandate

to promote maximum employment and price stability,

but information about those assessments has not been

included in the SEP.

A staff briefing described the details of the subcommittee’s recommended approach and compared it with

those taken by several other central banks. Most participants agreed that adding their projections of the

target federal funds rate to the economic projections

already provided in the SEP would help the public better understand the Committee’s monetary policy decisions and the ways in which those decisions depend on

members’ assessments of economic and financial conditions. One participant suggested that the economic

projections would be more understandable if they were

based on a common interest rate path. Another suggested that it would be preferable to publish a consensus policy projection of the entire Committee. Some

participants expressed concern that publishing information about participants’ individual policy projections

could confuse the public; for example, they saw an appreciable risk that the public could mistakenly interpret

participants’ projections of the target federal funds rate

as signaling the Committee’s intention to follow a specific policy path rather than as indicating members’

conditional projections for the federal funds rate given

their expectations regarding future economic developments. Most participants viewed these concerns as

manageable; several noted that participants would have

opportunities to explain their projections and policy

views in speeches and other forms of communication.

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Federal Open Market Committee

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Nonetheless, some participants did not see providing

policy projections as a useful step at this time.

At the conclusion of their discussion, participants decided to incorporate information about their projections of appropriate monetary policy into the SEP beginning in January. Specifically, the SEP will include

information about participants’ projections of the appropriate level of the target federal funds rate in the

fourth quarter of the current year and the next few calendar years, and over the longer run; the SEP also will

report participants’ current projections of the likely

timing of the first increase in the target rate given their

projections of future economic conditions. An accompanying narrative will describe the key factors underlying those assessments as well as qualitative information

regarding participants’ expectations for the Federal Reserve’s balance sheet. A number of participants suggested further enhancements to the SEP; the Chairman

asked the subcommittee to explore such enhancements

over coming months.

Following up on the Committee’s discussion of policy

frameworks at its November meeting, the subcommittee on communications presented a draft statement of

the Committee’s longer-run goals and policy strategy.

Participants generally agreed that issuing such a statement could be helpful in enhancing the transparency

and accountability of monetary policy and in facilitating

well-informed decisionmaking by households and businesses, and thus in enhancing the Committee’s ability

to promote the goals specified in its statutory mandate

in the face of significant economic disturbances. However, a couple of participants expressed the concern

that a statement that was sufficiently nuanced to capture the diversity of views on the Committee might not,

in fact, enhance public understanding of the Committee’s actions and intentions. Participants commented

on the draft statement, and the Chairman encouraged

the subcommittee to make adjustments to the draft and

to present a revised version for the Committee’s further consideration in January.

It was agreed that the next meeting of the Committee

would be held on Tuesday–Wednesday, January 24–25,

2012. The meeting adjourned at 4:00 p.m. on December 13, 2011.

Videoconference Meeting of November 28

On November 28, 2011, the Committee met by videoconference to discuss a proposal to amend and augment the Federal Reserve’s temporary liquidity swap

arrangements with foreign central banks in light of

strains in global financial markets. The proposal in-

cluded a six-month extension of the sunset date and a

50 basis point reduction in the pricing on the existing

liquidity swap arrangements with the Bank of Canada,

the Bank of England, the Bank of Japan, the ECB, and

the Swiss National Bank, as well as the establishment,

as a contingency measure, of swap arrangements that

would allow the Federal Reserve to provide liquidity in

the currencies of the foreign central banks should the

need arise. The proposal was aimed at helping to ease

strains in financial markets and thereby to mitigate the

effects of such strains on the supply of credit to U.S.

households and businesses, in support of the economic

recovery.

The staff provided briefings on financial and economic

developments in Europe. In recent weeks, financial

markets appeared to have become increasingly concerned that a timely resolution of the European sovereign debt situation might not occur despite the measures that authorities there announced in October; pressures on European sovereign debt markets had increased, and conditions in European funding markets

had deteriorated appreciably. The greater financial

stress appeared likely to damp economic activity in the

euro area and could pose a risk to the economic recovery in the United States.

Meeting participants discussed a range of considerations surrounding the proposed changes to the swap

arrangements. Most participants agreed that such

changes would represent an important demonstration

of the commitment of the Federal Reserve and the

other central banks to work together to support the

global financial system. Some participants indicated

that, although they did not anticipate that usage would

necessarily be heavy, they felt that lower pricing on the

existing swap lines could reduce the possible stigma

associated with the use of the lines by financial institutions borrowing dollars from the foreign central banks,

and so would contribute to improved functioning in

dollar funding markets in Europe and elsewhere. A

few noted that the risks associated with the swap lines

were low because the Federal Reserve’s counterparties

would be the foreign central banks themselves, and the

foreign central banks would be responsible for the

loans to banks in their jurisdictions. However, some

participants commented that the proposed changes to

the swap lines would not by themselves address the

need for additional policy action by European authorities. Several participants questioned whether the

changes to the swap lines were necessary at this time

and worried that such changes could be seen as suggesting greater concern about financial strains than was

Minutes of the Meeting of December 13, 2011

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warranted. It was also noted that the proposed reduction in pricing of the existing swap arrangements could

put the cost of dollar borrowing from foreign central

banks below the Federal Reserve’s primary credit rate

and that non-U.S. banks might be perceived to have an

advantage in meeting their short-term funding needs as

a result. However, U.S. banks did not face difficulties

obtaining liquidity in short-term funding markets, and

some participants felt that a cut in the primary credit

rate at the present time might incorrectly be seen as

suggesting concern about U.S. financial conditions.

At the conclusion of the discussion, all but one member agreed to support the changes to the existing swap

line arrangements and the establishment of the new

foreign currency swap agreements and approved the

following resolution:

“The Federal Open Market Committee directs the Federal Reserve Bank of New York

to extend the existing temporary reciprocal

currency arrangements (“swap arrangements”) for the System Open Market Account with the Bank of Canada, the Bank of

England, the Bank of Japan, the European

Central Bank, and the Swiss National Bank

through February 1, 2013.

In addition, the Federal Open Market Committee authorizes the Federal Reserve Bank

of New York to enter into additional swap

arrangements for the System Open Market

Account with the Bank of Canada, Bank of

England, the Bank of Japan, the European

Central Bank, and the Swiss National Bank

to support the provision by the Federal Reserve of liquidity in Canadian dollars, British

pounds, Japanese yen, euros, and Swiss

francs. The swap arrangements for provision of liquidity in each of those currencies

shall be subject to the same size limits, if any,

currently in force for the swap arrangements

for provision of liquidity in U.S. dollars to

that foreign central bank. These arrangements shall terminate on February 1, 2013.

Requests for drawings on the foreign currency swap lines and distribution of the

proceeds to U.S. financial institutions shall

be initiated by the appropriate Reserve Bank

and approved by the Chairman in consultation with the Foreign Currency Subcommittee. The Foreign Currency Subcommittee

will consult with the Federal Open Market

Committee prior to the initial drawing on the

foreign currency swap lines if possible under

the circumstances then prevailing.

The Chairman shall establish the rates on the

swap arrangements by mutual agreement

with the foreign central banks and in consultation with the Foreign Currency Subcommittee. He shall keep the Federal Open

Market Committee informed, and the rates

shall be consistent with principles discussed

with and guidance provided by the Committee.”

Voting for this action: Ben Bernanke, William C.

Dudley, Elizabeth Duke, Charles L. Evans, Richard W.

Fisher, Narayana Kocherlakota, Sarah Bloom Raskin,

Daniel K. Tarullo, and Janet L. Yellen.

Voting against this action: Jeffrey M. Lacker. Mr.

Lacker voted as alternate member for Mr. Plosser at

this meeting. Mr. Lacker dissented because of his opposition to arrangements that support Federal Reserve

lending in foreign currencies, which he viewed as

amounting to fiscal policy. He also opposed lowering

the interest rate on swap arrangements to below the

primary credit rate.

Notation Vote

By notation vote completed on November 21, 2011,

the Committee unanimously approved the minutes of

the FOMC meeting held on November 1–2, 2011.

_____________________________

William B. English

Secretary