FOMC Minutes

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Minutes of the Federal Open Market Committee

July 30–31, 2013

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, July 30, 2013, at 2:00 p.m. and continued on

Wednesday, July 31, 2013, at 9:00 a.m.

PRESENT:

Ben Bernanke, Chairman

William C. Dudley, Vice Chairman

James Bullard

Elizabeth Duke

Charles L. Evans

Esther L. George

Jerome H. Powell

Sarah Bloom Raskin

Eric Rosengren

Jeremy C. Stein

Daniel K. Tarullo

Janet L. Yellen

Christine Cumming, Richard W. Fisher, Narayana

Kocherlakota, Sandra Pianalto, and Charles I.

Plosser, Alternate Members of the Federal Open

Market Committee

Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors

James A. Clouse and William Nelson, Deputy Directors, Division of Monetary Affairs, Board of Governors; Maryann F. Hunter, Deputy Director, Division of Banking Supervision and Regulation, Board

of Governors

Jon W. Faust, Special Adviser to the Board, Office of

Board Members, Board of Governors

Linda Robertson, Assistant to the Board, Office of

Board Members, Board of Governors

Joyce K. Zickler, Senior Adviser, Division of Monetary

Affairs, Board of Governors

Michael T. Kiley, Thomas Laubach, and David E.

Lebow, Associate Directors, Division of Research

and Statistics, Board of Governors

Joshua Gallin, Deputy Associate Director, Division of

Research and Statistics, Board of Governors

Jeffrey M. Lacker, Dennis P. Lockhart, and John C.

Williams, Presidents of the Federal Reserve Banks

of Richmond, Atlanta, and San Francisco, respectively

Edward Nelson, Assistant Director, Division of Monetary Affairs, Board of Governors; Stacey Tevlin,

Assistant Director, Division of Research and Statistics, Board of Governors

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

Laura Lipscomb, Section Chief, Division of Monetary

Affairs, Board of Governors

Thomas A. Connors, Troy Davig, Michael P. Leahy,

Stephen A. Meyer, Daniel G. Sullivan, and William

Wascher, Associate Economists

Simon Potter, Manager, System Open Market Account

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

Marie Gooding, First Vice President, Federal Reserve

Bank of Atlanta

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

Lorie K. Logan, Senior Vice President, Federal Reserve

Bank of New York

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Todd E. Clark, William Gavin, Evan F. Koenig, Paolo

A. Pesenti, Julie Ann Remache,1 and Mark Spiegel,

Vice Presidents, Federal Reserve Banks of Cleveland, St. Louis, Dallas, New York, New York, and

San Francisco, respectively

Robert L. Hetzel and Samuel Schulhofer-Wohl, Senior

Economists, Federal Reserve Banks of Richmond

and Minneapolis, respectively

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1

Attended Tuesday’s session only.

Developments in Financial Markets and the Federal Reserve’s Balance Sheet

The Manager of the System Open Market Account

reported on developments in domestic and foreign financial markets as well as the System open market operations during the period since the Federal Open Market Committee (FOMC) met on June 18–19, 2013. By

unanimous vote, the Committee ratified the Open

Market 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.

In support of the Committee’s longer-run planning for

improvements in the implementation of monetary policy, the Desk report also included a briefing on the potential for establishing a fixed-rate, full-allotment overnight reverse repurchase agreement facility as an additional tool for managing money market interest rates.

The presentation suggested that such a facility would

allow the Committee to offer an overnight, risk-free

instrument directly to a relatively wide range of market

participants, perhaps complementing the payment of

interest on excess reserves held by banks and thereby

improving the Committee’s ability to keep short-term

market rates at levels that it deems appropriate to

achieve its macroeconomic objectives. The staff also

identified several key issues that would require consideration in the design of such a facility, including the

choice of the appropriate facility interest rate and possible additions to the range of eligible counterparties.

In general, meeting participants indicated that they

thought such a facility could prove helpful; they asked

the staff to undertake further work to examine how it

might operate and how it might affect short-term funding markets. A number of them emphasized that their

interest in having the staff conduct additional research

reflected an ongoing effort to improve the technical

execution of policy and did not signal any change in the

Committee’s views about policy going forward.

Staff Review of the Economic Situation

The information reviewed for the July 30–31 meeting

indicated that economic activity expanded at a modest

pace in the first half of the year. Private-sector employment increased further in June, but the unemployment rate was still elevated. Consumer price inflation

slowed markedly in the second quarter, likely restrained

in part by some transitory factors, but measures of

longer-term inflation expectations remained stable.

The Bureau of Economic Analysis (BEA) released its

advance estimate for second-quarter real gross domestic product (GDP), along with revised data for earlier

periods, during the second day of the FOMC meeting.

The staff’s assessment of economic activity and inflation in the first half of 2013, based on information

available before the meeting began, was broadly consistent with the new information from the BEA.

Private nonfarm employment rose at a solid pace in

June, as in recent months, while total government employment decreased further. The unemployment rate

was 7.6 percent in June, little changed from its level in

the prior few months. The labor force participation

rate rose slightly, as did the employment-to-population

ratio. The rate of long-duration unemployment decreased somewhat, but the share of workers employed

part time for economic reasons moved up; both of

these measures remained relatively high. Forwardlooking indicators of labor market activity in the near

term were mixed: Although household expectations for

the labor market situation generally improved and

firms’ hiring plans moved up, initial claims for unemployment insurance were essentially flat over the intermeeting period, and measures of job openings and the

rate of gross private-sector hiring were little changed.

Manufacturing production expanded in June, and the

rate of manufacturing capacity utilization edged up.

Auto production and sales were near pre-recession levels, and automakers’ schedules indicated that the rate of

motor vehicle assemblies would continue at a similar

pace in the coming months. Broader indicators of

manufacturing production, such as the readings on new

orders from the national and regional manufacturing

surveys, were generally consistent with further modest

gains in factory output in the near term.

Real personal consumption expenditures (PCE) increased more slowly in the second quarter than in the

first. However, some key factors that tend to support

household spending were more positive in recent

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months; in particular, gains in equity values and home

prices boosted household net worth, and consumer

sentiment in the Thomson Reuters/University of Michigan Surveys of Consumers rose in July to its highest

level since the onset of the recession.

exports was led by a sizable drop in consumer goods,

while most other categories of exports showed modest

gains. Imports increased in a wide range of categories,

with particular strength in oil, consumer goods, and

automotive products.

Conditions in the housing sector generally improved

further, as real expenditures for residential investment

continued to expand briskly in the second quarter.

However, construction activity was still at a low level,

with demand restrained in part by tight credit standards

for mortgage loans. Starts of new single-family homes

were essentially flat in June, but the level of permit issuance was consistent with gains in construction in

subsequent months. In the multifamily sector, where

activity is more variable, starts and permits both decreased. Home prices continued to rise strongly

through May, and sales of both new and existing

homes increased, on balance, in May and June. The

recent rise in mortgage rates did not yet appear to have

had an adverse effect on housing activity.

Overall U.S. consumer prices, as measured by the PCE

price index, were unchanged from the first quarter to

the second and were about 1 percent higher than a year

earlier. Consumer energy prices declined significantly

in the second quarter, although retail gasoline prices,

measured on a seasonally adjusted basis, moved up in

June and July. The PCE price index for items excluding food and energy rose at a subdued rate in the second quarter and was around 1¼ percent higher than a

year earlier. Near-term inflation expectations from the

Michigan survey were little changed in June and July, as

were longer-term inflation expectations, which remained within the narrow range seen in recent years.

Measures of labor compensation indicated that gains in

nominal wages and employee benefits remained modest.

Growth in real private investment in equipment and

intellectual property products was greater in the second

quarter than in the first quarter.2 Nominal new orders

for nondefense capital goods excluding aircraft continued to trend up in May and June and were running

above the level of shipments. Other recent forwardlooking indicators, such as surveys of business conditions and capital spending plans, were mixed and

pointed to modest gains in business equipment spending in the near term. Real business expenditures for

nonresidential construction increased in the second

quarter after falling in the first quarter. Business inventories in most industries appeared to be broadly aligned

with sales in recent months.

Real federal government purchases contracted less in

the second quarter than in the first quarter as reductions in defense spending slowed. Real state and local

government purchases were little changed in the second quarter; the payrolls of these governments expanded somewhat, but state and local construction expenditures continued to decrease.

The U.S. international trade deficit widened in May as

exports fell slightly and imports rose. The decline in

With the most recent revision to the national accounts, the

BEA introduced intellectual property products as a new category of investment that included software; research and

development; and entertainment, literary, and artistic originals.

2

Foreign economic growth appeared to remain subdued

in comparison with longer-run trends. Nonetheless,

there were some signs of improvement in the advanced

foreign economies. Production and business confidence turned up in Japan, real GDP growth picked up

to a moderate pace in the second quarter in the United

Kingdom, and recent indicators suggested that the

euro-area recession might be nearing an end. In contrast, Chinese real GDP growth moderated in the first

half of this year compared with 2012, and indicators for

other emerging market economies (EMEs) also pointed

to less-robust growth. Foreign inflation generally remained well contained. Monetary policy stayed highly

accommodative in the advanced foreign economies,

but some EME central banks tightened policy in reaction to capital outflows and to concerns about inflationary pressures from currency depreciation.

Staff Review of the Financial Situation

Financial markets were volatile at times during the intermeeting period as investors reacted to Federal Reserve communications and to incoming economic data

and as market dynamics appeared to amplify some asset

price moves. Broad equity price indexes ended the

period higher, and longer-term interest rates rose significantly. Sizable increases in rates occurred following

the June FOMC meeting, as investors reportedly saw

Committee communications as suggesting a less accommodative stance of monetary policy than had been

expected going forward; however, a portion of the increases was reversed as subsequent policy communica-

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tions lowered these concerns. U.S. economic data, particularly the June employment report, also contributed

to the rise in yields over the period.

On balance, yields on intermediate- and longer-term

Treasury securities rose about 30 to 45 basis points

since the June FOMC meeting, with staff models attributing most of the increase to a rise in term premiums and the remainder to an upward revision in the

expected path of short-term rates. The federal funds

rate path implied by financial market quotes steepened

slightly, on net, but the results from the Desk’s July

survey of primary dealers showed little change in dealers’ views of the most likely timing of the first increase

in the federal funds rate target. Market-based measures

of inflation compensation were about unchanged.

Over the period, rates on primary mortgages and yields

on agency mortgage-backed securities (MBS) rose

about in line with the 10-year Treasury yield. The

option-adjusted spread for production-coupon MBS

widened somewhat, possibly reflecting a downward

revision in investors’ expectations for Federal Reserve

MBS purchases, an increase in uncertainty about

longer-term interest rates, and convexity-related MBS

selling.

Spreads between yields on 10-year nonfinancial corporate bonds and yields on Treasury securities narrowed

somewhat on net. Early in the period, yields on corporate bonds increased, and bond mutual funds and bond

exchange-traded funds experienced large net redemptions in June; the rate of redemptions then slowed in

July.

Market sentiment toward large domestic banking organizations appeared to improve somewhat over the

intermeeting period, as the largest banks reported

second-quarter earnings that were above analysts’ expectations. Stock prices of large domestic banks outperformed broader equity indexes, and credit default

swap spreads for the largest bank holding companies

moved about in line with trends in broad credit indexes.

Municipal bond yields rose sharply over the intermeeting period, increasing somewhat more than yields on

Treasury securities. In June, gross issuance of longterm municipal bonds remained solid and was split

roughly evenly between refunding and new-capital issuance. The City of Detroit’s bankruptcy filing reportedly had only a limited effect on the market for municipal

securities as it had been widely anticipated by market

participants.

Credit flows to nonfinancial businesses showed mixed

changes. Reflecting the reduced incentive to refinance

as longer-term interest rates rose, the pace of gross issuance of investment- and speculative-grade corporate

bonds dropped in June and July, compared with the

elevated pace earlier this year. In contrast, gross issuance of equity by nonfinancial firms maintained its recent strength in June. Leveraged loan issuance also

continued to be strong amid demand for floating-rate

instruments by investors. Financing conditions for

commercial real estate continued to recover slowly. In

response to the July Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), banks generally indicated that they had eased standards on both

commercial and industrial (C&I) and commercial real

estate loans over the past three months. For C&I

loans, standards were currently reported to be somewhat easy compared with longer-term norms, while for

commercial real estate loans, standards remained

somewhat tighter than longer-term norms. Banks reported somewhat stronger demand for most types of

loans.

Financing conditions in the household sector improved

further in recent months. Mortgage purchase applications declined modestly through July even as refinancing applications fell off sharply with the rise in mortgage rates. The outstanding amounts of student and

auto loans continued to expand at a robust pace in

May. Credit card debt remained about flat on a yearover-year basis. In the July SLOOS, banks reported

that they had eased standards on most categories of

loans to households in the second quarter, but that

standards on all types of mortgages, and especially on

subprime mortgage loans and home equity lines of

credit, remained tight when judged against longer-run

norms.

Increases in total bank credit slowed in the second

quarter, as the book value of securities holdings fell

slightly and C&I loan balances at large banks increased

only modestly in April and May. M2 grew at an annual

rate of about 7 percent in June and July, supported by

flows into liquid deposits and retail money market

funds. Both of these components of M2 may have

been boosted recently by the sizable redemptions from

bond mutual funds. The monetary base continued to

expand rapidly in June and July, driven mainly by the

increase in reserve balances resulting from the Federal

Reserve’s asset purchases.

Ten-year sovereign yields in the United Kingdom and

Germany rose with U.S. yields early in the intermeeting

period but fell back somewhat after statements by the

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European Central Bank and the Bank of England were

both interpreted by market participants as signaling that

their policy rates would be kept low for a considerable

time. On net, the U.K. 10-year sovereign yield increased, though by less than the comparable yield in the

United States, while the yield on German bunds was

little changed. Peripheral euro-area sovereign spreads

over German bunds were also little changed on net.

Japanese government bond yields were relatively stable

over the period, after experiencing substantial volatility

in May. The staff’s broad nominal dollar index moved

up as the dollar appreciated against the currencies of

the advanced foreign economies, consistent with the

larger increase in U.S. interest rates. The dollar was

mixed against the EME currencies. Foreign equity

prices generally increased, although equity prices in

China declined amid investor concerns regarding further signs that the economy was slowing and over volatility in Chinese interbank funding markets. Outflows

from EME equity and bond funds, which had been

particularly rapid in June, moderated in July.

Staff Economic Outlook

The data received since the forecast was prepared for

the previous FOMC meeting suggested that real GDP

growth was weaker, on net, in the first half of the year

than had been anticipated.3 Nevertheless, the staff still

expected that real GDP would accelerate in the second

half of the year. Part of this projected increase in the

rate of real GDP growth reflected the staff’s expectation that the drag on economic growth from fiscal policy would be smaller in the second half as the pace of

reductions in federal government purchases slowed and

as the restraint on growth in consumer spending

stemming from the higher taxes put in place at the beginning of the year diminished. For the year as a

whole, the staff anticipated that the rate of growth of

real GDP would only slightly exceed that of potential

output. The staff’s projection for real GDP growth

over the medium term was essentially unrevised, as

higher equity prices were seen as offsetting the restrictive effects of the increase in longer-term interest rates.

The staff continued to forecast that the rate of real

GDP growth would strengthen in 2014 and 2015, supported by a further easing in the effects of fiscal policy

restraint on economic growth, increases in consumer

and business confidence, additional improvements in

3

The staff’s forecast for the July FOMC meeting was prepared before the BEA released its estimate for real GDP in

the second quarter and the revisions for earlier periods.

credit availability, and accommodative monetary policy.

The expansion in economic activity was anticipated to

lead to a slow reduction in the slack in labor and product markets over the projection period, and the unemployment rate was expected to decline gradually.

The staff’s forecast for inflation was little changed from

the projection prepared for the previous FOMC meeting. The staff continued to judge that much of the recent softness in consumer price inflation would be

transitory and that inflation would pick up somewhat in

the second half of this year. With longer-run inflation

expectations assumed to remain stable, changes in

commodity and import prices expected to be modest,

and significant resource slack persisting over the forecast period, inflation was forecast to be subdued

through 2015.

The staff continued to see numerous risks around the

forecast. Among the downside risks for economic activity were the uncertain effects and future course of

fiscal policy, the possibility of adverse developments in

foreign economies, and concerns about the ability of

the U.S. economy to weather potential future adverse

shocks. The most salient risk for the inflation outlook

was that the recent softness in inflation would not

abate as anticipated.

Participants’ Views on Current Conditions and the

Economic Outlook

In their discussion of the economic situation, meeting

participants noted that incoming information on economic activity was mixed. Household spending and

business fixed investment continued to advance, and

the housing sector was strengthening. Private domestic

final demand continued to increase in the face of tighter federal fiscal policy this year, but several participants

pointed to evidence suggesting that fiscal policy had

restrained spending in the first half of the year more

than they previously thought. Perhaps partly for that

reason, a number of participants indicated that growth

in economic activity during the first half of this year

was somewhat below their earlier expectations. In addition, subpar economic activity abroad was a negative

factor for export growth. Conditions in the labor market improved further as private payrolls rose at a solid

pace in June, but the unemployment rate remained elevated. Inflation continued to run below the Committee’s longer-run objective.

Participants generally continued to anticipate that the

growth of real GDP would pick up somewhat in the

second half of 2013 and strengthen further thereafter.

Factors cited as likely to support a pickup in economic

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activity included highly accommodative monetary policy, improving credit availability, receding effects of fiscal restraint, continued strength in housing and auto

sales, and improvements in household and business

balance sheets. A number of participants indicated,

however, that they were somewhat less confident about

a near-term pickup in economic growth than they had

been in June; factors cited in this regard included recent

increases in mortgage rates, higher oil prices, slow

growth in key U.S. export markets, and the possibility

that fiscal restraint might not lessen.

Participants reported further signs that the tightening in

federal fiscal policy restrained economic activity in the

first half of the year: Cuts in government purchases

and grants reportedly had been a factor contributing to

slower growth in sales and equipment orders in some

parts of the country, and consumer spending seemed to

have been held back by tax increases. Moreover, uncertainty about the effects of the federal spending sequestration and related furloughs clouded the outlook.

It was noted, however, that fiscal restriction by state

and local governments seemed to be easing.

Consumer spending continued to advance, but spending on items other than motor vehicles was relatively

soft. Recent high readings on consumer confidence

and boosts to household wealth from increased equity

and real estate prices suggested that consumer spending

would gather momentum in the second half of the year.

However, a few participants expressed concern that

higher household wealth might not translate into greater consumer spending, cautioning that household income growth remained slow, that households might

not treat the additions to wealth arising from recent

equity price increases as lasting, or that households’

scope to extract housing equity for the purpose of increasing their expenditures was less than in the past.

The June employment report showed continued solid

gains in payrolls. Nonetheless, the unemployment rate

remained elevated, and the continuing low readings on

the participation rate and the employment-topopulation ratio, together with a high incidence of

workers being employed part time for economic reasons, were generally seen as indicating that overall labor

market conditions remained weak. It was noted that

employment growth had been stronger than would

have been expected given the recent pace of output

growth, reflecting weak gains in productivity. Some

participants pointed out that once productivity growth

picked up, faster economic growth would be required

to support further increases in employment along the

lines seen of late. However, one participant thought

that sluggish productivity performance was likely to

persist, implying that the recent pace of output growth

would be sufficient to maintain employment gains near

current rates.

The housing sector continued to pick up, as indicated

by increases in house prices, low inventories of homes

for sale, and strong demand for construction. While

recent mortgage rate increases might serve to restrain

housing activity, several participants expressed confidence that the housing recovery would be resilient in

the face of the higher rates, variously citing pent-up

housing demand, banks’ increasing willingness to make

mortgage loans, strong consumer confidence, still-low

real interest rates, and expectations of continuing rises

in house prices. Nonetheless, refinancing activity was

down sharply, and the incoming data would need to be

watched carefully for signs of a greater-than-anticipated

effect of higher mortgage rates on housing activity

more broadly.

In the business sector, the outlook still appeared to be

mixed. Manufacturing activity was reported to have

picked up in a number of Districts, and activity in the

energy sector remained at a high level. Although a

step-up in business investment was likely to be a necessary element of the projected pickup in economic

growth, reports from businesses ranged from those

contacts who expressed heightened optimism to those

who suggested that little acceleration was likely in the

second half of the year.

Recent readings on inflation were below the Committee’s longer-run objective of 2 percent, in part reflecting

transitory factors, and participants expressed a range of

views about how soon inflation would return to

2 percent. A few participants, who felt that the recent

low inflation rates were unlikely to persist or that the

low PCE inflation readings might be marked up in future data revisions, suggested that, as transitory factors

receded and the pace of recovery improved, inflation

could be expected to return to 2 percent reasonably

quickly. A number of others, however, viewed the low

inflation readings as largely reflecting persistently deficient aggregate demand, implying that inflation could

remain below 2 percent for a protracted period and

further supporting the case for highly accommodative

monetary policy.

Both domestic and foreign asset markets were volatile

at times during the intermeeting period, reacting to policy communications and data releases. In discussing

the increases in U.S. longer-term interest rates that occurred in the wake of the June FOMC meeting and the

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associated press conference, meeting participants

pointed to heightened financial market uncertainty

about the path of monetary policy and a shift of market

expectations toward less policy accommodation. A few

participants suggested that this shift occurred in part

because Committee participants’ economic projections,

released following the June meeting, generally showed a

somewhat more favorable outlook than those of private forecasters, or because the June policy statement

and press conference were seen as indicating relatively

little concern about inflation readings, which had been

low and declining. Moreover, investors may have perceived that Committee communications about the possibility of slowing the pace of asset purchases also implied a higher probability of an earlier firming of the

federal funds rate. Subsequent Federal Reserve communications, which emphasized that decisions about

the two policy tools were distinct and underscored that

a highly accommodative stance of monetary policy

would remain appropriate for a considerable period

after purchases are completed, were seen as having

helped clarify the Committee’s policy strategy. A number of participants mentioned that, by the end of the

intermeeting period, market expectations of the future

course of monetary policy, both with regard to asset

purchases and with regard to the path of the federal

funds rate, appeared well aligned with their own expectations. Nonetheless, some participants felt that, as a

result of recent financial market developments, overall

financial market conditions had tightened significantly,

importantly reflecting larger term premiums, and they

expressed concern that the higher level of longer-term

interest rates could be a significant factor holding back

spending and economic growth. Several others, however, judged that the rise in rates was likely to exert relatively little restraint, or that the increase in equity prices and easing in bank lending standards would largely

offset the effects of the rise in longer-term interest

rates. Some participants also stated that financial developments during the intermeeting period might have

helped put the financial system on a more sustainable

footing, insofar as those developments were associated

with an unwinding of unsustainable speculative positions or an increase in term premiums from extraordinarily low levels.

In looking ahead, meeting participants commented on

several considerations pertaining to the course of monetary policy. First, almost all participants confirmed

that they were broadly comfortable with the characterization of the contingent outlook for asset purchases

that was presented in the June postmeeting press con-

ference and in the July monetary policy testimony.

Under that outlook, if economic conditions improved

broadly as expected, the Committee would moderate

the pace of its securities purchases later this year. And

if economic conditions continued to develop broadly as

anticipated, the Committee would reduce the pace of

purchases in measured steps and conclude the purchase

program around the middle of 2014. At that point, if

the economy evolved along the lines anticipated, the

recovery would have gained further momentum, unemployment would be in the vicinity of 7 percent, and

inflation would be moving toward the Committee’s 2

percent objective. While participants viewed the future

path of purchases as contingent on economic and financial developments, one participant indicated discomfort with the contingent plan on the grounds that

the references to specific dates could be misinterpreted

by the public as suggesting that the purchase program

would be wound down on a more-or-less preset schedule rather than in a manner dependent on the state of

the economy. Generally, however, participants were

satisfied that investors had come to understand the

data-dependent nature of the Committee’s thinking

about asset purchases. A few participants, while comfortable with the plan, stressed the need to avoid putting too much emphasis on the 7 percent value for the

unemployment rate, which they saw only as illustrative

of conditions that could obtain at the time when the

asset purchases are completed.

Second, participants considered whether it would be

desirable to include in the Committee’s policy statement additional information regarding the Committee’s

contingent outlook for asset purchases. Most participants saw the provision of such information, which

would reaffirm the contingent outlook presented following the June meeting, as potentially useful; however,

many also saw possible difficulties, such as the challenge of conveying the desired information succinctly

and with adequate nuance, and the associated risk of

again raising uncertainty about the Committee’s policy

intentions. A few participants saw other forms of

communication as better suited for this purpose. Several participants favored including such additional information in the policy statement to be released following the current meeting; several others indicated that

providing such information would be most useful when

the time came for the Committee to begin reducing the

pace of its securities purchases, reasoning that earlier

inclusion might trigger an unintended tightening of

financial conditions.

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Finally, the potential for clarifying or strengthening the

Committee’s forward guidance for the federal funds

rate was discussed. In general, there was support for

maintaining the current numerical thresholds in the

forward guidance. A few participants expressed concern that a decision to lower the unemployment

threshold could potentially lead the public to view the

unemployment threshold as a policy variable that could

not only be moved down but also up, thereby calling

into question the credibility of the thresholds and undermining their effectiveness. Nonetheless, several

participants were willing to contemplate lowering the

unemployment threshold if additional accommodation

were to become necessary or if the Committee wanted

to adjust the mix of policy tools used to provide the

appropriate level of accommodation. A number of

participants also remarked on the possible usefulness of

providing additional information on the Committee’s

intentions regarding adjustments to the federal funds

rate after the 6½ percent unemployment rate threshold

was reached, in order to strengthen or clarify the

Committee’s forward guidance. One participant suggested that the Committee could announce an additional, lower set of thresholds for inflation and unemployment; another indicated that the Committee could

provide guidance stating that it would not raise its target for the federal funds rate if the inflation rate was

expected to run below a given level at a specific horizon. The latter enhancement to the forward guidance

might be seen as reinforcing the message that the

Committee was willing to defend its longer-term inflation goal from below as well as from above.

Committee Policy Action

Committee members viewed the information received

over the intermeeting period as suggesting that economic activity expanded at a modest pace during the

first half of the year. Labor market conditions showed

further improvement in recent months, on balance, but

the unemployment rate remained elevated. Household

spending and business fixed investment advanced, and

the housing sector was strengthening, but mortgage

rates had risen somewhat and fiscal policy was restraining economic growth. The Committee expected that,

with appropriate policy accommodation, economic

growth would pick up from its recent pace, resulting in

a gradual decline in the unemployment rate toward levels consistent with the Committee’s dual mandate.

With economic activity and employment continuing to

grow despite tighter fiscal policy, and with global financial conditions less strained overall, members generally

continued to see the downside risks to the outlook for

the economy and the labor market as having diminished since last fall. Inflation was running below the

Committee’s longer-run objective, partly reflecting

transitory influences, but longer-run inflation expectations were stable, and the Committee anticipated that

inflation would move back toward its 2 percent objective over the medium term. Members recognized,

however, that inflation persistently below the Committee’s 2 percent objective could pose risks to economic

performance.

In their discussion of monetary policy for the period

ahead, members judged that a highly accommodative

stance of monetary policy was warranted in order to

foster a stronger economic recovery and sustained improvement in labor market conditions in a context of

price stability. In considering the likely path for the

Committee’s asset purchases, members discussed the

degree of improvement in the labor market outlook

since the purchase program began last fall. The unemployment rate had declined considerably since then,

and recent gains in payroll employment had been solid.

However, other measures of labor utilization—

including the labor force participation rate and the

numbers of discouraged workers and those working

part time for economic reasons—suggested more modest improvement, and other indicators of labor demand, such as rates of hiring and quits, remained low.

While a range of views were expressed regarding the

cumulative improvement in the labor market since last

fall, almost all Committee members agreed that a

change in the purchase program was not yet appropriate. However, in the view of the one member who

dissented from the policy statement, the improvement

in the labor market was an important reason for calling

for a more explicit statement from the Committee that

asset purchases would be reduced in the near future. A

few members emphasized the importance of being patient and evaluating additional information on the

economy before deciding on any changes to the pace of

asset purchases. At the same time, a few others pointed to the contingent plan that had been articulated on

behalf of the Committee the previous month, and suggested that it might soon be time to slow somewhat the

pace of purchases as outlined in that plan. At the conclusion of its discussion, the Committee decided to

continue adding policy accommodation by purchasing

additional MBS at a pace of $40 billion per month and

longer-term Treasury securities at a pace of $45 billion

per month and to maintain its existing reinvestment

policies. In addition, the Committee reaffirmed its intention to keep the target federal funds rate at

Minutes of the Meeting of July 30–31, 2013

Page 9

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0 to ¼ percent and retained its forward guidance that it

anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the

unemployment rate remains above 6½ percent, inflation between one and two years ahead is projected to

be no more than a half percentage point above the

Committee’s 2 percent longer-run goal, and longerterm inflation expectations continue to be well anchored.

Members also discussed the wording of the policy

statement to be issued following the meeting. In addition to updating its description of the state of the

economy, the Committee decided to underline its concern about recent shortfalls of inflation from its longerrun goal by including in the statement an indication

that it recognizes that inflation persistently below its

2 percent objective could pose risks to economic performance, while also noting that it continues to anticipate that inflation will move back toward its objective

over the medium term. The Committee also considered whether to add more information concerning the

contingent outlook for asset purchases to the policy

statement, but judged that doing so might prompt an

unwarranted shift in market expectations regarding asset purchases. The Committee decided to indicate in

the statement that it “reaffirmed its view”—rather than

simply “expects”—that a highly accommodative stance

of monetary policy will remain appropriate for a considerable time after the asset purchase program ends

and the economic recovery strengthens.

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:

“Consistent with its statutory mandate, the

Federal Open Market Committee seeks

monetary and financial conditions that will

foster maximum employment and price stability. In particular, 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 undertake open market operations as necessary to maintain such conditions. The

Desk is directed to continue purchasing

longer-term Treasury securities at a pace of

about $45 billion per month and to continue

purchasing agency mortgage-backed securities at a pace of about $40 billion per month.

The Committee also directs the Desk to en-

gage in dollar roll and coupon swap transactions as necessary to facilitate settlement of

the Federal Reserve’s agency mortgagebacked securities transactions. The Committee directs the Desk to maintain its policy of

rolling over maturing Treasury securities into

new issues and its policy of reinvesting principal payments on all agency debt and agency

mortgage-backed securities in agency

mortgage-backed securities. The System

Open Market Account Manager and the

Secretary will keep the Committee informed

of ongoing developments regarding the System’s balance sheet that could affect the attainment over time of the Committee’s objectives of maximum employment and price

stability.”

The vote encompassed approval of the statement below to be released at 2:00 p.m.:

“Information received since the Federal

Open Market Committee met in June suggests that economic activity expanded at a

modest pace during the first half of the year.

Labor market conditions have shown further

improvement in recent months, on balance,

but the unemployment rate remains elevated.

Household spending and business fixed investment advanced, and the housing sector

has been strengthening, but mortgage rates

have risen somewhat and fiscal policy is restraining economic growth. Partly reflecting

transitory influences, inflation has been running below the Committee’s longer-run objective, but 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 that, with appropriate policy accommodation, economic growth will pick up

from its recent pace and the unemployment

rate will gradually decline toward levels the

Committee judges consistent with its dual

mandate. The Committee sees the downside

risks to the outlook for the economy and the

labor market as having diminished since the

fall. The Committee recognizes that inflation

persistently below its 2 percent objective

could pose risks to economic performance,

but it anticipates that inflation will move

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Federal Open Market Committee

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back toward its objective over the medium

term.

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 decided to continue

purchasing additional agency mortgagebacked securities at a pace of $40 billion per

month and longer-term Treasury securities at

a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgagebacked securities in agency mortgage-backed

securities and of rolling over maturing

Treasury securities at auction. Taken together, these actions should maintain 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.

The

Committee will continue its purchases of

Treasury and agency mortgage-backed securities, and employ its other policy tools as

appropriate, until the outlook for the labor

market has improved substantially in a context of price stability. The Committee is

prepared to increase or reduce the pace of its

purchases to maintain appropriate policy accommodation as the outlook for the labor

market or inflation changes. In determining

the size, pace, and composition of its asset

purchases, the Committee will continue to

take appropriate account of the likely efficacy

and costs of such purchases as well as the extent of progress toward its economic objectives.

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

Committee today reaffirmed its view that a

highly accommodative stance of monetary

policy will remain appropriate for a considerable time after the asset purchase program

ends and the economic recovery strengthens.

In particular, the Committee decided to keep

the target range for the federal funds rate at

0 to ¼ percent and currently anticipates that

this exceptionally low range for the federal

funds rate will be appropriate at least as long

as the unemployment rate remains above

6½ percent, inflation between one and two

years ahead is projected to be no more than a

half percentage point above the Committee’s

2 percent longer-run goal, and longer-term

inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider

other information, including additional

measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to

begin to remove policy accommodation, it

will take a balanced approach consistent with

its longer-run goals of maximum employment and inflation of 2 percent.”

Voting for this action: Ben Bernanke, William C.

Dudley, James Bullard, Elizabeth Duke, Charles L. Evans, Jerome H. Powell, Sarah Bloom Raskin, Eric

Rosengren, Jeremy C. Stein, Daniel K. Tarullo, and

Janet L. Yellen.

Voting against this action: Esther L. George.

Ms. George dissented because she favored including in

the policy statement a more explicit signal that the pace

of the Committee’s asset purchases would be reduced

in the near term. She expressed concerns about the

open-ended approach to asset purchases and viewed

providing such a signal as important at this time, in

light of the ongoing improvement in labor market conditions as well as the potential costs and uncertain benefits of large-scale asset purchases.

It was agreed that the next meeting of the Committee

would be held on Tuesday–Wednesday, September 17–

18, 2013. The meeting adjourned at 12:30 p.m. on

July 31, 2013.

Notation Vote

By notation vote completed on July 9, 2013, the Committee unanimously approved the minutes of the

FOMC meeting held on June 18–19, 2013.

_____________________________

William B. English

Secretary