FOMC Minutes
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Minutes of the Federal Open Market Committee
January 24–25, 2012
A meeting of the Federal Open Market Committee was
held in the offices of the Board of Governors in Washington, D.C., on Tuesday, January 24, 2012, at
10:00 a.m., and continued on Wednesday, January 25,
2012, at 8:30 a.m.
PRESENT:
Ben Bernanke, Chairman
William C. Dudley, Vice Chairman
Elizabeth Duke
Jeffrey M. Lacker
Dennis P. Lockhart
Sandra Pianalto
Sarah Bloom Raskin
Daniel K. Tarullo
John C. Williams
Janet L. Yellen
James Bullard, Christine Cumming, Charles L.
Evans, Esther L. George, and Eric Rosengren,
Alternate Members of the Federal Open Market Committee
Richard W. Fisher, Narayana Kocherlakota, and
Charles I. Plosser, Presidents of the Federal
Reserve Banks of Dallas, Minneapolis, and
Philadelphia, 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
David Altig, Thomas A. Connors, Michael P.
Leahy, William Nelson, Simon Potter, David
Reifschneider, Glenn D. Rudebusch, and William Wascher, Associate Economists
Brian Sack, Manager, System Open Market Account
Michael S. Gibson, Director, Division of Banking
Supervision and Regulation, Board of Governors
Nellie Liang, Director, Office of Financial Stability
Policy and Research, Board of Governors
Jon W. Faust and Andrew T. Levin, Special Advisors to the Board, Office of Board Members,
Board of Governors
James A. Clouse, Deputy Director, Division of
Monetary Affairs, Board of Governors
Linda Robertson, Assistant to the Board, Office of
Board Members, Board of Governors
Daniel E. Sichel, Senior Associate Director, Division of Research and Statistics, Board of Governors
Ellen E. Meade, Stephen A. Meyer, and Joyce K.
Zickler, Senior Advisers, Division of Monetary
Affairs, Board of Governors; Lawrence Slifman, Senior Adviser, Division of Research and
Statistics, Board of Governors
Eric M. Engen¹ and Daniel M. Covitz, Associate
Directors, Division of Research and Statistics,
Board of Governors; Trevor A. Reeve, Associate Director, Division of International
Finance, Board of Governors
Joshua Gallin,¹ Deputy Associate Director, Division of Research and Statistics, Board of Governors
David H. Small, Project Manager, Division of
Monetary Affairs, Board of Governors
Chiara Scotti, Senior Economist, Division of International Finance, Board of Governors;
Louise Sheiner, Senior Economist, Division of
Research and Statistics, Board of Governors
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¹ Attended Tuesday’s session only.
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Lyle Kumasaka, Senior Financial Analyst, Division
of Monetary Affairs, Board of Governors
Kurt F. Lewis, Economist, Division of Monetary
Affairs, Board of Governors
Randall A. Williams, Records Management Analyst,
Division of Monetary Affairs, Board of Governors
Kenneth C. Montgomery, First Vice President,
Federal Reserve Bank of Boston
Jeff Fuhrer, Loretta J. Mester, Harvey Rosenblum,
and Daniel G. Sullivan, Executive Vice Presidents, Federal Reserve Banks of Boston, Philadelphia, Dallas, and Chicago, respectively
Craig S. Hakkio, Mark E. Schweitzer, Christopher
J. Waller, and Kei-Mu Yi, Senior Vice Presidents, Federal Reserve Banks of Kansas City,
Cleveland, St. Louis, and Minneapolis, respectively
John Duca² and Andrew Haughwout,² Vice Presidents, Federal Reserve Banks of Dallas and
New York, respectively
Julie Ann Remache, Assistant Vice President, Federal Reserve Bank of New York
Robert L. Hetzel, Senior Economist, Federal Reserve Bank of Richmond
Daniel Cooper,² Economist, Federal Reserve Bank
of Boston
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² Attended the discussion of the role of financial conditions in economic recovery.
Role of Financial Conditions in Economic Recovery: Lending and Leverage
Staff summarized research projects being conducted
across the Federal Reserve System on the effects of
changes in lending practices and household leverage on
consumer spending in recent years. These projects
provided a range of views regarding the size and importance of such effects. An analysis employing aggregate
time-series data indicated that changes in income,
household assets and liabilities, and credit availability
can largely account for the movements in aggregate
consumption seen since the mid-1990s; this finding
suggests that changes in credit conditions may have
been an important factor driving changes in the saving
rate in recent years. A second analysis used data on
borrowing, debt repayments, and other credit factors
for individual borrowers; this study found that movements in leverage—resulting from voluntary loan repayments and from loan charge-offs—have had a substantial effect on the cash flow of many households
over time, and thus presumably on their spending.
However, a third study, which employed householdlevel data, suggested that movements in consumption
before, during, and after the recession were driven primarily by employment, income, and net worth, leaving
little variation to be explained by changes in leverage
and credit availability.
In their discussion following the staff presentation,
several meeting participants considered possible reasons for the differing results of the various analyses;
participants also noted contrasts between these findings
and those reported in some academic research. Several
possible explanations for the varying conclusions were
discussed, including differences across studies in model
specification and data, as well as differences in the definition of deleveraging. In addition, it was noted that
data limitations make it difficult to reach firm conclusions on this issue, at least at this time. Participants
also considered the possible influence on aggregate
consumer spending of changes in real interest rates and
the distribution of income, the potential for policy actions to affect the fundamental factors driving household saving, and whether households’ spending behavior is being affected by concerns about the future of
Social Security.
Annual Organizational Matters
In the agenda for this meeting, it was reported that advices of the election of the following members and alternate members of the Federal Open Market Committee for a term beginning January 24, 2012, had been
received and that these individuals had executed their
oaths of office.
The elected members and alternate members were as
follows:
William C. Dudley, President of the Federal Reserve
Bank of New York, with Christine Cumming, First
Vice President of the Federal Reserve Bank of New
York, as alternate.
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Jeffrey M. Lacker, President of the Federal Reserve
Bank of Richmond, with Eric Rosengren, President of
the Federal Reserve Bank of Boston, as alternate.
Open Market Account, on the understanding that his
selection was subject to being satisfactory to the Federal Reserve Bank of New York.
Sandra Pianalto, President of the Federal Reserve Bank
of Cleveland, with Charles L. Evans, President of the
Federal Reserve Bank of Chicago, as alternate.
Secretary’s note: Advice subsequently was
received that the selection of Mr. Sack as
Manager was satisfactory to the Board of Directors of the Federal Reserve Bank of New
York.
Dennis P. Lockhart, President of the Federal Reserve
Bank of Atlanta, with James Bullard, President of the
Federal Reserve Bank of St. Louis, as alternate.
John C. Williams, President of the Federal Reserve
Bank of San Francisco, with Esther L. George, President of the Federal Reserve Bank of Kansas City, as
alternate.
By unanimous vote, the following officers of the Federal Open Market Committee were selected to serve
until the selection of their successors at the first regularly scheduled meeting of the Committee in 2013:
Ben Bernanke
William C. Dudley
William B. English
Deborah J. Danker
Matthew M. Luecke
David W. Skidmore
Michelle A. Smith
Scott G. Alvarez
Thomas C. Baxter
Richard M. Ashton
Steven B. Kamin
David W. Wilcox
Chairman
Vice Chairman
Secretary and Economist
Deputy Secretary
Assistant Secretary
Assistant Secretary
Assistant Secretary
General Counsel
Deputy General Counsel
Assistant General Counsel
Economist
Economist
David Altig
Thomas A. Connors
Michael P. Leahy
William Nelson
Simon Potter
David Reifschneider
Glenn D. Rudebusch
Mark S. Sniderman
William Wascher
John A. Weinberg
Associate Economists
By unanimous vote, the Federal Reserve Bank of New
York was selected to execute transactions for the System Open Market Account.
By unanimous vote, Brian Sack was selected to serve at
the pleasure of the Committee as Manager, System
By unanimous vote, the Authorization for Domestic
Open Market Operations was amended to allow lending of securities on longer than an overnight basis to
accommodate weekend, holiday, and similar trading
conventions. The Guidelines for the Conduct of System Open Market Operations in Federal-Agency Issues
remained suspended.
AUTHORIZATION FOR DOMESTIC OPEN
MARKET OPERATIONS
(Amended January 24, 2012)
1. The Federal Open Market Committee authorizes
and directs the Federal Reserve Bank of New York, to
the extent necessary to carry out the most recent domestic policy directive adopted at a meeting of the
Committee:
A. To buy or sell U.S. Government securities, including securities of the Federal Financing Bank, and
securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of
the United States in the open market, from or to securities dealers and foreign and international accounts
maintained at the Federal Reserve Bank of New
York, on a cash, regular, or deferred delivery basis,
for the System Open Market Account at market prices, and, for such Account, to exchange maturing U.S.
Government and Federal agency securities with the
Treasury or the individual agencies or to allow them
to mature without replacement;
B. To buy or sell in the open market U.S. Government securities, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, for the System Open Market Account under agreements to resell or repurchase such securities or obligations (including such transactions as are commonly referred
to as repo and reverse repo transactions) in 65 business days or less, at rates that, unless otherwise expressly authorized by the Committee, shall be determined by competitive bidding, after applying reason-
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able limitations on the volume of agreements with
individual counterparties.
2. In order to ensure the effective conduct of open
market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York
to use agents in agency MBS-related transactions.
3. In order to ensure the effective conduct of open
market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York
to lend on an overnight basis U.S. Government securities and securities that are direct obligations of any
agency of the United States, held in the System Open
Market Account, to dealers at rates that shall be determined by competitive bidding. The Federal Reserve
Bank of New York shall set a minimum lending fee
consistent with the objectives of the program and apply
reasonable limitations on the total amount of a specific
issue that may be auctioned and on the amount of securities that each dealer may borrow. The Federal Reserve Bank of New York may reject bids which could
facilitate a dealer’s ability to control a single issue as
determined solely by the Federal Reserve Bank of New
York. The Federal Reserve Bank of New York may
lend securities on longer than an overnight basis to accommodate weekend, holiday, and similar trading conventions.
4. In order to ensure the effective conduct of open
market operations, while assisting in the provision of
short-term investments for foreign and international
accounts maintained at the Federal Reserve Bank of
New York and accounts maintained at the Federal Reserve Bank of New York as fiscal agent of the United
States pursuant to Section 15 of the Federal Reserve
Act, the Federal Open Market Committee authorizes
and directs the Federal Reserve Bank of New York:
A. for System Open Market Account, to sell U.S.
Government securities, and securities that are direct
obligations of, or fully guaranteed as to principal and
interest by, any agency of the United States, to such
accounts on the bases set forth in paragraph 1.A under agreements providing for the resale by such accounts of those securities in 65 business days or less
on terms comparable to those available on such
transactions in the market; and
B. for New York Bank account, when appropriate,
to undertake with dealers, subject to the conditions
imposed on purchases and sales of securities in paragraph l.B, repurchase agreements in U.S. Government securities, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, and to arrange corresponding sale and repurchase agreements
between its own account and such foreign, international, and fiscal agency accounts maintained at the
Bank.
Transactions undertaken with such accounts under the
provisions of this paragraph may provide for a service
fee when appropriate.
5. In the execution of the Committee’s decision regarding policy during any intermeeting period, the
Committee authorizes and directs the Federal Reserve
Bank of New York, upon the instruction of the Chairman of the Committee, to adjust somewhat in exceptional circumstances the degree of pressure on reserve
positions and hence the intended federal funds rate and
to take actions that result in material changes in the
composition and size of the assets in the System Open
Market Account other than those anticipated by the
Committee at its most recent meeting. Any such adjustment shall be made in the context of the Committee’s discussion and decision at its most recent meeting
and the Committee’s long-run objectives for price stability and sustainable economic growth, and shall be
based on economic, financial, and monetary developments during the intermeeting period. Consistent with
Committee practice, the Chairman, if feasible, will consult with the Committee before making any adjustment.
The Committee voted to reaffirm the Authorization for
Foreign Currency Operations, the Foreign Currency
Directive, and the Procedural Instructions with Respect
to Foreign Currency Operations as shown below. The
votes to reaffirm these documents included approval of
the System’s warehousing agreement with the U.S.
Treasury. Mr. Lacker dissented in the votes on the Authorization for Foreign Currency Operations and the
Foreign Currency Directive to indicate his opposition
to foreign currency intervention by the Federal Reserve. In his view, such intervention would be ineffective if it did not also signal a shift in domestic monetary
policy; and if it did signal such a shift, it could potentially compromise the Federal Reserve’s monetary policy independence.
AUTHORIZATION FOR FOREIGN CURRENCY OPERATIONS
(Reaffirmed January 24, 2012)
1. The Federal Open Market Committee authorizes
and directs the Federal Reserve Bank of New York, for
System Open Market Account, to the extent necessary
to carry out the Committee's foreign currency directive
and express authorizations by the Committee pursuant
thereto, and in conformity with such procedural in-
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structions as the Committee may issue from time to
time:
A. To purchase and sell the following foreign currencies in the form of cable transfers through spot or
forward transactions on the open market at home
and abroad, including transactions with the U.S.
Treasury, with the U.S. Exchange Stabilization Fund
established by Section 10 of the Gold Reserve Act of
1934, with foreign monetary authorities, with the
Bank for International Settlements, and with other international financial institutions:
Australian dollars
Brazilian reais
Canadian dollars
Danish kroner
euro
Japanese yen
Korean won
Mexican pesos
New Zealand dollars
Norwegian kroner
Pounds sterling
Singapore dollars
Swedish kronor
Swiss francs
B. To hold balances of, and to have outstanding
forward contracts to receive or to deliver, the foreign
currencies listed in paragraph A above.
C. To draw foreign currencies and to permit foreign banks to draw dollars under the reciprocal currency arrangements listed in paragraph 2 below, provided that drawings by either party to any such arrangement shall be fully liquidated within 12 months
after any amount outstanding at that time was first
drawn, unless the Committee, because of exceptional
circumstances, specifically authorizes a delay.
D. To maintain an overall open position in all foreign currencies not exceeding $25.0 billion. For this
purpose, the overall open position in all foreign currencies is defined as the sum (disregarding signs) of
net positions in individual currencies, excluding
changes in dollar value due to foreign exchange rate
movements and interest accruals. The net position in
a single foreign currency is defined as holdings of
balances in that currency, plus outstanding contracts
for future receipt, minus outstanding contracts for future delivery of that currency, i.e., as the sum of these
elements with due regard to sign.
2. The Federal Open Market Committee directs the
Federal Reserve Bank of New York to maintain reci-
procal currency arrangements (“swap” arrangements)
for the System Open Market Account for periods up to
a maximum of 12 months with the following foreign
banks, which are among those designated by the Board
of Governors of the Federal Reserve System under Section 214.5 of Regulation N, Relations with Foreign
Banks and Bankers, and with the approval of the
Committee to renew such arrangements on maturity:
Foreign bank
Bank of Canada
Bank of Mexico
Amount of arrangement
(millions of dollars equivalent)
2,000
3,000
Any changes in the terms of existing swap arrangements, and the proposed terms of any new arrangements that may be authorized, shall be referred for review and approval to the Committee.
3. All transactions in foreign currencies undertaken
under paragraph 1.A. above shall, unless otherwise expressly authorized by the Committee, be at prevailing
market rates. For the purpose of providing an investment return on System holdings of foreign currencies
or for the purpose of adjusting interest rates paid or
received in connection with swap drawings, transactions with foreign central banks may be undertaken at
non-market exchange rates.
4. It shall be the normal practice to arrange with foreign central banks for the coordination of foreign currency transactions. In making operating arrangements
with foreign central banks on System holdings of foreign currencies, the Federal Reserve Bank of New York
shall not commit itself to maintain any specific balance,
unless authorized by the Federal Open Market Committee. Any agreements or understandings concerning
the administration of the accounts maintained by the
Federal Reserve Bank of New York with the foreign
banks designated by the Board of Governors under
Section 214.5 of Regulation N shall be referred for review and approval to the Committee.
5. Foreign currency holdings shall be invested to
ensure that adequate liquidity is maintained to meet
anticipated needs and so that each currency portfolio
shall generally have an average duration of no more
than 18 months (calculated as Macaulay duration).
Such investments may include buying or selling outright
obligations of, or fully guaranteed as to principal and
interest by, a foreign government or agency thereof;
buying such securities under agreements for repurchase
of such securities; selling such securities under agreements for the resale of such securities; and holding var-
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ious time and other deposit accounts at foreign institutions. In addition, when appropriate in connection
with arrangements to provide investment facilities for
foreign currency holdings, U.S. Government securities
may be purchased from foreign central banks under
agreements for repurchase of such securities within
30 calendar days.
6. All operations undertaken pursuant to the preceding paragraphs shall be reported promptly to the Foreign Currency Subcommittee and the Committee. The
Foreign Currency Subcommittee consists of the Chairman and Vice Chairman of the Committee, the Vice
Chairman of the Board of Governors, and such other
member of the Board as the Chairman may designate
(or in the absence of members of the Board serving on
the Subcommittee, other Board members designated by
the Chairman as alternates, and in the absence of the
Vice Chairman of the Committee, the Vice Chairman’s
alternate). Meetings of the Subcommittee shall be
called at the request of any member, or at the request of
the Manager, System Open Market Account (“Manager”), for the purposes of reviewing recent or contemplated operations and of consulting with the Manager
on other matters relating to the Manager’s responsibilities. At the request of any member of the Subcommittee, questions arising from such reviews and consultations shall be referred for determination to the Federal
Open Market Committee.
7. The Chairman is authorized:
A. With the approval of the Committee, to enter
into any needed agreement or understanding with the
Secretary of the Treasury about the division of responsibility for foreign currency operations between
the System and the Treasury;
B. To keep the Secretary of the Treasury fully advised concerning System foreign currency operations,
and to consult with the Secretary on policy matters
relating to foreign currency operations;
C. From time to time, to transmit appropriate reports and information to the National Advisory
Council on International Monetary and Financial Policies.
8. Staff officers of the Committee are authorized to
transmit pertinent information on System foreign currency operations to appropriate officials of the Treasury
Department.
9. All Federal Reserve Banks shall participate in the
foreign currency operations for System Account in accordance with paragraph 3G(1) of the Board of Governors’ Statement of Procedure with Respect to Foreign
Relationships of Federal Reserve Banks dated January
1, 1944.
FOREIGN CURRENCY DIRECTIVE
(Reaffirmed January 24, 2012)
1. System operations in foreign currencies shall generally be directed at countering disorderly market conditions, provided that market exchange rates for the U.S.
dollar reflect actions and behavior consistent with IMF
Article IV, Section 1.
2. To achieve this end the System shall:
A. Undertake spot and forward purchases and sales
of foreign exchange.
B. Maintain reciprocal currency (“swap”) arrangements with selected foreign central banks.
C. Cooperate in other respects with central banks
of other countries and with international monetary
institutions.
3. Transactions may also be undertaken:
A. To adjust System balances in light of probable
future needs for currencies.
B. To provide means for meeting System and
Treasury commitments in particular currencies, and
to facilitate operations of the Exchange Stabilization
Fund.
C. For such other purposes as may be expressly authorized by the Committee.
4. System foreign currency operations shall be conducted:
A. In close and continuous consultation and cooperation with the United States Treasury;
B. In cooperation, as appropriate, with foreign
monetary authorities; and
C. In a manner consistent with the obligations of
the United States in the International Monetary
Fund regarding exchange arrangements under
IMF Article IV.
PROCEDURAL INSTRUCTIONS WITH RESPECT
TO FOREIGN CURRENCY OPERATIONS
(Reaffirmed January 24, 2012)
In conducting operations pursuant to the authorization
and direction of the Federal Open Market Committee
as set forth in the Authorization for Foreign Currency
Operations and the Foreign Currency Directive, the
Federal Reserve Bank of New York, through the Manager, System Open Market Account (“Manager”), shall
be guided by the following procedural understandings
with respect to consultations and clearances with the
Committee, the Foreign Currency Subcommittee, and
the Chairman of the Committee, unless otherwise directed by the Committee. All operations undertaken
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pursuant to such clearances shall be reported promptly
to the Committee.
1. The Manager shall clear with the Subcommittee
(or with the Chairman, if the Chairman believes that
consultation with the Subcommittee is not feasible in
the time available):
A. Any operation that would result in a change in
the System’s overall open position in foreign currencies exceeding $300 million on any day or $600 million since the most recent regular meeting of the
Committee.
B. Any operation that would result in a change on
any day in the System’s net position in a single foreign currency exceeding $150 million, or $300 million
when the operation is associated with repayment of
swap drawings.
C. Any operation that might generate a substantial
volume of trading in a particular currency by the System, even though the change in the System’s net position in that currency might be less than the limits
specified in 1.B.
D. Any swap drawing proposed by a foreign bank
not exceeding the larger of (i) $200 million or
(ii) 15 percent of the size of the swap arrangement.
2. The Manager shall clear with the Committee (or
with the Subcommittee, if the Subcommittee believes
that consultation with the full Committee is not feasible
in the time available, or with the Chairman, if the
Chairman believes that consultation with the Subcommittee is not feasible in the time available):
A. Any operation that would result in a change in
the System’s overall open position in foreign currencies exceeding $1.5 billion since the most recent regular meeting of the Committee.
B. Any swap drawing proposed by a foreign bank
exceeding the larger of (i) $200 million or (ii) 15 percent of the size of the swap arrangement.
3. The Manager shall also consult with the Subcommittee or the Chairman about proposed swap drawings
by the System and about any operations that are not of
a routine character.
By unanimous vote, the Committee reaffirmed its Program for Security of FOMC Information.
Statement on Longer-Run Goals and Monetary
Policy Strategy
Following the Committee’s disposition of organizational matters, participants considered a revised draft of a
statement of principles regarding the FOMC’s longerrun goals and monetary policy strategy. The revisions
reflected discussion of an earlier draft during the
Committee’s December meeting as well as comments
received over the intermeeting period. The Chairman
noted that the proposed statement did not represent a
change in the Committee’s policy approach. Instead,
the statement was intended to help enhance the transparency, accountability, and effectiveness of monetary
policy.
In presenting the draft statement on behalf of the subcommittee on communications, Governor Yellen
pointed out several key elements. First, the statement
expresses the FOMC’s commitment to explain its policy decisions as clearly as possible. Second, the statement specifies a numerical inflation goal in a context
that firmly underscores the Federal Reserve’s commitment to fostering both parts of its dual mandate.
Third, the statement is intended to serve as an overarching set of principles that would be reaffirmed during the Committee’s organizational meeting each year,
and the bar for amending the statement would be high.
All participants but one supported adopting the revised
statement of principles regarding longer-run goals and
monetary policy strategy, which is reproduced below.
“Following careful deliberations at its recent
meetings, the Federal Open Market Committee (FOMC) has reached broad agreement
on the following principles regarding its
longer-run goals and monetary policy strategy. The Committee intends to reaffirm these
principles and to make adjustments as appropriate at its annual organizational meeting
each January.
The FOMC is firmly committed to fulfilling
its statutory mandate from the Congress of
promoting maximum employment, stable
prices, and moderate long-term interest rates.
The Committee seeks to explain its monetary
policy decisions to the public as clearly as
possible.
Such clarity facilitates wellinformed decisionmaking by households and
businesses, reduces economic and financial
uncertainty, increases the effectiveness of
monetary policy, and enhances transparency
and accountability, which are essential in a
democratic society.
Inflation, employment, and long-term interest rates fluctuate over time in response to
economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag.
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Therefore, the Committee's policy decisions
reflect its longer-run goals, its medium-term
outlook, and its assessments of the balance
of risks, including risks to the financial system that could impede the attainment of the
Committee’s goals.
The inflation rate over the longer run is primarily determined by monetary policy, and
hence the Committee has the ability to specify a longer-run goal for inflation. The
Committee judges that inflation at the rate of
2 percent, as measured by the annual change
in the price index for personal consumption
expenditures, is most consistent over the
longer run with the Federal Reserve’s statutory mandate. Communicating this inflation
goal clearly to the public helps keep longerterm inflation expectations firmly anchored,
thereby fostering price stability and moderate
long-term interest rates and enhancing the
Committee’s ability to promote maximum
employment in the face of significant economic disturbances.
The maximum level of employment is largely
determined by nonmonetary factors that affect the structure and dynamics of the labor
market. These factors may change over time
and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the
Committee’s policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a
wide range of indicators in making these assessments. Information about Committee
participants’ estimates of the longer-run
normal rates of output growth and unemployment is published four times per year in
the FOMC’s Summary of Economic Projections. For example, in the most recent projections, FOMC participants’ estimates of the
longer-run normal rate of unemployment
had a central tendency of 5.2 percent to
6.0 percent, roughly unchanged from last
January but substantially higher than the corresponding interval several years earlier.
In setting monetary policy, the Committee
seeks to mitigate deviations of inflation from
its longer-run goal and deviations of employment from the Committee’s assessments
of its maximum level. These objectives are
generally complementary. However, under
circumstances in which the Committee
judges that the objectives are not complementary, it follows a balanced approach in
promoting them, taking into account the
magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its
mandate.”
All FOMC members voted to adopt this statement except Mr. Tarullo, who abstained because he questioned
the ultimate usefulness of the statement in promoting
better communication of the Committee’s policy strategy.
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 December 13, 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 January 24–25 meeting indicated that U.S. economic activity continued to
expand moderately, while global growth appeared to be
slowing. Overall conditions in the labor market improved further, although the unemployment rate remained elevated. Consumer price inflation was subdued, and measures of long-run inflation expectations
remained stable.
The unemployment rate declined to 8.5 percent in December; however, both long-duration unemployment
and the share of workers employed part time for economic reasons were still quite high. Private nonfarm
employment continued to expand moderately, while
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state and local government employment decreased at a
slower pace than earlier in 2011. Some indicators of
firms’ hiring plans improved. Initial claims for unemployment insurance edged lower, on balance, since the
middle of December but remained at a level consistent
with only modest employment growth.
Industrial production expanded in November and December, on net, and the rate of manufacturing capacity
utilization moved up. Motor vehicle assemblies were
scheduled to increase, on balance, in the first quarter of
2012, 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 moderate growth in production in
the near term.
Real personal consumption expenditures continued to
rise moderately in November, boosted by spending for
motor vehicles and other durables, although households’ real disposable income edged down. In December, however, nominal retail sales excluding purchases
at motor vehicle and parts outlets declined, and sales of
motor vehicles also dropped slightly. Consumer sentiment improved further in early January but was still at a
low level.
Activity in the housing market improved a bit in recent
months but continued to be held down by the large
overhang of foreclosed and distressed properties, uncertainty about future home prices, and tight underwriting standards for mortgage loans. Starts and permits
for new single-family homes rose in November and
December but remained only a little above the depressed levels seen earlier in 2011. Sales of new and
existing homes also firmed somewhat in recent months,
but home prices continued to trend lower.
Real business expenditures on equipment and software
appeared to have decelerated in the fourth quarter.
Nominal orders and shipments of nondefense capital
goods excluding aircraft declined in November for a
second month. Forward-looking indicators of firms’
equipment spending were mixed: Some survey measures of business conditions and capital spending plans
improved, but corporate bond spreads continued to be
elevated and analysts’ earnings expectations for producers of capital goods remained muted. Nominal
business spending for nonresidential construction was
unchanged in November and continued to be held
back by high vacancy rates and tight credit conditions
for construction loans. Inventories in most industries
looked to be well aligned with sales, though motor vehicle stocks remained lean.
Monthly data for federal government spending pointed
to a significant decline in real defense purchases in the
fourth quarter. Real state and local government purchases seemed to be decreasing at a slower rate than
during earlier quarters, as the pace of reductions in payrolls eased and construction spending leveled off in
recent months.
The U.S. international trade deficit widened in November as exports fell and imports rose. Exports declined
in most major categories, with the exception of consumer goods. Exports of industrial supplies and materials were especially weak, though the weakness was
concentrated in a few particularly volatile categories
and reflected, in part, declines in prices. The rise in
imports largely reflected higher imports of petroleum
products and automotive products, which more than
offset decreases in most other broad categories of imports.
Overall U.S. consumer prices as measured by the price
index for personal consumption expenditures were unchanged in November; as measured by the consumer
price index, they were flat in December as well. Consumer energy prices decreased in recent months, while
increases in consumer food prices slowed. Consumer
prices excluding food and energy rose modestly in the
past two months. Near-term inflation expectations
from the Thomson Reuters/University of Michigan
Surveys of Consumers were essentially unchanged in
early January, and longer-term inflation expectations
remained stable.
Available measures of labor compensation indicated
that wage gains continued to be modest. Average
hourly earnings for all employees posted a moderate
gain in December, and their rate of increase from
12 months earlier remained slow.
Recent indicators of foreign economic activity pointed
to a substantial deceleration in the fourth quarter of
2011. In the euro area, retail sales and industrial production were below their third-quarter averages in both
October and November. Economic activity in much
of Asia was disrupted by the effects of severe flooding
in Thailand, which affected supply chains in the region.
Twelve-month inflation rates receded in several advanced and emerging market economies, and most central banks maintained policy rates or eased further
while continuing to provide significant liquidity support.
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Staff Review of the Financial Situation
Developments in Europe continued to be a central focus for investors over the intermeeting period as concerns persisted about the prospects for a durable solution to the European fiscal and financial difficulties.
Nevertheless, market sentiment toward Europe appeared to brighten a bit, and U.S. economic data releases were somewhat better than investors expected, leading to some improvement in conditions in financial
markets.
On balance over the period, the expected path for the
federal funds rate implied by money market futures
quotes was essentially unchanged. Yields on nominal
Treasury securities rose slightly at intermediate and
longer maturities. Indicators of inflation compensation
derived from nominal and inflation-protected Treasury
securities edged up.
U.S. financial institutions reportedly retained ready
access to short-term funding markets; there were no
significant dislocations in those markets over year-end.
Dollar funding pressures for European banks eased
slightly. While spreads of the London interbank offered rate (Libor) over overnight index swap (OIS)
rates of the same maturity remained elevated, rates for
unsecured overnight commercial paper (CP) issued by
some entities with European parents declined substantially following the lowering of charges on the central
bank liquidity swap lines with the Federal Reserve, the
implementation by the European Central Bank (ECB)
of its first three-year longer-term refinancing operation
(LTRO), and the passage of year-end. In secured funding markets, spreads of overnight asset-backed CP rates
over overnight unsecured CP rates also declined, and
the general collateral repurchase agreement, or repo,
market continued to function normally.
Indicators of financial stress eased somewhat over the
intermeeting period, although they generally continued
to be elevated. Market-based measures of possible
spillovers from troubles at particular financial firms to
the broader financial system were below their levels in
the fall but remained above their levels prior to the financial crisis. Initial fourth-quarter earnings reports for
large bank holding companies were mixed relative to
market expectations, with poor capital market revenues
weighing on the profits of institutions with significant
trading operations. Although credit default swap
(CDS) spreads of most large domestic bank holding
companies remained elevated, they moved lower over
the intermeeting period, and some institutions took
advantage of easing credit conditions by issuing signifi-
cant quantities of new long-term debt. Equity prices of
most large domestic financial institutions outperformed
the broader market, on net, over the intermeeting period. Nonetheless, the ratio of the market value of
bank equity to its book value remained low for some
large financial firms. Responses to the December Senior Credit Officer Opinion Survey on Dealer Financing
Terms indicate that, since August, securities dealers
have devoted increased time and attention to the management of concentrated credit exposures to other financial intermediaries, pointing to increased concern
over counterparty risk.
Broad equity price indexes increased more than 6 percent, on net, over the intermeeting period, and optionimplied equity volatility declined notably. Yields on
investment-grade corporate bonds declined a bit relative to those on comparable-maturity Treasury securities, while spreads of speculative-grade corporate bond
yields over yields on Treasury securities decreased noticeably. Indicators of the credit quality of nonfinancial
corporations continued to be solid. Conditions in the
secondary market for leveraged loans were stable, with
median bid prices about unchanged. Financing conditions for large nonfinancial businesses generally remained favorable. Bond issuance by investment-grade
nonfinancial corporations was robust, though below its
elevated November pace, while issuance by lower-rated
firms slowed, likely owing in part to seasonal factors.
Issuance of leveraged loans was relatively modest in the
fourth quarter compared with its rapid pace earlier in
the year. Share repurchases and cash-financed mergers
by nonfinancial firms maintained their recent strength
in the third quarter, leaving net equity issuance deeply
negative.
Financing conditions for commercial real estate (CRE)
remained strained, and issuance of commercial mortgage-backed securities was very light in the fourth quarter. Responses to the January Senior Loan Officer
Opinion Survey on Bank Lending Practices (SLOOS)
indicated that bank CRE lending standards continued
to be extraordinarily tight, but some banks reported
having reduced the spreads of loan rates over their cost
of funds (compared with a year ago) for the first time
since 2007. Delinquency rates on commercial mortgages remained elevated, and CRE price indexes continued to fluctuate around levels substantially lower
than their 2007 peaks.
Conditions in residential mortgage markets remained
extremely tight. Although mortgage interest rates and
yields on current-coupon agency MBS edged down to
Minutes of the Meeting of January 24–25, 2012
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near their historical lows, mortgage refinancing activity
continued to be subdued amid tight underwriting standards and low levels of home equity. Mortgage delinquency rates, while improving gradually, remained elevated relative to pre-crisis norms, and house prices
continued to move lower. The price of subprime residential mortgage-backed securities (RMBS), as measured by the ABX index, rose over the intermeeting period, consistent with similar changes for other higherrisk fixed-income securities. RMBS prices were supported by reports of the sale of a significant portion of
the RMBS held in the Maiden Lane II portfolio.
On the whole, conditions in consumer credit markets
showed signs of improvement. Consumer credit increased in November, while delinquency rates on credit
card loans in securitized pools held steady in November at historically low levels. Data on credit card solicitations and from responses to the January SLOOS suggested that lending standards on consumer loans continued to ease modestly.
Financing conditions for state and local governments
were mixed. Gross long-term issuance of municipal
bonds remained robust in December, with continued
strength in new issuance for capital projects. CDS
spreads for states inched down further over the intermeeting period, and yields on long-term general obligation municipal bonds fell notably. However, downgrades of municipal bonds continued to substantially
outpace upgrades in the third quarter.
In the fourth quarter, bank credit continued to increase
as banks accumulated agency MBS and growth of total
loans picked up. Core loans—the sum of commercial
and industrial (C&I) loans, real estate loans, and consumer loans—expanded modestly. Growth of C&I
loans at domestic banks was robust but was partly offset by weakness at U.S. branches and agencies of European banks. Noncore loans rose sharply, on net,
reflecting in part a surge in such loans at the U.S.
branches and agencies of European institutions. Responses to the January SLOOS indicated that, in the
aggregate, loan demand strengthened slightly and lending standards eased a bit further in the fourth quarter.
M2 increased at an annual rate of 5¼ percent in December, likely reflecting continued demand for safe and
liquid assets given investor concerns over developments in Europe. In addition, demand deposits rose
rapidly around year-end, reportedly because lenders in
short-term funding markets chose to leave substantial
balances with banks over the turn of the year. The
monetary base increased in December, largely reflecting
growth in currency. Reserve balances were roughly
unchanged over the intermeeting period.
International financial markets seemed somewhat calmer over the intermeeting period than they had been in
previous months, and the funding conditions faced by
most European financial institutions and sovereigns
eased somewhat in the wake of the ECB’s first threeyear LTRO. Short-term euro interest rates moved lower as euro-area institutions drew a substantial amount
of three-year funds from the ECB, and dollar funding
costs for European banks also appeared to decline.
Spreads of yields on Italian and Spanish government
debt over those on German bunds narrowed over the
intermeeting period, with spreads on shorter-term debt
falling particularly noticeably. The apparent improvement in market sentiment was not diminished by news
late in the period that Standard & Poor’s lowered its
long-term sovereign bond ratings of nine euro-area
countries and the European Financial Stability Facility
or by news that negotiations over the terms of a voluntary private-sector debt exchange for Greece had not
yet reached a conclusion.
The staff’s broad index of the foreign exchange value
of the dollar declined slightly over the intermeeting
period. While the dollar fell against most other currencies, it appreciated against the euro. Foreign stock
markets generally ended the period higher, with headline equity indexes in Europe and the emerging market
economies up substantially, although emerging market
equity and bond funds continued to experience outflows on net during the period.
Staff Economic Outlook
In the economic forecast prepared for the January
FOMC meeting, the staff’s projection for the growth in
real gross domestic product (GDP) in the near term
was revised down a bit. The revision reflected the apparent decline in federal defense purchases and the
somewhat shallower trajectory for consumer spending
in recent months; the recent data on the labor market,
production, and other spending categories were, on
balance, roughly in line with the staff’s expectations at
the time of the previous forecast. The medium-term
projection for real GDP growth in the January forecast
was little changed from the one presented in December. Although the developments in Europe were expected to continue to weigh on the U.S. economy during the first half of this year, the staff still projected that
real GDP growth would accelerate gradually in 2012
and 2013, supported by accommodative monetary policy, further improvements in credit availability, and ris-
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ing consumer and business sentiment. The increase in
real GDP was expected to be sufficient to reduce the
slack in product and labor markets only slowly over the
projection period, and the unemployment rate was anticipated to still be high at the end of 2013.
slowed in the fourth quarter of last year even as output
growth picked up. Inflation had been subdued in recent months, there was little evidence of wage or cost
pressures, and longer-term inflation expectations had
remained stable.
The staff’s forecast for inflation was essentially unchanged from the projection prepared for the December FOMC meeting. With stable long-run inflation
expectations and substantial slack in labor and product
markets anticipated to persist over the forecast period,
the staff continued to project that inflation would remain subdued in 2012 and 2013.
With respect to the economic outlook, participants
generally anticipated that economic growth over coming quarters would be modest and, consequently, expected that the unemployment rate would decline only
gradually. A number of factors were seen as likely to
restrain the pace of economic expansion, including the
slowdown in economic activity abroad, fiscal tightening
in the United States, the weak housing market, further
household deleveraging, high levels of uncertainty
among households and businesses, and the possibility
of increased volatility in financial markets until the fiscal and banking issues in the euro area are more fully
addressed. Participants continued to expect these
headwinds to ease over time and so anticipated that the
recovery would gradually gain strength. However, participants agreed that strains in global financial markets
continued to pose significant downside risks to the
economic outlook. With unemployment expected to
remain elevated, and with longer-term inflation expectations stable, almost all participants expected inflation
to remain subdued in coming quarters—that is, to run
at or below the 2 percent level that the Committee
judges most consistent with its statutory mandate over
the longer run.
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.
Starting with this meeting, participants also provided
assessments of the path for the target federal funds rate
that they view as appropriate and compatible with their
individual economic projections. Participants’ economic projections and policy assessments 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 agreed that the information
received since the Committee met in December suggested that the economy had been expanding moderately, notwithstanding some slowing in growth
abroad. In general, labor market indicators pointed to
some further improvement in labor market conditions,
but progress was gradual and the unemployment rate
remained elevated. Household spending had continued
to advance at a moderate pace despite still-sluggish
growth in real disposable income, but growth in business fixed investment had slowed. The housing sector
remained depressed, with very low levels of activity;
there were, however, signs of improvement in some
local housing markets. Many participants observed that
some indicators bearing on the economy’s recent performance had shown greater-than-expected improvement, but a number also noted less favorable data; one
noted that growth in final sales appeared to have
In discussing the household sector, meeting participants noted that consumer spending had grown moderately in recent months. Consumer sentiment had
improved since last summer, though its level was still
quite low. Business contacts in the retail sector reported generally satisfactory holiday sales, but high-end
retailers saw strong gains while lower-end retailers saw
mixed results. Contacts also reported widespread discounting. Major express delivery companies indicated
very high volumes at year-end and into January. Several participants observed that consumer spending had
outpaced growth in personal disposable income last
year, and a few noted that households remained pessimistic about their income prospects and uncertain
about the economic outlook. These observations suggested that growth of consumer spending might slow.
However, a few other participants pointed to increasing
job gains in recent months as contributing to an improving trend in real incomes and thus supporting continued moderate growth in consumer spending.
Minutes of the Meeting of January 24–25, 2012
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Reports from business contacts indicated that activity
in the manufacturing, energy, and agricultural sectors
continued to advance in recent months. Businesses
generally reported that they remained cautious regarding capital spending and hiring; some contacts cited
uncertainty about the economic outlook and about fiscal and regulatory policy. Nonetheless, business contacts had become somewhat more optimistic, with
more contacts reporting plans to expand capacity and
payrolls. Some companies indicated that they planned
to relocate some production from abroad to the United
States. A few participants noted that national and District surveys of firms’ capital spending plans suggested
that the recent slowing in business fixed investment
was partly temporary. The combination of high energy
prices and availability of new drilling technologies was
promoting strong growth in investment outlays in the
energy sector.
Participants generally saw the housing sector as still
depressed. The level of activity remained quite weak,
house prices were continuing to decline in most areas,
and the overhang of foreclosed and distressed properties was still substantial. Nonetheless, there were some
small signs of improvement. The inventory of unsold
homes had declined, though in part because the foreclosure process had slowed, and issuance of permits for
new single-family homes had risen from its lows. One
participant again noted reports from some homebuilders suggesting that land prices were edging up and that
financing was available from nonbank sources. Another participant cited reports from business contacts indicating that credit standards in mortgage lending were
becoming somewhat less stringent. Yet another noted
that recent changes to the Home Affordable Refinance
Program, which were intended to streamline the refinancing of performing high-loan-to-value mortgages,
were showing some success.
Participants generally expected that growth of U.S. exports was likely to be held back in the coming year by
slower global economic growth. In particular, fiscal
austerity programs in Europe and stresses in the European banking system seemed likely to restrain economic growth there, perhaps with some spillover to growth
in Asia. One participant noted that shipping rates had
declined of late, suggesting that a slowdown in international trade might be under way.
Participants agreed that recent indicators showed some
further gradual improvement in overall labor market
conditions: Payroll employment had increased somewhat more rapidly in recent months, new claims for
unemployment insurance had trended lower, and the
unemployment rate had declined. Some business contacts indicated that they planned to do more hiring this
year than last. However, unemployment—including
longer-term unemployment—remained elevated, and
the numbers of discouraged workers and people working part time because they could not find full-time
work were also still quite high. Participants expressed a
range of views on the current extent of slack in the labor market. Very high long-duration unemployment
might indicate a mismatch between unemployed workers’ skills and employers’ needs, suggesting that a substantial part of the increase in unemployment since the
beginning of the recession reflected factors other than a
shortfall in aggregate demand. In contrast, the quite
modest increases in labor compensation of late, and the
large number of workers reporting that they are working part time because their employers have cut their
hours, suggested that underutilization of labor was still
substantial. A few participants noted that the recent
decline in the unemployment rate reflected declining
labor force participation in large part, and judged that
the decline in the participation rate was likely to be reversed, at least to some extent, as the recovery continues and labor demand picks up.
Meeting participants observed that financial conditions
improved and financial market stresses eased somewhat
during the intermeeting period: Equity prices rose,
volatility declined, and bank lending conditions appeared to improve. Participants noted that the ECB’s
three-year refinancing operation had apparently contributed to improved conditions in European sovereign
debt markets. Nonetheless, participants expected that
global financial markets would remain focused on the
evolving situation in Europe and anticipated that continued policy efforts would be necessary in Europe to
fully address the area’s fiscal and financial problems.
U.S. banks reported increases in commercial lending as
some European lenders pulled back, and some banking
contacts indicated that creditworthy companies’ demand for credit had increased. A number of participants noted further improvement in the availability of
loans to businesses, with a couple of them indicating
that small business contacts had reported increased
availability of bank credit. However, a few other participants commented that small businesses in their Districts continued to face difficulty in obtaining bank
loans.
Participants observed that longer-run inflation expectations were still well anchored and also noted that inflation had been subdued in recent months, partly reflect-
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ing a decline in commodity prices and an easing of
supply chain disruptions since mid-2011. In addition,
labor compensation had risen only slowly and productivity continued to increase. One participant reported
that a survey of business inflation expectations indicated firms were anticipating increases in unit costs on
the order of 1¾ percent this year, just a bit higher than
last year. Looking farther ahead, participants generally
judged that the modest expansion in economic activity
that they were projecting would be consistent with a
gradual reduction in the current wide margins of slack
in labor and product markets and with subdued inflation going forward. Some remained concerned that,
with the persistence of considerable resource slack,
inflation might continue to drift down and run below
mandate-consistent levels for some time. However, a
couple of participants were concerned that inflation
could rise as the recovery continued and argued that
providing additional monetary accommodation, or even
maintaining the current highly accommodative stance
of monetary policy over the medium run, would erode
the stability of inflation expectations and risk higher
inflation.
Committee participants discussed possible changes to
the forward guidance that has been included in the
Committee’s recent post-meeting statements. Many
participants thought it important to explore means for
better communicating policymakers’ thinking about
future monetary policy and its relationship to evolving
economic conditions. A couple of participants expressed concern that some press reports had misinterpreted the Committee’s use of a date in its forward
guidance as a commitment about its future policy decisions. Several participants thought it would be helpful
to provide more information about the economic conditions that would be likely to warrant maintaining the
current target range for the federal funds rate, perhaps
by providing numerical thresholds for the unemployment and inflation rates. Different opinions were expressed regarding the appropriate values of such
thresholds, reflecting different assessments of the path
for the federal funds rate that would likely be appropriate to foster the Committee’s longer-run goals. However, some participants worried that such thresholds
would not accurately or effectively convey the Committee’s forward-looking approach to monetary policy and
thus would pose difficult communications issues, or
that movements in the unemployment rate, by themselves, would be an unreliable measure of progress toward maximum employment. Several participants proposed either dropping or greatly simplifying the for-
ward guidance in the Committee’s statement, arguing
that information about participants’ assessments of the
appropriate future level of the federal funds rate, which
would henceforth be contained in the Summary of
Economic Projections (SEP), made it unnecessary to
include forward guidance in the post-meeting statement. However, several other participants emphasized
that the information regarding the federal funds rate in
the SEP could not substitute for a formal decision of
the members of the FOMC. Participants agreed to
continue exploring approaches for providing the public
with greater clarity about the linkages between the economic outlook and the Committee’s monetary policy
decisions.
Committee Policy Action
Members viewed the information on U.S. economic
activity received over the intermeeting period as suggesting that the economy had been expanding moderately and generally agreed that the economic outlook
had not changed greatly since they met in December.
While overall labor market conditions had improved
somewhat further and unemployment had declined in
recent months, almost all members viewed the unemployment rate as still elevated relative to levels that they
saw as consistent with the Committee’s mandate over
the longer run. Available data indicated some slowing
in the pace of economic growth in Europe and in some
emerging market economies, pointing to reduced
growth of U.S. exports going forward. With the economy facing continuing headwinds from the recent financial crisis and with growth slowing in a number of
U.S. export markets, members generally expected a
modest pace of economic growth over coming quarters, with the unemployment rate declining only gradually. Strains in global financial markets continued to
pose significant downside risks to economic activity.
Inflation had been subdued in recent months, and
longer-term inflation expectations remained stable.
Members generally anticipated that inflation over coming quarters would run at or below the 2 percent level
that the Committee judges most consistent with its
mandate.
In their discussion of monetary policy for the period
ahead, members agreed that it would be appropriate to
maintain the existing highly accommodative stance of
monetary policy. In particular, they agreed to keep the
target range for the federal funds rate at 0 to ¼ percent, to continue the program of extending the average
maturity of the Federal Reserve’s holdings of securities
as announced in September, and to retain the existing
Minutes of the Meeting of January 24–25, 2012
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policies regarding the reinvestment of principal payments from Federal Reserve holdings of securities.
With respect to the statement to be released following
the meeting, members agreed that only relatively small
modifications to the first two paragraphs were needed
to reflect the incoming information and the modest
changes to the economic outlook implied by the recent
data. In light of the economic outlook, almost all
members agreed to indicate that the Committee expects
to maintain a highly accommodative stance for monetary policy 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 late 2014, longer
than had been indicated in recent FOMC statements.
In particular, several members said they anticipated that
unemployment would still be well above their estimates
of its longer-term normal rate, and inflation would be
at or below the Committee’s longer-run objective, in
late 2014. It was noted that extending the horizon of
the Committee’s forward guidance would help provide
more accommodative financial conditions by shifting
downward investors’ expectations regarding the future
path of the target federal funds rate. Some members
underscored the conditional nature of the Committee’s
forward guidance and noted that it would be subject to
revision in response to significant changes in the economic outlook.
The Committee also stated that it is prepared to adjust
the size and composition of its securities holdings as
appropriate to promote a stronger economic recovery
in a context of price stability. A few members observed that, in their judgment, current and prospective
economic conditions—including elevated unemployment and inflation at or below the Committee’s objective—could warrant the initiation of additional securities purchases before long. Other members indicated
that such policy action could become necessary if the
economy lost momentum or if inflation seemed likely
to remain below its mandate-consistent rate of 2 percent over the medium run. In contrast, one member
judged that maintaining the current degree of policy
accommodation beyond the near term would likely be
inappropriate; that member anticipated that a preemptive tightening of monetary policy would be necessary
before the end of 2014 to keep inflation close to 2 percent.
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 December
suggests that the economy has been expanding moderately, notwithstanding some slowing in global growth. While indicators point
to some further improvement in overall labor market conditions, the unemployment
rate remains elevated. Household spending
has continued to advance, but growth in
business fixed investment has slowed, and
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the housing sector remains depressed. Inflation has been subdued in recent months, 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
expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually toward 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 over coming
quarters, inflation will run at levels at or below those consistent with the Committee’s
dual mandate.
To support a stronger economic recovery
and to help ensure that inflation, over time,
is at levels consistent with the dual mandate,
the Committee expects to maintain a highly
accommodative stance for monetary policy.
In particular, the Committee decided today
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 late 2014.
The Committee also decided 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 to promote a stronger economic recovery in a context of price
stability.”
Voting for this action: Ben Bernanke, William C.
Dudley, Elizabeth Duke, Dennis P. Lockhart, Sandra
Pianalto, Sarah Bloom Raskin, Daniel K. Tarullo, John
C. Williams, and Janet L. Yellen.
Voting against this action: Jeffrey M. Lacker.
Mr. Lacker dissented because he preferred to omit the
description of the time period over which economic
conditions were likely to warrant exceptionally low levels of the federal funds rate. He expected that a
preemptive tightening of monetary policy would be
necessary to prevent an increase in inflation projections
or inflation expectations prior to the end of 2014.
More broadly, given the inclusion of FOMC participants’ projections for the federal funds rate target in
the Summary of Economic Projections, he saw no need
to provide additional forward guidance in the Committee statement.
It was agreed that the next meeting of the Committee
would be held on Tuesday, March 13, 2012. The meeting adjourned at 11:30 a.m. on January 25, 2012.
Notation Vote
By notation vote completed on December 30, 2011, the
Committee unanimously approved the minutes of the
FOMC meeting held on December 13, 2011.
_____________________________
William B. English
Secretary
Page 1
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Summary of Economic Projections
In conjunction with the January 24–25, 2012, 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 2012 to 2014 and over the longer
run. The economic projections were based on information available at the time of the meeting and participants’ individual assumptions about factors likely to
affect economic outcomes, including their assessments
of appropriate monetary policy. Starting with the January meeting, participants also submitted their assessments of the path for the target federal funds rate that
they viewed as appropriate and compatible with their
individual economic projections. 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. “Appropriate monetary
policy” is defined as the future path of policy that participants deem most likely to foster outcomes for economic activity and inflation that best satisfy their individual interpretation of the Federal Reserve’s objectives
of maximum employment and stable prices.
As depicted in figure 1, FOMC participants projected
continued economic expansion over the 2012–14 period, with real gross domestic product (GDP) rising at
a modest rate this year and then strengthening further
through 2014. Participants generally anticipated only a
small decline in the unemployment rate this year. In
2013 and 2014, the pace of the expansion was projected to exceed participants’ estimates of the longerrun sustainable rate of increase in real GDP by enough
to result in a gradual further decline in the unemployment rate. However, at the end of 2014, participants
generally expected that the unemployment rate would
still be well above their estimates of the longer-run
normal unemployment rate that they currently view as
consistent with the FOMC’s statutory mandate for
promoting maximum employment and price stability.
Participants viewed the upward pressures on inflation
in 2011 from factors such as supply chain disruptions
and rising commodity prices as having waned, and they
anticipated that inflation would fall back in 2012. Over
the projection period, most participants expected inflation, as measured by the annual change in the price
index for personal consumption expenditures (PCE), to
be at or below the FOMC’s objective of 2 percent that
was expressed in the Committee’s statement of longerrun goals and policy strategy. Core inflation was projected to run at about the same rate as overall inflation.
As indicated in table 1, relative to their previous projections in November 2011, participants made small
downward revisions to their expectations for the rate of
increase in real GDP in 2012 and 2013, but they did
Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, January 2012
Percent
Variable
Central tendency1
2012
Range2
2013
2014
Longer run
2012
2013
2014
Longer run
Change in real GDP. . . . . . 2.2 to 2.7
November projection. . 2.5 to 2.9
2.8 to 3.2
3.0 to 3.5
3.3 to 4.0
3.0 to 3.9
2.3 to 2.6
2.4 to 2.7
2.1 to 3.0
2.3 to 3.5
2.4 to 3.8
2.7 to 4.0
2.8 to 4.3
2.7 to 4.5
2.2 to 3.0
2.2 to 3.0
Unemployment rate. . . . . . 8.2 to 8.5
November projection. . 8.5 to 8.7
7.4 to 8.1
7.8 to 8.2
6.7 to 7.6
6.8 to 7.7
5.2 to 6.0
5.2 to 6.0
7.8 to 8.6
8.1 to 8.9
7.0 to 8.2
7.5 to 8.4
6.3 to 7.7
6.5 to 8.0
5.0 to 6.0
5.0 to 6.0
PCE inflation. . . . . . . . . . . 1.4 to 1.8
November projection. . 1.4 to 2.0
1.4 to 2.0
1.5 to 2.0
1.6 to 2.0
1.5 to 2.0
2.0
1.7 to 2.0
1.3 to 2.5
1.4 to 2.8
1.4 to 2.3
1.4 to 2.5
1.5 to 2.1
1.5 to 2.4
2.0
1.5 to 2.0
Core PCE inflation3. . . . . . 1.5 to 1.8
November projection. . 1.5 to 2.0
1.5 to 2.0
1.4 to 1.9
1.6 to 2.0
1.5 to 2.0
1.3 to 2.0
1.3 to 2.1
1.4 to 2.0
1.4 to 2.1
1.4 to 2.0
1.4 to 2.2
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 November projections were made in conjunction with the meeting of the
Federal Open Market Committee on November 1–2, 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
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Figure 1. Central tendencies and ranges of economic projections, 2012–14 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
2007
2008
2009
2010
2011
2012
2013
2014
Longer
run
Percent
Unemployment rate
9
8
7
6
5
2007
2008
2009
2010
2011
2012
2013
2014
Longer
run
Percent
PCE inflation
3
2
1
2007
2008
2009
2010
2011
2012
2013
2014
Longer
run
Percent
Core PCE inflation
3
2
1
2007
2008
2009
2010
2011
2012
2013
2014
NOTE: Definitions of variables are in the notes to table 1. The data for the actual values of the variables are annual. The data for the change in real
GDP, PCE inflation, and core PCE inflation shown for 2011 incorporate the advance estimate of GDP for the fourth quarter of 2011, which the Bureau
of Economic Analysis released on January 27, 2012. This information was not available to FOMC meeting participants at the time of their meeting.
Summary of Economic Projections of the Meeting of January 24–25, 2012
Page 3
_____________________________________________________________________________________________
not materially alter their projections for a noticeably
stronger pace of expansion by 2014. With the unemployment rate having declined in recent months by
more than participants had anticipated in the previous
Summary of Economic Projections (SEP), they generally lowered their forecasts for the level of the unemployment rate over the next two years. Participants’
expectations for both the longer-run rate of increase in
real GDP and the longer-run unemployment rate were
little changed from November. They did not significantly alter their forecasts for the rate of inflation over
the next three years. However, in light of the 2 percent
inflation that is the objective included in the statement
of longer-run goals and policy strategy adopted at the
January meeting, the range and central tendency of
their projections of longer-run inflation were all equal
to 2 percent.
As shown in figure 2, most participants judged that
highly accommodative monetary policy was likely to be
warranted over coming years to promote a stronger
economic expansion in the context of price stability. In
particular, with the unemployment rate projected to
remain elevated over the projection period and inflation expected to be subdued, six participants anticipated that, under appropriate monetary policy, the first
increase in the target federal funds rate would occur
after 2014, and five expected policy firming to commence during 2014 (the upper panel). The remaining
six participants judged that raising the federal funds
rate sooner would be required to forestall inflationary
pressures or avoid distortions in the financial system.
As indicated in the lower panel, all of the individual
assessments of the appropriate target federal funds rate
over the next several years were below the longer-run
level of the federal funds rate, and 11 participants
placed the target federal funds rate at 1 percent or lower at the end of 2014. Most participants indicated that
they expected that the normalization of the Federal
Reserve’s balance sheet should occur in a way consistent with the principles agreed on at the June 2011
meeting of the FOMC, with the timing of adjustments
dependent on the expected date of the first policy tightening. A few participants judged that, given their current assessments of the economic outlook, appropriate
policy would include additional asset purchases in 2012,
and one assumed an early ending of the maturity extension program.
A sizable majority of participants continued to judge
the level of uncertainty associated with their projections
for real activity and the unemployment rate as unusually high relative to historical norms. Many also attached
a greater-than-normal level of uncertainty to their forecasts for inflation, but, compared with the November
SEP, two additional participants viewed uncertainty as
broadly similar to longer-run norms. As in November,
many participants saw downside risks attending their
forecasts of real GDP growth and upside risks to their
forecasts of the unemployment rate; most participants
viewed the risks to their inflation projections as broadly
balanced.
The Outlook for Economic Activity
The central tendency of participants’ forecasts for the
change in real GDP in 2012 was 2.2 to 2.7 percent.
This forecast for 2012, while slightly lower than the
projection prepared in November, would represent a
pickup in output growth from 2011 to a rate close to its
longer-run trend. Participants stated that the economic
information received since November showed continued gradual improvement in the pace of economic activity during the second half of 2011, as the influence
of the temporary factors that damped activity in the
first half of the year subsided. Consumer spending
increased at a moderate rate, exports expanded solidly,
and business investment rose further. Recently, consumers and businesses appeared to become somewhat
more optimistic about the outlook. Financial conditions for domestic nonfinancial businesses were generally favorable, and conditions in consumer credit markets showed signs of improvement.
However, a number of factors suggested that the pace
of the expansion would continue to be restrained. Although some indicators of activity in the housing sector
improved slightly at the end of 2011, new homebuilding and sales remained at depressed levels, house prices
were still falling, and mortgage credit remained tight.
Households’ real disposable income rose only modestly
through late 2011. In addition, federal spending contracted toward year-end, and the restraining effects of
fiscal consolidation appeared likely to be greater this
year than anticipated at the time of the November projections. Participants also read the information on
economic activity abroad, particularly in Europe, as
pointing to weaker demand for U.S. exports in coming
quarters than had seemed likely when they prepared
their forecasts in November.
Participants anticipated that the pace of the economic
expansion would strengthen over the 2013–14 period,
reaching rates of increase in real GDP above their estimates of the longer-run rates of output growth. The
central tendencies of participants’ forecasts for the
change in real GDP were 2.8 to 3.2 percent in 2013 and
Page 4
Federal Open Market Committee
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Figure 2. Overview of FOMC participants’ assessments of appropriate monetary policy
Appropriate Timing of Policy Firming
Number of Participants
10
9
8
7
6
5
5
4
3
4
3
3
2
2
1
2012
2015
2014
2013
0
2016
Appropriate Pace of Policy Firming
Percent
6
Target Federal Funds Rate at Year-End
5
4
3
2
1
2012
2013
2014
Longer run
0
NOTE: In the upper panel, the height of each bar denotes the number of FOMC participants who judge that, under appropriate monetary policy and in
the absence of further shocks to the economy, the first increase in the target federal funds rate from its current range of 0 to ¼ percent will occur in
the specified calendar year. In the lower panel, each shaded circle indicates the value (rounded to the nearest ¼ percent) of an individual participant’s
judgment of the appropriate level of the target federal funds rate at the end of the specified calendar year or over the longer run.
Summary of Economic Projections of the Meeting of January 24–25, 2012
Page 5
_____________________________________________________________________________________________
3.3 to 4.0 percent in 2014. Among the considerations
supporting their forecasts, participants cited their expectation that the expansion would be supported by
monetary policy accommodation, ongoing improvements in credit conditions, rising household and business confidence, and strengthening household balance
sheets. Many participants judged that U.S. fiscal policy
would still be a drag on economic activity in 2013, but
many anticipated that progress would be made in resolving the fiscal situation in Europe and that the foreign economic outlook would be more positive. Over
time and in the absence of shocks, participants expected that the rate of increase of real GDP would
converge to their estimates of its longer-run rate, with a
central tendency of 2.3 to 2.6 percent, little changed
from their estimates in November.
The unemployment rate improved more in late 2011
than most participants had anticipated when they prepared their November projections, falling from 9.1 to
8.7 percent between the third and fourth quarters. As a
result, most participants adjusted down their projections for the unemployment rate this year. Nonetheless, with real GDP expected to increase at a modest
rate in 2012, the unemployment rate was projected to
decline only a little this year, with the central tendency
of participants’ forecasts at 8.2 to 8.5 percent at yearend. Thereafter, participants expected that the pickup
in the pace of the expansion in 2013 and 2014 would
be accompanied by a further gradual improvement in
labor market conditions. The central tendency of participants’ forecasts for the unemployment rate at the
end of 2013 was 7.4 to 8.1 percent, and it was 6.7 to
7.6 percent at the end of 2014. The central tendency of
participants’ estimates of the longer-run normal rate of
unemployment that would prevail in the absence of
further shocks was 5.2 to 6.0 percent. Most participants indicated that they anticipated that five or six
years would be required to close the gap between the
current unemployment rate and their estimates of the
longer-run rate, although some noted that more time
would likely be needed.
Figures 3.A and 3.B provide details on the diversity of
participants’ views regarding the likely outcomes for
real GDP growth and the unemployment rate over the
next three years and over the longer run. The dispersion in these projections reflected differences in participants’ assessments of many factors, including appropriate monetary policy and its effects on economic activity, the underlying momentum in economic activity,
the effects of the European situation, the prospective
path for U.S. fiscal policy, the likely evolution of credit
and financial market conditions, and the extent of
structural dislocations in the labor market. Compared
with their November projections, the range of participants’ forecasts for the change in real GDP in 2012
narrowed somewhat and shifted slightly lower, as some
participants reassessed the outlook for global economic
growth and for U.S. fiscal policy. Many, however,
made no material change to their forecasts for growth
of real GDP this year. The dispersion of participants’
forecasts for output growth in 2013 and 2014 remained
relatively wide. Having incorporated the data showing
a lower rate of unemployment at the end of 2011 than
previously expected, the distribution of participants’
projections for the end of 2012 shifted noticeably down
relative to the November forecasts. The ranges for the
unemployment rate in 2013 and 2014 showed less pronounced shifts toward lower rates and, as was the case
with the ranges for output growth, remained wide.
Participants made only modest adjustments to their
projections of the rates of output growth and unemployment over the longer run, and, on net, the dispersions of their projections for both were little changed
from those reported in November. The dispersion of
estimates for the longer-run rate of output growth is
narrow, with only one participant’s estimate outside of
a range of 2.2 to 2.7 percent. By comparison, participants’ views about the level to which the unemployment rate would converge in the long run are more
diverse, reflecting, among other things, different views
on the outlook for labor supply and on the extent of
structural impediments in the labor market.
The Outlook for Inflation
Participants generally viewed the outlook for inflation
as very similar to that in November. Most indicated
that, as they expected, the effects of the run-up in prices of energy and other commodities and the supply
disruptions that occurred in the first half of 2011 had
largely waned, and that inflation had been subdued in
recent months. Participants also noted that inflation
expectations had remained stable over the past year
despite the fluctuations in headline inflation. Assuming
no further supply shocks, most participants anticipated
that both headline and core inflation would remain
subdued over the 2012–14 period at rates at or below
the FOMC’s longer-run objective of 2 percent. Specifically, the central tendency of participants’ projections
for the increase in inflation, as measured by the PCE
price index, in 2012 was 1.4 to 1.8 percent, and it edged
up to a central tendency of 1.6 to 2.0 percent in 2014;
the central tendencies of the forecasts for core PCE
Page 6
Federal Open Market Committee
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Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2012–14 and over the longer run
Number of participants
2012
18
January projections
November projections
16
14
12
10
8
6
4
2
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
2013
18
16
14
12
10
8
6
4
2
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
2014
18
16
14
12
10
8
6
4
2
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
Longer run
18
16
14
12
10
8
6
4
2
2.02.1
2.22.3
2.42.5
2.62.7
2.82.9
3.03.1
3.23.3
Percent range
NOTE: Definitions of variables are in the general note to table 1.
3.43.5
3.63.7
3.83.9
4.04.1
4.24.3
4.44.5
Summary of Economic Projections of the Meeting of January 24–25, 2012
Page 7
_____________________________________________________________________________________________
Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2012–14 and over the longer run
Number of participants
2012
18
January projections
November projections
16
14
12
10
8
6
4
2
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
Percent range
Number of participants
2013
18
16
14
12
10
8
6
4
2
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
Percent range
Number of participants
2014
18
16
14
12
10
8
6
4
2
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
Percent range
Number of participants
Longer run
18
16
14
12
10
8
6
4
2
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
Page 8
Federal Open Market Committee
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Figure 3.C. Distribution of participants’ projections for PCE inflation, 2012–14 and over the longer run
Number of participants
2012
18
January projections
November projections
16
14
12
10
8
6
4
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
Percent range
Number of participants
2013
18
16
14
12
10
8
6
4
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
Percent range
Number of participants
2014
18
16
14
12
10
8
6
4
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
Percent range
Number of participants
Longer run
18
16
14
12
10
8
6
4
2
1.31.4
1.51.6
1.71.8
1.92.0
Percent range
NOTE: Definitions of variables are in the general note to table 1.
2.12.2
2.32.4
2.52.6
2.72.8
Summary of Economic Projections of the Meeting of January 24–25, 2012
Page 9
_____________________________________________________________________________________________
Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2012–14
Number of participants
2012
18
January projections
November projections
16
14
12
10
8
6
4
2
1.31.4
1.51.6
1.71.8
1.92.0
2.12.2
Percent range
Number of participants
2013
18
16
14
12
10
8
6
4
2
1.31.4
1.51.6
1.71.8
1.92.0
2.12.2
Percent range
Number of participants
2014
18
16
14
12
10
8
6
4
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
Page 10
Federal Open Market Committee
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inflation were largely the same as those for the total
measure.
Figures 3.C and 3.D provide information about the
diversity of participants’ views about the outlook for
inflation. Compared with their November projections,
expectations for inflation in 2012 shifted down a bit,
with some participants noting that the slowing in inflation at the end of 2011 had been greater than they anticipated. Nonetheless, the range of participants’ forecasts for inflation in 2012 remained wide, and the dispersion was only slightly narrower in 2013. By 2014,
the range of inflation forecasts narrowed more noticeably, as participants expected that, under appropriate
monetary policy, inflation would begin to converge to
the Committee’s longer-run objective. In general, the
dispersion of views on the outlook for inflation over
the projection period represented differences in judgments regarding the degree of slack in resource utilization and the extent to which slack influences inflation
and inflation expectations. In addition, participants
differed in their estimates of how the stance of monetary policy would influence inflation expectations.
Appropriate Monetary Policy
Most participants judged that the current outlook—for
a moderate pace of economic recovery with the unemployment rate declining only gradually and inflation
subdued—warranted exceptionally low levels of the
federal funds rate at least until late 2014. In particular,
five participants viewed appropriate policy firming as
commencing during 2014, while six others judged that
the first increase in the federal funds rate would not be
warranted until 2015 or 2016. As a result, those
11 participants anticipated that the appropriate federal
funds rate at the end of 2014 would be 1 percent or
lower. Those who saw the first increase occurring in
2015 reported that they anticipated that the federal
funds rate would be ½ percent at the end of that year.
For the two participants who put the first increase in
2016, the appropriate target federal funds rate at the
end of that year was 1½ and 1¾ percent. In contrast,
six participants expected that an increase in the target
federal funds rate would be appropriate within the next
two years, and those participants anticipated that the
target rate would need to be increased to around 1½ to
2¾ percent at the end of 2014.
Participants’ assessments of the appropriate path for
the federal funds rate reflected their judgments of the
policy that would best support progress in achieving
the Federal Reserve’s mandate for promoting maximum employment and stable prices. Among the key
factors informing participants’ expectations about the
appropriate setting for monetary policy were their assessments of the maximum level of employment, the
Committee’s longer-run inflation goal, the extent to
which current conditions deviate from these mandateconsistent levels, and their projections of the likely time
horizons required to return employment and inflation
to such levels. Several participants commented that
their assessments took into account the risks to the
outlook for economic activity and inflation, and a few
pointed specifically to the relevance of financial stability
in their policy judgments. Participants also noted that
because the appropriate stance of monetary policy depends importantly on the evolution of real activity and
inflation over time, their assessments of the appropriate
future path of the federal funds rate could change if
economic conditions were to evolve in an unexpected
manner.
All participants reported levels for the appropriate target federal funds rate at the end of 2014 that were well
below their estimates of the level expected to prevail in
the longer run. The longer-run nominal levels were in
a range from 3¾ to 4½ percent, reflecting participants’
judgments about the longer-run equilibrium level of the
real federal funds rate and the Committee’s inflation
objective of 2 percent.
Participants also provided qualitative information on
their views regarding the appropriate path of the Federal Reserve’s balance sheet. A few participants’ assessments of appropriate monetary policy incorporated
additional purchases of longer-term securities in 2012,
and a number of participants indicated that they remained open to a consideration of additional asset purchases if the economic outlook deteriorated. All but
one of the participants continued to expect that the
Committee would carry out the normalization of the
balance sheet according to the principles approved at
the June 2011 FOMC meeting. That is, prior to the
first increase in the federal funds rate, the Committee
would likely cease reinvesting some or all payments on
the securities holdings in the System Open Market Account (SOMA), and it would likely begin sales of agency securities from the SOMA sometime after the first
rate increase, aiming to eliminate the SOMA’s holdings
of agency securities over a period of three to five years.
Indeed, most participants saw sales of agency securities
starting no earlier than 2015. However, those participants anticipating an earlier increase in the federal
funds rate also called for earlier adjustments to the balance sheet, and one participant assumed an early end of
the maturity extension program.
Summary of Economic Projections of the Meeting of January 24–25, 2012
Page 11
_____________________________________________________________________________________________
Figure 3.E. Distribution of participants’ projections for the target federal funds rate, 2012–14 and over the longer run
Number of participants
2012
18
January projections
16
14
12
10
8
6
4
2
0.000.37
0.380.62
0.630.87
0.881.12
1.131.37
1.381.62
1.631.87
1.882.12
2.132.37
2.382.62
2.632.87
2.883.12
3.133.37
3.383.62
3.633.87
3.884.12
4.134.37
4.384.62
4.634.87
Percent range
Number of participants
2013
18
16
14
12
10
8
6
4
2
0.000.37
0.380.62
0.630.87
0.881.12
1.131.37
1.381.62
1.631.87
1.882.12
2.132.37
2.382.62
2.632.87
2.883.12
3.133.37
3.383.62
3.633.87
3.884.12
4.134.37
4.384.62
4.634.87
Percent range
Number of participants
2014
18
16
14
12
10
8
6
4
2
0.000.37
0.380.62
0.630.87
0.881.12
1.131.37
1.381.62
1.631.87
1.882.12
2.132.37
2.382.62
2.632.87
2.883.12
3.133.37
3.383.62
3.633.87
3.884.12
4.134.37
4.384.62
4.634.87
Percent range
Number of participants
Longer run
18
16
14
12
10
8
6
4
2
0.000.37
0.380.62
0.630.87
0.881.12
1.131.37
1.381.62
1.631.87
1.882.12
2.132.37
2.382.62
2.632.87
2.883.12
3.133.37
3.383.62
3.633.87
3.884.12
4.134.37
Percent range
NOTE: The target funds rate is measured as the level of the target rate at the end of the calendar year or in the longer run.
4.384.62
4.634.87
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Federal Open Market Committee
_____________________________________________________________________________________________
Figure 3.E details the distribution of participants’
judgments regarding the appropriate level of the target
federal funds rate at the end of each calendar year from
2012 to 2014 and over the longer run. Most participants anticipated that economic conditions would warrant maintaining the current low level of the federal
funds rate over the next two years. However, views on
the appropriate level of the federal funds rate at the end
of 2014 were more widely dispersed, with two-thirds of
participants seeing the appropriate level of the federal
funds rate as 1 percent or below and five seeing the
appropriate rate as 2 percent or higher. Those participants who judged that a longer period of exceptionally
low levels of the federal funds rate would be appropriate generally also anticipated that the pace of the economic expansion would be moderate and that the unemployment rate would decline only gradually, remaining well above its longer-run rate at the end of 2014.
Almost all of these participants expected that inflation
would be relatively stable at or below the FOMC’s
longer-run objective of 2 percent until the time of the
first increase in the federal funds rate. A number of
them also mentioned their assessment that a longer
period of low federal funds rates is appropriate when
the federal funds rate is constrained by its effective
lower bound. In contrast, the six participants who
judged that policy firming should begin in 2012 or 2013
indicated that the Committee would need to act decisively to keep inflation at mandate-consistent levels and
to limit the risk of undermining Federal Reserve credibility and causing a rise in inflation expectations. Several were projecting a faster pickup in economic activity, and a few stressed the risk of distortions in the financial system from an extended period of exceptionally low interest rates.
Uncertainty and Risks
Figure 4 shows that most participants continued to
share the view that their projections for real GDP
growth and the unemployment rate were subject to a
higher level of uncertainty than was the norm during
the previous 20 years.1 Many also judged the level of
uncertainty associated with their inflation forecasts to
be higher than the longer-run norm, but that assessTable 2 provides estimates of the 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
Variable
2012
2013
2014
Change in real GDP1 . . . . . . . .
±1.3
±1.7
±1.8
±0.7
±1.4
±1.8
±0.9
±1.0
±1.0
Unemployment
rate1
........
Total consumer
prices2
......
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 winter 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.
ment was somewhat less prevalent among participants
than was the case for uncertainty about real activity.
Participants identified a number of factors that contributed to the elevated level of uncertainty about the outlook. In particular, many participants continued to cite
risks related to ongoing developments in Europe.
More broadly, they again noted difficulties in forecasting the path of economic recovery from a deep recession that was the result of a severe financial crisis and
thus differed importantly from the experience with recoveries over the past 60 years. In that regard, participants continued to be uncertain about the pace at
which credit conditions would ease and about prospects for a recovery in the housing sector. In addition,
participants generally saw the outlook for fiscal and
regulatory policies as still highly uncertain. Regarding
the unemployment rate, several expressed uncertainty
about how labor demand and supply would evolve over
the forecast period. Among the sources of uncertainty
about the outlook for inflation were the difficulties in
assessing the current and prospective margins of slack
in resource markets and the effect of such slack on
prices.
A majority of participants continued to report that they
saw the risks to their forecasts of real GDP growth as
weighted to the downside and, accordingly, the risks to
their projections for the unemployment rate as skewed
to the upside. All but one of the remaining participants
viewed the risks to both projections as broadly balanced, while one noted a risk that the unemployment
rate might continue to decline more rapidly than expected. The most frequently cited downside risks to
the projected pace of the economic expansion were the
Summary of Economic Projections of the Meeting of January 24–25, 2012
Page 13
_____________________________________________________________________________________________
Figure 4. Uncertainty and risks in economic projections
Number of participants
Uncertainty about GDP growth
18
January projections
November 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
January projections
November 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.
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Federal Open Market Committee
_____________________________________________________________________________________________
possibility of financial market and economic spillovers
from the fiscal and financial issues in the euro area and
the chance that some of the factors that have restrained
the recovery in recent years could persist and weigh on
economic activity to a greater extent than assumed in
participants’ baseline forecasts. In particular, some
participants mentioned the downside risks to consumer
spending from still-weak household balance sheets and
only modest gains in real income, along with the possible effects of still-high levels of uncertainty regarding
fiscal and regulatory policies that might damp businesses’ willingness to invest and hire. A number of participants noted the risk of another disruption in global oil
markets that could not only boost inflation but also
reduce real income and spending. The participants
who judged the risks to be broadly balanced also recognized a number of these downside risks to the outlook but saw them as counterbalanced by the possibility that the resilience of economic activity in late 2011
and the recent drop in the unemployment rate might
signal greater underlying momentum in economic activity.
In contrast to their outlook for economic activity, most
participants judged the risks to their projections of inflation as broadly balanced. Participants generally
viewed the recent decline in inflation as having been in
line with their earlier forecasts, and they noted that inflation expectations remain stable. While many of
these participants saw the persistence of substantial
slack in resource utilization as likely to keep inflation
subdued over the projection period, a few others noted
the risk that elevated resource slack might put more
downward pressure on inflation than expected. In contrast, some participants noted the upside risks to inflation from developments in global oil and commodity
markets, and several indicated that the current highly
accommodative stance of monetary policy and the substantial liquidity currently in the financial system risked
a pickup in inflation to a level above the Committee’s
objective. A few also pointed to the risk that uncertainty about the Committee’s ability to effectively remove
policy accommodation when appropriate could lead to
a rise in inflation expectations.
Summary of Economic Projections of the Meeting of January 24–25, 2012
Page 15
_____________________________________________________________________________________________
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 1.7 to
4.3 percent in the current year, 1.3 to 4.7 percent in the second year, and 1.2 to 4.8 in the
third year. The corresponding 70 percent confidence intervals for overall inflation would be
1.1 to 2.9 percent in the current year and 1.0 to
3.0 percent in the second and third years.
Because current conditions may differ
from those that prevailed, on average, over history, participants provide judgments as to
whether the uncertainty attached to their projections of each variable is greater than, smaller
than, or broadly similar to typical levels of
forecast uncertainty in the past, as shown in
table 2. Participants also provide judgments as
to whether the risks to their projections are
weighted to the upside, are weighted to the
downside, or are broadly balanced. That is,
participants judge whether each variable is
more likely to be above or below their projections of the most likely outcome. These judgments about the uncertainty and the risks attending each participant’s projections are distinct from the diversity of participants’ views
about the most likely outcomes. Forecast uncertainty is concerned with the risks associated
with a particular projection rather than with
divergences across a number of different projections.
As with real activity and inflation, the outlook for the future path of the federal funds
rate is subject to considerable uncertainty. This
uncertainty arises primarily because each participant’s assessment of the appropriate stance of
monetary policy depends importantly on the
evolution of real activity and inflation over
time. If economic conditions evolve in an unexpected manner, then assessments of the appropriate setting of the federal funds rate
would change from that point forward.
Cite this document
Federal Reserve (2012, January 24). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_20120125
@misc{wtfs_fomc_minutes_20120125,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {2012},
month = {Jan},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_20120125},
note = {Retrieved via When the Fed Speaks corpus}
}