FOMC March 16, 2010, Meeting Minutes

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                          Minutes of the Federal Open Market Committee
                                          March 16, 2010
A joint meeting of the Federal Open Market Committee       Patrick M. Parkinson, Director, Division of Bank
and the Board of Governors of the Federal Reserve Sys-         Supervision and Regulation, Board of Gover-
tem was held in the offices of the Board of Governors in       nors
Washington, D.C., on Tuesday, March 16, 2010, at
8:00 a.m.                                                  Robert deV. Frierson, Deputy Secretary, Office of
                                                              the Secretary, Board of Governors
   Ben Bernanke, Chairman                                  Charles S. Struckmeyer, Deputy Staff Director, Of-
   William C. Dudley, Vice Chairman                           fice of the Staff Director for Management,
   James Bullard                                              Board of Governors
   Elizabeth Duke
   Thomas M. Hoenig                                        James A. Clouse, Deputy Director, Division of
   Donald L. Kohn                                             Monetary Affairs, Board of Governors
   Sandra Pianalto
   Eric Rosengren                                          Linda Robertson, Assistant to the Board, Office of
   Daniel K. Tarullo                                           Board Members, Board of Governors
   Kevin Warsh
                                                           Sherry Edwards and Andrew T. Levin, Senior As-
    Christine Cumming, Charles L. Evans, Richard W.            sociate Directors, Division of Monetary Af-
        Fisher, Narayana Kocherlakota, and Charles I.          fairs, Board of Governors; David Reifschneid-
        Plosser, Alternate Members of the Federal              er and William Wascher, Senior Associate Di-
        Open Market Committee                                  rectors, Division of Research and Statistics,
                                                               Board of Governors
    Jeffrey M. Lacker, Dennis P. Lockhart, and Janet L.
         Yellen, Presidents of the Federal Reserve         Michael G. Palumbo, Deputy Associate Director,
         Banks of Richmond, Atlanta, and San Francis-         Division of Research and Statistics, Board of
         co, respectively                                     Governors

    Brian F. Madigan, Secretary and Economist              David H. Small, Project Manager, Division of
    Matthew M. Luecke, Assistant Secretary                    Monetary Affairs, Board of Governors
    David W. Skidmore, Assistant Secretary
    Michelle A. Smith, Assistant Secretary                 Min Wei, Senior Economist, Division of Monetary
    Scott G. Alvarez, General Counsel                         Affairs, Board of Governors
    Thomas C. Baxter, Deputy General Counsel
    Nathan Sheets, Economist                               Penelope A. Beattie, Assistant to the Secretary, Of-
    David J. Stockton, Economist                              fice of the Secretary, Board of Governors

    Thomas A. Connors, William B. English, Steven B.       Valerie Hinojosa and Randall A. Williams, Records
       Kamin, Lawrence Slifman, Christopher J. Wal-            Management Analysts, Division of Monetary
       ler, and David W. Wilcox, Associate Econo-              Affairs, Board of Governors
                                                           James M. Lyon, First Vice President, Federal Re-
    Brian Sack, Manager, System Open Market Ac-               serve Bank of Minneapolis
                                                           Jamie J. McAndrews and Harvey Rosenblum, Ex-
    Jennifer J. Johnson, Secretary of the Board, Office        ecutive Vice Presidents, Federal Reserve Banks
        of the Secretary, Board of Governors                   of New York and Dallas, respectively
Page 2                                          Federal Open Market Committee                                               _

    David Altig, Craig S. Hakkio, Loretta J. Mester,              mulative volume of borrowing from the TALF had ex-
       Glenn D. Rudebusch, Mark E. Schweitzer,                    panded fairly steadily in recent months, the volume of
       Daniel G. Sullivan, and John A. Weinberg, Se-              repayments of TALF loans had also risen as borrowers
       nior Vice Presidents, Federal Reserve Banks of             were able to secure funding from other sources on more
       Atlanta, Kansas City, Philadelphia, San Fran-              favorable terms. As a result, the net amount of outstand-
       cisco, Cleveland, Chicago, and Richmond, re-               ing TALF credit had leveled out and would likely decline
       spectively                                                 going forward as a result of continuing repayments.
                                                                  In his report on System open market operations, the
    Giovanni Olivei, Vice President, Federal Reserve
                                                                  Manager noted that over the period since the Committee
       Bank of Boston
                                                                  had met in January, the Federal Reserve’s total assets had
                                                                  risen to about $2.3 trillion, as an increase in the System’s
    Joshua Frost, Assistant Vice President, Federal Re-
                                                                  holdings of securities was partly offset by the declining
        serve Bank of New York
                                                                  usage of the System’s credit and liquidity facilities. The
                                                                  Desk continued to gradually slow the pace of its purchas-
    Jonathan Heathcote, Senior Economist, Federal
                                                                  es of agency mortgage-backed securities (MBS) and agen-
        Reserve Bank of Minneapolis
                                                                  cy debt as it moved toward completing the Committee’s
                                                                  previously announced asset purchases by the end of
                                                                  March. The Desk’s purchases of agency MBS were on
Developments in Financial Markets and the Federal
                                                                  track to meet the targeted amount of $1.25 trillion, while
Reserve’s Balance Sheet
                                                                  its purchases of agency debt would likely cumulate to
The Manager of the System Open Market Account re-                 slightly less than $175 billion. The Desk continued to
ported on developments in domestic and foreign financial          engage in dollar roll transactions in agency MBS securities
markets during the period since the Committee met on              to facilitate settlement of its outright purchases. There
January 26-27, 2010. The net effect of these develop-             were no open market operations in foreign currencies for
ments was that financial conditions had become modestly           the System’s account over the intermeeting period. By
more supportive of economic growth. No market strains             unanimous vote, the Committee ratified the Desk’s trans-
emerged in conjunction with the Federal Reserve’s clos-           actions. Participants also agreed that the Desk should
ing of nearly all of its remaining special liquidity facilities   continue the interim approach of allowing all maturing
over the intermeeting period. On February 1, the Primary          agency debt and all prepayments of agency MBS to be
Dealer Credit Facility, the Commercial Paper Funding              redeemed without replacement.
Facility, the Asset-Backed Commercial Paper Money
                                                                  In addition, the Manager reported on recent progress in
Market Mutual Fund Liquidity Facility, and the Term Se-
                                                                  the development of reserve draining tools, including the
curities Lending Facility were closed, and the Federal Re-
                                                                  initiation of a program for expanding the set of counter-
serve’s temporary currency swap lines with foreign central
                                                                  parties in conducting reverse repurchase agreements, and
banks expired. Financial markets also adjusted smoothly
                                                                  the staff gave a presentation on potential approaches for
to the final offering of funds through the Term Auction
                                                                  tightening the link between short-term market interest
Facility on March 8.
                                                                  rates and the interest rate paid on reserve balances held at
The Manager noted that securitized credit markets had             the Federal Reserve Banks.
not shown substantial strain from the anticipated end of
                                                                       Secretary’s note: A staff memorandum was
new credit extensions under the Term Asset-Backed Se-
                                                                       provided to members of the Board of Gover-
curities Loan Facility (TALF), which was scheduled to
                                                                       nors and Federal Reserve Bank presidents
close on June 30 for loans backed by new-issue commer-
                                                                       summarizing public comments on last Decem-
cial mortgage-backed securities (CMBS) and on March 31
                                                                       ber’s Federal Register notice regarding the estab-
for loans backed by all other types of collateral.1 Spreads
                                                                       lishment of a term deposit facility, but that
on asset-backed securities remained tight while
                                                                       topic was not discussed at this meeting.
issuance—the bulk of which was being financed outside
of TALF—continued to be fairly strong. While the cu-              The staff also briefed the Committee on potential ap-
                                                                  proaches for managing the Treasury securities held by the
                                                                  Federal Reserve. To date, the Desk had been reinvesting
1 The final non-CMBS subscription had already occurred in
early March and the final subscription for legacy CMBS
                                                                  all maturing Treasury securities by exchanging those hold-
would take place soon after the FOMC meeting; subscrip-           ings for newly issued Treasury securities, but an alterna-
tions for new-issue CMBS would continue through June.             tive strategy would be to allow some or all of those Trea-
                                        Minutes of the Meeting of March 16, 2010                                   Page 3

sury securities to mature without reinvestment. Redeem-        tion. Capacity utilization in manufacturing rose further,
ing all of its maturing Treasury holdings would signifi-       to a level noticeably above its trough in June, but re-
cantly reduce the size of the Federal Reserve’s balance        mained well below its longer-run average. As a result,
sheet over coming years and hence could be helpful in          incentives for manufacturing firms to expand production
limiting the need to use other reserve draining tools such     capacity were weak. The available indicators of near-term
as reverse repurchase agreements and term deposits. Re-        manufacturing activity pointed to moderate gains in IP in
demptions would also lower the interest rate sensitivity of    coming months.
the Federal Reserve’s portfolio over time. Nevertheless,
                                                               Consumer spending continued to move up. Although
the initiation of a redemption strategy might generate up-
                                                               sales of new automobiles and light trucks softened
ward pressure on market rates, especially if that measure
                                                               slightly, on average, in January and February, real outlays
led investors to move up their expected timing of policy
                                                               for a wide variety of non-auto goods and food services
firming. Participants agreed that the Committee would
                                                               increased appreciably, and real outlays for other services
give further consideration to these matters and that in the
                                                               remained on a gradual uptrend. In contrast to the modest
interim the Desk should continue its current practice of
                                                               recovery in spending, measures of consumer sentiment
reinvesting all maturing Treasury securities.
                                                               remained relatively downbeat in February and had im-
Staff Review of the Economic Situation                         proved little, on balance, since a modest rebound last
The information reviewed at the March 16 meeting sug-          spring. Household income appeared less supportive of
gested that economic activity expanded at a moderate           spending than at the January meeting, reflecting down-
pace in early 2010. Business investment in equipment           ward revisions to estimates by the Bureau of Economic
and software seemed to have picked up, consumer spend-         Analysis of wages and salaries in the second half of 2009.
ing increased further in January, and private employment       The ratio of household net worth to income was little
would likely have turned up in February in the absence of      changed in the fourth quarter after two consecutive quar-
the snowstorms that affected the East Coast. Output in         ters of appreciable gains.
the manufacturing sector continued to trend higher as
                                                               Activity in the housing sector appeared to have flattened
firms increased production to meet strengthening final
                                                               out in recent months. Sales of both new and existing
demand and to slow the pace of inventory liquidation.
                                                               homes had turned down, while starts of single-family
On the downside, housing activity remained flat and the
                                                               homes were about unchanged despite the substantial re-
nonresidential construction sector weakened further.
                                                               duction in inventories of unsold new homes. Some of
Meanwhile, a sizable increase in energy prices pushed up
                                                               the recent weakness in sales might have been due to
headline consumer price inflation in recent months; in
                                                               transactions that had been pulled forward in anticipation
contrast, core consumer price inflation was quite low.
                                                               of the originally scheduled expiration of the tax credit for
Available indicators suggested that the labor market might     first-time homebuyers in November 2009; nonetheless,
be stabilizing. Declines in private payrolls slowed mar-       the underlying pace of housing demand likely remained
kedly in recent months, and, in the absence of the snows-      weak. The slowdown in sales notwithstanding, housing
torms, private employment probably would have risen in         demand was being supported by low interest rates for
February. The average workweek for production and              conforming fixed-rate 30-year mortgages and reportedly
nonsupervisory workers fell back in February after ticking     by a perception that real estate values were near their
up in January; however, the drop was likely due to the         trough.
storms. The unemployment rate was unchanged at 9.7
                                                               Real spending on equipment and software increased at a
percent in February, and the labor force participation rate
                                                               solid pace in the fourth quarter of 2009 and apparently
inched up over the past two months. However, the level
                                                               rose further early in the first quarter of 2010. Business
of initial claims for unemployment insurance benefits
                                                               outlays for motor vehicles seemed to be holding up after
remained high.
                                                               a sharp increase in the fourth quarter, purchases of high-
After increasing briskly in the second half of 2009, indus-    tech equipment appeared to be rising briskly, and incom-
trial production (IP) continued to expand, on net, in the      ing data pointed to some firming in outlays on other
early months of 2010, rising sharply in January and re-        equipment. The recent gains in investment spending
maining little changed in February despite some adverse        were consistent with improvements in many indicators of
effects of the snowstorms. Recent production gains re-         business demand. In contrast, conditions in the nonresi-
mained broadly based across industries, as firms contin-       dential construction sector generally remained poor. Real
ued to boost production to meet rising domestic and for-       outlays on structures outside of the drilling and mining
eign demand and to slow the pace of inventory liquida-         sector fell again in the fourth quarter, and nominal ex-
Page 4                                         Federal Open Market Committee                                                _

penditures dropped further in January. The weakness was          Japan but rising only slightly in the euro area and the
widespread across categories and likely reflected rising         United Kingdom. That divergence appeared to have per-
vacancy rates, falling property prices, and difficult financ-    sisted in the first quarter, as indicators pointed to contin-
ing conditions for new projects. However, real spending          ued rapid economic growth in Canada and moderate ex-
on drilling and mining structures increased strongly in          pansion in Japan but somewhat anemic growth in Eu-
response to the earlier rebound in oil and natural gas pric-     rope. In the emerging market economies, rebounding
es.                                                              global trade, inventory restocking, and increased domestic
                                                                 demand supported generally robust fourth-quarter
The pace of inventory liquidation slowed considerably in
                                                                 growth. Continued rapid expansion in China and several
late 2009. As measured in the national income and prod-
                                                                 other Asian economies offset slowdowns elsewhere in the
uct accounts, real nonfarm inventories excluding motor
                                                                 region. In Latin America, Mexican activity was buoyed by
vehicles were drawn down at a much slower pace in the
                                                                 rising manufacturing and exports to the United States,
fourth quarter than in each of the preceding two quarters.
                                                                 while Brazil’s economy again grew briskly. Headline con-
Available data for January indicated a further small liqui-
                                                                 sumer price inflation picked up around the world over the
dation of real stocks early this year in the manufacturing
                                                                 past two months, principally reflecting increases in food
and wholesale trade sectors. The ratio of book-value in-
                                                                 and energy prices. Excluding food and energy, consumer
ventories to sales (excluding motor vehicles and parts)
                                                                 prices were generally more subdued.
edged down again in January and stood well below the
recent peak recorded near the end of 2008. Inventories           Staff Review of the Financial Situation
remained elevated for equipment, materials, and, to a            The decision by the Federal Open Market Committee
lesser degree, construction supplies, while inventories of       (FOMC) at the January meeting to keep the target range
consumer goods and business supplies appeared to be              for the federal funds rate unchanged and to retain the
low relative to demand.                                          “extended period” language in the statement was widely
                                                                 anticipated by market participants. However, investors
Although rising energy prices continued to boost overall
                                                                 reportedly read the statement’s characterization of the
consumer price inflation, consumer prices excluding food
                                                                 economic outlook as somewhat more upbeat than they
and energy were soft, as a wide variety of goods and ser-
                                                                 had anticipated, and Eurodollar futures rates rose a bit in
vices exhibited persistently low inflation or outright price
                                                                 response. The changes to the terms for primary credit
declines. On a 12-month change basis, core personal
                                                                 and the Term Auction Facility that were announced on
consumption expenditures (PCE) price inflation slowed
                                                                 February 18 resulted in a small increase in near-term fu-
in January 2010 compared with a year earlier, as a marked
                                                                 tures rates, but this reaction proved short lived, as the
and fairly widespread deceleration in market-based core
                                                                 statement and subsequent Federal Reserve communica-
PCE prices was partly offset by an acceleration in non-
                                                                 tions—including the Chairman’s semiannual congression-
market prices. Survey expectations for near-term infla-
                                                                 al testimony—emphasized that the modifications were
tion were unchanged over the intermeeting period; me-
                                                                 technical adjustments and did not signal any near-term
dian longer-term inflation expectations edged down to
                                                                 shifts in the overall stance of monetary policy.
near the lower end of the narrow range that prevailed
over the previous few years. With regard to labor costs,         On balance, incoming economic data led investors to
the revised data on wages and salaries showed that last          mark down the expected path of the federal funds rate
year’s deceleration in hourly compensation was even              over the intermeeting period. By contrast, yields on
sharper than was evident at the January meeting.                 2-year and 10-year nominal Treasury securities edged up,
                                                                 on net, over the period. Yields on Treasury inflation-
The U.S. international trade deficit widened in December
                                                                 protected securities (TIPS) rose at all maturities, reported-
but narrowed slightly in January, ending the period a little
                                                                 ly buoyed by investor anticipation of heavier TIPS is-
larger. Both exports and imports rose sharply in Decem-
                                                                 suance and by reduced demand for TIPS by retail inves-
ber before pulling back somewhat the following month.
                                                                 tors. Reflecting these developments, inflation compensa-
For the period as a whole, the rise in exports was broadly
                                                                 tion—the difference between nominal yields and TIPS
based, with notable gains in aircraft and industrial sup-
                                                                 yields for a given term to maturity—declined over the
plies. Oil and other industrial supplies accounted for
                                                                 period, a move that was supported by the somewhat
much of the increase in imports over the two months,
                                                                 weaker-than-expected economic data and the publication
while purchases of consumer products declined.
                                                                 of lower-than-expected readings on consumer prices.
Economic performance in the advanced foreign econo-
                                                                 Conditions in short-term funding markets remained gen-
mies was mixed in the fourth quarter, with real gross do-
                                                                 erally stable over the intermeeting period. Spreads be-
mestic product (GDP) advancing sharply in Canada and
                                         Minutes of the Meeting of March 16, 2010                                   Page 5

tween London interbank offered rates (Libor) and over-          higher in the fourth quarter. Nonetheless, indexes of
night index swap (OIS) rates at one- and three-month            commercial mortgage credit default swaps changed little,
maturities stayed low, while six-month spreads edged            on balance, over the intermeeting period.
down somewhat further. Spreads of rates on A2/P2-
                                                                Since the January meeting, yields and spreads on agency
rated commercial paper and on AA-rated asset-backed
                                                                MBS were little changed despite the continued tapering of
commercial paper over the AA nonfinancial rate were
                                                                the Federal Reserve’s purchases of these securities, and
also little changed at low levels. The Federal Reserve
                                                                residential mortgage interest rates and spreads were
continued to taper its large-scale asset purchases and wind
                                                                roughly flat. Net issuance of MBS by Fannie Mae and
down the emergency lending facilities with no apparent
                                                                Freddie Mac remained subdued through the end of Janu-
adverse effects on financial markets or institutions.
                                                                ary. Consumer credit expanded in January, its first in-
Broad stock price indexes rose, on net, over the inter-         crease since January 2009. Despite low and stable spreads
meeting period, boosted in part by favorable earnings           on consumer asset-backed securities (ABS), the amount
reports from the retail sector. Bank equity prices outper-      of ABS issued in the first two months of the year was
formed the broader equity markets. Option-implied vola-         somewhat below that in the fourth quarter, reflecting the
tility on the S&P 500 index dropped back to post-crisis         very weak pace of consumer credit originations late last
lows after increasing earlier in the period on concerns         year. The spread of credit card interest rates over two-
about Chinese monetary policy tightening and fiscal             year Treasury yields ticked up in January, while spreads
strains in Europe. Nonetheless, the gap between the             on new auto loans declined slightly, on net, over the in-
staff’s estimate of the expected real equity return over the    termeeting period. Delinquency rates on credit card loans
next 10 years for S&P 500 firms and the real 10-year            in securitized pools and on auto loans at captive finance
Treasury yield—a rough measure of the equity risk pre-          companies remained elevated in January but were down a
mium—remained well above its average over the past              bit from their recent peaks.
decade. Yields on investment-grade corporate bonds, as
                                                                Total bank credit contracted substantially in January and
well as their spreads over yields on comparable-maturity
                                                                February. Banks’ securities holdings declined at a modest
Treasury securities, were about unchanged over the in-
                                                                pace after several months of steady growth, and total
termeeting period; investment-grade risk spreads were
                                                                loans on banks’ books continued to drop. Commercial
near the levels that prevailed late in 2007. Yields and
                                                                and industrial (C&I) loans continued falling, as spreads of
spreads on speculative-grade bonds edged down, and
                                                                interest rates on C&I loans over comparable-maturity
secondary-market prices of leveraged loans rose further.
                                                                market instruments climbed further in the first quarter
Overall, net debt financing by nonfinancial firms was           and nonfinancial firms’ need for external finance appar-
about zero over the first two months of 2010, consistent        ently remained subdued. Commercial real estate loans
with firms’ weak demand for credit and banks’ tight credit      also posted significant declines. Household loans on
policies. Gross public equity issuance by nonfinancial          banks’ books contracted as well, in part because of a
firms was robust in the fourth quarter of 2009. Since the       pickup in bank securitizations of first-lien residential
turn of the year, gross public equity issuance by nonfi-        mortgages with the government-sponsored enterprises in
nancial firms slowed somewhat, while announcements of           February. Consumer loans originated by banks declined,
both new share repurchase programs and cash-financed            primarily reflecting a large drop in credit card loans. In
mergers and acquisitions picked up. Public equity is-           contrast, other consumer loans—including auto, student,
suance by financial firms declined in January and Febru-        and tax advance loans—were roughly flat during January
ary following very strong issuance in December, when            and February.
several large banks issued equity to facilitate the repay-
                                                                M2 decreased in January, owing partly to a contraction in
ment of capital received under the Troubled Asset Relief
                                                                liquid deposits. Many institutions opted out of the Fed-
Program. Gross bond issuance by financial firms re-
                                                                eral Deposit Insurance Corporation’s Transaction Ac-
mained solid. The contraction in commercial mortgage
                                                                count Guarantee Program because of the higher fees as-
debt accelerated in the fourth quarter. The dollar value of
                                                                sociated with participation after year-end, reportedly driv-
commercial real estate sales remained very low in Febru-
                                                                ing depositors to transfer funds out of transaction ac-
ary, and the share of properties sold at a nominal loss
                                                                counts and into alternative investments outside of M2.
inched higher. The delinquency rate on commercial
                                                                M2 expanded in February, however, as liquid deposits
mortgages in securitized pools increased in January, and
                                                                resumed their growth. Small time deposits and retail
the delinquency rate on commercial mortgages at com-
                                                                money market mutual funds contracted in January and, to
mercial banks rose in the fourth quarter. The percentage
                                                                a lesser extent, in February, while currency declined a bit
of delinquent construction loans at banks also ticked
Page 6                                        Federal Open Market Committee                                                 _

in January but advanced notably in February. The mone-          inflation was projected to be quite subdued at rates below
tary base rose in both months, as the increase in reserve       last year’s pace. Although increased oil prices had
balances resulting from the ongoing large-scale asset pur-      boosted overall inflation over recent months, the staff
chases by the Federal Reserve more than offset the con-         anticipated that consumer prices for energy would in-
traction in balances associated with the decline in credit      crease more slowly going forward, consistent with quotes
outstanding under the System’s liquidity and credit facili-     on oil futures contracts. Consequently, total PCE price
ties.                                                           inflation was projected to run a little above core inflation
                                                                this year and then edge down to the same rate as core
Movements in foreign financial markets since the January
                                                                inflation in 2011.
meeting were importantly influenced by concerns over
fiscal problems in Greece. Spreads on Greek government          Participants’ Views on Current Conditions and the
debt relative to German bunds widened appreciably be-           Economic Outlook
fore falling back as press reports indicated that euro-area     In their discussion of the economic situation and outlook,
countries were discussing a possible aid package for            participants agreed that economic activity continued to
Greece and the Greek government announced further               strengthen and that the labor market appeared to be stabi-
deficit reduction measures. Spreads on debt issued by           lizing. Incoming information on economic activity re-
several other European countries followed a similar pat-        ceived over the intermeeting period was somewhat mixed
tern over the intermeeting period. The Bank of England          but generally confirmed that the economic recovery was
(BOE) and the European Central Bank (ECB) held rates            likely to proceed at a moderate pace. On the positive
steady during the period, and the BOE elected not to ex-        side, recent data pointed to significant gains in retail sales,
pand its Asset Purchase Facility, which reached its limit at    a substantial pickup in business spending on equipment
the end of January. In early March, the ECB announced           and software, and a further expansion of goods exports.
several steps to normalize its provision of liquidity. Equi-    Moreover, the latest labor market readings had been mild-
ty prices in most foreign countries were up moderately          ly encouraging, with a considerable increase in temporary
since the January FOMC meeting. Likely reflecting the           employment, especially in the manufacturing and infor-
concerns about Greece as well as weak economic data in          mation technology sectors. However, housing starts had
Europe, the dollar appreciated notably against sterling         remained flat at a depressed level, investment in nonresi-
and the euro over the intermeeting period. However, the         dential structures was still declining, and state and local
dollar declined against most emerging market currencies,        government expenditures were being depressed by lower
which were buoyed by brightening growth prospects,              revenues. Moreover, consumer sentiment continued to
leaving the broad trade-weighted value of the dollar down       be damped by very weak labor market conditions, and
a bit since the January meeting.                                firms remained reluctant to add to payrolls or to commit
                                                                to new capital projects. Participants saw recent inflation
Staff Economic Outlook
                                                                readings as suggesting a slightly greater deceleration in
In the forecast prepared for the March FOMC meeting,
                                                                consumer prices than had been expected. In light of sta-
the staff’s outlook for real economic activity was broadly
                                                                ble longer-term inflation expectations and the likely con-
similar to that at the time of the January meeting. In par-
                                                                tinuation of substantial resource slack, they generally an-
ticular, the staff continued to anticipate a moderate pace
                                                                ticipated that inflation would be subdued for some time.
of economic recovery over the next two years, reflecting
the accommodative stance of monetary policy and a fur-          Participants agreed that financial market conditions re-
ther diminution of the factors that had weighed on spend-       mained supportive of economic growth. Spreads in
ing and production since the onset of the financial crisis.     short-term funding markets were near pre-crisis levels,
The staff did make modest downward adjustments to its           and risk spreads on corporate bonds and measures of
projections for real GDP growth in response to unfavor-         implied volatility in equity markets were broadly consis-
able news on housing activity, unexpectedly weak spend-         tent with historical norms given the outlook for the econ-
ing by state and local governments, and a substantial re-       omy. Participants were also reassured by the absence of
duction in the estimated level of household income in the       any signs of renewed strains in financial market function-
second half of 2009. The staff’s forecast for the unem-         ing as a consequence of the Federal Reserve’s winding
ployment rate at the end of 2011 was about the same as in       down of its special liquidity facilities. In contrast, bank
its previous projection.                                        lending was still contracting and interest rates on many
                                                                bank loans had risen further in recent months. Partici-
Recent data on consumer prices and unit labor costs led
                                                                pants anticipated that credit conditions would gradually
the staff to revise down slightly its projection for core
                                                                improve over time, and they noted the possibility of a
PCE price inflation for 2010 and 2011; as before, core
                                                                beneficial feedback loop in which the economic recovery
                                           Minutes of the Meeting of March 16, 2010                                   Page 7

would contribute to stronger bank balance sheets and so           Participants were also concerned that activity in the hous-
to an increased availability of credit to households and          ing sector appeared to be leveling off in most regions de-
small businesses, which would in turn help boost the              spite various forms of government support, and they
economy further.                                                  noted that commercial and industrial real estate markets
                                                                  continued to weaken. Indeed, housing sales and starts
While participants saw incoming information as broadly
                                                                  had flattened out at depressed levels, suggesting that pre-
consistent with continued strengthening of economic ac-
                                                                  vious improvements in those indicators may have largely
tivity, they also highlighted a variety of factors that would
                                                                  reflected transitory effects from the first-time homebuyer
be likely to restrain the overall pace of recovery, especially
                                                                  tax credit rather than a fundamental strengthening of
in light of the waning effects of fiscal stimulus and inven-
                                                                  housing activity. Participants indicated that the pace of
tory rebalancing over coming quarters. While recent data
                                                                  foreclosures was likely to remain quite high; indeed, re-
pointed to a noticeable pickup in the pace of consumer
                                                                  cent data on the incidence of seriously delinquent mort-
spending during the first quarter, participants agreed that
                                                                  gages pointed to the possibility that the foreclosure rate
household spending going forward was likely to remain
                                                                  could move higher over coming quarters. Moreover, the
constrained by weak labor market conditions, lower hous-
                                                                  prospect of further additions to the already very large
ing wealth, tight credit, and modest income growth. For
                                                                  inventory of vacant homes posed downside risks to home
example, real disposable personal income in January was
virtually unchanged from a year earlier and would have
been even lower in the absence of a substantial rise in           Participants referred to a wide array of evidence as indi-
federal transfer payments to households. Business spend-          cating that underlying inflation trends remained subdued.
ing on equipment and software picked up substantially             The latest readings on core inflation—which exclude the
over recent months, but anecdotal information suggested           relatively volatile prices of food and energy—were gener-
that this pickup was driven mainly by increased spending          ally lower than they had anticipated, and with petroleum
on maintaining existing capital and updating technology           prices having leveled out, headline inflation was likely to
rather than expanding capacity. The continued gains in            come down to a rate close to that of core inflation over
manufacturing production were bolstered by growing                coming months. While the ongoing decline in the impli-
demand from foreign trading partners, especially emerg-           cit rental cost for owner-occupied housing was weighing
ing market economies. However, a few participants                 on core inflation, a number of participants observed that
noted the possibility that fiscal retrenchment in some for-       the moderation in price changes was widespread across
eign countries could trigger a slowdown of those econo-           many categories of spending. This moderation was evi-
mies and hence weigh on the demand for U.S. exports.              dent in the appreciable slowing of inflation measures such
                                                                  as trimmed means and medians, which exclude the most
Some labor market indicators displayed positive signals
                                                                  extreme price movements in each period.
over the intermeeting period, including a pickup in tem-
porary employment and increased job postings. Indeed,             In discussing the inflation outlook, participants took note
nonfarm payrolls might well have increased in February in         of signs that inflation expectations were reasonably well
the absence of weather disruptions. Nevertheless, partic-         anchored, and most agreed that substantial resource slack
ipants were concerned about the scarcity of job openings,         was continuing to restrain cost pressures. Measures of
the elevated level of unemployment, and the extent of             gains in nominal compensation had slowed, and sharp
longer-term unemployment, which was seen as potentially           increases in productivity had pushed down producers’
leading to the loss of worker skills. Moreover, the               unit labor costs. Anecdotal information indicated that
downward trend in initial unemployment insurance claims           planned wage increases were small or nonexistent and
appeared to have leveled off in recent weeks, while hiring        suggested that large margins of underutilized capital and
remained at historically low rates. Information from              labor and a highly competitive pricing environment were
business contacts and evidence from regional surveys              exerting considerable downward pressure on price ad-
generally underscored the degree to which firms’ reluc-           justments. Survey readings and financial market data
tance to add to payrolls or start large capital projects re-      pointed to a modest decline in longer-term inflation ex-
flected their concerns about the economic outlook and             pectations over recent months. While all participants an-
uncertainty regarding future government policies. A               ticipated that inflation would be subdued over the near
number of participants pointed out that the economic              term, a few noted that the risks to inflation expectations
recovery could not be sustained over time without a sub-          and the medium-term inflation outlook might be tilted to
stantial pickup in job creation, which they still anticipated     the upside in light of the large fiscal deficits and the
but had not yet become evident in the data.                       extraordinarily accommodative stance of monetary policy.
Page 8                                        Federal Open Market Committee                                               _

Committee Policy Action                                         ing the Term Asset-Backed Securities Loan Facility was
In their discussion of monetary policy for the period           being maintained. The Committee also discussed possi-
ahead, members agreed that it would be appropriate to           ble approaches for formulating and communicating key
maintain the target range of 0 to ¼ percent for the federal     elements of its strategy for removing extraordinary mone-
funds rate and to complete the Committee’s previously           tary policy accommodation at the appropriate time. No
announced purchases of $1.25 trillion of agency MBS and         decisions about the Committee’s exit strategy were made
about $175 billion of agency debt by the end of March.          at this meeting, but participants agreed to give further
Nearly all members judged that it was appropriate to rei-       consideration to these issues at a later date.
terate the expectation that economic conditions— includ-
                                                                At the conclusion of the discussion, the Committee voted
ing low levels of resource utilization, subdued inflation
                                                                to authorize and direct the Federal Reserve Bank of New
trends, and stable inflation expectations—were likely to
                                                                York, until it was instructed otherwise, to execute transac-
warrant exceptionally low levels of the federal funds rate
                                                                tions in the System Account in accordance with the fol-
for an extended period, but one member believed that
                                                                lowing domestic policy directive:
communicating such an expectation would create condi-
tions that could lead to financial imbalances. A number              “The Federal Open Market Committee seeks
of members noted that the Committee’s expectation for                monetary and financial conditions that will fos-
policy was explicitly contingent on the evolution of the             ter price stability and promote sustainable
economy rather than on the passage of any fixed amount               growth in output. To further its long-run ob-
of calendar time. Consequently, such forward guidance                jectives, the Committee seeks conditions in re-
would not limit the Committee’s ability to commence                  serve markets consistent with federal funds
monetary policy tightening promptly if evidence sug-                 trading in a range from 0 to ¼ percent. The
gested that economic activity was accelerating markedly              Committee directs the Desk to complete the
or underlying inflation was rising notably; conversely, the          execution of its purchases of about $1.25 tril-
duration of the extended period prior to policy firming              lion of agency MBS and of about $175 billion
might last for quite some time and could even increase if            in housing-related agency debt by the end of
the economic outlook worsened appreciably or if trend                March. The Committee directs the Desk to
inflation appeared to be declining further. A few mem-               engage in dollar roll transactions as necessary
bers also noted that at the current juncture the risks of an         to facilitate settlement of the Federal Reserve’s
early start to policy tightening exceeded those associated           agency MBS transactions. The System Open
with a later start, because the Committee could be flexible          Market Account Manager and the Secretary
in adjusting the magnitude and pace of tightening in re-             will keep the Committee informed of ongoing
sponse to evolving economic circumstances; in contrast,              developments regarding the System’s balance
its capacity for providing further stimulus through con-             sheet that could affect the attainment over
ventional monetary policy easing continued to be con-                time of the Committee’s objectives of maxi-
strained by the effective lower bound on the federal funds           mum employment and price stability.”
                                                                The vote encompassed approval of the statement below
Members noted the importance of continued close moni-           to be released at 2:15 p.m.:
toring of financial markets and institutions—including
                                                                     “Information received since the Federal Open
asset prices, levels of leverage, and underwriting stan-
                                                                     Market Committee met in January suggests
dards—to help identify significant financial imbalances at
                                                                     that economic activity has continued to streng-
an early stage. At the time of the meeting the information
                                                                     then and that the labor market is stabilizing.
collected in this process, including that by supervisory
                                                                     Household spending is expanding at a mod-
staff, had not revealed emerging misalignments in finan-
                                                                     erate rate but remains constrained by high un-
cial markets or widespread instances of excessive risk-
                                                                     employment, modest income growth, lower
taking. All members agreed that the Committee would
                                                                     housing wealth, and tight credit. Business
continue to monitor the economic outlook and financial
                                                                     spending on equipment and software has risen
developments and would employ its policy tools as neces-
                                                                     significantly. However, investment in nonresi-
sary to promote economic recovery and price stability.
                                                                     dential structures is declining, housing starts
In light of the improved functioning of financial markets,           have been flat at a depressed level, and em-
Committee members agreed that it would be appropriate                ployers remain reluctant to add to payrolls.
for the statement to be released following the meeting to            While bank lending continues to contract, fi-
indicate that the previously announced schedule for clos-            nancial market conditions remain supportive
                                     Minutes of the Meeting of March 16, 2010                                   Page 9

of economic growth. Although the pace of                    Voting for this action: Ben Bernanke, William C. Dud-
economic recovery is likely to be moderate for              ley, James Bullard, Elizabeth Duke, Donald L. Kohn,
a time, the Committee anticipates a gradual re-             Sandra Pianalto, Eric Rosengren, Daniel K. Tarullo, and
turn to higher levels of resource utilization in a          Kevin Warsh.
context of price stability.
                                                            Voting against this action: Thomas M. Hoenig.
With substantial resource slack continuing to
                                                            Mr. Hoenig dissented because he believed it was no long-
restrain cost pressures and longer-term infla-
                                                            er advisable to indicate that economic and financial con-
tion expectations stable, inflation is likely to be
                                                            ditions were likely to warrant “exceptionally low levels of
subdued for some time.
                                                            the federal funds rate for an extended period.” Mr. Hoe-
The Committee will maintain the target range                nig was concerned that communicating such an expecta-
for the federal funds rate at 0 to ¼ percent and            tion could lead to the buildup of future financial imbal-
continues to anticipate that economic condi-                ances and increase the risks to longer-run macroeconomic
tions, including low rates of resource utiliza-             and financial stability. Accordingly, Mr. Hoenig believed
tion, subdued inflation trends, and stable infla-           that it would be more appropriate for the Committee to
tion expectations, are likely to warrant excep-             express its anticipation that economic conditions were
tionally low levels of the federal funds rate for           likely to warrant “a low level of the federal funds rate for
an extended period. To provide support to                   some time.” Such a change in communication would
mortgage lending and housing markets and to                 provide the Committee flexibility to begin raising rates
improve overall conditions in private credit                modestly. He further believed that making such an ad-
markets, the Federal Reserve has been pur-                  justment to the Committee’s target for the federal funds
chasing $1.25 trillion of agency mortgage-                  rate sooner rather than later would reduce longer-run
backed securities and about $175 billion of                 risks to macroeconomic and financial stability while con-
agency debt; those purchases are nearing com-               tinuing to provide needed support to the economic re-
pletion, and the remaining transactions will be             covery.
executed by the end of this month. The
                                                            It was agreed that the next meeting of the Committee
Committee will continue to monitor the eco-
                                                            would be held on Tuesday-Wednesday, April 27-28, 2010.
nomic outlook and financial developments and
                                                            The meeting adjourned at 1:00 p.m. on March 16, 2010.
will employ its policy tools as necessary to
promote economic recovery and price stability.              Notation Vote
In light of improved functioning of financial               By notation vote completed on February 16, 2010, the
markets, the Federal Reserve has been closing               Committee unanimously approved the minutes of the
the special liquidity facilities that it created to         FOMC meeting held on January 26-27, 2010.
support markets during the crisis. The only
remaining such program, the Term Asset-
Backed Securities Loan Facility, is scheduled to
close on June 30 for loans backed by new-issue
commercial mortgage-backed securities and on
                                                                            Brian F. Madigan
March 31 for loans backed by all other types of

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