FOMC Minutes

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Minutes of the Federal Open Market Committee

October 23–24, 2012

A meeting of the Federal Open Market Committee was

held in the offices of the Board of Governors of the

Federal Reserve System in Washington, D.C., on

Tuesday, October 23, 2012, at 1:00 p.m. and continued

on Wednesday, October 24, 2012, at 9:00 a.m.

James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors

PRESENT:

Ben Bernanke, Chairman

William C. Dudley, Vice Chairman

Elizabeth Duke

Jeffrey M. Lacker

Dennis P. Lockhart

Sandra Pianalto

Jerome H. Powell

Sarah Bloom Raskin

Jeremy C. Stein

Daniel K. Tarullo

John C. Williams

Janet L. Yellen

Linda Robertson, Assistant to the Board, Office of

Board Members, Board of Governors

James Bullard, 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, David Reifschneider, Mark S. Sniderman, and William Wascher, Associate Economists

Simon Potter, Manager, System Open Market Account

Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors

Andreas Lehnert, Deputy Director, Office of Financial

Stability Policy and Research, Board of Governors

Thomas Laubach, Senior Adviser, 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

Eric M. Engen, Michael T. Kiley, and Michael G. Palumbo, Associate Directors, Division of Research

and Statistics, Board of Governors

Joshua Gallin, Deputy Associate Director, Division of

Research and Statistics, Board of Governors

Marnie Gillis DeBoer, Assistant Director, Division of

Monetary Affairs, Board of Governors

David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors

Jeremy B. Rudd, Senior Economist, Division of Research and Statistics, Board of Governors

Helen E. Holcomb, First Vice President, Federal Reserve Bank of Dallas

Jeff Fuhrer and Loretta J. Mester, Executive Vice Presidents, Federal Reserve Banks of Boston and Philadelphia, respectively

Troy Davig, Spencer Krane, and Kevin Stiroh, Senior

Vice Presidents, Federal Reserve Banks of Kansas

City, Chicago, and New York, respectively

William Gavin, Evan F. Koenig, Lorie K. Logan, and

Paolo A. Pesenti, Vice Presidents, Federal Reserve

Banks of St. Louis, Dallas, New York, and New

York, respectively

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Thomas D. Tallarini, Jr., Assistant Vice President, Federal Reserve Bank of Minneapolis

Andreas L. Hornstein, Senior Advisor, Federal Reserve

Bank of Richmond

Eric T. Swanson, Senior Research Advisor, Federal

Reserve Bank of San Francisco

Thresholds and Forward Guidance

A staff presentation focused on the potential effects of

using specific threshold values of inflation and the unemployment rate to provide forward guidance regarding the timing of the initial increase in the federal funds

rate. The presentation reviewed simulations from a

staff macroeconomic model to illustrate the implications for policy and the economy of announcing various threshold values that would need to be attained

before the Federal Open Market Committee (FOMC)

would consider increasing its target for the federal

funds rate. Meeting participants discussed whether

such thresholds might usefully replace or perhaps augment the date-based guidance that had been provided

in the policy statements since August 2011. Participants generally favored the use of economic variables,

in place of or in conjunction with a calendar date, in

the Committee’s forward guidance, but they offered

different views on whether quantitative or qualitative

thresholds would be most effective. Many participants

were of the view that adopting quantitative thresholds

could, under the right conditions, help the Committee

more clearly communicate its thinking about how the

likely timing of an eventual increase in the federal funds

rate would shift in response to unanticipated changes in

economic conditions and the outlook. Accordingly,

thresholds could increase the probability that market

reactions to economic developments would move

longer-term interest rates in a manner consistent with

the Committee’s view regarding the likely future path

of short-term rates. A number of other participants

judged that communicating a careful qualitative description of the indicators influencing the Committee’s

thinking about current and future monetary policy, or

providing more information about the Committee’s

policy reaction function, would be more informative

than either quantitative thresholds or date-based forward guidance. Several participants were concerned

that quantitative thresholds could confuse the public by

giving the impression that the FOMC focuses on a

small number of economic variables in setting monetary policy, when the Committee in fact uses a wide

range of information. Some other participants worried

that the public might mistakenly interpret quantitative

thresholds as equivalent to the Committee’s longer-run

objectives or as triggers that, when reached, would

prompt an immediate rate increase; but it was noted

that the Chairman’s postmeeting press conference and

other venues could be used to explain the distinction

between thresholds and these other concepts.

Participants generally agreed that the Committee would

need to resolve a number of practical issues before deciding whether to adopt quantitative thresholds to

communicate its thinking about the timing of the initial

increase in the federal funds rate. These issues included whether to specify such thresholds in terms of

realized or projected values of inflation and the unemployment rate and, in either case, what values for those

thresholds would best balance the Committee’s objectives of promoting maximum employment and price

stability. Another open question was whether to supplement thresholds expressed in terms of the unemployment rate and inflation with additional indicators

of economic and financial conditions that might signal

a need either to raise the federal funds rate before a

threshold is crossed or to delay until well afterward. A

final question was whether the statement should also

provide forward guidance about the likely path of the

federal funds rate after the initial increase. It was noted

that such guidance could have significant effects on

financial conditions and the economy. At the conclusion of the discussion, the Chairman asked the staff to

provide additional background material, taking into

account the range of participants’ views.

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

FOMC met on September 12–13, 2012. The Manager

also reported on System open market operations over

the intermeeting period, focusing on the ongoing reinvestment into agency-guaranteed mortgage-backed securities (MBS) of principal payments received on

SOMA holdings of agency debt and agency-guaranteed

MBS and the purchases of MBS authorized at the September 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.

Minutes of the Meeting of October 23–24, 2012

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Staff Review of the Economic Situation

The information reviewed at the October 23–24 meeting suggested that economic activity continued to increase at a moderate pace in recent months. The unemployment rate declined but was still elevated. Consumer price inflation picked up, reflecting higher consumer energy costs, but longer-run inflation expectations remained stable.

Private nonfarm employment expanded modestly in

September, and government employment increased.

The unemployment rate fell to 7.8 percent, and the

labor force participation rate rose slightly. The share of

workers employed part time for economic reasons increased somewhat and continued to be elevated, while

the rate of long-duration unemployment edged down

further but remained high. Other indicators of labor

market conditions, such as surveys of firms’ job openings and hiring plans and initial claims for unemployment insurance, did not show decided improvement

over the intermeeting period.

Manufacturing production declined in the third quarter,

and the rate of manufacturing capacity utilization edged

down. Automakers’ schedules pointed to a similar rate

of motor vehicle assemblies in the fourth quarter as in

the third quarter. Broader indicators of factory production, such as the diffusion indexes of new orders from

the national and regional manufacturing surveys, remained subdued in recent months at levels consistent

with only tepid increases in manufacturing output in

the near term.

Real personal consumption expenditures rose at a solid

pace in August. In September, nominal retail sales,

excluding purchases at motor vehicle and parts outlets,

increased considerably. Light motor vehicle sales also

expanded. Recent data on factors that tend to support

household spending were mixed. Real disposable income declined in August, largely reflecting the effect of

higher consumer energy prices. In contrast, consumer

sentiment rose in September and early October, and

continued modest increases in house prices added to

households’ net worth.

Housing market conditions improved more generally in

recent months. Starts and permits of both new singlefamily homes and multifamily units picked up in August and September. However, construction activity

remained at a relatively low level, reflecting the restraint

imposed by tight credit standards for mortgage borrowing and by the large inventory of foreclosed and distressed properties. Sales of existing homes continued

to expand, on balance, in recent months, but new

home sales were flat.

Real business expenditures on equipment and software

appeared to edge down in the third quarter. Nominal

shipments for nondefense capital goods excluding aircraft continued to decrease in August; the backlog of

unfilled orders for these capital goods also declined.

Other forward-looking indicators, such as subdued

readings from surveys of business conditions and capital spending plans, also pointed toward roughly flat real

expenditures for business equipment in the near term.

Nominal business spending for new nonresidential

construction decreased further in August. Meanwhile,

inventories in most industries were about in line with

sales. In the farm sector, however, drought conditions

likely reduced inventory accumulation last quarter and

subtracted from overall economic growth.

Real federal government purchases appeared to edge

up in the third quarter, as data for nominal federal

spending in August and September pointed to a slight

increase in real defense expenditures. Real state and

local government purchases likely moved essentially

sideways in the third quarter. State and local government payrolls expanded, but nominal construction

spending continued to decline in recent months.

The U.S. international trade deficit widened in August,

as imports fell less than exports. Imports edged down,

on net, with higher purchases of services and petroleum products more than offset by declines in all of the

other major categories. Across export categories, exports of industrial supplies posted a particularly large

decline, as the volume of petroleum product exports

dropped sharply.

Consumer prices picked up in August and September,

primarily reflecting sharp increases in retail gasoline

prices. However, survey data indicated that retail gasoline prices were about flat in early October. Consumer

food prices rose modestly in recent months. The

somewhat better-than-expected crop harvest caused

spot and futures prices of farm commodities to retrace

some of their rise during the summer; however, farm

commodity prices remained elevated and continued to

point toward some temporary upward pressures on

retail food prices later this year. Increases in consumer

prices excluding food and energy were subdued in August and September. Near-term inflation expectations

from the Thomson Reuters/University of Michigan

Surveys of Consumers declined in September and early

October, while longer-term inflation expectations in

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the survey moved down to near the lower end of the

narrow range where they have remained for some time.

Available measures of labor compensation indicated

that increases in nominal wages stayed relatively modest. The gains in average hourly earnings for all employees in the third quarter were subdued.

Foreign economic growth remained sluggish, restrained

by weak activity in Europe and the associated spillovers—including through trade—to the rest of the world.

Euro-area production indicators signaled continued

contraction, and the area’s unemployment rate in August stayed at a historical high. In Japan, exports and

output declined in the summer months, and growth of

real gross domestic product (GDP) for the first half of

the year was revised down significantly. Data for exports from emerging market economies, especially in

Asia, showed a drop, although recently released data

for China indicated a pickup in economic activity in the

third quarter. Foreign inflation rose slightly in some

emerging market economies in response to higher food

prices but was still generally well contained. Monetary

policy remained accommodative in most advanced and

emerging market economies.

Staff Review of the Financial Situation

Market participants reportedly read the September

FOMC statement as pointing to a significant increase in

monetary policy accommodation. As a result, financial

conditions generally eased appreciably early in the intermeeting period. However, toward the end of the

period investor sentiment deteriorated somewhat, in

part because of concerns about corporate profitability.

Short- and medium-term nominal Treasury yields

ended the intermeeting period up slightly, and longterm yields were about unchanged on net. At the same

time, real yields on Treasury inflation-protected securities (TIPS) decreased somewhat, leaving inflation compensation higher. In part, the rise in inflation compensation may have reflected upward pressure on nominal

Treasury yields associated with some unwinding of

safe-haven demands.

The expected path of the federal funds rate based on

money market futures was little changed between the

September and October FOMC meetings. Marketbased measures of uncertainty about the path of the

federal funds rate over medium-to-long horizons declined over the period. The survey of primary dealers

conducted prior to the October meeting showed that

the expected size of the SOMA at the end of 2013 had

risen significantly.

Indicators of the condition of domestic financial institutions were mixed over the intermeeting period. Indexes of equity prices for those institutions were modestly lower. But spreads on credit default swaps for

large financial institutions declined in recent months,

and third-quarter earnings of large bank holding companies that had reported by the time of the FOMC

meeting were generally in line with expectations.

Conditions in unsecured dollar funding markets appeared to improve some. In secured funding markets,

rates on repurchase agreements spiked around quarterend but subsequently more than retraced that move,

ending the intermeeting period down slightly.

Broad equity price indexes were a little lower, on balance, as gains following the September FOMC meeting

and generally better-than-expected economic data releases were more than offset by concerns about corporate profitability. Option-implied volatility for the S&P

500 index fell noticeably following the September

FOMC meeting but increased, on net, over the intermeeting period.

Yields on investment-grade corporate bonds reached a

record low level, and their spreads to yields on comparable-maturity Treasury securities narrowed on net.

Yields and spreads on speculative-grade corporate

bonds also decreased.

The pace of investment- and speculative-grade bond

issuance by nonfinancial firms picked up significantly in

September from the already robust pace in previous

months. In the syndicated leveraged loan market, issuance through the first three quarters of 2012 lagged

that of the same period in 2011 but nonetheless remained solid. The pace of gross public equity issuance

by nonfinancial firms moved up some in September

from the subdued levels observed in prior months, but

overall issuance in the third quarter stayed low compared with the first half of 2012.

Financial conditions in the commercial real estate sector remained weak amid elevated vacancy and delinquency rates. However, some indicators pointed to

modest improvement in this sector, and issuance of

commercial mortgage-backed securities was solid in the

third quarter.

Residential mortgage rates declined over the intermeeting period. The decline in mortgage rates reflected a

sizable drop in MBS yields following the September

FOMC statement. Refinancing activity increased further in September and early October. House prices

continued to rise, and some indicators of credit quality

Minutes of the Meeting of October 23–24, 2012

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on residential real estate loans improved. The fraction

of seriously delinquent existing mortgages remained

elevated, but the rate at which mortgages entered delinquency continued to trend down in July.

Consumer credit expanded briskly in August. Nonrevolving credit continued to increase at a robust pace,

mainly reflecting growth in student and auto loans.

Revolving credit also rose in August but was little

changed, on balance, over the past few months. Delinquency rates for consumer credit remained low, and

issuance of consumer asset-backed securities was

strong in the third quarter, close to the pace seen earlier

this year.

Bank credit continued to expand at a moderate rate in

the third quarter, with further growth in loans augmented by larger gains in securities holdings. Results

from the October Senior Loan Officer Opinion Survey

on Bank Lending Practices indicated that modest fractions of domestic banks, on net, continued to report

having eased their lending standards on some categories of business and household loans. In addition, for

the second straight quarter, reports of stronger demand

were relatively widespread for many types of loans.

M2 growth picked up somewhat in September, as

strong growth in liquid deposits and currency offset

ongoing declines in small time deposits and retail money market funds.

The staff’s broad nominal index of the foreign exchange value of the dollar was little changed, on net,

over the intermeeting period. The dollar rose against

the currencies of most advanced economies but declined against the euro and most Asian emerging market currencies. Of note, the Chinese renminbi appreciated further against the dollar. A number of central

banks eased monetary policy during the period, including those of Australia, Brazil, Japan, Korea, and Thailand. Foreign equity indexes, which generally rose following the September FOMC statement, ended the

intermeeting period higher in most markets, although

stock prices in the euro area were down on net. Tenyear sovereign yields in Germany and the United Kingdom moved down just a few basis points. After declining significantly between late July and early September,

the yield spread of 10-year sovereign debt in Italy over

comparable German bunds declined only slightly further over the intermeeting period, and the Spanish sovereign spread edged up.

Staff Economic Outlook

In the economic forecast prepared by the staff for the

October FOMC meeting, real GDP growth in the near

term was revised up relative to the previous projection.

The upward revision to the near-term forecast primarily

reflected better-than-expected incoming information

for consumer spending, residential construction, and

labor market conditions that more than offset the recent data for business fixed investment and industrial

production that were weaker than anticipated. The

staff’s medium-term projection for real GDP growth

also was revised up, mostly reflecting the monetary

policy actions announced by the FOMC after the September meeting and the resulting improved outlook for

financial conditions. Nonetheless, with fiscal policy

assumed to be tighter next year than this year, the staff

anticipated that real GDP growth would not materially

exceed increases in potential output in 2013. In 2014,

economic activity was projected to accelerate gradually,

supported by a lessening in fiscal policy restraint, gains

in consumer and business confidence, further improvements in financial conditions and credit availability, and accommodative monetary policy. Progress in

reducing unemployment over the projection period was

expected to be relatively slow.

The staff’s near-term forecast for inflation was little

changed, on balance, from the projection prepared for

the September FOMC meeting, notwithstanding recent

increases in consumer energy prices. The staff’s projection for inflation over the medium term was also

essentially unchanged. Crude oil prices were anticipated to decline slowly from their current levels, the

boost to retail food prices from the drought was expected to be only temporary and relatively small, longrun inflation expectations were assumed to remain stable, and significant resource slack was projected to

persist over the projection period. As a result, the staff

continued to forecast that inflation would be subdued

through 2014.

Participants’ Views on Current Conditions and the

Economic Outlook

In their discussion of the economic situation and the

outlook, meeting participants viewed the information

received since the Committee met in September as indicating that economic activity continued to expand at

a moderate pace. Employment was still rising slowly,

and the unemployment rate remained elevated.

Household spending advanced more quickly in recent

months than during the spring, and housing activity

showed further signs of improvement. However, business fixed investment slowed noticeably. Inflation re-

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cently picked up somewhat, reflecting higher energy

prices, while longer-run inflation expectations remained

stable.

Participants generally saw the economic outlook as little changed, on balance, from their projections prepared for the September Summary of Economic Projections (SEP), agreeing that the pace of the economic

recovery was likely to stay moderate over coming quarters. The recent news on household spending, consumer sentiment, and the housing market was encouraging, and most participants expected that highly accommodative monetary policy would provide support

for the recovery in the period ahead. However, many

participants saw the uncertainty attending the unresolved U.S. fiscal situation and the ongoing fiscal and

financial strains in the euro area as factors likely to restrain the pace of economic growth in coming months.

Moreover, many participants cited significant downside

risks to the outlook that might arise from more widespread weakness in global economic activity or an intensification of strains in global financial markets. Regarding inflation, the recent run-up in consumer energy

prices was expected to subside over the next few

months, while the effects of the drought were likely to

show through to retail food prices. Over the medium

term, most participants anticipated that inflation would

run at or below the Committee’s 2 percent objective.

Concerning developments in the household sector,

participants observed that the recent news on consumer spending and confidence had been positive, with

surveys reporting that households had become noticeably more optimistic about the outlook for unemployment and income. Sales of motor vehicles remained an

area of strength, in part due to favorable credit conditions. The increase in consumer spending appeared to

be relatively broadly based across the country, although

retailers in a few areas reported that they had seen

slower sales recently and expressed concerns about the

near-term outlook. Among the factors mentioned that

might support consumer confidence and a continuation

of the somewhat stronger pace of spending were an

expected decline in retail energy prices and continued

gradual improvement in labor market conditions. In

addition, lower mortgage rates had spurred a rise in

refinancing activity, which, along with the increases in

household wealth attributable to higher home values

and equity prices, would provide support for consumer

spending going forward.

Participants generally agreed that a recovery in housing

activity now appeared to be under way, citing increases

in house prices, sales, and construction in many areas.

Most saw the low levels of mortgage interest rates as an

important factor contributing to increased housing demand. Although the recovery in the housing sector

appeared to be taking hold, several participants cited

obstacles to more rapid improvement. For example,

several participants reported that lenders’ capacity for

processing home-purchase mortgages was tight and

backlogs were long, in part due to the current heavy

pace of refinancings. These participants also noted that

underwriting standards remained quite tight, particularly for borrowers with lower credit quality.

In contrast to the more favorable news on consumer

spending and housing, contacts generally reported

slower activity in the business sector. Some participants expressed concern about weaker manufacturing

output and new orders in recent months, particularly in

capital goods industries, although several pointed out

that manufacturers’ expectations for future orders and

production were more positive. A few participants

noted that shipping activity was down, and one participant added that energy production had decelerated. In

contrast, a few participants had received reports of a

pickup in nonresidential construction, and one indicated that high-tech firms were expecting gains in business going forward. In many instances, participants’

business contacts stated that they were delaying or cutting back on hiring and capital spending because of the

uncertain outlook for government spending, taxes, or

regulatory policies. One participant, however, reported

that contacts said that insufficient demand remained

their principal concern. Several participants mentioned

that the cautious posture of businesses was apparent in

national and regional surveys of plans of both large and

small firms. Some participants noted that the outlook

for business spending would likely be difficult to assess

until the direction of U.S. fiscal policy becomes clearer.

A few suggested the possibility that a near-term resolution of the fiscal situation might lead to a significant

increase in spending as projects now being deferred

were undertaken; another worried that the uncertainty

attending the outlook for fiscal policy might weigh on

business planning for some time. In addition to the

uncertainty about the fiscal outlook, manufacturing

contacts attributed the weakness in orders and production to softer export demand; one participant added

that agricultural exports had also softened. Several participants noted that their contacts were concerned not

only about the economic slowdown in Europe, but also

about whether the recent slowing in economic activity

in Asia might persist.

Minutes of the Meeting of October 23–24, 2012

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In their comments on labor market developments, participants generally viewed the recent decline in the unemployment rate and continued modest gains in payroll

employment, taken together, as consistent with a gradually improving job market. However, with economic

growth anticipated to stay moderate, some participants

expressed concern that the pace of job creation would

generate only a slow decline in joblessness. Several

pointed to a steep drop in the index of hiring plans by

small businesses. A couple of participants mentioned

that some firms planned to increase their use of parttime or temporary workers rather than full-time permanent employees, at least partly in order to limit

health insurance costs.

Participants saw recent price developments as consistent with inflation remaining at or below the Committee’s 2 percent objective over the medium run. Although energy prices had risen sharply in recent

months, reflecting earlier increases in crude oil costs

and supply disruptions, gasoline prices were anticipated

to move back down in coming months as those pressures eased. Similarly, effects of the drought were expected to show through to retail food prices over the

next few quarters but then subside. By various estimates, underlying inflation trends remained subdued,

and indicators of longer-term inflation expectations

were generally viewed as stable.

In their discussion of financial developments over the

intermeeting period, participants commented on the

effects of the policy actions taken at the September

meeting to strengthen the Committee’s forward guidance and to purchase additional MBS. The initial effects were generally viewed as consistent with a marked

easing in financial conditions. For example, yields on

MBS dropped noticeably, leading to a decline in mortgage interest rates, and corporate bond yields generally

moved lower. Yields on nominal Treasury securities

were little changed. Some participants suggested that

more time would be required to assess the ultimate effects of the additional MBS purchases on primary

mortgage rates and on financial conditions more broadly. The stability in nominal Treasury yields, paired with

a decline in TIPS yields, implied a modest increase in

inflation compensation, on net, over the intermeeting

period. A couple of participants saw this increase as a

sign that the open-ended asset purchases posed a risk

to the stability of longer-term inflation expectations.

However, others saw the effect on expected inflation as

relatively muted or likely the result of reduced risks of

undesirably low inflation. Participants remained concerned about risks to financial markets associated with

the situation in the euro area and uncertain U.S. fiscal

prospects, but a couple noted that measures of financial

market uncertainty were still relatively low. Several

participants pointed out that recent policy announcements by the European Central Bank were received

favorably in markets. A number of participants mentioned other signs of greater optimism in financial markets, including a rise in merger and acquisition activity

and a moderation in pressures on large U.S. financial

institutions. A few participants observed that low interest rates had increased demand for riskier financial

products, and a couple of participants saw a risk that

holding interest rates low for a prolonged period could

lead to financial imbalances and imprudent risk-taking.

One participant, however, commented that risk aversion still seemed quite high, citing the very low yields

on longer-term TIPS and a large estimated risk premium in equity markets.

Participants also discussed the efficacy and potential

costs of the Committee’s asset purchases. A number of

participants offered the assessment that the Committee’s policy actions, to date, had been effective in making financial conditions more accommodative and that

lower interest rates were providing support to aggregate

spending, most notably in areas such as housing, autos,

and other consumer durables. In particular, some

pointed out that the favorable developments in mortgage markets over the intermeeting period suggested

that the MBS purchases were likely to reinforce the

nascent recovery in the housing market. Several added

that, based on the experience with earlier asset purchases, the broader effects on economic activity from

more-accommodative financial conditions were likely

to accrue over time. Looking ahead, a number of participants indicated that additional asset purchases

would likely be appropriate next year after the conclusion of the maturity extension program in order to

achieve a substantial improvement in the labor market.

In that regard, a couple of participants noted the likely

usefulness of clarifying the range of indicators that

would be evaluated in assessing the outlook for the

labor market. Participants generally agreed that in determining the appropriate size, pace, and composition

of further purchases, they would need to carefully assess the efficacy of asset purchases in fostering stronger

economic activity and consider the potential risks and

costs of such purchases. Several participants questioned the effectiveness of the current purchases or

whether a continuation of them would be warranted if

the recent moderate pace of economic recovery were

sustained. In addition, several participants expressed

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concerns that sizable asset purchases might eventually

have adverse consequences for the functioning of asset

markets or that they might complicate the Committee’s

ability to remove policy accommodation at the appropriate time and normalize the size and composition of

the Federal Reserve’s balance sheet. A couple of participants noted that an extended period of policy accommodation posed an upside risk to inflation.

Committee Policy Action

Members viewed the information on U.S. economic

activity received over the intermeeting period as suggesting that the economy was, on balance, expanding

moderately, with a pickup in household spending and

further improvement in housing markets offset to

some extent by a slowdown in the business sector.

Although the unemployment rate declined in recent

months, monthly gains in nonfarm payroll jobs remained modest, and many members noted that, without sufficient policy accommodation, economic growth

might not be strong enough to generate sustained improvement in the labor market. Inflation rose recently

because of a temporary run-up in energy prices. However, longer-term inflation expectations were stable,

and over the medium run, inflation was anticipated to

run at or below the Committee’s 2 percent objective.

In their discussion of monetary policy for the period

ahead, Committee members generally agreed that their

overall assessments of the economic outlook were little

changed since their previous meeting. Accordingly, all

but one member judged that maintaining the current,

highly accommodative stance of monetary policy was

warranted in order to foster a stronger economic recovery in a context of price stability. The Committee

judged that continuing both the purchases of MBS at a

pace of $40 billion per month and the existing program

to extend the average maturity of its Treasury securities

holdings remained appropriate. The Committee also

agreed to maintain its policy of reinvesting principal

payments from its holdings of agency debt and agency

MBS into agency MBS. One member opposed further

asset purchases because he viewed them as unlikely to

help the Committee achieve its goals and because he

thought that purchases of MBS represented inappropriate credit allocation. Many members saw the adjustments in the Committee’s forward guidance at the

September meeting as having been effective in communicating its intention to maintain a highly accommodative stance of monetary policy for a considerable

time after the economic recovery strengthens and

judged that the guidance remained appropriate at this

meeting. However, one member continued to object to

the calendar-date-based forward guidance for the federal funds rate. With respect to the statement to be

released following the meeting, members made only

relatively small modifications to update the description

of recent developments in consumer and business

spending and in inflation. With the economic outlook

little changed, they agreed that the remainder of the

statement would reiterate the policy actions and intentions adopted at the September meeting.

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 announced in

June to purchase Treasury securities with remaining maturities of 6 years to 30 years with a

total face value of about $267 billion by the

end of December 2012, and to sell or redeem

Treasury securities with remaining maturities

of approximately 3 years or less with a total

face value of about $267 billion. For the duration of this program, the Committee directs

the Desk to suspend its policy of rolling over

maturing Treasury securities into new issues.

The Committee directs the Desk to maintain

its existing policy of reinvesting principal payments on all agency debt and agency mortgagebacked securities in the System Open Market

Account in agency mortgage-backed securities.

The Desk is also directed to continue purchasing agency mortgage-backed securities at a

pace of about $40 billion per month. The

Committee directs the Desk to engage in dollar

roll and coupon swap 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.”

Minutes of the Meeting of October 23–24, 2012

Page 9

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The vote encompassed approval of the statement below to be released at 2:15 p.m.:

“Information received since the Federal Open

Market Committee met in September suggests

that economic activity has continued to expand

at a moderate pace in recent months. Growth

in employment has been slow, and the unemployment rate remains elevated. Household

spending has advanced a bit more quickly, but

growth in business fixed investment has

slowed. The housing sector has shown some

further signs of improvement, albeit from a

depressed level. Inflation recently picked up

somewhat, reflecting higher energy prices.

Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the

Committee seeks to foster maximum employment and price stability. The Committee remains concerned that, without sufficient policy

accommodation, economic growth might not

be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets

continue to pose significant downside risks to

the economic outlook. The Committee also

anticipates that inflation over the medium term

likely would run at or below its 2 percent objective.

To support a stronger economic recovery and

to help ensure that inflation, over time, is at

the rate most consistent with its dual mandate,

the Committee will continue purchasing additional agency mortgage-backed securities at a

pace of $40 billion per month. The Committee also will continue through the end of the

year its program to extend the average maturity

of its holdings of Treasury securities, and it is

maintaining its existing policy of reinvesting

principal payments from its holdings of agency

debt and agency mortgage-backed securities in

agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by

about $85 billion each month through the end

of the year, should put downward pressure on

longer-term interest rates, support mortgage

markets, and help to make broader financial

conditions more accommodative.

The Committee will closely monitor incoming

information on economic and financial developments in coming months. If the outlook for

the labor market does not improve substantially, the Committee will continue its purchases

of agency mortgage-backed securities, undertake additional asset purchases, and employ its

other policy tools as appropriate until such improvement is achieved in a context of price

stability. In determining the size, pace, and

composition of its asset purchases, the Committee will, as always, take appropriate account

of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the

Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the

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

¼ percent and currently anticipates that exceptionally low levels for the federal funds rate are

likely to be warranted at least through mid2015.”

Voting for this action: Ben Bernanke, William C.

Dudley, Elizabeth Duke, Dennis P. Lockhart, Sandra

Pianalto, Jerome H. Powell, Sarah Bloom Raskin, Jeremy C. Stein, Daniel K. Tarullo, John C. Williams, and

Janet L. Yellen.

Voting against this action: Jeffrey M. Lacker.

Mr. Lacker dissented for the same reasons he had cited

at the September FOMC meeting, including his view of

the likely ineffectiveness of asset purchases and their

potential inflationary effects, as well as the inappropriateness of credit allocation inherent in purchasing

MBS. He also continued to disagree with the description of the time period over which a highly accommodative stance of monetary policy would remain appropriate and exceptionally low levels for the federal funds

rate were likely to be warranted.

Discussion of Communications regarding Economic Projections

A staff presentation reviewed the results of the consensus forecast experiments that the Committee conducted in conjunction with its August and September

meetings. The briefing highlighted the important role

of the assumed path for monetary policy in construct-

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Federal Open Market Committee

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ing a consensus forecast and reviewed several alternative approaches for setting such a path. As a possible

alternative to a consensus forecast, the staff presentation also discussed potential enhancements to the SEP.

In their discussion, participants agreed that FOMC

communications could be enhanced by clarifying the

linkage between participants’ economic forecasts, including the underlying policy assumptions, and the

Committee’s policy decision as expressed in the postmeeting statement. However, most participants judged

that, given the diversity of their views about the economy’s structure and dynamics, it would be difficult for

the Committee to agree on a fully specified longer-term

path for monetary policy to incorporate into a quantitative consensus forecast in a timely manner, especially

under present conditions in which the policy decision

comprises several elements. Participants agreed to continue to explore ways to increase transparency and clarity in the Committee’s policy communications, and they

indicated a willingness to look into modifications to the

SEP. At the end of the discussion, the Chairman asked

the subcommittee on communications to explore potential approaches to providing more information

about the Committee’s collective judgment regarding

the economic outlook and appropriate monetary policy

through the SEP.

It was agreed that the next meeting of the Committee

would be held on Tuesday–Wednesday, December 11–

12, 2012. The meeting adjourned at 12:50 p.m. on October 24, 2012.

Notation Vote

By notation vote completed on October 3, 2012, the

Committee unanimously approved the minutes of the

FOMC meeting held on September 12–13, 2012.

_____________________________

William B. English

Secretary