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                                                                                   205




Record of Policy Actions
of the Board of Governors

This report provides an account of           prime mortgages. They are intended to
actions taken by the Board on questions      cover subprime mortgages (and gener-
of policy in 2008 as implemented             ally avoid covering prime mortgages)
through (1) rules and regulations,           by requiring mortgage loans to be re-
(2) policy statements and other actions,     ported if the rate spread is 1.5 percent-
(3) special liquidity facilities and other   age points or more for first liens and
initiatives to address financial strains,    3.5 percentage points or more for sec-
and (4) discount rates for depository        ond liens. The amendments are effec-
institutions. All actions were approved      tive October 1, 2009.
by a unanimous vote of the Board               Votes for this action: Chairman Bernanke,
members, unless indicated otherwise.           Vice Chairman Kohn, and Governors
Full texts of the actions are available        Warsh, Kroszner, and Duke.
via the online version of the Annual
Report, from the “Reading Rooms” on
the Board’s FOIA web page, and on            Regulation D
request from the Board’s Freedom of          Reserve Requirements of
Information Office. Policy actions in        Depository Institutions
2009 that affect actions approved in
2008 have been summarized through            [Docket No. R-1334]
March 31, 2009, in editorial notes.
                                             On October 3, 2008, the Board
                                             approved an interim final rule with
Rules and Regulations                        request for comment to permit the Fed-
                                             eral Reserve to begin paying interest on
Regulation C                                 depository institutions’ required reserve
Home Mortgage Disclosure                     balances (held by the Reserve Banks to
                                             satisfy depository institutions’ reserve
[Docket No. R-1321]                          requirements) and excess balances (held
                                             by the Reserve Banks in excess of
On October 20, 2008, the Board               required reserve and clearing balances).
approved amendments to conform the           The Financial Services Regulatory
rules for reporting price information on     Relief Act authorized the Federal Re-
higher-priced loans with the definition      serve to pay interest on such balances,
of “higher-priced mortgage loans”            beginning October 1, 2011, and the
adopted by the Board for Regulation Z        Emergency Economic Stabilization Act
in July 2008. The new reporting thresh-      accelerated the effective date to Octo-
olds for first-lien and subordinate-lien     ber 1, 2008. The interest rates paid are
loans are based on the rate spread           determined by a formula based on the
between a mortgage’s annual percent-         target federal funds rate. The Board
age rate (APR) and a survey-based es-        also made minor changes to its
timate of APRs currently offered on          clearing-balance policy and the method
206 95th Annual Report, 2008

for recovering float costs. The interim         (discussed under “Special Liquidity
final rule is effective October 9, 2008.        Facilities and Other Initiatives”) with an
                                                exemption from the Board’s leverage
On October 21, 2008, and November 4,
                                                and risk-based capital guidelines for
2008, the Board approved interim final
                                                asset-backed commercial paper held as
rules with requests for comment to alter
                                                a result of participation in the facility.
the formulas used for determining the
                                                The exemption is subject to safety and
interest rates paid on excess balances
                                                soundness conditions. The interim final
and on required reserves and excess
                                                rule is effective September 19, 2008,
balances, respectively.
                                                and expires January 30, 2009, unless
On December 16, 2008, the Board                 extended by the Board.
approved an interim final rule to set the         Votes for this action: Chairman Bernanke,
interest rates on required reserve bal-           Vice Chairman Kohn, and Governors
ances and excess balances at 1⁄4 percent          Warsh, Kroszner, and Duke.
after the Federal Open Market Commit-
tee established a target range for the          Note: On January 27, 2009, the Board
federal funds rate of 0 to 1⁄4 percent.         approved final rules to conform with
The rule also provides that interest rates      the extension of the AMLF to October
paid on those balances may be rates as          30, 2009.
determined by the Board from time to
                                                [Docket No. R-1329]
time rather than the rates in the regula-
tion. The interim final rule is effective       On December 13, 2008, the Board, act-
December 23, 2008, and the revised              ing with the Federal Deposit Insurance
rates apply to maintenance periods              Corporation, Office of the Comptroller
beginning December 18, 2008.                    of the Currency, and Office of Thrift
  Votes for these actions: Chairman Bernanke,   Supervision, approved a final rule that
  Vice Chairman Kohn, and Governors             permits a banking organization to re-
  Warsh, Kroszner, and Duke.                    duce the amount of goodwill that it
                                                must deduct from tier 1 capital by the
                                                amount of any deferred tax liability
Regulation H                                    associated with that goodwill. The final
Membership of                                   rule is effective January 29, 2009, and
State Banking Institutions                      may be applied, at the banking organi-
in the Federal Reserve System                   zation’s election, for purposes of the
                                                regulatory reporting period ending
Regulation Y                                    December 31, 2008.
Bank Holding Companies
                                                  Votes for this action: Chairman Bernanke,
and Change in Bank Control                        Vice Chairman Kohn, and Governors
                                                  Warsh, Kroszner, and Duke.
[Docket No. R-1332]
On September 19, 2008, the Board                Regulation W
approved an interim final rule with             Transactions between
request for comment to provide state            Member Banks and Their Affiliates
member banks or bank holding compa-
                                                [Docket No. R-1330]
nies participating in the Asset-Backed
Commercial Paper Money Market Mu-               On September 14, 2008, the Board
tual Fund Liquidity Facility (AMLF)             approved an interim final rule with
                         Record of Policy Actions of the Board of Governors 207

request for comment to provide a tem-         the extension of the AMLF to October
porary exemption for member banks             30, 2009.
from certain limitations in section 23A
of the Federal Reserve Act and Regula-        On October 5, 2008, the Board granted
tion W. The exemption increases the           a request by a depository institution for
capacity of member banks to enter into        an exemption from the limits on trans-
securities-financing transactions with        actions with affiliates under section
their affiliates and is subject to safety     23A of the Federal Reserve Act and
and soundness conditions. The interim         Regulation W to allow the institution to
final rule is effective September 14,         purchase assets from affiliated money
2008, and expires January 30, 2009,           market mutual funds under certain cir-
unless extended by the Board.                 cumstances. The Board announced it
                                              would consider similar requests from
  Votes for this action: Chairman Bernanke,   depository institutions under similar cir-
  Vice Chairman Kohn, and Governors           cumstances.
  Warsh, Kroszner, and Duke.
                                                Votes for this action: Chairman Bernanke,
Note: On January 27, 2009, the Board            Vice Chairman Kohn, and Governors
approved a final rule that extended the         Warsh, Kroszner, and Duke.
expiration date for the exemption to
October 30, 2009.                             Regulation Y
                                              Bank Holding Companies
[Docket No. R-1331]                           and Change in Bank Control
On September 19, 2008, the Board              [Docket No. R-1336]
approved an interim final rule with
                                              On October 13, 2008, the Board
request for comment to provide a tem-
                                              approved an interim final rule with
porary exemption for member banks
                                              request for comment to allow bank
from certain provisions of sections 23A
                                              holding companies to include in their
and 23B of the Federal Reserve Act and
                                              tier 1 capital without restriction the
Regulation W to facilitate use of the
                                              senior perpetual preferred stock they
Asset-Backed Commercial Paper
                                              issue to the Department of the Treasury
Money Market Mutual Fund Liquidity
                                              (Treasury) under its capital purchase
Facility (AMLF) (discussed under
                                              program. Treasury announced the pro-
“Special Liquidity Facilities and Other
                                              gram, which was established under the
Initiatives”). The exemption increases
                                              Emergency Economic Stabilization Act,
the capacity of participating member
                                              on October 14, 2008. The interim final
banks to purchase asset-backed com-
                                              rule is effective October 17, 2008.
mercial paper from affiliated money
market mutual funds and is subject to           Votes for this action: Chairman Bernanke,
safety and soundness conditions. The            Vice Chairman Kohn, and Governors
                                                Warsh, Kroszner, and Duke.
interim final rule is effective September
19, 2008, and expires January 30, 2009,
unless extended by the Board.                 Regulation Z
  Votes for this action: Chairman Bernanke,   Truth in Lending
  Vice Chairman Kohn, and Governors
  Warsh, Kroszner, and Duke.                  [Docket No. R-1305]
Note: On January 27, 2009, the Board          On July 14, 2008, the Board approved
approved a final rule to conform with         comprehensive amendments under the
208 95th Annual Report, 2008

Home Ownership and Equity Protection          that prohibit certain unfair or deceptive
Act that are intended to (1) protect con-     credit card practices and improve con-
sumers in the home mortgage market            sumer disclosures in connection with
from unfair, abusive, or deceptive mort-      credit card accounts, other revolving
gage lending and servicing practices;         credit plans, and overdraft services.
(2) preserve responsible lending and          Among other changes, the amendments
sustainable homeownership; (3) ensure         to Regulation AA, which are adopted
that advertisements for mortgage loans        under the Federal Trade Commission
provide accurate and balanced informa-        Act, prohibit banks from (1) increasing
tion and do not contain misleading or         the rate on a pre-existing credit card
deceptive representations; and (4) pro-       balance (except under limited circum-
vide consumers with transaction-              stances), (2) applying payments in
specific disclosures early enough to          excess of the minimum in a manner
assist them in selecting a mortgage.          that maximizes interest charges, and
Among other changes, the final rule           (3) imposing finance charges based on
prohibits certain acts and practices in       balances on days in the current billing
connection with mortgages, particularly       cycle and in the previous billing cycle,
higher-priced mortgages; revises the          a practice that is sometimes referred to
disclosure requirements for mortgage          as “two-cycle” billing. Amendments to
advertisements; and revises the timing        Regulation DD, which implements the
requirements for providing disclosures        Truth in Savings Act, address deposi-
for mortgages. The final rule is effec-       tory institutions’ disclosure practices
tive October 1, 2009, except for the          for overdraft services. Amendments to
requirement to establish escrow ac-           Regulation Z, which implements the
counts for taxes and insurance for            Truth in Lending Act, revise the disclo-
higher-priced mortgage loans, which is        sures consumers receive in connection
effective April 1, 2010 (October 1,           with their credit cards and other revolv-
2010, for such loans secured by manu-         ing (non-home-secured) credit plans to
factured housing).                            ensure that information is provided in a
  Votes for this action: Chairman Bernanke,   timely manner and in a form that is
  Vice Chairman Kohn, and Governors           readily understandable. The Regulation
  Warsh, Kroszner, and Mishkin.               AA and Regulation Z amendments are
                                              effective July 1, 2010, and the Regula-
Regulation AA                                 tion DD amendments are effective
Unfair or Deceptive                           January 1, 2010.
Acts or Practices                               Votes for this action: Chairman Bernanke,
                                                Vice Chairman Kohn, and Governors
Regulation DD                                   Warsh, Kroszner, and Duke.
Truth in Savings
Regulation Z                                  Regulation GG
Truth in Lending                              Prohibition on Funding of
                                              Unlawful Internet Gambling
[Docket Nos. R-1314, R-1315, and
R-1286]                                       [Docket No. R-1298]
On December 18, 2008, the Board               On November 7, 2008, the Board
approved comprehensive amendments             approved a joint final rule to implement
                         Record of Policy Actions of the Board of Governors 209

the Unlawful Internet Gambling En-            if they meet particular conditions and
forcement Act. Under the new regula-          subject to a preference for U.S. citizens
tion, promulgated with the Department         over equally qualified noncitizens. The
of the Treasury as required by the act,       final rule is effective April 2, 2008.
non-exempt U.S. financial institutions
that participate in designated payment          Votes for this action: Chairman Bernanke,
                                                Vice Chairman Kohn, and Governors
systems must establish policies and pro-        Warsh, Kroszner, and Mishkin.
cedures that are reasonably designed to
prevent or prohibit payments to gam-
bling businesses involved in unlawful
Internet gambling. The final rule also        Policy Statements
provides non-exclusive examples of            and Other Actions
such policies and procedures. Compli-
ance with the final rule is required by
December 1, 2009.                             Statement to Servicers on
                                              Reporting of Loss Mitigation
  Votes for this action: Chairman Bernanke,   of Subprime Mortgages
  Vice Chairman Kohn, and Governors
  Warsh, Kroszner, and Duke.                  On March 2, 2008, the Board approved
                                              a statement encouraging Federal
                                              Reserve−supervised financial institu-
Rules of Practice for Hearings                tions that service subprime mortgage
                                              loans to report their loss-mitigation
[Docket No. R-1333]                           activities consistent with uniform stan-
                                              dards and to consider using the HOPE
On September 19, 2008, the Board              NOW alliance’s loan-modification re-
approved amendments to adjust the             porting standards for subprime residen-
maximum amount of the statutory civil         tial mortgages. The Federal Deposit
money penalties under its jurisdiction to     Insurance Corporation, Office of the
account for inflation, as required by the     Comptroller of the Currency, Office of
Debt Collection Improvement Act. The          Thrift Supervision, and National Credit
amendments are effective October 12,          Union Administration issued similar
2008.                                         statements to their supervised institu-
  Votes for this action: Chairman Bernanke,   tions.
  Vice Chairman Kohn, and Governors             Votes for this action: Chairman Bernanke,
  Warsh, Kroszner, and Duke.                    Vice Chairman Kohn, and Governors
                                                Warsh, Kroszner, and Mishkin.

Rules regarding
Equal Opportunity                             Illustrations of
                                              Consumer Information for
[Docket No. OP-1264]                          Hybrid Adjustable-Rate
                                              Mortgage Products
On March 25, 2008, the Board
approved the publication of an amend-
                                              [Docket No. OP-1292]
ment to its Rules regarding Equal Op-
portunity as a final rule. Under the rule,    On April 15, 2008, the Board, acting
certain noncitizen employees are eli-         with the Federal Deposit Insurance Cor-
gible for access to sensitive information     poration, Office of the Comptroller of
210 95th Annual Report, 2008

the Currency, Office of Thrift Supervi-       Interagency Guidance on the
sion, and National Credit Union Ad-           Supervisory Review Process for
ministration, approved final illustrations    Capital Adequacy (Pillar 2)
of consumer information for certain           related to the Implementation
hybrid adjustable-rate mortgage prod-         of the Advanced Approaches
ucts. The illustrations are intended to       Final Rule
assist financial institutions in imple-
menting the consumer protection provi-        [Docket No. OP-1322]
sions of the Interagency Statement on
                                              On July 14, 2008, the Board, acting
Subprime Mortgage Lending issued in
                                              with the Federal Deposit Insurance Cor-
July 2007. Financial institutions may
                                              poration, Office of the Comptroller of
use the illustrations as provided, change     the Currency, and Office of Thrift Super-
their format, or tailor the information       vision, approved interagency guidance
to specific transactions or products.         for banking organizations using the
The illustrations are effective May 29,       advanced approaches final rule of the
2008.                                         new capital adequacy framework that is
  Votes for this action: Chairman Bernanke
                                              popularly known as Basel II. The ad-
  and Governors Warsh, Kroszner, and          vanced approaches rule, which became
  Mishkin. Absent and not voting: Vice        final on April 1, 2008, implements a
  Chairman Kohn.                              new risk-based capital framework that
                                              encompasses three “pillars.” The inter-
                                              agency guidance relates to pillar 2
                                              (supervisory review of capital ade-
Memorandum of Understanding                   quacy) and provides details about the
with the Securities and Exchange              agencies’ standards for ensuring that
Commission on Information                     each institution subject to the advanced
Sharing                                       approaches rule has a rigorous process
                                              for assessing its overall capital ade-
On July 7, 2008, the Board approved a         quacy in relation to its risk profile and
memorandum of understanding with the          has a comprehensive strategy for main-
Securities and Exchange Commission            taining appropriate capital levels.
that establishes a framework for col-
                                                Votes for this action: Chairman Bernanke,
laborating, coordinating, and sharing           Vice Chairman Kohn, and Governors
information in areas of common regula-          Warsh, Kroszner, and Mishkin.
tory and supervisory interest. The mem-
orandum states that such efforts con-
cerning certain banking and securities        Policy Statement on
companies are important in maintaining        Equity Investments in Banks
effective oversight, promoting compli-        and Bank Holding Companies
ance with the banking and securities
                                              On September 19, 2008, the Board
laws, fostering the stability of financial
                                              approved a policy statement to provide
markets, and facilitating the effective
                                              additional guidance on the Board’s
execution of monetary policy by the
                                              position on the types of minority equity
Federal Reserve.
                                              investments in banks and bank holding
  Votes for this action: Chairman Bernanke,   companies that would not constitute
  Vice Chairman Kohn, and Governors           “control” for purposes of the Bank
  Warsh, Kroszner, and Mishkin.               Holding Company Act. The guidance
                         Record of Policy Actions of the Board of Governors 211

covers director representation, total         sury (Treasury), to provide protection
equity ownership, and consultations           against unusually large losses on a des-
with management and discusses the per-        ignated pool of Citigroup Inc. assets.
missible extent of a noncontrolling in-       The protection was one aspect of a
vestment for each of these areas. The         package of coordinated actions by the
guidance also reiterates that control         Board, FDIC, and Treasury (discussed
determinations are based on all the facts     under “Special Liquidity and Other
and circumstances surrounding an in-          Facilities”) that reflect the U.S. govern-
vestor’s investment in and relationship       ment’s commitment to supporting
with a banking organization.                  financial market stability and restoring
  Votes for this action: Chairman Bernanke,   vigorous economic growth.
  Vice Chairman Kohn, and Governors             Votes for this action: Chairman Bernanke,
  Warsh, Kroszner, and Duke.                    Vice Chairman Kohn, and Governors
                                                Warsh, Kroszner, and Duke.
Systemic-Risk Exceptions for                  Note: On January 15, 2009, the Board
Federal Deposit Insurance                     approved a proposal to similarly invoke
Corporation Guarantees                        the systemic-risk exception to allow the
                                              FDIC, with Treasury, to provide protec-
On October 13, 2008, the Board                tion against unusually large losses on a
approved a proposal to broadly invoke         designated pool of Bank of America
the systemic-risk exception to the least-     Corporation assets, as part of a package
cost-resolution requirements in the Fed-      of coordinated actions by the Board,
eral Deposit Insurance Act. Under the         FDIC, and Treasury.
act, the Federal Deposit Insurance Cor-
poration (FDIC) is generally required to
resolve troubled depository institutions
in a manner that is least costly to the       Interagency Statement on
deposit insurance fund. Invoking the          Meeting the Needs of
systemic-risk exception allowed the           Creditworthy Borrowers
FDIC to temporarily provide guarantees
                                              On November 5, 2008, the Board, act-
for new senior debt issued by insured
                                              ing with the Federal Deposit Insurance
depository institutions and their holding
                                              Corporation, Office of the Comptroller
companies and for non-interest-bearing
                                              of the Currency, and Office of Thrift
transaction deposit accounts at insured
                                              Supervision, approved an interagency
depository institutions. The FDIC pro-
                                              statement to emphasize the need for
vided the temporary guarantees in con-
                                              banking organizations and their super-
nection with the Department of the
                                              visors to work together to ensure that
Treasury’s capital purchase program
                                              the needs of creditworthy borrowers are
that was announced on October 14,
                                              being met during the ongoing period of
2008.
                                              financial and economic stress. The
  Votes for this action: Chairman Bernanke,   statement encourages banking organiza-
  Vice Chairman Kohn, and Governors           tions to lend to creditworthy borrowers,
  Warsh, Kroszner, and Duke.
                                              engage in capital planning, work with
On November 23, 2008, the Board               borrowers to avoid preventable foreclo-
approved a proposal to invoke the             sures, and structure compensation in-
systemic-risk exception to allow the          centives to support prudent lending and
FDIC, with the Department of the Trea-        discourage excessive risk-taking.
212 95th Annual Report, 2008

  Votes for this action: Chairman Bernanke,   depository institutions, a zero fee for
  Vice Chairman Kohn, and Governors           collateralized daylight overdrafts, a
  Warsh, Kroszner, and Duke.                  50-basis-point (annual rate) charge for
                                              uncollateralized daylight overdrafts,
Memorandum of Understanding                   and a biweekly daylight-overdraft-fee
with the Commodity Futures                    waiver of $150. The Board also ap-
Trading Commission and the                    proved an interim policy change for for-
Securities and Exchange                       eign banking organizations that relates
Commission on Credit Default                  to the calculation of the amount to be
Swaps                                         deducted from daylight-overdraft fees
                                              and early implementation of a stream-
On November 14, 2008, the Board               lined procedure for maximum daylight-
approved a memorandum of under-               overdraft capacity. The interim policy
standing with the Commodity Futures           change is effective March 26, 2009. The
Trading Commission and the Securities         other revisions will be effective in
and Exchange Commission that reflects         either late 2010 or early 2011; a spe-
the intent of the parties to cooperate,       cific date will be announced at least 90
coordinate, and share information in          days in advance. In addition, the Board
carrying out their respective responsi-       decided not to pursue a proposal to
bilities and exercising their respective      change the daylight-overdraft posting
authorities with regard to central coun-      rules but stated that it will reconsider
terparties for credit default swaps. The      the proposal in the future.
memorandum states that such efforts
are important in maintaining effective          Votes for this action: Chairman Bernanke,
                                                Vice Chairman Kohn, and Governors
oversight; fostering stability in the mar-      Warsh, Kroszner, and Duke.
ket for credit default swaps and in the
financial system as a whole; and pro-
moting compliance with banking, com-          Interagency Questions
modities, and securities laws.                and Answers regarding
                                              Community Reinvestment
  Votes for this action: Chairman Bernanke,
  Vice Chairman Kohn, and Governors
  Warsh, Kroszner, and Duke.                  [Docket No. OP-1349]
                                              On December 17, 2008, the Board, act-
Policy on Payment System Risk                 ing with the Federal Deposit Insurance
                                              Corporation, Office of the Comptroller
                                              of the Currency, and Office of Thrift
[Docket Nos. OP-1345 and OP-1346]
                                              Supervision, approved a final notice of
On December 13, 2008, the Board               new and revised Interagency Questions
approved revisions to part II of its Pol-     and Answers regarding Community
icy on Payment System Risk to improve         Reinvestment. Among other new topics,
intraday liquidity management and pay-        the questions and answers provide guid-
ment flows for the banking system and         ance on (1) consideration by the agen-
to help mitigate the credit exposures of      cies of a majority-owned financial insti-
Federal Reserve Banks from daylight           tution’s activities in cooperation with a
overdrafts. The revisions include a new       minority- or women-owned financial
approach that explicitly recognizes the       institution or low-income credit union
role of the central bank in providing         and (2) how an institution can demon-
intraday balances and credit to healthy       strate that investments in nationwide
                          Record of Policy Actions of the Board of Governors 213

community development funds meet the           Kohn, and Governors Warsh, Kroszner,
geographic requirements of the Com-            and Duke.
munity Reinvestment Act. The agen-
cies’ revisions to existing questions and
answers include, as additional examples        Special Liquidity Facilities
of community development services,
foreclosure prevention programs for            Term Securities Lending Facility
low- or moderate-income homeowners
                                               On March 11, 2008, the Board and the
and credit counseling to help low- or
                                               Federal Open Market Committee
moderate-income borrowers avoid fore-
                                               (FOMC) approved the establishment of
closure. The interagency questions and
                                               the Term Securities Lending Facility
answers are effective January 6, 2009,
                                               (TSLF) to strengthen the financing
and supersede all previously published
                                               position of primary dealers and foster
questions and answers.
                                               improved conditions in financial mar-
  Votes for this action: Chairman Bernanke,    kets more generally. Using an auction
  Vice Chairman Kohn, and Governors            process, the facility lends up to
  Warsh, Kroszner, and Duke.                   $200 billion of Treasury securities to
                                               primary dealers for a term of 28 days
Special Liquidity Facilities                   (previous practice was to lend over-
                                               night) in transactions secured by a
and Other Initiatives                          pledge of other securities.
Against the background of continued            On July 24, 2008, the Board and the
fragility in financial markets, the Board      FOMC extended their authorizations for
established special liquidity facilities       the TSLF until January 30, 2009.
and authorized other initiatives in 2008
to address financial strains and support       On September 14, 2008, the Board and
critical institutions. Unless otherwise        the FOMC broadened the collateral
indicated, the facilities and initiatives      accepted under the TSLF to include all
were established for the Federal Re-           investment-grade debt securities.
serve Bank of New York and under sec-          On November 24, 2008, the Board and
tion 13(3) of the Federal Reserve Act,         the FOMC extended their authoriza-
which permits the Board, in unusual            tions for the TSLF until April 30, 2009.
and exigent circumstances, to authorize
Reserve Banks to extend credit to indi-        Note: On January 27, 2009, the Board
viduals, partnerships, or corporations         and the FOMC extended their authori-
that are unable to obtain adequate credit      zations for the TSLF until October 30,
accommodations from other banking              2009.
institutions. Also unless otherwise indi-
cated, all facilities and initiatives autho-   Primary Dealer Credit Facility
rized before August 31, 2008, were
approved by the unanimous vote of              On March 16, 2008, the Board
Chairman Bernanke, Vice Chairman               approved the establishment of the Pri-
Kohn, and Governors Warsh, Kroszner,           mary Dealer Credit Facility (PDCF) to
and Mishkin. After that date, all facili-      bolster market liquidity, promote or-
ties and initiatives in 2008 were              derly market functioning, and improve
approved by the unanimous vote of              the ability of primary dealers to provide
Chairman Bernanke, Vice Chairman               financing to participants in securitiza-
214 95th Annual Report, 2008

tion markets. Under the facility, over-    Term Auction Facility (TAF) loans, as a
night loans to primary dealers may be      complement to the previously estab-
collateralized by a broad range of         lished auctions for 28-day TAF loans.
investment-grade debt securities.          The Board had initially established the
                                           TAF in December 2007 to provide
On July 24, 2008, the Board extended       depository institutions with a facility for
its authorization for the PDCF until       obtaining advances from their local
January 30, 2009.                          Reserve Banks at interest rates deter-
                                           mined through auctions. By increasing
On September 14, 2008, the Board           depository institutions’ access to fund-
broadened the collateral accepted by the   ing, the TAF supports the ability of
PDCF to closely match the types of col-    such institutions to meet the credit
lateral that may be pledged in the tri-    needs of their customers. The Board
party funding arrangements of the          authorized the TAF under section 10B
major clearing banks.                      of the Federal Reserve Act, which per-
                                           mits (under certain terms and condi-
On September 21, 2008, the Board
                                           tions) advances to individual member
authorized extensions of credit to the
                                           banks. The Federal Open Market Com-
U.K. broker-dealer subsidiaries of Gold-
                                           mittee made coincident changes to its
man Sachs, Morgan Stanley, and Mer-
                                           dollar-swap lines with several other
rill Lynch and to the primary-dealer
                                           central banks to accommodate similar
subsidiaries of these firms. Among
                                           auctions by those central banks of
other terms and conditions, credit ex-
                                           84-day dollar loans.
tensions under these authorizations
must be secured by the types of collat-
eral accepted (1) at the PDCF, for the     Asset-Backed Commercial Paper
U.K. broker-dealer subsidiaries, and       Money Market Mutual Fund
(2) at the primary credit facility for     Liquidity Facility
depository institutions or at the PDCF,
                                           On September 19, 2008, the Board
for the primary-dealer subsidiaries.
                                           approved the establishment of the
On November 23, 2008, the Board            Asset-Backed Commercial Paper
authorized extensions of credit to the     Money Market Mutual Fund Liquidity
London-based broker-dealer subsidiary      Facility (AMLF) for the Federal
of Citigroup Inc. under the same terms     Reserve Bank of Boston to provide
and conditions.                            funding to U.S. depository institutions
                                           and bank holding companies to help
On November 24, 2008, the Board            finance their purchases of high-quality
extended its authorization for the PDCF    asset-backed commercial paper from
until April 30, 2009.                      money market mutual funds. The facil-
                                           ity is designed to assist money funds
Note: On January 27, 2009, the Board       that hold such paper in meeting re-
extended its authorization for the PDCF    demption demands from investors and
until October 30, 2009.                    to foster liquidity in asset-backed com-
                                           mercial paper markets and money mar-
Term Auction Facility                      kets more generally. The Board autho-
                                           rized the AMLF under sections 13(3)
On July 28, 2008, the Board approved       and 10B of the Federal Reserve Act
the establishment of auctions for 84-day   (section 10B permits, under certain
                          Record of Policy Actions of the Board of Governors 215

terms and conditions, advances to indi-       Note: On January 27, 2009, the Board
vidual member banks).                         extended its authorization for the CPFF
                                              until October 30, 2009.
On November 24, 2008, the Board
extended its authorization for the
AMLF until April 30, 2009.
                                              Money Market Investor
Note: On January 27, 2009, the Board          Funding Facility
extended its authorization for the
AMLF until October 30, 2009.
                                              On October 21, 2008, the Board
                                              approved the establishment of the
Commercial Paper                              Money Market Investor Funding Facil-
Funding Facility                              ity (MMIFF) to support a private-sector
On October 7, 2008, the Board                 initiative designed to provide liquidity
approved the establishment of the Com-        to U.S. money market investors, thus
mercial Paper Funding Facility (CPFF)         increasing their ability to meet redemp-
to provide a liquidity backstop to U.S.       tion requests and their willingness to
issuers of commercial paper (CP)              invest in money market instruments.
through a special-purpose vehicle             Improved money market conditions in
(SPV) that purchases three-month unse-        turn enhance the ability of banks and
cured and asset-backed CP directly            other financial intermediaries to accom-
from eligible issuers. The CPFF re-           modate the credit needs of businesses
moves much of the risk that eligible          and households. Under the facility, the
issuers will not be able to roll over their   Federal Reserve provides senior se-
maturing CP, thereby encouraging in-          cured funding to a series of private-
vestors to engage in term lending in the      sector special-purpose vehicles (SPVs).
CP market. The CPFF is intended to            Each SPV purchases eligible money
improve liquidity in short-term funding       market instruments from eligible money
markets, thus increasing the availability     market investors using financing from
of credit for businesses and households.      the facility and from the issuance of
The SPV will stop purchasing CP on            asset-backed commercial paper to
April 30, 2009, unless the Board ex-          investors. The SPVs will stop purchas-
tends the facility, and the SPV will con-     ing money market instruments on April
tinue to be funded by the Federal             30, 2009, unless the Board extends the
Reserve until the underlying assets           facility, and the SPVs will continue to
mature.                                       be funded by the Federal Reserve until
On October 13, 2008, the Board                the underlying assets mature.
approved additional details regarding
the CPFF’s implementation on October          On December 24, 2008, the Board
27, 2008.                                     approved changes to the MMIFF that
                                              (1) expand the set of eligible investors
On December 25, 2008, the Board               that may participate in the facility and
approved setting the interest rate on dis-    (2) adjust several of the facility’s eco-
count window loans to the CPFF’s SPV          nomic parameters to ensure that it re-
at the maximum rate within the target         mains a viable source of backup liquid-
range for the federal funds rate, if the      ity for money market investors even if
target federal funds rate is a range of       money market interest rates are at low
rates rather than a specific rate.            levels.
216 95th Annual Report, 2008

Note: On January 27, 2009, the Board        Other Initiatives
extended its authorization for the
MMIFF until October 30, 2009.               The Bear Stearns Companies Inc.
                                            On March 14, 2008, the Board
Term Asset-Backed Securities                approved temporary emergency financ-
Loan Facility                               ing for The Bear Stearns Companies
On November 24, 2008, the Board             Inc. through an arrangement with
approved the establishment of the Term      JPMorgan Chase & Co. Bear Stearns, a
Asset-Backed Securities Loan Facility       major investment bank and primary
(TALF) to support the issuance of asset-    dealer, was on the brink of failure after
backed securities (ABS) collateralized      losing the confidence of investors and
by consumer and small business loans.       finding itself without access to short-
The facility is designed to increase        term financing markets. The Board
credit availability and support economic    judged that a disorderly failure of Bear
activity by facilitating renewed issuance   Stearns would threaten overall financial
of consumer and small business ABS at       stability and would most likely have
more-normal interest rate spreads. The      significant adverse implications for the
TALF will lend up to $200 billion on a      U.S. economy.
nonrecourse basis to holders of certain       Votes for this action: Chairman Bernanke,
AAA-rated ABS. Using funds from the           Vice Chairman Kohn, and Governors
Troubled Asset Relief Program, the            Warsh and Kroszner. Absent and not vot-
Department of the Treasury (Treasury)         ing: Governor Mishkin.
will provide $20 billion of credit pro-     On March 16, 2008, the Board autho-
tection to the Federal Reserve in con-      rized a nonrecourse loan of up to
nection with the facility.                  $30 billion that would be fully collater-
On December 19, 2008, the Board             alized by a pool of Bear Stearns assets
approved revisions to the terms and         to facilitate JPMorgan’s acquisition of
conditions of the TALF.                     Bear Stearns. The acquisition was com-
                                            pleted on June 26, 2008.
Note: On February 6, 2009, and Feb-
ruary 23, 2009, the Board approved fur-     Provisional Lending to Fannie Mae
ther revisions to the TALF. On March 3,     and Freddie Mac
2009, the Board and Treasury an-
nounced the launch of the TALF for eli-     On July 13, 2008, the Board authorized
gible holders of ABS that are backed by     lending to the Federal National Mort-
newly and recently originated auto,         gage Association (Fannie Mae) and the
credit card, and student loans and Small    Federal Home Loan Mortgage Corpora-
Business Administration–guaranteed          tion (Freddie Mac) if necessary. The
small business loans. On March 19,          authorization was made under section
2009, the Board expanded the set of eli-    13(13) of the Federal Reserve Act,
gible collateral for loans under the        which permits (under certain terms and
TALF to include ABS backed by               conditions) advances to an individual, a
mortgage-servicing advances, loans or       partnership, or a corporation on obliga-
leases relating to business equipment,      tions of the United States, and is in-
leases of vehicle fleets, and non-auto      tended to supplement the Department of
floorplan loans, and expanded the list of   the Treasury’s existing lending author-
eligible auto-related receivables.          ity and to help ensure the ability of Fan-
                         Record of Policy Actions of the Board of Governors 217

nie Mae and Freddie Mac to promote           promote market stability, and protect
the availability of home mortgage credit     the interests of the U.S. government and
during a period of stress in financial       taxpayers. They include a purchase of
markets. No lending took place, and the      AIG equity by Treasury, modified terms
companies were placed in conservator-        for the Federal Reserve’s existing AIG
ship on September 7, 2008.                   liquidity facility, and two new Federal
                                             Reserve lending facilities that each
                                             support a distinct AIG portfolio of
American International Group, Inc.
                                             mortgage-related securities.
On September 16, 2008, the Board             Note: On March 2, 2009, the Board
approved, with the support of the            and Treasury announced an additional
Department of the Treasury (Treasury),       restructuring for AIG, which continues
a secured loan of up to $85 billion for      to face significant challenges. The plan
the American International Group, Inc.       is intended to help stabilize the com-
(AIG) to assist AIG in meeting its obli-     pany and, in turn, the financial system.
gations as they become due and to
facilitate a process under which it can
sell certain businesses in an orderly        Citigroup Inc.
manner with the least possible disrup-       On November 23, 2008, the Board
tion to the overall economy. The condi-      approved financing, if necessary, for
tion of AIG, a large complex financial       Citigroup Inc. that would backstop
institution, had deteriorated rapidly, and   residual risk in a pool of approximately
a disorderly failure of AIG would likely     $306 billion of Citigroup assets secured
have systemic implications and poten-        by residential and commercial real es-
tially adverse effects on the economy.       tate and certain other assets. Market
The loan is subject to terms and condi-      anxiety about the condition of Citigroup
tions that protect the interests of the      had intensified, and concerns about the
U.S. government and taxpayers.               firm’s access to funding continued to
                                             mount. The residual financing was ap-
On October 6, 2008, the Board autho-         proved as part of a package of coordi-
rized borrowing up to $37.8 billion in       nated actions with the Department of
securities from certain regulated U.S.       the Treasury (Treasury) and the Federal
insurance subsidiaries of AIG, in return     Deposit Insurance Corporation (FDIC).
for cash collateral. The authorization       These actions included Treasury and the
applied to investment-grade fixed-           FDIC providing (1) protection against
income securities previously lent by the     the possibility of unusually large losses
insurance subsidiaries to third parties.     on the Citigroup asset pool in return
This facility was subsequently repaid        for preferred shares of Citigroup and
and terminated on December 12, 2008.         (2) Treasury investing $20 billion in
                                             Citigroup under the Troubled Asset
On November 7, 2008, the Board and           Relief Program in return for additional
Treasury approved a restructuring of the     preferred shares.
government’s financial support to AIG.
The new measures are intended to
                                             Bank of America Corporation
establish a more durable capital struc-
ture, resolve liquidity issues, facilitate   Note: On January 15, 2009, the Board
AIG’s execution of its plan to sell cer-     approved an agreement with Bank of
tain businesses in an orderly manner,        America Corporation that is similar to
218 95th Annual Report, 2008

the Citigroup arrangement of November        from 50 basis points, and announced a
2008. Under the agreement, Treasury          temporary change to the Reserve
and the FDIC will provide protection         Banks’ discount window lending prac-
against the possibility of unusually         tices to allow the provision of term
large losses on a pool of approximately      financing for as long as 90 days.1 These
$118 billion of financial instruments, in    changes remained in effect at the end of
return for preferred shares in Bank of       2008. In the remaining seven instances,
America. If necessary, the Federal           the Board reached its determinations on
Reserve Bank of Richmond will pro-           the primary credit rate recommenda-
vide nonrecourse credit to Bank of           tions of the Reserve Bank boards of
America against this pool of financial       directors in conjunction with the
instruments.                                 FOMC’s decisions to lower the target
                                             federal funds rate from 41⁄4 percent to a
                                             range of 0 to 1⁄4 percent. Monetary pol-
Discount Rates for                           icy developments are reviewed more
Depository Institutions                      fully in other parts of this report (see
                                             the section “Monetary Policy and Eco-
in 2008                                      nomic Developments” and the minutes
                                             of FOMC meetings held in 2008).
Under the Federal Reserve Act, the
boards of directors of the Federal Re-
serve Banks must establish rates on dis-     Secondary and Seasonal Credit
count window loans to depository insti-
tutions at least every 14 days, subject to   Secondary credit is available in appro-
review and determination by the Board        priate circumstances to depository insti-
of Governors.                                tutions that do not qualify for primary
                                             credit. The secondary credit rate is set
                                             at a spread above the primary credit
Primary Credit                               rate. Throughout 2008, the spread was
                                             set at 50 basis points.
Primary credit, the Federal Reserve’s           Seasonal credit is available to smaller
main lending program, is extended at a       depository institutions to meet liquidity
rate above the federal funds rate target     needs that arise from regular swings in
set by the Federal Open Market Com-          their loans and deposits. The rate on
mittee (FOMC). It is typically made          seasonal credit is calculated every two
available, with minimal administration       weeks as an average of selected money-
and for very short terms, as a backup        market yields, typically resulting in a
source of liquidity to depository institu-   rate close to the federal funds rate
tions that, in the judgment of the lend-     target.
ing Federal Reserve Bank, are in gener-         At year-end, the secondary and sea-
ally sound financial condition.              sonal credit rates were 1 percent and
   During 2008, the Board approved           1.05 percent, respectively.2
eight reductions in the primary credit
rate, bringing the rate from 43⁄4 percent
to 1⁄2 percent. One of these reductions        1. The spread of the primary credit rate over
came on March 16, when the Board             the FOMC’s target rate is usually 100 basis
                                             points. In 2007, the Board had approved a nar-
approved a narrowing of the spread of        rowing of this spread to 50 basis points.
the primary credit rate over the               2. For current and historical discount rates, see
FOMC’s target rate to 25 basis points,       www.frbdiscountwindow.org/.
                          Record of Policy Actions of the Board of Governors 219

Term Auction Facility Credit                   Louis, effective January 23, 2008. The
                                               Board also approved identical actions
In December 2007, the Federal Reserve
                                               subsequently taken by the directors of
established a temporary Term Auction
                                               the Federal Reserve Banks of Atlanta
Facility (TAF). Under the TAF, the Fed-
eral Reserve auctions term funds to            and Kansas City, effective January 24,
depository institutions that are in gener-     2008.
ally sound financial condition and are           Votes for this action: Chairman Bernanke,
eligible to borrow under the primary             Vice Chairman Kohn, and Governors
credit program. The amount of each               Warsh and Kroszner. Absent and not vot-
                                                 ing: Governor Mishkin.
auction is determined in advance by the
Federal Reserve, and the interest rate on      January 30, 2008. Effective this date,
TAF credit is determined by the bidding        the Board approved actions taken by the
process as the rate at which all bids can      directors of the Federal Reserve Banks
be fulfilled, up to the maximum auction        of Boston, New York, Philadelphia,
amount and subject to a minimum bid            Cleveland, Atlanta, Chicago, Kansas
rate. The Federal Reserve conducted            City, and San Francisco to lower the
regular autions of 28- and 84-day TAF          rate on discounts and advances under
credit in 2008.3                               the primary credit program by 1⁄2 per-
                                               centage point, to 31⁄2 percent. The same
Votes on Changes to Discount                   decrease was approved for the Federal
Rates for Depository Institutions              Reserve Bank of St. Louis, effective
                                               January 31, 2008. The Board also ap-
About every two weeks during 2008,             proved identical actions subsequently
the Board approved proposals by the 12         taken by the directors of the Federal
Reserve Banks to maintain the formulas         Reserve Banks of Richmond, Minne-
for computing the secondary and sea-           apolis, and Dallas, effective January 31,
sonal credit rates as well as the auction      2008.
method by which the TAF credit rate is
set. Details on the eight actions by the         Votes for this action: Chairman Bernanke,
                                                 Vice Chairman Kohn, and Governors
Board to approve changes in the pri-             Warsh, Kroszner, and Mishkin.
mary credit rate are provided below.
                                               March 16, 2008. Effective this date, the
January 22, 2008. Effective this date,
                                               Board approved an action taken by the
the Board approved actions taken by the
                                               directors of the Federal Reserve Bank
directors of the Federal Reserve Banks
                                               of New York to lower the rate on dis-
of Boston, New York, Philadelphia,
                                               counts and advances under the primary
Cleveland, Richmond, Chicago, Minne-
                                               credit program by 1⁄4 percentage point,
apolis, Dallas, and San Francisco to
                                               to 31⁄4 percent.4 The Board also ap-
lower the rate on discounts and ad-
                                               proved identical actions subsequently
vances under the primary credit pro-
                                               taken by the directors of the Federal
gram by 3⁄4 percentage point, to 4 per-
cent. The same decrease was approved           Reserve Banks of Boston, Cleveland,
for the Federal Reserve Bank of St.            Richmond, Chicago, Minneapolis, Kan-


  3. For more information on TAF auctions,        4. As March 16, 2008, was a Sunday, the new
including minimum bid rates and the auction-   primary credit rate for the Federal Reserve Bank
determined rates on TAF credit, see www.       of New York was first applied on the next busi-
federalreserve.gov/monetarypolicy/taf.htm.     ness day, Monday, March 17.
220 95th Annual Report, 2008

sas City, and San Francisco, effective        Philadelphia, Richmond, Minneapolis,
March 17, 2008.                               and Dallas, effective May 1, 2008.
  Votes for this action: Chairman Bernanke,     Votes for this action: Chairman Bernanke,
  Vice Chairman Kohn, and Governors             Vice Chairman Kohn, and Governors
  Warsh, Kroszner, and Mishkin.                 Warsh, Kroszner, and Mishkin.

                                              October 8, 2008. Effective this date, the
March 18, 2008. Effective this date, the
                                              Board approved actions taken by the
Board approved actions taken by the
                                              directors of the Federal Reserve Banks
directors of the Federal Reserve Banks
                                              of Boston, New York, Philadelphia,
of Boston, New York, Cleveland, Chi-
                                              Cleveland, Richmond, Atlanta, Chi-
cago, Kansas City, and San Francisco to
                                              cago, Minneapolis, Kansas City, Dallas,
lower the rate on discounts and ad-
                                              and San Francisco to lower the rate on
vances under the primary credit pro-
                                              discounts and advances under the pri-
gram by 3⁄4 percentage point, to 21⁄2 per-
                                              mary credit program by 1⁄2 percentage
cent. The Board also approved identical
                                              point, to 13⁄4 percent. The same de-
actions subsequently taken by the direc-
                                              crease was approved for the Federal
tors of the Federal Reserve Banks of
                                              Reserve Bank of St. Louis, effective
Richmond and Minneapolis, effective
                                              October 9, 2008.
March 19, 2008. The Board also ap-
proved actions taken to lower the rate          Votes for this action: Chairman Bernanke,
on discounts and advances under the             Vice Chairman Kohn, and Governors
                                                Warsh, Kroszner, and Duke.
primary credit program by 1 percentage
point, to 21⁄2 percent, by the directors of   October 29, 2008. Effective this date,
the Federal Reserve Bank of Dallas,           the Board approved actions taken by the
effective March 18, 2008; the Federal         directors of the Federal Reserve Banks
Reserve Banks of Atlanta and St. Louis,       of Boston, New York, Cleveland, Chi-
effective March 19, 2008; and the Fed-        cago, Kansas City, and San Francisco to
eral Reserve Bank of Philadelphia,            lower the rate on discounts and ad-
effective March 20, 2008.                     vances under the primary credit pro-
                                              gram by 1⁄2 percentage point, to 11⁄4 per-
  Votes for this action: Chairman Bernanke,
  Vice Chairman Kohn, and Governors
                                              cent. The same decrease was approved
  Warsh, Kroszner, and Mishkin.               for the Federal Reserve Bank of St.
                                              Louis, effective October 30, 2008. The
                                              Board also approved identical actions
April 30, 2008. Effective this date, the
                                              subsequently taken by the directors of
Board approved actions taken by the
                                              the Federal Reserve Banks of Philadel-
directors of the Federal Reserve Banks
                                              phia, Richmond, Minneapolis, and Dal-
of New York, Cleveland, Atlanta, Chi-
                                              las, effective October 30, 2008; and the
cago, Kansas City, and San Francisco to
                                              Federal Reserve Bank of Atlanta, effec-
lower the rate on discounts and ad-
                                              tive October 31, 2008.
vances under the primary credit pro-
gram by 1⁄4 percentage point, to 21⁄4 per-      Votes for this action: Chairman Bernanke,
cent. The same decrease was approved            Vice Chairman Kohn, and Governors
                                                Warsh, Kroszner, and Duke.
for the Federal Reserve Bank of St.
Louis, effective May 1, 2008. The             December 16, 2008. Effective this date,
Board also approved identical actions         the Board approved actions taken by the
subsequently taken by the directors of        directors of the Federal Reserve Banks
the Federal Reserve Banks of Boston,          of New York, Cleveland, Richmond,
                       Record of Policy Actions of the Board of Governors 221

Atlanta, Chicago, Minneapolis, Kansas     taken by the directors of the Federal
City, and San Francisco to lower the      Reserve Banks of Boston and Dallas,
rate on discounts and advances under      effective December 17, 2008; and the
the primary credit program by 3⁄4 per-    Federal Reserve Bank of Philadelphia,
centage point, to 1⁄2 percent. The same   effective December 18, 2008.
decrease was approved for the Federal
Reserve Bank of St. Louis, effective        Votes for this action: Chairman Bernanke,
December 17, 2008. The Board also           Vice Chairman Kohn, and Governors
approved identical actions subsequently     Warsh, Kroszner, and Duke.             Á
                                                                                       223



Minutes of Federal Open Market
Committee Meetings
The policy actions of the Federal Open     mary of the reasons for their dissent is
Market Committee, contained in the         provided.
minutes of its meetings, are presented        Policy directives of the Federal Open
in the Annual Report of the Board of       Market Committee are issued to the
Governors pursuant to the requirements     Federal Reserve Bank of New York as
of section 10 of the Federal Reserve       the Bank selected by the Committee to
Act. That section provides that the        execute transactions for the System
Board shall keep a complete record of      Open Market Account. In the area of
the actions taken by the Board and by      domestic open market operations, the
the Federal Open Market Committee on       Federal Reserve Bank of New York
all questions of policy relating to open   operates under instructions from the
market operations, that it shall record    Federal Open Market Committee that
therein the votes taken in connection      take the form of an Authorization for
with the determination of open market      Domestic Open Market Operations and
policies and the reasons underlying        a Domestic Policy Directive. (A new
each policy action, and that it shall      Domestic Policy Directive is adopted at
include in its annual report to Congress   each regularly scheduled meeting.) In
a full account of such actions.            the foreign currency area, the Federal
   The minutes of the meetings contain     Reserve Bank of New York operates
the votes on the policy decisions made     under an Authorization for Foreign Cur-
at those meetings as well as a summary     rency Operations, a Foreign Currency
of the information and discussions that    Directive, and Procedural Instructions
led to the decisions. In addition, four    with Respect to Foreign Currency
times a year, starting with the October    Operations.1 Changes in the instruments
2007 Committee meeting, a Summary          during the year are reported in the min-
of Economic Projections is published as    utes for the individual meetings.
an addendum to the minutes. The
descriptions of economic and financial
conditions in the minutes and the Sum-
mary of Economic Projections are
based solely on the information that
was available to the Committee at the         1. As of January 1, 2008, the Federal Reserve
time of the meetings.                      Bank of New York was operating under the
                                           Domestic Policy Directive approved at the De-
   Members of the Committee voting         cember 11, 2007, Committee meeting. The other
for a particular action may differ among   policy instruments (the Authorization for Domes-
themselves as to the reasons for their     tic Open Market Operations, the Authorization for
votes; in such cases, the range of their   Foreign Currency Operations, the Foreign Cur-
                                           rency Directive, and Procedural Instructions with
views is noted in the minutes. When        Respect to Foreign Currency Operations) in effect
members dissent from a decision, they      as of January 1, 2008, were approved at the Janu-
are identified in the minutes and a sum-   ary 30−31, 2007, meeting.
224 95th Annual Report, 2008

Meeting Held on                                  Mr. Parkinson,3 Deputy Director, Divi-
January 29–30, 2008                                  sion of Research and Statistics,
                                                     Board of Governors
A meeting of the Federal Open Market             Mr. Clouse, Senior Associate Director,
Committee was held in the offices of                 Division of Monetary Affairs,
the Board of Governors of the Federal                Board of Governors
Reserve System in Washington, D.C.,              Ms. Liang and Messrs. Reifschneider
on Tuesday, January 29, 2008 at 2:00                 and Wascher, Associate Directors,
p.m. and continued on Wednesday,                     Division of Research and Statis-
January 30, 2008 at 9:00 a.m.                        tics, Board of Governors

Present:                                         Ms. Barger3 and Mr. Greenlee,3 Asso-
    Mr. Bernanke, Chairman                           ciate Directors, Division of Bank-
    Mr. Geithner, Vice Chairman                      ing Supervision and Regulation,
    Mr. Fisher                                       Board of Governors
    Mr. Kohn                                     Mr. Gibson,3 Deputy Associate Direc-
    Mr. Kroszner                                     tor, Division of Research and Sta-
    Mr. Mishkin                                      tistics, Board of Governors
    Ms. Pianalto
    Mr. Plosser                                  Mr. Dale, Senior Adviser, Division of
    Mr. Stern                                        Monetary Affairs, Board of Gov-
    Mr. Warsh                                        ernors
    Messrs. Evans, Lacker, and Lockhart,         Mr. Oliner, Senior Adviser, Division of
        and Ms. Yellen, Alternate Mem-               Research and Statistics, Board of
        bers of the Federal Open Market              Governors
        Committee
                                                 Messrs. Durham and Perli, Assistant
    Messrs. Hoenig, Poole, and Rosengren,            Directors, Division of Monetary
        Presidents of the Federal Reserve            Affairs, Board of Governors
        Banks of Kansas City, St. Louis,
        and Boston, respectively                 Mr. Blanchard, Assistant to the Board,
                                                     Office of Board Members, Board
    Mr. Madigan, Secretary and Economist             of Governors
    Ms. Danker, Deputy Secretary
    Mr. Skidmore, Assistant Secretary            Mr. Small, Project Manager, Division
    Ms. Smith, Assistant Secretary                   of Monetary Affairs, Board of
    Mr. Alvarez, General Counsel                     Governors
    Mr. Baxter, Deputy General Counsel           Mr. Bassett,4 Senior Economist, Divi-
    Mr. Sheets, Economist                            sion of Monetary Affairs, Board
    Mr. Stockton, Economist                          of Governors
    Messrs. Connors, English, and Kamin,         Mr. Doyle,4 Senior Economist, Divi-
        Ms. Mester, Messrs. Rosenblum,               sion of International Finance,
        Slifman, Sniderman, Tracy, and               Board of Governors
        Wilcox, Associate Economists
                                                 Ms. Kusko,4 Senior Economist, Divi-
    Mr. Dudley, Manager, System Open                 sion of Research and Statistics,
        Market Account                               Board of Governors
    Mr. Struckmeyer,2 Deputy Staff Direc-
        tor, Office of Staff Director for
        Management, Board of Governors         3. Attended portion of the meeting relating to
                                            the analysis of policy issues raised by financial
                                            market developments.
                                               4. Attended portion of the meeting relating to
                                            the economic outlook and monetary policy deci-
 2. Attended Wednesday’s session.           sion.
                                           Minutes of FOMC Meetings, January 225

    Mr. Luecke, Senior Financial Analyst,          Federal Reserve Bank of Richmond, as
        Division of Monetary Affairs,              alternate.
        Board of Governors
                                               Sandra Pianalto, President of the Federal
    Mr. Driscoll, Economist, Division of           Reserve Bank of Cleveland, with
        Monetary Affairs, Board of Gov-            Charles L. Evans, President of the Fed-
        ernors                                     eral Reserve Bank of Chicago, as
                                                   alternate.
    Ms. Low, Open Market Secretariat
        Specialist, Division of Monetary       Richard W. Fisher, President of the Federal
        Affairs, Board of Governors                Reserve Bank of Dallas, with Dennis P.
                                                   Lockhart, President of the Federal
    Ms. Green, First Vice President, Fed-          Reserve Bank of Atlanta, as alternate.
        eral Reserve Bank of Richmond
                                               Gary H. Stern, President of the Federal
    Messrs. Fuhrer and Judd, Executive             Reserve Bank of Minneapolis, with
        Vice Presidents, Federal Reserve           Janet L. Yellen, President of the Fed-
        Banks of Boston and San Fran-              eral Reserve Bank of San Francisco, as
        cisco, respectively                        alternate.
    Messrs. Altig and Angulo,3 Mses.              By unanimous vote, the following
        Hirtle3 and Mosser, Messrs.
        Peters3 and Rasche, Senior Vice        officers of the Federal Open Market
        Presidents, Federal Reserve Banks      Committee were selected to serve until
        of Atlanta, New York, New York,        the selection of their successors at the
        New York, New York, and St.            first regularly scheduled meeting of the
        Louis, respectively                    Committee in 2009:
    Mr. Hakkio, Senior Adviser, Federal        Ben S. Bernanke         Chairman
        Reserve Bank of Kansas City            Timothy F. Geithner     Vice Chairman
    Mr. Krane, Vice President, Federal         Brian F. Madigan        Secretary and
        Reserve Bank of Chicago                                          Economist
                                               Deborah J. Danker       Deputy Secretary
    Mr. Weber, Senior Research Officer,        David W. Skidmore       Assistant Secretary
        Federal Reserve Bank of Minne-         Michelle A. Smith       Assistant Secretary
        apolis                                 Scott G. Alvarez        General Counsel
                                               Thomas C. Baxter, Jr.   Deputy General
  In the agenda for this meeting, it was                                 Counsel
reported that advices of the election of       Richard M. Ashton       Assistant General
the following members and alternate                                      Counsel
members of the Federal Open Market             D. Nathan Sheets        Economist
Committee for a term beginning Janu-           David J. Stockton       Economist
ary 29, 2008 had been received and that        Thomas A. Connors, William B. English,
these individuals had executed their              Steven B. Kamin, Loretta J. Mester,
oaths of office.                                  Arthur J. Rolnick, Harvey Rosenblum,
  The elected members and alternate               Lawrence Slifman, Mark S. Sniderman,
members were as follows:                          Joseph S. Tracy, and David W. Wilcox,
                                                  Associate Economists
Timothy F. Geithner, President of the Fed-
    eral Reserve Bank of New York, with           By unanimous vote, the Committee
    Christine M. Cumming, First Vice           made a few amendments to its rules and
    President of the Federal Reserve Bank      to the Program for Security of FOMC
    of New York, as alternate.                 Information. The amendments primarily
Charles I. Plosser, President of the Federal   addressed the Committee’s practice of
    Reserve Bank of Philadelphia, with         approving the minutes via notation
    Jeffrey M. Lacker, President of the        vote, attendance at Committee meet-
226 95th Annual Report, 2008

ings, and access to Committee informa-            Committee, shall be determined by competi-
tion by System employees.                         tive bidding, after applying reasonable limi-
   By unanimous vote, the Federal                 tations on the volume of agreements with
                                                  individual dealers.
Reserve Bank of New York was sel-                      (c) To sell U.S. Government securities
ected to execute transactions for the             and obligations that are direct obligations of,
System Open Market Account.                       or fully guaranteed as to principal and inter-
   By unanimous vote, William C. Dud-             est by, any agency of the United States to
ley was selected to serve at the pleasure         dealers for System Open Market Account
of the Committee as Manager, System               under agreements for the resale by dealers
                                                  of such securities or obligations in 65 busi-
Open Market Account, on the under-                ness days or less, at rates that, unless other-
standing that his selection was subject           wise expressly authorized by the Commit-
to being satisfactory to the Federal              tee, shall be determined by competitive
Reserve Bank of New York.                         bidding, after applying reasonable limita-
   By unanimous vote, the Authoriza-              tions on the volume of agreements with
tion for Domestic Open Market Opera-              individual dealers.
tions was reaffirmed in the form shown               2. In order to ensure the effective conduct
below:                                            of open market operations, the Federal Open
                                                  Market Committee authorizes the Federal
                                                  Reserve Bank of New York to lend on an
Authorization for Domestic                        overnight basis U.S. Government securities
Open Market Operations                            held in the System Open Market Account to
(Reaffirmed January 29, 2008)                     dealers at rates that shall be determined by
                                                  competitive bidding. The Federal Reserve
   1. The Federal Open Market Committee           Bank of New York shall set a minimum
authorizes and directs the Federal Reserve        lending fee consistent with the objectives of
Bank of New York, to the extent necessary         the program and apply reasonable limita-
to carry out the most recent domestic policy      tions on the total amount of a specific issue
directive adopted at a meeting of the Com-        that may be auctioned and on the amount of
mittee:                                           securities that each dealer may borrow. The
      (a) To buy or sell U.S. Government          Federal Reserve Bank of New York may
securities, including securities of the Federal   reject bids which could facilitate a dealer’s
Financing Bank, and securities that are           ability to control a single issue as deter-
direct obligations of, or fully guaranteed as     mined solely by the Federal Reserve Bank
to principal and interest by, any agency of       of New York.
the United States in the open market, from
or to securities dealers and foreign and inter-      3. In order to ensure the effective conduct
national accounts maintained at the Federal       of open market operations, while assisting in
Reserve Bank of New York, on a cash, regu-        the provision of short-term investments for
lar, or deferred delivery basis, for the Sys-     foreign and international accounts main-
tem Open Market Account at market prices,         tained at the Federal Reserve Bank of New
and, for such Account, to exchange matur-         York and accounts maintained at the Federal
ing U.S. Government and Federal agency            Reserve Bank of New York as fiscal agent
securities with the Treasury or the indi-         of the United States pursuant to Section 15
vidual agencies or to allow them to mature        of the Federal Reserve Act, the Federal
without replacement;                              Open Market Committee authorizes and
      (b) To buy U.S. Government securities,      directs the Federal Reserve Bank of New
obligations that are direct obligations of, or    York (a) for System Open Market Account,
fully guaranteed as to principal and interest     to sell U.S. Government securities to such
by, any agency of the United States, from         accounts on the bases set forth in paragraph
dealers for the account of the System Open        l(a) under agreements providing for the
Market Account under agreements for               resale by such accounts of those securities in
repurchase of such securities or obligations      65 business days or less on terms compa-
in 65 business days or less, at rates that,       rable to those available on such transactions
unless otherwise expressly authorized by the      in the market; and (b) for New York Bank
                                           Minutes of FOMC Meetings, January 227

account, when appropriate, to undertake         with such procedural instructions as the
with dealers, subject to the conditions         Committee may issue from time to time:
imposed on purchases and sales of securities          A. To purchase and sell the following
in paragraph l(b), repurchase agreements in     foreign currencies in the form of cable trans-
U.S. Government and agency securities, and      fers through spot or forward transactions on
to arrange corresponding sale and repur-        the open market at home and abroad, includ-
chase agreements between its own account        ing transactions with the U.S. Treasury, with
and such foreign, international, and fiscal     the U.S. Exchange Stabilization Fund estab-
agency accounts maintained at the Bank.         lished by Section 10 of the Gold Reserve
Transactions undertaken with such accounts      Act of 1934, with foreign monetary authori-
under the provisions of this paragraph may      ties, with the Bank for International Settle-
provide for a service fee when appropriate.     ments, and with other international financial
                                                institutions:
   4. In the execution of the Committee’s
decision regarding policy during any inter-          Canadian dollars      Mexican pesos
meeting period, the Committee authorizes             Danish kroner         Norwegian kroner
                                                     Euro                  Swedish kronor
and directs the Federal Reserve Bank of              Pounds sterling       Swiss francs
New York, upon the instruction of the                Japanese yen
Chairman of the Committee, to adjust some-
what in exceptional circumstances the de-             B. To hold balances of, and to have
gree of pressure on reserve positions and       outstanding forward contracts to receive or
hence the intended federal funds rate. Any      to deliver, the foreign currencies listed in
such adjustment shall be made in the context    paragraph A above.
of the Committee’s discussion and decision            C. To draw foreign currencies and to
at its most recent meeting and the Commit-      permit foreign banks to draw dollars under
tee’s long-run objectives for price stability   the reciprocal currency arrangements listed
and sustainable economic growth, and shall      in paragraph 2 below, provided that draw-
be based on economic, financial, and mone-      ings by either party to any such arrangement
tary developments during the intermeeting       shall be fully liquidated within 12 months
period. Consistent with Committee practice,     after any amount outstanding at that time
the Chairman, if feasible, will consult with    was first drawn, unless the Committee,
the Committee before making any adjust-         because of exceptional circumstances, spe-
ment.                                           cifically authorizes a delay.
                                                      D. To maintain an overall open posi-
   By unanimous vote, the Committee             tion in all foreign currencies not exceeding
approved the Authorization for Foreign          $25.0 billion. For this purpose, the overall
                                                open position in all foreign currencies is
Currency Operations with an amend-              defined as the sum (disregarding signs) of
ment to paragraph 1.D. regarding the            net positions in individual currencies, ex-
maximum open position in all foreign            cluding changes in dollar value due to for-
currencies. Accordingly, the Authoriza-         eign exchange rate movements and interest
tion for Foreign Currency Operations            accruals. The net position in a single foreign
was adopted, as shown below:                    currency is defined as holdings of balances
                                                in that currency, plus outstanding contracts
                                                for future receipt, minus outstanding con-
                                                tracts for future delivery of that currency,
Authorization for                               i.e., as the sum of these elements with due
Foreign Currency Operations                     regard to sign.
(Amended January 29, 2008)
                                                   2. The Federal Open Market Committee
   1. The Federal Open Market Committee         directs the Federal Reserve Bank of New
authorizes and directs the Federal Reserve      York to maintain reciprocal currency ar-
Bank of New York, for System Open Mar-          rangements (“swap” arrangements) for the
ket Account, to the extent necessary to carry   System Open Market Account for periods
out the Committee’s foreign currency direc-     up to a maximum of 12 months with the
tive and express authorizations by the Com-     following foreign banks, which are among
mittee pursuant thereto, and in conformity      those designated by the Board of Governors
228 95th Annual Report, 2008

of the Federal Reserve System under Sec-                                               eign government or agency thereof; buying
tion 214.5 of Regulation N, Relations with                                             such securities under agreements for repur-
Foreign Banks and Bankers, and with the                                                chase of such securities; selling such securi-
approval of the Committee to renew such                                                ties under agreements for the resale of such
arrangements on maturity:                                                              securities; and holding various time and
                                                                                       other deposit accounts at foreign institu-
                                                     Amount of                         tions. In addition, when appropriate in con-
                                                    arrangement
           Foreign bank
                                                    (millions of                       nection with arrangements to provide invest-
                                                 dollars equivalent)                   ment facilities for foreign currency holdings,
                                                                                       U.S. Government securities may be pur-
Bank of Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000   chased from foreign central banks under
Bank of Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
                                                                                       agreements for repurchase of such securities
Any changes in the terms of existing swap                                              within 30 calendar days.
arrangements, and the proposed terms of                                                   6. All operations undertaken pursuant to
any new arrangements that may be autho-                                                the preceding paragraphs shall be reported
rized, shall be referred for review and                                                promptly to the Foreign Currency Subcom-
approval to the Committee.                                                             mittee and the Committee. The Foreign Cur-
   3. All transactions in foreign currencies                                           rency Subcommittee consists of the Chair-
undertaken under paragraph 1.A. above                                                  man and Vice Chairman of the Committee,
shall, unless otherwise expressly authorized                                           the Vice Chairman of the Board of Gover-
by the Committee, be at prevailing market                                              nors, and such other member of the Board
rates. For the purpose of providing an                                                 as the Chairman may designate (or in the
investment return on System holdings of                                                absence of members of the Board serving on
foreign currencies or for the purpose of                                               the Subcommittee, other Board members
adjusting interest rates paid or received in                                           designated by the Chairman as alternates,
connection with swap drawings, transactions                                            and in the absence of the Vice Chairman of
with foreign central banks may be under-                                               the Committee, his alternate). Meetings of
taken at non-market exchange rates.                                                    the Subcommittee shall be called at the
                                                                                       request of any member, or at the request of
   4. It shall be the normal practice to                                               the Manager, System Open Market Account
arrange with foreign central banks for the                                             (“Manager”), for the purposes of reviewing
coordination of foreign currency transac-                                              recent or contemplated operations and of
tions. In making operating arrangements                                                consulting with the Manager on other mat-
with foreign central banks on System hold-                                             ters relating to his responsibilities. At the
ings of foreign currencies, the Federal                                                request of any member of the Subcommit-
Reserve Bank of New York shall not com-                                                tee, questions arising from such reviews and
mit itself to maintain any specific balance,                                           consultations shall be referred for determi-
unless authorized by the Federal Open Mar-                                             nation to the Federal Open Market Com-
ket Committee. Any agreements or under-                                                mittee.
standings concerning the administration of
the accounts maintained by the Federal                                                    7. The Chairman is authorized:
Reserve Bank of New York with the foreign                                                    A. With the approval of the Commit-
banks designated by the Board of Governors                                             tee, to enter into any needed agreement or
under Section 214.5 of Regulation N shall                                              understanding with the Secretary of the
be referred for review and approval to the                                             Treasury about the division of responsibility
Committee.                                                                             for foreign currency operations between the
                                                                                       System and the Treasury;
   5. Foreign currency holdings shall be                                                     B. To keep the Secretary of the Trea-
invested to ensure that adequate liquidity is                                          sury fully advised concerning System for-
maintained to meet anticipated needs and so                                            eign currency operations, and to consult
that each currency portfolio shall generally                                           with the Secretary on policy matters relating
have an average duration of no more than 18                                            to foreign currency operations;
months (calculated as Macaulay duration).                                                    C. From time to time, to transmit
Such investments may include buying or                                                 appropriate reports and information to the
selling outright obligations of, or fully guar-                                        National Advisory Council on International
anteed as to principal and interest by, a for-                                         Monetary and Financial Policies.
                                             Minutes of FOMC Meetings, January 229

  8. Staff officers of the Committee are          national Monetary Fund regarding exchange
authorized to transmit pertinent information      arrangements under IMF Article IV.
on System foreign currency operations to
appropriate officials of the Treasury Depart-        By unanimous vote, the Procedural
ment.                                             Instructions with Respect to Foreign
                                                  Currency Operations were reaffirmed in
   9. All Federal Reserve Banks shall par-
ticipate in the foreign currency operations       the form shown below:
for System Account in accordance with
paragraph 3G(1) of the Board of Governors’        Procedural Instructions
Statement of Procedure with Respect to For-
eign Relationships of Federal Reserve
                                                  with respect to
Banks dated January 1, 1944.                      Foreign Currency Operations
                                                  (Reaffirmed January 29, 2008)
   By unanimous vote, the Foreign Cur-
rency Directive was reaffirmed in the                In conducting operations pursuant to the
form shown below:                                 authorization and direction of the Federal
                                                  Open Market Committee as set forth in the
                                                  Authorization for Foreign Currency Opera-
                                                  tions and the Foreign Currency Directive,
Foreign Currency Directive                        the Federal Reserve Bank of New York,
(Reaffirmed January 29, 2008)                     through the Manager, System Open Market
                                                  Account (“Manager”), shall be guided by
   1. System operations in foreign curren-        the following procedural understandings
cies shall generally be directed at countering    with respect to consultations and clearances
disorderly market conditions, provided that       with the Committee, the Foreign Currency
market exchange rates for the U.S. dollar         Subcommittee, and the Chairman of the
reflect actions and behavior consistent with      Committee. All operations undertaken pur-
IMF Article IV, Section 1.                        suant to such clearances shall be reported
   2. To achieve this end the System shall:       promptly to the Committee.
     A. Undertake spot and forward pur-              1. The Manager shall clear with the Sub-
chases and sales of foreign exchange.             committee (or with the Chairman, if the
     B. Maintain reciprocal currency              Chairman believes that consultation with the
(“swap”) arrangements with selected foreign       Subcommittee is not feasible in the time
central banks.                                    available):
     C. Cooperate in other respects with                A. Any operation that would result in a
central banks of other countries and with         change in the System’s overall open posi-
international monetary institutions.              tion in foreign currencies exceeding $300
   3. Transactions may also be undertaken:        million on any day or $600 million since the
     A. To adjust System balances in light        most recent regular meeting of the Commit-
of probable future needs for currencies.          tee.
     B. To provide means for meeting Sys-               B. Any operation that would result in a
tem and Treasury commitments in particular        change on any day in the System’s net posi-
currencies, and to facilitate operations of the   tion in a single foreign currency exceeding
Exchange Stabilization Fund.                      $150 million, or $300 million when the
     C. For such other purposes as may be         operation is associated with repayment of
expressly authorized by the Committee.            swap drawings.
                                                        C. Any operation that might generate a
   4. System foreign currency operations          substantial volume of trading in a particular
shall be conducted:                               currency by the System, even though the
     A. In close and continuous consulta-         change in the System’s net position in that
tion and cooperation with the United States       currency might be less than the limits speci-
Treasury;                                         fied in 1.B.
     B. In cooperation, as appropriate, with            D. Any swap drawing proposed by a
foreign monetary authorities; and                 foreign bank not exceeding the larger of (i)
     C. In a manner consistent with the           $200 million or (ii) 15 percent of the size of
obligations of the United States in the Inter-    the swap arrangement.
230 95th Annual Report, 2008

   2. The Manager shall clear with the           ticeably, with private payroll employ-
Committee (or with the Subcommittee, if          ment posting a small decline in Decem-
the Subcommittee believes that consultation      ber and the unemployment rate rising.
with the full Committee is not feasible in the
time available, or with the Chairman, if the     Readings on both headline and core
Chairman believes that consultation with the     inflation increased in recent months,
Subcommittee is not feasible in the time         although the twelve-month change in
available):                                      prices of core personal consumption
      A. Any operation that would result in a    expenditures in December was about
change in the System’s overall open posi-        the same as its year-earlier value.
tion in foreign currencies exceeding $1.5
billion since the most recent regular meeting
                                                    On average, private nonfarm payroll
of the Committee.                                employment in November and Decem-
      B. Any swap drawing proposed by a          ber rose at only about half of the aver-
foreign bank exceeding the larger of (i)         age pace seen from July to October.
$200 million or (ii) 15 percent of the size of   Over 2007 as a whole, the deterioration
the swap arrangement.                            in labor demand was most pronounced
   3. The Manager shall also consult with        in the construction and financial activi-
the Subcommittee or the Chairman about           ties industries, which had been hardest
proposed swap drawings by the System and         hit by the difficulties in the housing and
about any operations that are not of a rou-      mortgage markets. Manufacturing em-
tine character.
                                                 ployment declined yet again in Decem-
   The Manager of the System Open                ber, while the decrease in employment
Market Account reported on recent                in retail trade nearly reversed the siz-
developments in foreign exchange mar-            able increase in that sector recorded in
kets. There were no open market opera-           November. Aggregate hours of produc-
tions in foreign currencies for the Sys-         tion or nonsupervisory workers were
tem’s account in the period since the            unchanged in December. The unem-
previous meeting. The Manager also               ployment rate rose to 5.0 percent in
reported on developments in domestic             December after having been at or near
financial markets and on System open             4.7 percent since September.
market operations in government secu-               Industrial production declined in the
rities and federal agency obligations            fourth quarter, as a drag from motor
during the period since the previous             vehicles and construction-related indus-
meeting. By unanimous vote, the Com-             tries more than offset a positive contri-
mittee ratified these transactions.              bution from other industries. Output in
   The information reviewed at the Jan-          high-tech industries moderated in the
uary meeting, which included the ad-             fourth quarter, largely because of a
vance data on the national income and            deceleration in production of computers
product accounts for the fourth quarter,         and semiconductors. Utilities output
indicated that economic activity had             climbed for a second consecutive quar-
decelerated sharply in recent months.            ter, and mining output was boosted by
The contraction in homebuilding inten-           increases in natural gas extraction and
sified in the fourth quarter, the growth         in crude oil.
in consumer spending slowed, and sur-               The rise in real consumer spending
vey measures of both consumer and                moderated in the fourth quarter, with
business sentiment were at low levels.           outlays on non-auto consumer goods
In addition, industrial production con-          increasing weakly. Spending on ser-
tracted in the fourth quarter. Conditions        vices rose solidly in November (the
in the labor market deteriorated no-             most recent month available), led by
                                         Minutes of FOMC Meetings, January 231

energy services and commissions paid         last quarter after having posted sizable
to stockbrokers, but warmer-than-usual       gains over the summer. Orders and
temperatures in December likely              shipments rose somewhat in the fourth
damped expenditures for energy ser-          quarter, but imports in the first two
vices in that month. Sales of light motor    months of the quarter were below their
vehicles were moderate during the            average in the third quarter. Nonresi-
fourth quarter. Real disposable personal     dential construction remained vigorous
income was little changed in the fourth      in the fourth quarter. However, indica-
quarter, held down by higher consumer        tors of future spending in this sector
energy prices. Also, the wealth-to-          pointed to a slowdown in coming
income ratio ticked down in the third        months, with a decline in architectural
quarter, and appeared likely to decline      billings, a rise in retail-sector vacancy
again in the fourth quarter, as equity       rates, and survey reports that contrac-
prices had fallen since the end of the       tors were experiencing more difficulty
third quarter and available indicators       in obtaining funding. More generally,
pointed to continued declines in house       surveys of business conditions and sen-
prices in the fourth quarter. In Decem-      timent deteriorated and suggested that
ber, readings on consumer sentiment          capital spending would be reduced in
remained at relatively low levels by his-    the near term.
torical standards.                              Real nonfarm inventory investment
   Both single-family housing starts and     excluding motor vehicles appeared to
permit issuance fell in December.            have stepped up from its average rate
Meanwhile, multifamily housing starts        over the first three quarters of 2007. In
plunged in December, but permit issu-        November, the ratio of manufacturing
ance pointed to a rebound in multifam-       and trade book-value inventories (ex-
ily starts in the near term. New home        cluding motor vehicles) to sales ticked
sales dropped in November and Decem-         down.
ber after having held relatively steady         The U.S. international trade deficit
since August, keeping inventories of         widened slightly in October and then
unsold homes at elevated levels. Sales       more substantially in November, as
of existing homes also moved down in         increases in imports in both months
December but, on balance, had declined       more than offset increases in exports.
less in recent months than sales of new      The increases in imports almost entirely
homes. Demand for housing through            reflected a jump in the value of im-
the end of 2007 likely continued to be       ported oil. Non-oil goods imports were
restrained by tight financing conditions     boosted by a large increase in imports
for jumbo and nonprime mortgages.            of consumer goods and small increases
   Real spending on equipment and            in several other categories, which more
software rose at a sluggish rate in the      than offset a steep decline in imports of
fourth quarter after having posted a         non-oil industrial supplies. Imports of
solid increase in the third quarter. Sales   automotive products and capital goods
of medium and heavy trucks edged up          recorded modest gains, with the in-
after falling to a four-year low. Spend-     crease in capital goods primarily re-
ing on high-tech capital goods increased     flecting a jump in imports of telecom-
at a moderate pace over the second half      munications equipment. Imports of
of last year. Outside of the transporta-     services grew strongly. Exports in both
tion and high-tech sectors, spending on      months were boosted by higher exports
equipment appeared to have declined          of services. Exports of industrial sup-
232 95th Annual Report, 2008

plies also recorded a strong gain, aided     mixed. Economic activity appeared to
by a large increase in exports of fuels in   be strong in Argentina in both the third
November. Higher exports of semicon-         and fourth quarters.
ductors, aircraft, and machinery pushed         In the United States, headline con-
up exports of capital goods, while           sumer price inflation stepped up notice-
exports of agricultural goods increased      ably in November and December from
only slightly following a large jump in      the low rates posted in the summer. Part
the third quarter. In contrast, exports of   of the increase reflected the rapid rise in
consumer goods fell from their third-        energy prices, but prices of core per-
quarter level.                               sonal consumption expenditures (PCE)
   Economic growth in the advanced           also moved up faster in those months
foreign economies appeared to have           than they had earlier in the year. The
slowed in the fourth quarter, with recent    pickup in core PCE inflation over the
data on household expenditures and           second half of 2007 reflected an accel-
retail sales weakening on balance and        eration in prices that had been unusu-
consumers and businesses considerably        ally soft earlier in the year, such as
less upbeat about growth prospects. In       prices for apparel, prescription drugs,
Japan, the estimate of real GDP growth       and nonmarket services. For the year as
in the third quarter was revised down,       a whole, core PCE prices increased at
and business sentiment declined in           about the same rate as they had in 2006.
December amidst concerns about high          Household survey measures of expecta-
oil prices. In the euro area, retail sales   tions for year-ahead inflation picked up
growth declined in October and Nov-          in November and remained at that level
ember, and consumer and business             in December and January. Households’
surveys in November and December             longer-term inflation expectations rose
pointed to economic weakness. In the         in December but ticked down in Janu-
United Kingdom, although real GDP            ary. Average hourly earnings increased
grew solidly in the fourth quarter, the      faster in November and December than
estimate of third-quarter real GDP           they had in October, although over the
growth was revised down. In Canada,          twelve months that ended in December,
indicators suggested that growth in eco-     this wage measure rose a bit more
nomic activity moderated in the fourth       slowly than the elevated pace posted in
quarter. Private employment shrank in        2006.
December after having posted very               At its December meeting, the FOMC
strong growth in November. Incoming          lowered its target for the federal funds
data on emerging-market economies            rate 25 basis points, to 41⁄4 percent. In
pointed, on balance, to a slowing of         addition, the Board of Governors ap-
growth in the fourth quarter. Overall,       proved a decrease of 25 basis points in
growth in emerging Asia appeared to          the discount rate, to 43⁄4 percent, leav-
have moderated somewhat in the fourth        ing the gap between the federal funds
quarter, with trade balances declining in    rate target and the discount rate at
several countries as exports slowed.         50 basis points. The Committee’s state-
Readings on economic activity in Latin       ment noted that incoming information
America were more mixed. Incoming            suggested that economic growth was
data suggested that growth slowed in         slowing, reflecting the intensification of
Mexico in the fourth quarter. In Brazil ,    the housing correction and some soften-
third-quarter growth was solid, but indi-    ing in business and consumer spending.
cators for the fourth quarter were           Moreover, strains in financial markets
                                        Minutes of FOMC Meetings, January 233

had increased in recent weeks. The          ness and additional financial strains
Committee indicated that its action,        would likely require an easier stance of
combined with the policy actions taken      policy. The Committee’s decision to
earlier, should help promote moderate       reduce the target federal funds rate
growth over time. Readings on core          75 basis points on January 22 surprised
inflation had improved modestly during      market participants and led investors to
the year, but elevated energy and com-      mark down further the path of policy
modity prices, among other factors,         over the next few months. Consistent
might put upward pressure on inflation.     with the shift in the economic outlook,
In this context, the Committee judged       the revision in policy expectations, and
that some inflation risk remained and       the reduction in the target federal funds
said that it would continue to monitor      rate, yields on nominal Treasury cou-
inflation developments carefully. Re-       pon securities declined substantially
cent developments, including the dete-      over the period since the December
rioration in financial market conditions,   FOMC meeting. The yield curve steep-
had increased the uncertainty surround-     ened somewhat further, with the two-
ing the outlook for economic growth         year yield dropping more than the
and inflation. The Committee stated         ten-year yield. Near-term inflation com-
that it would continue to assess the        pensation increased in early January
effects of financial and other develop-     amid rising oil prices, but it retreated in
ments on economic prospects and             later weeks, along with oil prices, and
would act as needed to foster price sta-    declined, on net, over the period.
bility and sustainable economic growth.        Conditions in short-term funding
   Over the intermeeting period, the        markets improved notably over the inter-
expected path of monetary policy over       meeting period, but strains remained.
the next year as measured by money          Spreads of rates on securities in inter-
market futures rates tilted down sharply,   bank funding markets over risk-free
primarily in response to softer-than-       rates narrowed somewhat following the
expected economic data releases. The        announcement of the TAF on December
Committee’s action at its December          12 and eased considerably after year-
meeting was largely anticipated by mar-     end, although they remained at some-
ket participants, although some inves-      what elevated levels. Spreads of rates
tors were surprised by the absence of       on asset-backed commercial paper over
any indication of accompanying mea-         risk-free rates also fell, on net, and the
sures to address strains in term funding    level of such paper outstanding in-
markets. Some of that surprise was          creased in the first two weeks of Janu-
reversed the next day, following the        ary for the first time since August. In
announcement of a Term Auction Facil-       longer-term corporate markets, yields
ity (TAF) and associated swap lines         on investment-grade corporate bonds
with the European Central Bank and the      fell less than those on comparable-
Swiss National Bank. The subsequent         maturity Treasury securities, while
release of the minutes of the meeting       yields on speculative-grade bonds rose
elicited little market reaction. However,   considerably. As a result, corporate
investors did mark down the expected        bond spreads climbed to their highest
path of policy in response to speeches      levels since early 2003, apparently
by Federal Reserve officials; the           reflecting increased concern among in-
speeches were interpreted as suggesting     vestors about the outlook for corporate
that signs of broader economic weak-        credit quality over the next few years.
234 95th Annual Report, 2008

Nonetheless, gross bond issuance in         institutions offered attractive deposit
December remained strong. Commer-           rates to secure funding. In contrast, liq-
cial bank credit expanded briskly in        uid deposits continued to increase
December, supported by robust growth        weakly and currency contracted notice-
in business loans and in nonmortgage        ably, the latter apparently reflecting an
loans to households, and in the face of     ongoing trend in overseas demand away
survey reports of tighter lending condi-    from U.S. dollar bank notes and towards
tions. Over the intermeeting period,        the euro and other currencies.
spreads on conforming mortgages over           In the forecast prepared for this meet-
comparable-maturity Treasury securi-        ing, the staff revised up slightly its esti-
ties remained about flat, as did spreads    mated increase in aggregate economic
on jumbo mortgages, although credit         activity in the fourth quarter of 2007
availability for jumbo-mortgage bor-        but revised down its projected increase
rowers continued to be tight. Broad         for the first half of 2008. Although data
stock price indexes fell over the inter-    on consumer spending and nonresiden-
meeting period on perceptions of a          tial construction activity for the fourth
deteriorating economic outlook and          quarter had come in above the staff’s
additional write-downs by financial in-     expectations, most of the information
stitutions. Similar stresses were again     received over the intermeeting period
evident in the financial markets of         was weaker than had been previously
major foreign economies. The trade-         expected. The drop in housing activity
weighted foreign exchange value of the      continued to intensify, conditions in
dollar against major currencies declined    labor markets appeared to have deterio-
slightly, on balance, over the intermeet-   rated noticeably near year-end, and fac-
ing period.                                 tory output had weakened. Consumer
   Debt in the domestic nonfinancial        confidence remained low, and indica-
sector was estimated to have increased      tors of business sentiment had wors-
somewhat more slowly in the fourth          ened. Equity prices had also fallen
quarter than in the third. The rate of      sharply so far in 2008, and, while the
increase of nonfinancial business debt      functioning of money markets had
decelerated in the fourth quarter from      improved, conditions in some other
its rapid third-quarter pace despite        financial markets had become more
robust bond issuance as the rise in com-    restrictive. The staff projection showed
mercial and industrial lending moder-       the weakness in spending dissipating
ated. Household mortgage debt ex-           over the second half of 2008 and 2009,
panded at a slow rate in the fourth         in response to the cumulative easing of
quarter, reflecting continued weakness      monetary policy since August, the
in home prices, declining home sales,       abatement of housing weakness, a less-
and tighter credit conditions for some      ening drag from high oil prices, and the
borrowers. Nonmortgage consumer cre-        prospect of fiscal stimulus. Still, pro-
dit appeared to expand at a moderate        jected resource utilization was lower
pace. In December, the increase in M2       over the next two years than in the pre-
was up slightly from its November           vious forecast. The projection for core
pace, boosted primarily by inflows into     PCE price inflation in 2008 was raised
the relative safety and liquidity of        slightly in response to elevated readings
money market mutual funds. The rise in      in recent months. The forecast for head-
small time deposits moderated but           line PCE price inflation also incorpo-
remained elevated, as several thrift        rated a somewhat higher rate of in-
                                          Minutes of FOMC Meetings, January 235

crease for energy prices for the first half   activity and house prices still declining
of 2008; as a result, headline PCE price      and with financial conditions for busi-
inflation was now expected to exceed          nesses and households tightening fur-
core PCE price inflation slightly for that    ther, significant uncertainties sur-
year. The forecasts for both headline         rounded this outlook and the risks to
and core PCE price inflation for 2009         economic growth in the near term
were unchanged, with both receding            appeared to be weighted to the down-
from their 2008 levels.                       side. Indeed, several participants noted
   In conjunction with the FOMC meet-         that the risks of a downturn in the econ-
ing in January, all meeting participants      omy were significant. Inflation data had
(Federal Reserve Board members and            been disappointing in recent months,
Reserve Bank presidents) provided an-         and a few participants cited anecdotal
nual projections for economic growth,         reports that some firms were able to
unemployment, and inflation for the           pass on costs to consumers. However,
period 2008 through 2010. The projec-         with inflation expectations anticipated
tions are described in the Summary of         to remain reasonably well anchored,
Economic Projections, which is at-            energy and other commodity prices
tached as an addendum to these min-           expected to flatten out, and pressures on
utes.                                         resources likely to ease, participants
   In their discussion of the economic        generally expected inflation to moder-
situation and outlook, and in the projec-     ate somewhat in coming quarters.
tions that they had submitted for this           Meeting participants observed that
meeting, participants noted that infor-       conditions in short-term funding mar-
mation received since the December            kets had improved considerably since
meeting had been decidedly downbeat           the December meeting, reflecting the
on balance. In particular, the drop in        easing of pressures related to funding
housing activity had intensified, factory     around the turn of the year as well as
output had weakened, news on business         the implementation of the TAF. How-
investment had been soft, and condi-          ever, broader financial conditions had
tions in labor markets appeared to have       tightened significantly, on balance, in
deteriorated. In addition, consumer con-      the weeks leading up to the meeting, as
fidence had remained low and business         evidence of further deterioration in
confidence appeared to have worsened.         housing markets and investors’ more
Although the functioning of money             pessimistic view of the economic out-
markets had improved notably, strains         look adversely affected a range of
remained evident in a number of other         financial markets. Many participants
financial markets, and credit conditions      were concerned that the drop in equity
had become generally more restrictive.        prices, coupled with the ongoing de-
Against this backdrop, participants           cline in house prices, implied reduc-
expected economic growth to remain            tions in household wealth that would
weak in the first half of this year before    likely damp consumer spending. More-
picking up in the second half, aided in       over, elevated volatility in financial
part by a more accommodative stance           markets likely reflected increased un-
of monetary policy and by likely fiscal       certainty about the economic outlook,
stimulus. Further ahead, participants         and that greater uncertainty could lead
judged that economic growth would             firms and households to limit spending.
continue to pick up gradually in 2009         The availability of credit to consumers
and 2010. Nonetheless, with housing           and businesses appeared to be tighten-
236 95th Annual Report, 2008

ing, likely adding to restraint on eco-      the rates on outstanding adjustable-rate
nomic growth. Participants discussed         mortgages, both of which would tend to
the risks to financial markets and insti-    improve some households’ finances.
tutions posed by possible further dete-      Nonetheless, participants viewed the
rioration in the condition of financial      housing situation and its potential fur-
guarantors, and many perceived a possi-      ther effect on employment, income, and
bility that additional downgrades in         wealth as one of the major sources of
these firms’ credit ratings could put        downside risk to the economic outlook.
increased strains on financial markets.         Recent data as well as anecdotal
To be sure, some positive financial          information indicated that consumer
developments were evident. Banks ap-         spending had decelerated considerably,
peared to be making some progress in         perhaps partly reflecting a spillover
strengthening their balance sheets, with     from the weakness in the housing sec-
several financial institutions able to       tor. Participants remarked that declining
raise significant amounts of capital to      house prices and sales appeared to be
offset the large losses they had suffered    depressing consumer sentiment and that
in recent quarters. Nevertheless, partici-   the contraction in wealth associated
pants generally viewed financial mar-        with decreases in home and equity
kets as still vulnerable to additional       prices probably was restraining spend-
economic and credit weakness. Some           ing. In addition, consumption expendi-
noted the especially worrisome possi-        tures were being damped by slower
bility of an adverse feedback loop, that     growth in real disposable income in-
is, a situation in which a tightening of     duced by high energy prices and possi-
credit conditions could depress invest-      bly by a softening of the labor market.
ment and consumer spending, which, in        The December employment report
turn, could feed back to a further tight-    showed that job growth had slowed
ening of credit conditions.                  appreciably, and other indicators also
   In their discussion of individual sec-    pointed to emerging weakness in the
tors of the economy, meeting partici-        labor market in the intermeeting period.
pants emphasized that activity in hous-      And spending in the future could be
ing markets had continued to deteriorate     affected by an ongoing tightening in the
sharply. With single-family permits and      availability of consumer credit amid
starts still falling, sales of new homes     signs that lenders were becoming
dropping precipitously, sales of existing    increasingly cautious in view of some
homes flat, and inventories of unsold        deterioration of credit performance on
homes remaining elevated even in the         consumer loans and widening expecta-
face of falling house prices, several par-   tions of slower income growth. Some
ticipants noted the absence of signs of      participants, however, cited evidence
stabilization in the sector. Of further      that workers in some sectors were still
concern were the reduced availability of     in short supply and saw signs that the
nonconforming loans and the apparent         labor market remained resilient.
tightening by banks of credit standards         The outlook for business investment
on mortgages, both of which had the          had turned weaker as well since the
potential for intensifying the housing       time of the December meeting. Several
contraction. The recent declines in          participants reported that firms in their
interest rates had spurred a surge in        districts were reducing capital expendi-
applications for mortgage refinancing        tures in anticipation of a slowing in
and would limit the upward resets on         sales. Manufacturing activity appeared
                                        Minutes of FOMC Meetings, January 237

to have slowed or contracted in many        domestic spending was slackening, it
districts. Although a few participants      could also damp commodity prices and
reported more upbeat attitudes among        help reduce global price pressures.
firms in the technology and energy             Participants agreed that the inflation
sectors, business sentiment overall ap-     data that were received since the De-
peared to be declining. Moreover, a         cember meeting had been disappoint-
number of indicators pointed to a tight-    ing. But many believed that the slow
ening in credit availability to busi-       growth in economic activity anticipated
nesses. For example, the Senior Loan        for the first half of this year and the
Officer Opinion Survey on Bank Lend-        associated slack in resource utilization
ing Practices indicated that banks had      would contribute to an easing of price
tightened lending standards and pricing     pressures. Moreover, a leveling-off of
terms on business loans. Lending stan-      energy and commodity prices such as
dards had been raised especially sharply    that embedded in futures markets would
on commercial real estate loans. While      also help moderate inflation pressures.
real outlays for nonresidential construc-   However, some participants cautioned
tion apparently continued to rise           that commodity prices had remained
through the fourth quarter, anecdotal       stubbornly high for quite some time and
evidence pointed to a weakening of          that inferences drawn in the past from
commercial real estate spending in sev-     futures markets about likely trends in
eral districts, with some projects being    such prices had often proven inaccurate.
canceled or scaled back.                    Participants also related anecdotal evi-
   Most participants anticipated that a     dence of firms facing increasing input
fiscal stimulus package, including tax      cost pressures and in some cases being
rebates for households and bonus de-        able to pass on those costs to consum-
preciation allowances for businesses,       ers. Moreover, headline inflation had
would be enacted before long and            been generally above 2 percent over the
would support economic growth in the        past four years, and participants noted
second half of the year. Some pointed       that such persistently elevated readings
out, however, that the fiscal stimulus      could ultimately affect inflation expec-
package might not help in the near          tations. Some survey measures of infla-
term, when the risks of a downturn in       tion expectations had edged up in recent
economic activity appeared largest. In      months, and longer-term financial mar-
addition, the effects of the proposed       ket gauges of inflation compensation
package would likely be temporary,          had climbed. The latter probably re-
with the stimulus reversing in 2009.        flected at least in part increased un-
   With regard to the external sector,      certainty—inflation risk—rather than
some participants noted that growth         greater inflation expectations; increases
abroad had recently been strong and         in nominal wages did not appear to be
that increasing U.S. exports had been a     incorporating higher inflation expecta-
significant source of strength for the      tions. On balance, expectations seemed
U.S. economy of late. However, avail-       to remain fairly well anchored, but par-
able data suggested that economic           ticipants agreed that continued stability
activity outside the United States ap-      of inflation expectations was essential.
peared to be decelerating somewhat.            In the discussion of monetary policy
Although slowing foreign growth             for the intermeeting period, most mem-
would reduce a source of support for        bers believed that a further significant
the U.S. economy at the same time that      easing in policy was warranted at this
238 95th Annual Report, 2008

meeting to address the considerable           recent information pointed to a deepen-
worsening of the economic outlook             ing of the housing contraction as well
since December as well as increased           as to some softening in labor markets.
downside risks. As had been the case in       The Committee again viewed it as ap-
some previous cyclical episodes, a rela-      propriate to indicate that it expected
tively low real federal funds rate now        inflation to moderate in coming quarters
appeared appropriate for a time to            but also to emphasize that it would be
counter the factors that were restraining     necessary to monitor inflation develop-
economic growth, including the slide in       ments carefully. The action taken at the
housing activity and prices, the tighten-     meeting, combined with the cumulative
ing of credit availability, and the drop in   policy easing already in place, should
equity prices. Members judged that a          help to promote moderate growth over
50 basis point reduction in the federal       time and to mitigate the risks to eco-
funds rate, together with the Commit-         nomic activity. However, members con-
tee’s previous policy actions, would          curred that downside risks to growth re-
bring the real short-term rate to a level     mained, and that the Committee would
that was likely to help the economy           continue to assess the effects of finan-
expand at a moderate pace over time.          cial and other developments on eco-
Still, with no signs of stabilization in      nomic prospects and would act in a
the housing sector and with financial         timely manner as needed to address
conditions not yet stabilized, the Com-       those risks.
mittee agreed that downside risks to             At the conclusion of the discussion,
growth would remain even after this           the Committee voted to authorize and
action. Members were also mindful of          direct the Federal Reserve Bank of New
the need for policy to promote price sta-     York, until it was instructed otherwise,
bility, and some noted that, when pros-       to execute transactions in the System
pects for growth had improved, a              Account in accordance with the follow-
reversal of a portion of the recent eas-      ing domestic policy directive:
ing actions, possibly even a rapid re-
versal, might be appropriate. However,           The Federal Open Market Committee
most members agreed that a 50 basis           seeks monetary and financial conditions that
point easing at this meeting would            will foster price stability and promote sus-
likely not contribute to an increase in       tainable growth in output. To further its
                                              long-run objectives, the Committee in the
inflation pressures given the actual and      immediate future seeks conditions in reserve
expected weakness in economic growth          markets consistent with reducing the federal
and the consequent reduction in pres-         funds rate to an average of around 3 percent.
sures on resources. Rather, members
agreed that inflation was likely to mod-         The vote encompassed approval of
erate in coming quarters, but they also       the statement below to be released at
concurred that it would be necessary to       2:15 p.m.:
continue to monitor inflation develop-           The Federal Open Market Committee
ments carefully.                              decided today to lower its target for the fed-
   The Committee agreed that the state-       eral funds rate 50 basis points to 3 percent.
ment to be released after the meeting            Financial markets remain under consider-
should indicate that financial markets        able stress, and credit has tightened further
                                              for some businesses and households. More-
remained under considerable stress, that      over, recent information indicates a deepen-
credit had tightened further for some         ing of the housing contraction as well as
businesses and households, and that           some softening in labor markets.
                                           Minutes of FOMC Meetings, January 239

   The Committee expects inflation to mod-      before it would have its full effect on
erate in coming quarters, but it will be nec-   the economy.
essary to continue to monitor inflation            The Committee then turned to a dis-
developments carefully.
   Today’s policy action, combined with         cussion of selected longer-term regula-
those taken earlier, should help to promote     tory and structural issues raised by
moderate growth over time and to mitigate       recent financial market developments.
the risks to economic activity. However,        A staff presentation began by noting
downside risks to growth remain. The Com-       that the difficulties in financial markets
mittee will continue to assess the effects of
financial and other developments on eco-        started with unexpectedly heavy losses
nomic prospects and will act in a timely        on subprime mortgages and related
manner as needed to address those risks.        structured securities, which led inves-
    Votes for this action: Messrs. Ber-         tors to question the valuations of com-
    nanke, Geithner, Kohn, Kroszner, and        plex structured instruments more gen-
    Mishkin, Ms. Pianalto, Messrs. Plosser,     erally and to pull back from such
    Stern, and Warsh. Votes against this        investments. The resulting effects in
    action: Mr. Fisher.                         markets put pressure on some large
   Mr. Fisher dissented because he pre-         banking organizations, particularly
ferred to leave the federal funds rate          through losses on subprime-mortgage-
unchanged. The rate had been lowered            related securities and other assets, and
by 75 basis points just one week earlier        through the unplanned expansion of
in a decision he supported, which               balance sheets triggered by the disrup-
brought the funds rate down 175 basis           tion of various markets in which assets
points since September. Given these             were securitized. The remainder of the
actions, he felt that monetary policy           presentation, and the discussion by
was already quite stimulative, while            meeting participants, focused on two
headline inflation was too high at more         issues: first, the important role of credit
than 3 percent over the last year.              ratings in the securitization process,
Demand-pull inflation pressures from            including the methods used to set rat-
emerging-market economies abroad                ings and the way investors use ratings
appeared to be continuing, and anec-            in making their investment decisions;
dotal reports from business contacts            and second, how weaknesses in risk
suggested greater willingness domesti-          management practices at some large
cally to pass rising costs through to           global financial services organizations
prices. Moreover, Mr. Fisher was con-           appear to have led to outsized losses at
cerned that inflation expectations could        those institutions, and the reasons that
become unanchored if the perception of          such weaknesses may have emerged at
negative real rates of interest were to         some firms and not at others.
become pervasive. At the same time,                It was agreed that the next meeting of
the economy appeared to be still grow-          the Committee would be held on Tues-
ing, albeit at a substantially weakened         day, March 18, 2008.
pace. Given the policy tradeoffs con-              The meeting adjourned at 1:15 p.m.
fronting the FOMC at this time, Mr.
Fisher saw the upside risks to inflation        Notation Vote
as being greater than the downside risks
to longer-term economic growth, espe-           By notation vote completed on Decem-
cially in light of the recent, aggressive       ber 31, 2007, the Committee unani-
easing of monetary policy and the lag           mously approved the minutes of the
240 95th Annual Report, 2008

FOMC meeting held on December 11,           weakening. Among other develop-
2007.                                       ments, strains in some financial markets
                                            had intensified, as it appeared that
Conference Calls                            investors were becoming increasingly
                                            concerned about the economic outlook
On January 9, 2008, the Committee           and the downside risks to activity. Par-
reviewed recent economic data and           ticipants discussed the possibility that
financial market developments. The          these developments could lead to an
available information suggested that the    excessive pull-back in credit availabil-
downside risks to growth had increased      ity and in investment. Although infla-
significantly since the time of the         tion was expected to moderate from
December FOMC meeting. Participants         recent elevated levels, participants
discussed the possibility that the slow-    stressed that this outlook relied upon
ing in economic growth and associated       inflation expectations remaining well
softening in labor markets might exac-      anchored and that the inflation situation
erbate the tightening in credit condi-      should continue to be monitored care-
tions and the correction in housing mar-    fully.
ket activity and prices, which could in        All members judged that a substantial
turn weigh further on economic activity.    easing in policy in the near term was
Participants emphasized the risks that      appropriate to foster moderate eco-
such adverse dynamics could pose to         nomic growth and reduce the downside
economic and financial stability.           risks to economic activity. Most mem-
   Participants noted that core price in-   bers judged that an immediate reduction
flation had edged up in recent months,      in the federal funds rate was called for
boosted in part by the pass-through of      to begin aligning the real policy rate
higher energy costs to the prices of core   with a weakening economic situation.
consumer goods and services. Inflation      Such an action, by demonstrating the
was expected to edge lower this year as     Committee’s commitment to act deci-
energy prices leveled off and pressures     sively to support economic activity,
on resources eased. However, this slow-     might reduce concerns about economic
ing in inflation was dependent on infla-    prospects that seemed to be contributing
tion expectations remaining well an-        to the deteriorating conditions in finan-
chored, and participants noted that         cial markets, which could feed back on
considerable uncertainty surrounded the     the economy. However, some concern
inflation outlook.                          was expressed that an immediate policy
   Most participants were of the view       action could be misinterpreted as di-
that substantial additional policy easing   rected at recent declines in stock prices,
in the near term might well be neces-       rather than the broader economic out-
sary to promote moderate economic           look, and one member believed it pref-
growth over time and to reduce the          erable to delay policy action until the
downside risks to growth, and partici-      scheduled FOMC meeting on January
pants discussed the possible timing of      29–30. Some members also noted that
such policy actions.                        were policy to become very stimulative
   On January 21, 2008, the Committee       it would be important for the Commit-
again met by conference call. Incoming      tee to be decisive in reversing the
information since the conference call on    course of interest rates once the econ-
January 9 had reinforced the view that      omy had strengthened and downside
the outlook for economic activity was       risks had abated.
                                           Minutes of FOMC Meetings, January 241

   At the conclusion of the discussion,         fied policy action before the regularly
the Committee voted to authorize and            scheduled meeting the following week.
direct the Federal Reserve Bank of New
                                                                       Brian F. Madigan
York, until it was instructed otherwise,
                                                                               Secretary
to execute transactions in the System
Account in accordance with the follow-
ing domestic policy directive:                  Addendum:
   The Federal Open Market Committee            Summary of Economic Projections
seeks monetary and financial conditions that
will foster price stability and promote sus-    In conjunction with the January 2008
tainable growth in output. To further its       FOMC meeting, the members of the
long-run objectives, the Committee in the       Board of Governors and the presidents
immediate future seeks conditions in reserve    of the Federal Reserve Banks, all of
markets consistent with reducing the federal    whom participate in the deliberations of
funds rate to an average of around 31⁄2 per-    the FOMC, provided projections for
cent.
                                                economic growth, unemployment, and
   The vote encompassed approval of             inflation in 2008, 2009, and 2010. Pro-
the text below for inclusion in the state-      jections were based on information
ment to be released at 8:30 a.m. on             available through the conclusion of the
Tuesday, January 22:                            January meeting, on each participant’s
                                                assumptions regarding a range of fac-
   The Federal Open Market Committee has
decided to lower its target for the federal     tors likely to affect economic outcomes,
funds rate 75 basis points to 31⁄2 percent.     and on his or her assessment of appro-
   The Committee took this action in view       priate monetary policy. “Appropriate
of a weakening of the economic outlook and      monetary policy” is defined as the
increasing downside risks to growth. While      future policy that, based on current
strains in short-term funding markets have      information, is deemed most likely to
eased somewhat, broader financial market
conditions have continued to deteriorate and    foster outcomes for economic activity
credit has tightened further for some busi-     and inflation that best satisfy the par-
nesses and households. Moreover, incoming       ticipant’s interpretation of the Federal
information indicates a deepening of the        Reserve’s dual objectives of maximum
housing contraction as well as some soften-     employment and price stability.
ing in labor markets.
   The Committee expects inflation to mod-         The projections, which are summa-
erate in coming quarters, but it will be nec-   rized in table 1 and chart 1, suggest that
essary to continue to monitor inflation         FOMC participants expected that output
developments carefully.                         would grow at a pace appreciably
   Appreciable downside risks to growth         below its trend rate in 2008, owing pri-
remain. The Committee will continue to
assess the effects of financial and other       marily to a deepening of the housing
developments on economic prospects and          contraction and a tightening in the
will act in a timely manner as needed to        availability of household and business
address those risks.                            credit, and that the unemployment rate
    Votes for this action: Messrs. Ber-         would increase somewhat. Given the
    nanke, Geithner, Evans, Hoenig, Kohn,       substantial reductions in the target fed-
    Kroszner, Rosengren, and Warsh. Votes       eral funds rate through the January
    against this action: Mr. Poole. Absent      FOMC meeting as well as the assump-
    and not voting: Mr. Mishkin
                                                tion of appropriate policy going for-
  Mr. Poole dissented because he did            ward, output growth further ahead was
not believe that current conditions justi-      projected to pick up to a pace around or
242 95th Annual Report, 2008

Table 1. Economic Projections of Federal Reserve Governors and Reserve Bank Presidents
                Percent

                                                          2008                         2009                        2010
Central Tendency1
  Growth of real GDP . . . . . . . . . . . . .          1.3   to   2.0               2.1   to   2.7              2.5   to   3.0
    October projections . . . . . . . . . . .           1.8   to   2.5               2.3   to   2.7              2.5   to   2.6
  Unemployment rate . . . . . . . . . . . . . .         5.2   to   5.3               5.0   to   5.3              4.9   to   5.1
    October projections . . . . . . . . . . .           4.8   to   4.9               4.8   to   4.9              4.7   to   4.9
  PCE inflation . . . . . . . . . . . . . . . . . . .   2.1   to   2.4               1.7   to   2.0              1.7   to   2.0
    October projections . . . . . . . . . . .           1.8   to   2.1               1.7   to   2.0              1.6   to   1.9
  Core PCE inflation . . . . . . . . . . . . . .        2.0   to   2.2               1.7   to   2.0              1.7   to   1.9
    October projections . . . . . . . . . . .           1.7   to   1.9               1.7   to   1.9              1.6   to   1.9
Range2
  Growth of real GDP . . . . . . . . . . . . .          1.0   to   2.2               1.8   to   3.2              2.2   to   3.2
    October projections . . . . . . . . . . .           1.6   to   2.6               2.0   to   2.8              2.2   to   2.7
  Unemployment rate . . . . . . . . . . . . . .         5.0   to   5.5               4.9   to   5.7              4.7   to   5.4
    October projections . . . . . . . . . . .           4.6   to   5.0               4.6   to   5.0              4.6   to   5.0
  PCE inflation . . . . . . . . . . . . . . . . . . .   2.0   to   2.8               1.7   to   2.3              1.5   to   2.0
    October projections . . . . . . . . . . .           1.7   to   2.3               1.5   to   2.2              1.5   to   2.0
  Core PCE inflation . . . . . . . . . . . . . .        1.9   to   2.3               1.7   to   2.2              1.4   to   2.0
    October projections . . . . . . . . . . .           1.7   to   2.0               1.5   to   2.0              1.5   to   2.0

   Note: Projections of the growth of real GDP, of PCE                   ployment rate in the fourth quarter of the year indicated.
inflation, and of core PCE inflation are percent changes                 Each participant’s projections are based on his or her
from the fourth quarter of the previous year to the fourth               assessment of appropriate monetary policy.
quarter of the year indicated. PCE inflation and core PCE                   1. The central tendency excludes the three highest and
inflation are the percentage rates of change in, respec-                 three lowest projections for each variable in each year.
tively, the price index for personal consumption expendi-                   2. The range for a variable in a given year includes all
tures and the price index for personal consumption                       participants’ projections, from lowest to highest, for that
expenditures excluding food and energy. Projections for                  variable in that year.
the unemployment rate are for the average civilian unem-



a bit above its long-run trend by 2010.                                  of the projections provided in conjunc-
Inflation was expected to decline in                                     tion with the October FOMC meeting,
2008 and 2009 from its recent elevated                                   which was 1.8 to 2.5 percent. These
levels as energy prices leveled out and                                  downward revisions to the 2008 outlook
economic slack contained cost and price                                  stemmed from a number of factors,
increases. Most participants judged that                                 including a further intensification of the
considerable uncertainty surrounded                                      housing market correction, tighter credit
their projections for output growth and                                  conditions amid increased concerns
viewed the risks to their forecasts as                                   about credit quality and ongoing tur-
weighted to the downside. A majority                                     moil in financial markets, and higher
of participants viewed the risks to the                                  oil prices. However, some participants
inflation outlook as broadly balanced,                                   noted that a fiscal stimulus package
but a number of participants saw the                                     would likely provide a temporary boost
risks to inflation as skewed to the                                      to domestic demand in the second half
upside.                                                                  of this year. Beyond 2008, a number of
                                                                         factors were projected to buoy eco-
The Outlook                                                              nomic growth, including a gradual turn-
The central tendency of participants’                                    around in housing markets, lower inter-
projections for real GDP growth in                                       est rates associated with the substantial
2008, at 1.3 to 2.0 percent, was consid-                                 easing of monetary policy to date and
erably lower than the central tendency                                   appropriate adjustments to policy going
                                       Minutes of FOMC Meetings, January 243




forward, and an anticipated reduction in      With output growth running below
financial market strains. Real GDP was     trend over the next year or so, most par-
expected to accelerate somewhat in         ticipants expected that the unemploy-
2009 and by 2010 to expand at or a         ment rate would edge higher. The
little above participants’ estimates of    central tendency of participants’ projec-
the rate of trend growth.                  tions for the average rate of unemploy-
244 95th Annual Report, 2008

ment in the fourth quarter of 2008 was       to their longer-run sustainable or opti-
5.2 to 5.3 percent, above the 4.8 to         mal levels. Consequently, the rate of
4.9 percent unemployment rate fore-          unemployment was projected by some
casted in October and broadly sugges-        participants to remain slightly above its
tive of some slack in labor markets. The     longer-run sustainable level even in
unemployment rate was generally ex-          2010, and inflation was judged likely
pected to change relatively little in 2009   still to be a bit above levels that some
and then to edge lower in 2010 as out-       participants judged would be consistent
put growth picks up, although in both        with the Federal Reserve’s dual man-
years the unemployment rate was pro-         date.
jected to be a little higher than had been
anticipated in October.
                                             Risks to the Outlook
   The higher-than-expected rates of
overall and core inflation since October,    Most participants viewed the risks to
which were driven in part by the steep       their GDP projections as weighted to
run-up in oil prices, had caused partici-    the downside and the associated risks to
pants to revise up somewhat their pro-       their projections of unemployment as
jections for inflation in the near term.     tilted to the upside. The possibility that
The central tendency of participants’        house prices could decline more steeply
projections for core PCE inflation in        than anticipated, further reducing house-
2008 was 2.0 to 2.2 percent, up from         holds’ wealth and access to credit, was
the 1.7 to 1.9 percent central tendency      perceived as a significant risk to the
in October. However, core inflation was      central outlook for economic growth
expected to moderate over the next two       and employment. In addition, despite
years, reflecting muted pressures on         some recovery in money markets after
resources and fairly well-anchored in-       the turn of the year, financial market
flation expectations. Overall PCE infla-     conditions continued to be strained—
tion was projected to decline from its       stock prices had declined sharply since
current elevated rate over the coming        the December meeting, concerns about
year, largely reflecting the assumption      further potential losses at major finan-
that energy and food prices would flat-      cial institutions had mounted amid wor-
ten out. Thereafter, overall PCE infla-      ries about the condition of financial
tion was projected to move largely in        guarantors, and credit conditions had
step with core PCE inflation.                tightened in general for both households
   Participants’ projections for 2010        and firms. The potential for adverse
were importantly influenced by their         interactions, in which weaker economic
judgments about the measured rates of        activity could lead to a worsening of fi-
inflation consistent with the Federal        nancial conditions and a reduced avail-
Reserve’s dual mandate to promote            ability of credit, which in turn could
maximum employment and price stabil-         further damp economic growth, was
ity and about the time frame over which      viewed as an especially worrisome
policy should aim to attain those rates      possibility.
given current economic conditions.               Regarding risks to the inflation out-
Many participants judged that, given         look, several participants pointed to the
the recent adverse shocks to both ag-        possibility that real activity could re-
gregate demand and inflation, policy         bound less vigorously than projected,
would be able to foster only a gradual       leading to more downward pressure on
return of key macroeconomic variables        costs and prices than anticipated. How-
                                                Minutes of FOMC Meetings, January 245

ever, participants also saw a number of              Table 2. Average Historical Projection Error
upside risks to inflation. In particular,                     Ranges
the pass-through of recent increases in                               Percentage points
energy and commodity prices as well as                                                      2008   2009   2010
of past dollar depreciation to consumer                           1
                                                     Real GDP . . . . . . . . . . . . . .   ±1.2   ±1.4   ±1.4
prices could be greater than expected.               Unemployment rate2 . . . . .           ±0.5   ±0.8   ±1.0
                                                     Total consumer prices3 . . .           ±1.0   ±1.0   ±0.9
In addition, participants recognized a
risk that inflation expectations could                  Note: Error ranges shown are measured as plus or
become less firmly anchored if the cur-              minus the root mean squared error of projections that
                                                     were released in the winter from 1986 through 2006 for
rent elevated rates of inflation persisted           the current and following two years by various private
for longer than anticipated or if the                and government forecasters. As described in the box
                                                     “Forecast Uncertainty,” under certain assumptions, there
recent substantial easing in monetary                is about a 70 percent probability that actual outcomes for
policy was misinterpreted as reflecting              real GDP, unemployment, and consumer prices will be in
less resolve among Committee mem-                    ranges implied by the average size of projection errors
                                                     made in the past. Further information is in David Reif-
bers to maintain low and stable infla-               schneider and Peter Tulip (2007), “Gauging the Uncer-
tion. On balance, a larger number of                 tainty of the Economic Outlook from Historical Forecast-
participants than in October viewed the              ing Errors,” Finance and Economics Discussion Series
                                                     #2007-60 (November).
risks to their inflation forecasts as                   1. Projection is percent change, fourth quarter of the
broadly balanced, although several par-              previous year to fourth quarter of the year indicated.
                                                        2. Projection is the fourth quarter average of the civil-
ticipants continued to indicate that their           ian unemployment rate (percent).
inflation projections were skewed to the                3. Measure is the overall consumer price index, the
upside.                                              price measure that has been most widely used in govern-
                                                     ment and private economic forecasts. Projection is per-
   The ongoing financial market turbu-               cent change, fourth quarter of the previous year to the
lence and tightening of credit conditions            fourth quarter of the year indicated. The slightly nar-
had increased participants’ uncertainty              rower estimated width of the confidence interval for
                                                     inflation in the third year compared with those for the
about the outlook for economic activity.             second and third years is likely the result of using a lim-
Most participants judged that the uncer-             ited sample period for computing these statistics.
tainty attending their January projec-
tions for real GDP growth and for the                Diversity of Participants’ Views
unemployment rate was above typical                  Charts 2(a) and 2(b) provide more
levels seen in the past. (Table 2 pro-               detail on the diversity of participants’
vides an estimate of average ranges of               views. The dispersion of participants’
forecast uncertainty for GDP growth,                 projections for real GDP growth was
unemployment, and inflation over the                 markedly wider than in the forecasts
past twenty years.5) In contrast, the un-            submitted in October, which in turn
certainty attached to participants’ infla-           were considerably more diverse than
tion projections was generally viewed                those submitted in conjunction with the
as being broadly in line with past expe-             June FOMC meeting and included in
rience, although several participants                the Board’s Monetary Policy Report to
judged that the degree of uncertainty                the Congress in July. Mirroring the
about inflation was higher than normal.              increase in diversity of views on real
                                                     GDP growth, the dispersion of partici-
                                                     pants’ projections for the rate of unem-
   5. The box “Forecast Uncertainty” at the end      ployment also widened notably, particu-
of this summary discusses the sources and inter-     larly for 2009 and 2010. The dispersion
pretation of uncertainty in economic forecasts and
explains the approach used to assess the uncer-
                                                     of projections for output and employ-
tainty and risks attending participants’ projec-     ment seemed largely to reflect differing
tions.                                               assessments of the effect of financial
246 95th Annual Report, 2008




market conditions on real activity, the   maximum employment. Views also dif-
speed with which credit conditions        fered about the pace at which output
might improve, and the depth and dura-    and employment would recover toward
tion of the housing market contraction.   those levels over the forecast horizon
The dispersion of participants’ longer-   and beyond, given appropriate mone-
term projections was also affected to     tary policy. The dispersion of the pro-
some degree by differences in their       jections for PCE inflation in the near
judgments about the economy’s trend       term partly reflected different views on
growth rate and the unemployment rate     the extent to which recent increases in
that would be consistent over time with   energy and other commodity prices
                                       Minutes of FOMC Meetings, January 247




would pass through into higher con-        views of the rate of inflation consistent
sumer prices and on the influence that     with the Federal Reserve’s dual objec-
inflation expectations would exert on      tives and the time it would take to
inflation over the short and medium        achieve these goals given current
run. Participants’ inflation projections   economic conditions and appropriate
further out were influenced by their       policy.
248 95th Annual Report, 2008



 Forecast Uncertainty
 The economic projections provided by the       jections are broadly balanced, the num-
 members of the Board of Governors and          bers reported in table 2 might imply a
 the presidents of the Federal Reserve          probability of about 70 percent that
 Banks help shape monetary policy and           actual GDP would expand between
 can aid public understanding of the basis      1.8 percent to 4.2 percent in the current
 for policy actions. Considerable uncer-        year, and 1.6 percent to 4.4 percent in the
 tainty attends these projections, however.     second and third years. The correspond-
 The economic and statistical models and        ing 70 percent confidence intervals for
 relationships used to help produce eco-        overall inflation would be 1 percent to
 nomic forecasts are necessarily imperfect      3 percent in the current and second
 descriptions of the real world. And the        years, and 1.1 percent to 2.9 percent in
 future path of the economy can be              the third year.
 affected by myriad unforeseen develop-            Because current conditions may differ
 ments and events. Thus, in setting the         from those that prevailed on average
 stance of monetary policy, participants        over history, participants provide judg-
 consider not only what appears to be the       ments as to whether the uncertainty
 most likely economic outcome as embod-         attached to their projections of each vari-
 ied in their projections, but also the range   able is greater than, smaller than, or
 of alternative possibilities, the likelihood   broadly similar to typical levels of fore-
 of their occurring, and the potential costs    cast uncertainty in the past as shown in
 to the economy should they occur.              table 2. Participants also provide judg-
    Table 2 summarizes the average his-         ments as to whether the risks to their
 torical accuracy of a range of forecasts,      projections are weighted to the upside,
 including those reported in past Monetary      downside, or are broadly balanced. That
 Policy Reports and those prepared by           is, participants judge whether each vari-
 Federal Reserve Board staff in advance of      able is more likely to be above or below
 meetings of the Federal Open Market            their projections of the most likely out-
 Committee. The projection error ranges         come. These judgments about the uncer-
 shown in the table illustrate the consider-    tainty and the risks attending each par-
 able uncertainty associated with economic      ticipant’s projections are distinct from
 forecasts. For example, suppose a partici-     the diversity of participants’ views about
 pant projects that real GDP and total con-     the most likely outcomes. Forecast
 sumer prices will rise steadily at annual      uncertainty is concerned with the risks
 rates of, respectively, 3 percent and 2 per-   associated with a particular projection,
 cent. If the uncertainty attending those       rather than with divergences across a
 projections is similar to that experienced     number of different projections.
 in the past and the risks around the pro-
                                            Minutes of FOMC Meetings, March 249

Meeting Held on                                  Mr. Parkinson, Deputy Director, Divi-
March 18, 2008                                       sion of Research and Statistics,
                                                     Board of Governors
A meeting of the Federal Open Market             Ms. Bailey, Deputy Director, Division
Committee was held in the offices of                 of Banking Supervision and Regu-
the Board of Governors of the Federal                lation, Board of Governors
Reserve System in Washington, D.C.,              Mr. Clouse, Deputy Director, Division
on Tuesday, March 18, 2008 at 8:30                   of Monetary Affairs, Board of
a.m.                                                 Governors
Present:                                         Ms. Liang and Messrs. Reifschneider
    Mr. Bernanke, Chairman                           and Wascher, Associate Directors,
    Mr. Geithner, Vice Chairman                      Division of Research and Statis-
    Mr. Fisher                                       tics, Board of Governors
    Mr. Kohn                                     Mr. Gagnon, Visiting Associate Direc-
    Mr. Kroszner                                     tor, Division of Monetary Affairs,
    Mr. Mishkin                                      Board of Governors
    Ms. Pianalto
    Mr. Plosser                                  Mr. Blanchard, Assistant to the Board,
    Mr. Stern                                        Office of Board Members, Board
    Mr. Warsh                                        of Governors
    Messrs. Evans, Lacker, and Lockhart,         Mr. Carpenter, Assistant Director, Divi-
        and Ms. Yellen, Alternate Mem-               sion of Monetary Affairs, Board
        bers of the Federal Open Market              of Governors
        Committee
                                                 Mr. Small, Project Manager, Division
    Messrs. Hoenig and Rosengren, Presi-             of Monetary Affairs, Board of
        dents of the Federal Reserve                 Governors
        Banks of Kansas City and Boston,         Mr. Luecke, Section Chief, Division of
        respectively                                 Monetary Affairs, Board of Gov-
                                                     ernors
    Mr. Sapenaro, First Vice President,
        Federal Reserve Bank of St. Louis        Ms. Low, Open Market Secretariat
                                                     Specialist, Division of Monetary
    Mr. Madigan, Secretary and Economist             Affairs, Board of Governors
    Ms. Danker, Deputy Secretary
    Mr. Skidmore, Assistant Secretary            Mr. Judd, Executive Vice President,
    Ms. Smith, Assistant Secretary                   Federal Reserve Bank of San
    Mr. Alvarez, General Counsel                     Francisco
    Mr. Ashton, Assistant General Counsel
    Mr. Sheets, Economist                        Messrs. Altig, Rasche, Sellon, and Sul-
    Mr. Stockton, Economist                          livan, Senior Vice Presidents, Fed-
                                                     eral Reserve Banks of Atlanta, St.
    Messrs. Connors, English, and Kamin,             Louis, Kansas City, and Chicago,
        Ms. Mester, Messrs. Rolnick,                 respectively
        Rosenblum, Slifman, Sniderman,           Mr. Olivei, Vice President, Federal
        and Wilcox, Associate Economists             Reserve Bank of Boston
    Mr. Dudley, Manager, System Open             Mr. Pesenti, Assistant Vice President,
        Market Account                               Federal Reserve Bank of New
                                                     York
    Mr. Struckmeyer, Deputy Staff Direc-
        tor, Office of Staff Director for        Mr. Hetzel, Senior Economist, Federal
        Management, Board of Governors               Reserve Bank of Richmond
250 95th Annual Report, 2008

   The Manager of the System Open            cent rate of a year earlier. The labor
Market Account reported on recent            force participation rate declined in
developments in foreign exchange mar-        February.
kets. There were no open market opera-          Industrial production declined in
tions in foreign currencies for the Sys-     February after edging up slightly in the
tem’s account in the period since the        previous two months. The output of
previous meeting. The Manager also           utilities dropped back after a weather-
reported on developments in domestic         related surge in January, while mining
financial markets and on System open         output fell somewhat in the first two
market operations in government secu-        months of the year on average. Manu-
rities and federal agency obligations        facturing production edged down after
during the period since the previous         having flattened out in January. The
meeting. By unanimous vote, the Com-         motor vehicle and construction-related
mittee ratified these transactions.          industries continued to hold down over-
   The information reviewed at the           all manufacturing output even as high-
March meeting indicated that economic        tech production posted moderate in-
activity had continued to decelerate in      creases. The factory utilization rate
recent months. The contraction in            edged down in February to a level
homebuilding intensified, consumer           noticeably below its recent high in the
spending appeared to be weakening,           third quarter of 2007.
and survey measures of both consumer            Real consumer spending appeared to
and business sentiment were at de-           have stalled in recent months. Real out-
pressed levels. Industrial production fell   lays for nondurable and durable con-
in February, and private payroll em-         sumer goods, including automobiles,
ployment posted a third consecutive          were estimated to have declined, on
monthly decline. After having increased      average, in January and February. Real
in recent months through January, both       disposable personal income was un-
headline and core inflation as measured      changed in the fourth quarter, held
by the consumer price index (CPI)            down by higher food and energy prices,
dropped noticeably in February. In early     and moved up only slightly in January.
March, however, prices of oil and other      Further declines in house prices led to a
commodities rose sharply.                    noticeable decrease in the ratio of
   Labor demand softened markedly in         household wealth to disposable income
recent months. The decline in private        in the fourth quarter. The downturn in
payroll employment that began last           equity prices since December further
December steepened through February.         reduced household wealth in the first
Although employment by firms in the          quarter. Readings on consumer senti-
nonbusiness services sector and in state     ment dropped sharply in February from
and local governments continued to           already low levels, and the Reuters/
rise, declines elsewhere were wide-          University of Michigan survey re-
spread. Losses were greatest in the          mained at a depressed level in early
manufacturing, construction, and retail      March.
trade sectors. Aggregate hours of pri-          The contraction in residential con-
vate production or nonsupervisory            struction continued into early 2008.
workers fell slightly in the first two       Single-family housing starts fell in both
months of the year. The unemployment         January and February. After having
rate edged down to 4.8 percent in Feb-       dropped especially sharply in Decem-
ruary, but was still up from the 4.5 per-    ber, multifamily housing starts re-
                                             Minutes of FOMC Meetings, March 251

bounded somewhat in the first two             Exports rose sharply in both months,
months of the year. New home sales            while imports dipped in December
declined again in January, thereby push-      before recovering in January. Increases
ing inventories of unsold homes to even       in exports were broadly based except
higher levels relative to sales. Sales of     for automotive exports, which dropped
existing homes held roughly steady in         sharply in December and remained low
January, and the index of pending sales       in January. Imports of services were up
agreements in that month was consis-          moderately. Oil imports soared, reflect-
tent with flat sales in February and          ing increases in both prices and vol-
March. Overall, demand for housing            umes. Most other categories of imports
continued to be restrained by tight           dropped in December and January on
financing conditions for jumbo and            net, with especially large declines in
nonprime mortgages.                           imports of automotive and consumer
   Real spending on equipment and             goods.
software rose at a sluggish rate in the          In the major advanced foreign econo-
fourth quarter. In January, orders and        mies, the rate of growth of real gross
shipments of nondefense capital goods         domestic product (GDP) generally de-
excluding aircraft were above their           clined in the fourth quarter. The source
fourth-quarter levels. However, the           of the slowdown varied substantially
overall outlook for capital spending in       across economies. In the euro area and
the first quarter was weak in light of the    in the United Kingdom, output was
deterioration in surveys of business
                                              restrained by a softening in domestic
conditions and attitudes and the worsen-
                                              demand. In contrast, Canadian domestic
ing situation in markets for business
                                              demand continued to increase at a very
finance. On the heels of robust gains
                                              strong pace, but because of an offsetting
during most of last year, nominal
spending on nonresidential structures         steep decline in net exports, real GDP
decelerated in December and posted an         rose only modestly. Japan was the
outright decline in January. Although         exception among the advanced foreign
spending in this sector is often volatile,    economies to the pattern of slower
the recent deceleration was consistent        growth; real GDP there strengthened in
with mounting indications of slowing          the fourth quarter with higher domestic
demand for nonresidential buildings           spending and continued strength in
and tightening credit conditions.             exports. Japanese exports to the United
   Real investment in nonfarm inven-          States, however, declined. Available
tories excluding motor vehicles re-           first-quarter economic indicators for the
mained at a steady pace in the fourth         advanced foreign economies were
quarter of 2007, but motor vehicle            mixed, but, on balance, they pointed to
inventories fell sharply. After declining     slowing growth. Real activity also
in November, the ratio of manufactur-         appeared to have slowed a bit in emerg-
ing and trade book-value inventories          ing markets, though it continued to
(excluding motor vehicles) to sales           advance at a fairly strong rate. In
ticked up in December and held steady         emerging Asia, the pace of real GDP
in January, but this ratio remained well      growth picked up in the fourth quarter
below its average value in 2007.              in China and South Korea, but it soft-
   The U.S. international trade deficit       ened in most other countries. The rate
narrowed substantially in December            of increase in economic activity slowed
and was about unchanged in January.           in Brazil, Mexico, and several other
252 95th Annual Report, 2008

countries in Latin America in the fourth      labor markets. The Committee expected
quarter, but remained generally strong.       inflation to moderate in coming quarters
   In the United States, the headline CPI     but said that it would be necessary to
continued to rise rapidly in January but      continue to monitor inflation develop-
was flat in February. For those two           ments carefully. The Committee indi-
months on average, the rate of headline       cated that its action, combined with the
inflation was down significantly from         policy actions taken earlier, should help
its elevated level in the fourth quarter of   to promote moderate growth over time
2007, as retail energy prices stopped         and to mitigate the risks to economic
rising and core inflation moderated a         activity. However, the Committee noted
bit; these two factors more than offset       that downside risks to growth remained.
an acceleration of food prices. How-          The Committee stated that it would
ever, the increase in world petroleum         continue to assess the effects of finan-
prices in early March pointed to a            cial and other developments on eco-
renewed burst of energy price inflation       nomic prospects and would act in a
in the near term. Available information,      timely manner as needed to address
including producer prices for Febru-          these risks.
ary, suggested that prices of core per-          Over the intermeeting period, condi-
sonal consumption expenditures (PCE)          tions in some short-term funding mar-
moved up a bit more slowly than the           kets worsened. Spreads in interbank
core CPI in January and somewhat              funding markets widened, as did
faster than the core CPI in February.         spreads on lower-rated commercial
Household survey measures of expecta-         paper. Obtaining credit through repur-
tions for year-ahead inflation jumped in      chase agreements backed by agency and
March to their highest levels in about        private-label mortgage-backed securi-
two years; in contrast, survey measures       ties (MBS) also became more difficult
of longer-term inflation expectations         amid reports of larger “haircuts” being
were unchanged or up slightly. Average        applied by lenders and news that some
hourly earnings increased at a some-          market participants missed margin calls
what slower rate in January and Febru-        on positions as a result. Concerns over
ary than they had in November and             the health of financial guarantors
December. Over the twelve months that         caused dislocations in the markets for
ended in February, this wage measure          municipal securities, and the ratios of
rose a bit more slowly than in the pre-       municipal bond yields to those on com-
vious twelve months.                          parable-maturity Treasuries climbed to
   At its January 30 meeting, the FOMC        historically high levels. In longer-term
lowered its target for the federal funds      corporate markets, yields on in-
rate 50 basis points, to 3 percent. In        vestment-grade and speculative-grade
addition, the Board of Governors ap-          corporate bonds rose, pushing their
proved a decrease of 50 basis points in       spreads relative to Treasuries to the
the discount rate, to 31⁄2 percent. The       highest levels since 2002 or even earlier
Committee’s statement noted that finan-       in some cases. Nonetheless, gross bond
cial markets remained under consider-         issuance in January and February
able stress and that credit had tightened     remained solid for investment-grade
further for some businesses and house-        firms.
holds. Moreover, incoming information            Commercial bank credit decelerated
indicated a deepening of the housing          in January and February, damped by a
contraction as well as some softening in      reduction in merger and acquisition
                                            Minutes of FOMC Meetings, March 253

activity, weak business spending, fewer      chase transactions that would facilitate
previously committed loan deals com-         funding of primary dealers’ assets and
ing onto banks’ books, and slower resi-      that the volume of lending through the
dential mortgage lending. Commercial         Term Auction Facility (TAF) would be
real estate lending at banks, however,       increased. On March 11, the Federal
continued to advance briskly in January      Reserve, in coordination with other cen-
and February, while the rise in con-         tral banks, announced the expansion
sumer loans was moderate. Over the           and extension of the reciprocal currency
intermeeting period, spreads on con-         arrangements that were established in
forming and jumbo residential mort-          December as well as the creation of
gages over comparable-maturity Trea-         a Term Securities Lending Facility
sury securities jumped, and credit           (TSLF) under which the Federal Re-
default swap premiums for the gov-           serve would lend Treasury securities to
ernment-sponsored      enterprises    in-    primary dealers for longer terms than in
creased to record highs. Issuance of         the existing program and based on a
conforming MBS continued to be               broader range of collateral. On March
strong, while credit availability for        14, the Federal Reserve Board approved
jumbo and nonprime mortgage borrow-          the temporary financing arrangement
ers remained tight. Broad stock price        announced that morning by JPMorgan
indexes fell further over the intermeet-     Chase & Co. and The Bear Stearns
ing period on negative economic news         Companies Inc. On March 16, the Fed-
as well as concerns about the outlook        eral Reserve announced the creation of
for many financial institutions.             a lending facility to improve the ability
   Similar stresses were again evident in    of primary dealers to provide financing
the financial markets of major foreign       to participants in securitization markets.
economies. However, economic news in         In addition, the Federal Reserve low-
these economies was generally less           ered the primary credit rate, or discount
downbeat than in the United States,          rate, 25 basis points to 3.25 percent, and
leading to expectations of greater mone-     extended the maximum maturity of pri-
tary easing in the United States than        mary credit loans to ninety days from
elsewhere. The trade-weighted foreign        thirty days. It also approved the longer-
exchange value of the dollar against         term financing arrangement announced
major currencies declined notably.           that evening by JPMorgan Chase
   M2 increased strongly in January and      and Bear Stearns in conjunction with
February, boosted primarily by height-       the acquisition of Bear Stearns by
ened demands for the relative safety         JPMorgan Chase.
and liquidity of money market mutual            Over the intermeeting period, the
funds. The decline in opportunity costs      expected path of monetary policy over
associated with monetary policy easing       the next year as measured by money
also supported rapid growth of liquid        market futures rates moved down
deposits.                                    sharply, largely in response to softer-
   In the two weeks prior to the March       than-expected economic data releases
meeting, the Federal Reserve an-             and deteriorating financial market con-
nounced several measures to bolster          ditions. The Committee’s action at the
liquidity and promote orderly function-      January 30 meeting had been viewed by
ing in financial markets. On March 7,        market participants as the most likely
the Federal Reserve announced that it        outcome, but near-term futures rates
would initiate a series of term repur-       declined a few basis points as investors
254 95th Annual Report, 2008

had placed some probability on a              became more restrictive. The staff pro-
smaller policy move. Neither the subse-       jection showed a contraction of real
quent release of the minutes of the           GDP in the first half of 2008 followed
meeting nor the March 7 Federal Re-           by a slow rise in the second half. The
serve announcements elicited signifi-         recently enacted fiscal stimulus package
cant market reaction. The March 11            was expected to boost real GDP in the
TSLF announcement was followed by a           second half of 2008, but that effect was
step-up in money market futures rates         projected to unwind in 2009. The fore-
as liquidity concerns eased somewhat          cast showed real GDP rising at a rate
and market participants evidently con-        somewhat above the growth rate of its
cluded that less policy easing would be       potential in 2009, in response to the
needed than previously anticipated.           impetus from cumulative monetary pol-
However, liquidity concerns reemerged         icy easing, continued strength in net
subsequently, prompting a further drop        exports, a lessening drag from high oil
in money market futures rates. Consis-        prices, and a relaxation of financial
tent with the shift in the economic out-      market strains. Even with this pickup in
look, the revision in policy expecta-         growth in 2009, resource utilization was
tions, and the reduction in the target        anticipated to follow a lower trajectory
federal funds rate, yields on short- and      than in the previous forecast.
medium-term nominal Treasury coupon              The forecast for core PCE price infla-
securities declined substantially after       tion over the first half of 2008 was
the January 30 FOMC meeting. How-             raised in response to elevated readings
ever, yields on long-term Treasuries fell     in recent months. In addition, the fore-
much less than those on shorter-term          cast for headline PCE price inflation
instruments, and the yield curve steep-       incorporated a much higher rate of
ened significantly. Inflation compen-         increase for energy prices for the first
sation—the difference between yields          half of the year; as a result, headline
on nominal Treasury securities and            PCE price inflation was expected to
those on inflation-indexed issues—was         substantially exceed core PCE price
little changed on balance for shorter-        inflation in 2008. By 2009, the forecasts
term issues, but longer-term inflation        for both the headline and core PCE
compensation rose.                            price indexes showed inflation receding
    In the forecast prepared for this meet-   from its 2008 level, in line with the pre-
ing, the staff substantially revised down     vious forecasts.
its projection for the pace of real GDP          In their discussion of the economic
throughout 2008. Although the avail-          situation and outlook, FOMC partici-
able data on spending and production          pants noted that prospects for both eco-
early in the first quarter were not mate-     nomic activity and near-term inflation
rially weaker than the staff’s expecta-       had deteriorated in view of increasingly
tions, many other indicators of real          fragile financial markets and tighter
activity were more negative. Payroll          credit conditions, rising prices for oil
employment declined substantially; oil        and other commodities, and the deepen-
prices surged again, crimping real            ing contraction in the housing sector.
household incomes; and measures of            Home prices had declined more steeply
consumer and business sentiment dete-         than anticipated, and the weakening
riorated sharply. Moreover, house prices      housing market, combined with a soft-
fell by more than anticipated, and con-       ening in labor markets, appeared to be
ditions in a broad range of debt markets      weighing on consumer sentiment. Busi-
                                              Minutes of FOMC Meetings, March 255

nesses also were seen as becoming              mortgage assets quite unclear and many
more pessimistic and cautious, despite a       financial institutions experiencing sig-
strong foreign demand for U.S. goods.          nificant balance sheet pressures, many
Strains in financial markets had in-           lenders pulled back from risk taking—
creased, portending a possible further         notably by increasing collateral margins
tightening in the availability of credit to    on secured lending—and liquidity di-
households and businesses. Against this        minished in a number of financial mar-
backdrop, many participants thought            kets. In these circumstances, many mar-
some contraction in economic activity          ket participants were experiencing
in the first half of 2008 now appeared         greater difficulties obtaining funding,
likely. The economy was expected to            and meeting participants regarded fi-
begin to recover in the second half of         nancial markets as unusually fragile.
the year, supported by recent monetary         The new liquidity facilities recently
policy easing and fiscal stimulus. Ac-         introduced by the Federal Reserve
commodative monetary policy and a              would probably be helpful in bolstering
recovery in financial markets along            market liquidity and promoting orderly
with an abatement of the downdraft in          market functioning, but even so, the
housing activity were expected to help         ongoing strains were likely to raise the
foster a further pickup in economic            price and reduce the availability of
growth in 2009. However, considerable          credit to businesses and households.
uncertainty surrounded this forecast,          Evidence that an adverse feedback loop
and some participants expressed con-           was under way, in which a restriction in
cern that falling house prices and             credit availability prompts a deteriora-
stresses in financial markets could lead       tion in the economic outlook that, in
to a more severe and protracted down-          turn, spurs additional tightening in
turn in activity than currently antici-        credit conditions, was discussed. Sev-
pated. Participants noted that recent          eral participants noted that the problems
readings on inflation had generally been       of declining asset values, credit losses,
elevated, that energy prices had risen         and strained financial market conditions
sharply, and that some indicators of           could be quite persistent, restraining
inflation expectations had risen. Most         credit availability and thus economic
participants anticipated that a flattening     activity for a time and having the poten-
of oil and other commodity prices and          tial subsequently to delay and damp
easing pressures on resources would            economic recovery.
contribute to some moderation in infla-           Participants noted that the contrac-
tion pressures. Nonetheless, uncertain-        tion in the housing sector had deepened
ties about the outlook for inflation had       and that considerable uncertainty sur-
risen.                                         rounded the outlook for housing. Al-
   Stresses in financial markets had           though some stabilization in housing
intensified noticeably since the January       markets was likely needed to help un-
meeting. Several meeting participants          derpin an economic recovery in coming
noted that price discovery for mortgage-       quarters, there was little indication that
related financial assets had become            that process had yet begun. Elevated
increasingly difficult in an environment       rates of foreclosures and large inven-
of declining house prices and consider-        tories of unsold property were likely to
able uncertainty as to the ultimate            depress home prices for some time.
extent of such declines. With the mag-         Lower home prices would eventually
nitude and distribution of losses on           buoy home buying, but in the mean-
256 95th Annual Report, 2008

time the prospect of continued price         mixed but, overall, inventories appeared
declines could lead potential homebuy-       to be roughly in balance with desired
ers to defer purchases for a time, further   levels.
damping housing activity and adding to          In discussing the external sector of
downward pressure on home values.            the economy, some participants indi-
Participants noted that the trajectory of    cated that net exports remained a
house prices was a major source of           notable source of support for the econ-
uncertainty in their economic outlook.       omy. Growth in exports was being sup-
   Recent data and anecdotal reports         ported by strength in foreign economies
from business contacts suggested that        as well as declines in the foreign
consumer spending was decelerating           exchange value of the dollar. However,
noticeably, though it apparently had not     some of the recent increase in net
yet actually declined substantially. Par-    exports resulted from weaker imports,
ticipants noted that private payroll         which reflected softer domestic spend-
employment had fallen in February for        ing. Some participants saw somewhat
the third consecutive month, and sug-        slower global economic growth as a
gested that increasing concerns among        possible consequence of the problems
workers about prospects for employ-          in financial markets and weakness in
ment and income likely were holding          the United States and noted that such a
down consumer outlays. Rising energy         development could potentially limit the
prices were also damping growth in real      support that exports would provide to
incomes. One participant reported that       the U.S. economy going forward.
lenders were restricting draws on home          The recent information on inflation
equity lines, and the tightening of credit   was seen as disappointing. With the
availability more generally was prob-        exception of the February report on
ably starting to constrain consumer          consumer prices, readings on inflation
spending. Also, the continued fall in        had generally been elevated. Agricul-
home prices and declines in equity           tural prices were rising at a substantial
prices were weighing on household            clip, partly in response to strong global
wealth, with a depressing effect on          demand, lean supplies, and a lower for-
spending.                                    eign exchange value of the dollar. Other
   The outlook for business spending         commodity prices also were climbing
had also dimmed since the time of the        rapidly, and crude oil prices were near
January meeting. Anecdotal reports           record levels. Several participants stated
from many regions of the country             that business contacts had emphasized
pointed to a retrenchment in capital         that their input costs were rising and
spending in response to increased pessi-     that they were seeking to pass on higher
mism about economic prospects and            costs to their customers. Some partici-
heightened caution on the part of busi-      pants, however, expressed the view that
ness managers. The tightening supply         emerging economic slack would limit
of credit was seen as exacerbating this      the extent to which firms could pass on
softness in business outlays and contrib-    their higher costs and could serve to
uting particularly to a pullback from        damp inflation more generally. More-
nonresidential construction projects.        over, available data and anecdotal
However, investment spending on agri-        reports suggested that unit labor costs
cultural equipment was reported to be        were rising only modestly, and thus
quite strong, spurred by soaring crop        were seen as unlikely to exert signifi-
prices. Reports on inventories were          cant upward pressure on prices. Weaker
                                             Minutes of FOMC Meetings, March 257

growth, both in the United States and         rates should help buoy economic activ-
abroad, should also contribute to a flat-     ity and ameliorate strains in these mar-
tening of oil and other commodity             kets. Even with a substantial easing at
prices over time, which would also            this meeting, most members saw overall
reduce price pressures and the threat of      inflation as likely to moderate in com-
rising inflation expectations. On bal-        ing quarters, reflecting a projected
ance, most participants still expected        leveling-out of energy and commodity
inflation to moderate later this year and     prices and an easing of pressures on
in 2009. However, the recent deprecia-        resource utilization. However, inflation
tion of the dollar could boost import         pressures had apparently risen even as
prices and thus contribute to higher          the outlook for growth had weakened.
inflation. Moreover, with both core and       With the uncertainties in the outlook for
headline inflation having been some-          both economic activity and inflation
what elevated, participants expressed         elevated, members noted that appropri-
some concern that inflation expecta-          ately calibrating the stance of policy
tions might become less firmly an-            was difficult, partly because some time
chored. Indeed, some indicators sug-          would be required to assess the effects
gested that inflation expectations had        of the substantial easing of policy to
edged higher of late. In view of these        date. All in all, members judged that a
considerations, significant uncertainty       75 basis point easing of policy at this
attended the near-term outlook for price      meeting was appropriate to address the
pressures. On balance, however, partic-       combination of risks of slowing eco-
ipants emphasized that appropriate            nomic growth, inflationary pressures,
monetary policy, combined with effec-         and financial market disruptions.
tive communication of the Committee’s            The Committee agreed that the state-
commitment to price stability, would          ment to be released after the meeting
foster price stability over time.             should indicate that economic activity
   In the Committee’s discussion of           had weakened further, reflecting slower
monetary policy for the intermeeting          growth in consumer spending and soft-
period, most members judged that a            ening in the labor market, that financial
substantial easing in the stance of           markets remained under considerable
monetary policy was warranted at this         stress, and that the tightening of credit
meeting. The outlook for economic             conditions and the deepening of the
activity had weakened considerably            housing market contraction were likely
since the January meeting, and mem-           to weigh on economic growth over the
bers viewed the downside risks to eco-        next few quarters. Given recent devel-
nomic growth as having increased.             opments, the Committee concurred that
Indeed, some believed that a prolonged        the statement should note that inflation
and severe economic downturn could            had been elevated and that some indica-
not be ruled out given the further            tors of inflation expectations had risen,
restriction of credit availability and on-    but agreed that the announcement
going weakness in the housing market.         should also reiterate that inflation was
Members recognized that monetary pol-         expected to moderate in coming quar-
icy alone could not address fully the         ters. As in recent statements, the Com-
underlying problems in the housing            mittee emphasized that it would con-
market and in financial markets, but          tinue to monitor inflation developments
they noted that, through a range of           carefully. The Federal Reserve had im-
channels, lower short-term real interest      plemented a number of measures to fos-
258 95th Annual Report, 2008

ter market liquidity in recent weeks,            moderate in coming quarters, reflecting a
and members thought that the statement           projected leveling-out of energy and other
should note that policy actions taken            commodity prices and an easing of pres-
                                                 sures on resource utilization. Still, uncer-
today and earlier, including those li-           tainty about the inflation outlook has
quidity measures, would promote mod-             increased. It will be necessary to continue to
erate growth over time. In light of the          monitor inflation developments carefully.
uncertainties regarding the housing sec-            Today’s policy action, combined with
tor and financial market developments,           those taken earlier, including measures to
                                                 foster market liquidity, should help to pro-
however, the Committee repeated its              mote moderate growth over time and to
recent indications that downside risks           mitigate the risks to economic activity.
to growth remained. The Committee                However, downside risks to growth remain.
agreed on the need to act in a timely            The Committee will act in a timely manner
manner to promote its dual objectives            as needed to promote sustainable economic
of sustainable economic growth and               growth and price stability.
price stability.                                      Votes for this action: Messrs. Ber-
   At the conclusion of the discussion,               nanke, Geithner, Kohn, Kroszner, and
the Committee voted to authorize and                  Mishkin, Ms. Pianalto, Messrs. Stern
                                                      and Warsh. Votes against this action:
direct the Federal Reserve Bank of New                Messrs. Fisher and Plosser.
York, until it was instructed otherwise,
to execute transactions in the System               Messrs. Fisher and Plosser dissented
Account in accordance with the follow-           because, in light of heightened inflation
ing domestic policy directive:                   risks, they favored easing policy less
                                                 aggressively. Incoming data suggested a
   The Federal Open Market Committee             weaker near-term outlook for economic
seeks monetary and financial conditions that
will foster price stability and promote sus-     growth, but the Committee’s earlier
tainable growth in output. To further its        policy moves had already reduced the
long-run objectives, the Committee in the        target federal funds rate by 225 basis
immediate future seeks conditions in reserve     points to address risks to growth, and
markets consistent with reducing the federal     the full effect of those rate cuts had yet
funds rate to an average of around 21⁄4 per-     to be felt. While financial markets re-
cent.
                                                 mained under stress, the Federal Re-
   The vote encompassed approval of              serve had already taken separate, sig-
the statement below to be released at            nificant actions to address liquidity
2:15 p.m.:                                       issues in markets. In fact, Mr. Fisher
   The Federal Open Market Committee             felt that focusing on measures targeted
decided today to lower its target for the fed-   at relieving liquidity strains would im-
eral funds rate 75 basis points to 21⁄4 per-     prove economic prospects more quickly
cent.                                            and lastingly than would further reduc-
   Recent information indicates that the out-    tions in the federal funds rate at this
look for economic activity has weakened
further. Growth in consumer spending has
                                                 point; he believed that alleviating these
slowed and labor markets have softened.          strains would increase the efficacy of
Financial markets remain under consider-         the earlier rate cuts. Both Messrs.
able stress, and the tightening of credit con-   Fisher and Plosser were concerned that
ditions and the deepening of the housing         inflation expectations could potentially
contraction are likely to weigh on economic      become unhinged should the Commit-
growth over the next few quarters.
   Inflation has been elevated, and some         tee continue to lower the funds rate in
indicators of inflation expectations have        the current environment. They pointed
risen. The Committee expects inflation to        to measures of inflation and indicators
                                            Minutes of FOMC Meetings, March 259

of inflation expectations that had risen,    expected to help restore the functioning
and Mr. Fisher stressed the international    of financial markets more generally and
influences on U.S. inflation rates. Mr.      thereby promote the effective conduct
Plosser noted that the Committee could       of monetary policy as well as macro-
not afford to wait until there was clear     economic stability. During the discus-
evidence that inflation expectations         sion, participants expressed concerns
were no longer anchored, as by then it       that establishment of the facility could
would be too late to prevent a further       be viewed as setting a precedent and
increase in inflation pressures.             thus raise expectations of other actions
   It was agreed that the next meeting of    in the future, and they also noted some
the Committee would be held on Tues-         uncertainty about how effective the
day−Wednesday, April 29–30, 2008.            facility would be in practice. On bal-
   The meeting adjourned at 1:15 p.m.        ance, the Committee decided that the
                                             facility could prove useful in preventing
Notation Vote                                an escalation of an unhealthy dynamic
                                             that was developing in money and
By notation vote completed on     Febru-     credit markets, in which liquidity and
ary 19, 2008, the Committee       unani-     collateral concerns were spreading. In
mously approved the minutes       of the     addition, the Committee agreed to
FOMC meeting held on January      29–30,     expand and extend the existing recipro-
2008.                                        cal currency agreements with the Euro-
                                             pean Central Bank and the Swiss Na-
Conference Call                              tional Bank.
                                                The Committee voted to approve the
On March 10, 2008, the Committee met         following resolutions:
to review financial market develop-
                                             Term Securities Lending Facility
ments and to consider proposals aimed
at supporting the liquidity and orderly      In addition to the current authorization
functioning of those markets. In light of    granted to the Federal Reserve Bank of
the sharp further deterioration of some      New York to engage in overnight secu-
key money and credit markets, and            rities lending transactions, and in order
against the backdrop of a weaker eco-        to ensure the effective conduct of open
nomic outlook, meeting participants          market operations, the Federal Open
discussed the potential usefulness and       Market Committee authorizes the Fed-
risks of instituting a Term Securities       eral Reserve Bank of New York to lend
Lending Facility, under which primary        up to $200 billion of U.S. Government
dealers would be able to borrow Trea-        securities held in the System Open Mar-
sury securities for a term of approxi-       ket Account to primary dealers for a
mately one month against any collateral      term that does not exceed 35 days at
eligible for open market operations and      rates that shall be determined by com-
the highest-quality private mortgage         petitive bidding.
securities. Most participants concluded         These lending transactions may be
that offering this facility was an appro-    against pledges of U.S. Government
priate step that could help alleviate        securities, other assets that the Reserve
pressures in the financing markets for       Bank is specifically authorized to buy
Treasury and some mortgage-backed            and sell under section 14 of the Federal
securities. By improving conditions in       Reserve Act (including federal agency
funding markets, the measure was             residential-mortgage-backed securities
260 95th Annual Report, 2008

(MBS)), and non-agency AAA-rated               currency arrangement (“swap” arrange-
residential MBS.                               ment) with the Swiss National Bank to
   The Federal Reserve Bank of New             an amount not to exceed $6 billion.
York shall set a minimum lending fee           Draws are authorized up to the full
consistent with the objectives of the          amount of the swap. The current swap
program and apply reasonable limita-           arrangement shall be extended until
tions on the total amount of a specific        September 30, 2008, unless further
issue that may be auctioned and on the         extended by the Federal Open Market
amount of securities that each dealer          Committee.
may borrow.
                                                   Votes for these actions: Messrs. Ber-
   The Federal Reserve Bank of New                 nanke, Geithner, Fisher, Kohn, and
York may reject bids which could facili-           Kroszner, Ms. Pianalto, Messrs. Plosser
tate a dealer’s ability to control a single        and Warsh, and Ms. Yellen. Votes
issue as determined solely by the Fed-             against these actions: None. Absent
eral Reserve Bank of New York.                     and not voting: Mr. Mishkin. Ms.
   This authority shall expire at such             Yellen voted as alternate member.
time as determined by the Federal Open                                Brian F. Madigan
Market Committee or the Board of                                              Secretary
Governors.
   Secretary’s note: By notation vote
completed on March 20, 2008, the               Meeting Held on
Committee unanimously approved a               April 29–30, 2008
resolution that added non-agency AAA-
rated commercial-mortgage-backed               A meeting of the Federal Open Market
securities to the list of collateral accept-   Committee was held in the offices of
able in connection with the Term Se-           the Board of Governors of the Federal
curities Lending Facility.                     Reserve System in Washington, D.C.,
                                               on Tuesday, April 29, 2008 at 2:00 p.m.
Swap Authorizations
                                               and continued on Wednesday, April 30,
The Federal Open Market Committee              2008 at 9:00 a.m.
directs the Federal Reserve Bank of
New York to increase the amount avail-         Present:
able from the System Open Market                   Mr. Bernanke, Chairman
                                                   Mr. Geithner, Vice Chairman
Account under the existing reciprocal              Mr. Fisher
currency arrangement (“swap” arrange-              Mr. Kohn
ment) with the European Central Bank               Mr. Kroszner
to an amount not to exceed $30 billion.            Mr. Mishkin
Within that aggregate limit, draws of up           Ms. Pianalto
                                                   Mr. Plosser
to $15 billion are hereby authorized.              Mr. Stern
The current swap arrangement shall be              Mr. Warsh
extended until September 30, 2008,
                                                   Ms. Cumming, Messrs. Evans, Lacker,
unless further extended by the Federal                 and Lockhart, and Ms. Yellen,
Open Market Committee.                                 Alternate Members of the Federal
   The Federal Open Market Committee                   Open Market Committee
directs the Federal Reserve Bank of
                                                   Messrs. Bullard, Hoenig, and Rosen-
New York to increase the amount avail-                 gren, Presidents of the Federal
able from the System Open Market                       Reserve Banks of St. Louis, Kan-
Account under the existing reciprocal                  sas City, and Boston, respectively
                                                     Minutes of FOMC Meetings, April 261

     Mr. Lyon, First Vice President, Federal             Ms. Edwards, 6 Associate Director,
         Reserve Bank of Minneapolis                         Division of Monetary Affairs,
                                                             Board of Governors
     Mr. Madigan, Secretary and Economist
     Ms. Danker, Deputy Secretary                        Ms. Shanks, 6 Associate Secretary,
     Mr. Skidmore, Assistant Secretary                       Office of the Secretary, Board of
     Ms. Smith, Assistant Secretary                          Governors
     Mr. Alvarez, General Counsel
     Mr. Baxter, Deputy General Counsel                  Messrs. Reifschneider and Wascher,
     Mr. Sheets, Economist                                   Associate Directors, Division of
     Mr. Stockton, Economist                                 Research and Statistics, Board of
                                                             Governors
     Messrs. Connors, English, and Kamin,
         Ms. Mester, Messrs. Rosenblum,                  Mr. Gagnon, Visiting Associate Direc-
         Slifman, Sniderman, and Wilcox,                     tor, Division of Monetary Affairs,
         Associate Economists                                Board of Governors
     Mr. Dudley, Manager, System Open                    Ms. Martin,6 Associate General Coun-
         Market Account                                      sel, Legal Division, Board of Gov-
                                                             ernors
     Ms. J. Johnson,6 Secretary, Office of
         the Secretary, Board of Governors               Mr. Carpenter, 6 Assistant Director,
                                                             Division of Monetary Affairs,
     Ms. Roseman,6 Director, Division of                     Board of Governors
         Reserve Bank Operations and
         Payment Systems, Board of Gov-                  Mr. Dale, Senior Adviser, Division of
         ernors                                              Monetary Affairs, Board of Gov-
                                                             ernors
     Mr. Struckmeyer, Deputy Staff Direc-
         tor, Office of Staff Director for               Mr. Oliner, Senior Adviser, Division of
         Management, Board of Governors                      Research and Statistics, Board of
                                                             Governors
     Mr. Blanchard, Assistant to the Board,
         Office of Board Members, Board                  Ms. Allison,6 Senior Counsel, Legal
         of Governors                                        Division, Board of Governors
     Mr. Frierson,6 Deputy Secretary, Office             Mr. Gross,6 Special Assistant to the
          of the Secretary, Board of Gover-                  Board, Office of Board Members,
          nors                                               Board of Governors
     Ms. Bailey, Deputy Director, Division               Ms. Weinbach, Adviser, Division of
         of Banking Supervision and Regu-                    Monetary Affairs, Board of Gov-
         lation, Board of Governors                          ernors
     Mr. Clouse, Deputy Director, Division               Mr. Small, Project Manager, Division
         of Monetary Affairs, Board of                       of Monetary Affairs, Board of
         Governors                                           Governors
     Messrs. Hammond6 and Marquardt,6                    Mr. Luecke, Section Chief, Division of
         Deputy Directors, Division of                       Monetary Affairs, Board of Gov-
         Reserve Bank Operations and                         ernors
         Payment Systems, Board of Gov-
                                                         Ms. Beattie,6 Assistant to the Secretary,
         ernors
                                                             Office of the Secretary, Board of
                                                             Governors
                                                         Ms. Low, Open Market Secretariat
                                                             Specialist, Division of Monetary
                                                             Affairs, Board of Governors
   6. Attended portion of the meeting relating to
the implications of interest on reserves for mone-       Ms. Hughes,6 Staff Assistant, Office of
tary policy implementation.                                  the Secretary, Board of Governors
262 95th Annual Report, 2008

    Mr. Fuhrer, Executive Vice President,   ber was taken at this meeting because
        Federal Reserve Bank of Boston      of the provision that each party must
    Messrs. Hilton, McAndrews,6 Rasche,     provide six months’ prior notice of an
        Rudebusch, Steindel, Sullivan,      intention to terminate its participation.
        and Weinberg, Senior Vice Presi-       In view of continuing strains in inter-
        dents, Federal Reserve Banks of     bank and other financial markets, the
        New York, New York, St. Louis,
        San Francisco, New York, Chi-
                                            Committee took up proposals to expand
        cago, and Richmond, respectively    several of the liquidity arrangements
                                            that had been put in place in recent
    Messrs. Clark and Meyer,6 Vice Presi-   months. Chairman Bernanke indicated
        dents, Federal Reserve Banks of
        Kansas City and Philadelphia,
                                            his intention to increase the overall size
        respectively                        of the Term Auction Facility under del-
                                            egated authority from the Board of
    Mr. Weber, Senior Research Officer,     Governors, and he proposed increases
        Federal Reserve Bank of Minne-
        apolis
                                            in the swap lines with the European
                                            Central Bank and Swiss National Bank
    Mr. Roberds, Policy Adviser, Federal    to help address pressures in short-term
        Reserve Bank of Atlanta             dollar funding markets. Meeting partici-
                                            pants discussed the possible costs and
   The Manager of the System Open
                                            benefits of a proposed broadening of
Market Account reported on recent de-
                                            eligible collateral for the Term Securi-
velopments in foreign exchange mar-
                                            ties Lending Facility (TSLF). On bal-
kets. There were no open market opera-
                                            ance, the Committee agreed that ex-
tions in foreign currencies for the         panding the range of eligible collateral
System’s account in the period since the    for the TSLF might help to increase the
previous meeting. The Manager also          effectiveness of the facility and so fur-
reported on developments in domestic        ther promote the orderly functioning of
financial markets and on System open        financial markets.
market operations in government secu-          By unanimous votes, the Committee
rities and federal agency obligations       approved the following three resolu-
during the period since the previous        tions:
meeting. By unanimous vote, the Com-
mittee ratified these transactions.            The Federal Open Market Committee
   By unanimous vote, the Committee         directs the Federal Reserve Bank of New
extended for one year beginning in mid-     York to increase the amount available from
                                            the System Open Market Account under the
December 2008 the reciprocal currency       existing reciprocal currency arrangement
(“swap”) arrangements with the Bank         (“swap” arrangement) with the European
of Canada and the Banco de Mexico.          Central Bank to an amount not to exceed
The arrangement with the Bank of Can-       $50 billion. Within that aggregate limit,
                                            draws of up to $25 billion are hereby autho-
ada is in the amount of $2 billion          rized. The current swap arrangement shall
equivalent and that with the Banco de       be extended until January 30, 2009, unless
Mexico is in the amount of $3 billion       further extended by the Federal Open Mar-
equivalent. Both arrangements are asso-     ket Committee.
ciated with the Federal Reserve’s par-         The Federal Open Market Committee
ticipation in the North American Frame-     directs the Federal Reserve Bank of New
                                            York to increase the amount available from
work Agreement of 1994. The vote to         the System Open Market Account under the
renew the System’s participation in the     existing reciprocal currency arrangement
swap arrangements maturing in Decem-        (“swap” arrangement) with the Swiss
                                                Minutes of FOMC Meetings, April 263

National Bank to an amount not to exceed        and the labor force participation rate
$12 billion. Within that aggregate limit,       was little changed.
draws of up to $6 billion are hereby autho-        Although industrial production rose
rized. The current swap arrangement shall
be extended until January 30, 2009, unless      in March, production over the first
further extended by the Federal Open Mar-       quarter as a whole was soft, having de-
ket Committee.                                  clined, on average, in January and Feb-
   In connection with the Term Securities       ruary. Gains in manufacturing output of
Lending Facility, the Federal Reserve Bank      consumer and high-tech goods in March
of New York may accept pledges of AAA-          were partially offset by a sharp drop in
rated asset-backed securities (in addition to
the other assets previously authorized by the
                                                production of motor vehicles and parts
FOMC) as collateral against loans of U.S.       and by ongoing weakness in the output
Government securities.                          of construction-related industries. The
                                                output of utilities rebounded in March
   The information reviewed at the Ap-          following a weather-related drop in
ril meeting, which included the advance         February, and mining output moved up
data on the national income and product         after exhibiting weakness earlier in the
accounts for the first quarter, indicated       year. The factory utilization rate edged
that economic growth had remained               up in March but stayed well below its
weak so far this year. Labor market             recent high in the third quarter of 2007.
conditions had deteriorated further, and           Real consumer spending expanded
manufacturing activity was soft. Hous-          slowly in the first quarter. Real outlays
ing activity had continued its sharp            on durable goods, including automo-
descent, and business spending on both          biles, were estimated to have declined
structures and equipment had turned             in March, but expenditures on nondura-
down. Consumer spending had grown               ble goods were thought to have edged
very slowly, and household sentiment            up, boosted by a sizable increase in real
had tumbled further. Core consumer              outlays for gasoline. For the quarter as
price inflation had slowed in recent            a whole, however, real expenditures on
months, but overall inflation remained          both durable and nondurable goods
elevated.                                       declined. Real disposable personal in-
   Labor demand continued to weaken             come also grew slowly in the first quar-
in March. Private payroll employment            ter, restrained by rapidly rising prices
fell in March at a rate similar to that in      for energy and food. The ratio of house-
January and February. The reduction in          hold wealth to disposable income ap-
jobs was again widespread, with losses          peared to have moved down again in
registered at firms in the construction,        the first quarter, damped by the appre-
manufacturing, and professional and             ciable net decline in broad equity prices
business services sectors. Employment           over that period and by further re-
at firms in the nonbusiness services sec-       ductions in house prices. Measures of
tor, which includes health care, contin-        consumer sentiment fell sharply in
ued to rise. Aggregate hours of private         March and April; the April reading of
production or nonsupervisory workers            consumer sentiment published in the
moved up in March but posted a decline          Reuters/University of Michigan Survey
for the first quarter as a whole after          of Consumers was near the low levels
having contracted slightly in the first         posted in the early 1990s.
two months of the year. The unemploy-              Residential construction continued its
ment rate rose to 5.1 percent in March,         rapid contraction in the first quarter.
significantly above its level a year ago,       Single-family housing starts maintained
264 95th Annual Report, 2008

their steep downward trajectory in           but motor vehicle inventories continued
March, and starts of multifamily homes       to fall. Some of the drop in motor vehi-
declined to the lower portion of their       cle stocks was a result of the disruption
recent range. Sales of new single-family     to production from a labor dispute. The
homes declined in February to a very         ratio of book-value inventories to sales
low rate and dropped further in March.       in the manufacturing and trade sector
Even though production cuts by home-         (excluding motor vehicles) moved up a
builders helped to reduce the level of       little, on average, in January and Febru-
inventories at the end of February, the      ary. Still, outside of categories tied to
slow pace of sales caused the ratio of       housing and construction, firms did not
unsold new homes to sales to increase        appear to be burdened with excess
further. Sales of existing homes re-         stocks.
mained weak, on average, in February             The U.S. international trade deficit
and March, and the index of pending          widened in February. Imports rose
sales agreements in February suggested       sharply, more than offsetting continued
continued sluggish activity in coming        robust growth of exports. Most major
months. The recent softening in resi-        categories of non-oil imports increased
dential housing demand was consistent        in February, and imports of natural gas,
with reports of tighter credit conditions    automobiles, and consumer goods sur-
for both prime and nonprime borrowers.       ged. Imports of services continued to
   In the business sector, real spending     rise at a robust pace. By contrast, oil
on equipment and software contracted         imports moved down. Increases in ex-
slightly in the first quarter after having   ports in February were concentrated in
posted a small increase in the fourth        agricultural goods, automobiles, and
quarter. Following declines in both          industrial supplies, particularly fuels.
shipments and orders of nondefense           Exports of capital goods declined for
capital goods excluding aircraft in Janu-    the second consecutive month, with
ary and February, shipments increased        weakness evident across a wide range
in March, but orders were flat. The          of products.
deteriorating outlook for sales, reduced         Real economic growth in the major
credit availability, and downbeat read-      advanced foreign economies was esti-
ings on business sentiment all pointed       mated to have slowed further in the first
to further weakness in capital spending      quarter and consumer and business sen-
in the near term. Real outlays for non-      timent was generally down. In Japan,
residential structures also were esti-       business sentiment fell significantly
mated to have declined in the first          and indicators of investment remained
quarter. Indicators suggested that the       weak. In the euro area, growth was esti-
demand for commercial properties had         mated to have remained subdued in the
fallen off substantially from record lev-    first quarter, with Germany and France
els last year, and commercial property       faring better than Italy and Spain.
prices appeared to be decelerating.          Growth in the United Kingdom slowed
Reduced credit availability and less-        in the first quarter, as credit conditions
favorable lending terms had apparently       tightened. Available data for Canada
weighed on activity in this sector.          indicated a continued substantial drag
   Real investment in nonfarm inven-         from exports in the first quarter, al-
tories excluding motor vehicles was          though domestic demand appeared rela-
estimated to have bounced back to a          tively robust. In emerging market econ-
moderate annual rate in the first quarter,   omies, economic growth slowed some
                                              Minutes of FOMC Meetings, April 265

in the fourth quarter and was estimated       economic activity had weakened fur-
to have held about steady in the first        ther; growth in consumer spending had
quarter. In emerging Asia, real eco-          slowed, and labor markets had softened.
nomic growth was estimated to have            It also indicated that financial markets
picked up in the first quarter from a         remained under considerable stress, and
robust pace in the fourth quarter, led by     that the tightening of credit conditions
brisk expansions in China and Sin-            and the deepening of the housing con-
gapore. Growth in other emerging              traction were likely to weigh on eco-
Asian economies generally remained            nomic growth over the next few quar-
subdued. The pace of expansion in             ters. Inflation had been elevated, and
Latin America likely declined some in         some indicators of inflation expecta-
the first quarter, largely because the        tions had risen, but the Committee
Mexican economy slowed in the wake            expected inflation to moderate in com-
of softer growth in the United States.        ing quarters, reflecting a projected
   Headline inflation in the United           leveling-out of energy and other com-
States was elevated in March. Although        modity prices and an easing of pres-
the increase in food prices slowed in         sures on resource utilization. Still, the
March relative to earlier in the year,        Committee noted that uncertainty about
energy prices rose sharply. Excluding         the inflation outlook had increased, and
these categories, core inflation rose at a    that it would be necessary to continue
relatively subdued rate again in March.       to monitor inflation developments care-
The core personal consumption expen-          fully. The Committee said that its
ditures (PCE) price index increased at a      action, combined with those taken ear-
somewhat more moderate rate in the            lier, including measures to foster market
first quarter than in the fourth quarter of   liquidity, should help to promote mod-
2007. Survey measures of households’          erate growth over time and to mitigate
expectations for year-ahead inflation         the risks to economic activity. The
rose further in early April, but survey       Committee noted, however, that down-
measures of longer-term inflation ex-         side risks to growth remained, and indi-
pectations moved relatively little. Aver-     cated that it would act in a timely man-
age hourly earnings increased in March        ner as needed to promote sustainable
at a somewhat slower pace than in             economic growth and price stability.
January and February. This wage mea-             Conditions in U.S. financial markets
sure rose significantly less over the         improved somewhat, on balance, over
12 months that ended in March than in         the intermeeting period, but strains in
the previous 12 months. The employ-           some short-term funding markets in-
ment cost index for hourly compensa-          creased. Pressures on bank balance
tion continued to rise at a moderate rate     sheets and capital positions appeared to
in the first quarter.                         mount further, reflecting additional
   At its March 18 meeting, the Federal       losses on asset-backed securities and on
Open Market Committee (FOMC) low-             business and household loans. Against
ered its target for the federal funds rate    this backdrop, term spreads in interbank
75 basis points, to 21⁄4 percent. In addi-    funding markets and spreads on com-
tion, the Board of Governors approved         mercial paper issued by financial insti-
a decrease of 75 basis points in the dis-     tutions widened significantly. Financial
count rate, to 21⁄2 percent. The Commit-      institutions continued to tap the Federal
tee’s statement noted that recent infor-      Reserve’s credit programs. Primary
mation indicated that the outlook for         credit borrowing picked up noticeably
266 95th Annual Report, 2008

after March 16, when the Federal             conditions in the Senior Loan Officer
Reserve reduced the spread between the       Opinion Survey on Bank Lending Prac-
primary credit rate and the target fed-      tices conducted in April. Part of the
eral funds rate to 25 basis points.          strength in commercial and industrial
Demand for funds from the Term Auc-          loans was apparently due to increased
tion Facility stayed high over the per-      utilization of existing credit lines, the
iod. In addition, the Primary Dealer         pricing of which reflects changes in
Credit Facility drew substantial demand      lending policies only with a lag. Some
through late March, although the             banks surveyed in April reported that
amount outstanding subsequently de-          they had started to take actions to limit
clined somewhat. Early in the period,        their exposure to home equity lines of
historically low interest rates on Trea-     credit, draws on which had grown rap-
sury bills and on general-collateral         idly in recent months. After having
Treasury repurchase agreements indi-         tightened considerably in March, condi-
cated a considerable demand for safe-        tions in the conforming segment of the
haven assets. However, Federal Reserve       residential mortgage market recovered
actions that increased the availability of   somewhat. Spreads of rates on con-
Treasury securities to the public appar-     forming residential mortgages over
ently helped to improve conditions in        those on comparable-maturity Treasury
those markets. In five weekly auctions       securities decreased, and credit default
beginning on March 27, the Term Secu-        swap premiums for the government-
rities Lending Facility provided a sub-      sponsored enterprises declined substan-
stantial volume of Treasury securities in    tially. Broad stock price indexes in-
exchange for less-liquid assets. Yields      creased markedly over the intermeeting
on short-term Treasury securities and        period, mainly in response to earnings
Treasury repurchase agreements moved         reports and announcements of recapital-
higher, on balance, following these auc-     izations from major financial institu-
tions; nonetheless, “haircuts” applied by    tions that evidently lessened investors’
lenders on non-Treasury collateral re-       concerns about the possibility of severe
mained elevated, and in some cases           difficulties materializing at those firms.
increased somewhat, toward the end of           Conditions in the money markets of
the period.                                  major foreign economies remained
   In longer-term credit markets, yields     strained, particularly in the United
on investment-grade corporate bonds          Kingdom and the euro area. Term inter-
rose, but their spreads relative to Trea-    bank funding spreads rose in these
sury securities decreased a bit from re-     areas, despite steps taken by their cen-
cent multiyear highs. In contrast, yields    tral banks to help ease liquidity pres-
on speculative-grade issues dropped,         sures. Yields on sovereign debt in the ad-
and their spreads relative to Treasury       vanced foreign economies moved up in
yields narrowed significantly. Gross         a range that was about in line with the
bond issuance by nonfinancial firms          increases in comparable Treasury yields
was robust in March and the first half       in the United States. The trade-
of April and included a small amount of      weighted foreign exchange value of the
issuance by speculative-grade firms.         dollar against major currencies rose.
Supported by increases in business and          M2 expanded briskly again in March,
residential real estate loans, commercial    as households continued to seek the
bank credit expanded briskly in March        relative liquidity and safety of liquid
despite the report of tighter lending        deposits and retail money market mu-
                                             Minutes of FOMC Meetings, April 267

tual funds. The increases in these com-      2009. The available indicators of recent
ponents were also supported by declines      economic activity had come in close to
in opportunity costs stemming from           the staff’s expectations and had contin-
monetary policy easing.                      ued to suggest that a substantial soften-
   Over the intermeeting period, the         ing in economic activity was under
expected path of monetary policy over        way. The staff projection pointed to a
the next year as measured by money           contraction of real GDP in the first half
market futures rates moved up signifi-       of 2008 followed by a modest rise in
cantly on net, apparently because eco-       the second half of this year, aided in
nomic data releases and announcements        part by the fiscal stimulus package. The
by large financial firms imparted            forecast showed real GDP expanding at
greater confidence among investors           a rate somewhat above its potential in
about the prospects for the economy’s        2009, reflecting the impetus from
performance in coming quarters. Fu-          cumulative monetary policy easing,
tures rates also moved up in response to     continued strength in net exports, a
both the Committee’s decision to lower       gradual lessening in financial market
the target for the federal funds rate by     strains, and the waning drag from past
75 basis points at the March 18 meet-        increases in energy prices. Despite this
ing, which was a somewhat smaller            pickup in the pace of activity, the trajec-
reduction than market participants had       tory of resource utilization anticipated
expected, and the Committee’s accom-         through 2009 implied noticeable slack.
panying statement, which reportedly          The projection for core PCE price infla-
conveyed more concern about inflation        tion in 2008 as a whole was unchanged;
than had been anticipated. The subse-        it was reduced a bit over the first half of
quent release of the minutes of the          the year to reflect the somewhat lower-
March FOMC meeting elicited limited          than-expected readings of recent core
reaction. Consistent with the higher         PCE inflation and raised a bit over the
expected path for policy and easing of       second half of the year to incorporate
safe-haven demands, yields on nominal        the spillover from larger-than-an-
Treasury coupon securities rose sub-         ticipated increases in prices of crude oil
stantially over the period, and the Trea-    and non-oil imports since the previous
sury yield curve flattened. Measures of      FOMC meeting. The forecast of head-
inflation compensation for the next five     line PCE inflation in 2008 was revised
years derived from yields on inflation-      up in light of the further run-up in
indexed Treasury securities were quite       energy prices and somewhat higher
volatile around the time of the March        food price inflation; headline PCE infla-
FOMC meeting and on balance in-              tion was expected to exceed core PCE
creased somewhat over the intermeeting       price inflation by a considerable margin
period, although they remained in the        this year. In view of the projected slack
lower portion of their range over the        in resource utilization in 2009 and flat-
past several months. Measures of             tening out of oil and other commodity
longer-term inflation compensation de-       prices, both core and headline PCE
clined, returning to around the middle       price inflation were projected to drop
of their recent elevated range.              back from their 2008 levels, in line with
   In the forecast prepared for this meet-   the staff’s previous forecasts.
ing, the staff made little change to its        In conjunction with the FOMC meet-
projection for the growth of real gross      ing in April, all meeting participants
domestic product (GDP) in 2008 and           (Federal Reserve Board members and
268 95th Annual Report, 2008

Reserve Bank presidents) provided an-        flect transitory factors, and energy and
nual projections for economic growth,        other commodity prices had increased
the unemployment rate, and inflation         further since March. Total PCE infla-
for the period 2008 through 2010. The        tion was projected to moderate from
projections are described in the Sum-        its current elevated level to between
mary of Economic Projections, which          11⁄2 percent and 2 percent in 2010,
is attached as an addendum to these          although participants stressed that this
minutes.                                     expected moderation was dependent on
   In their discussion of the economic       food and energy prices flattening out
situation and outlook, FOMC partici-         and critically on inflation expectations
pants noted that the data received since     remaining reasonably well anchored.
the March FOMC meeting, while point-            Conditions across a number of finan-
ing to continued weakness in economic        cial markets had improved since the
activity, had been broadly consistent        previous FOMC meeting. Equity prices
with their expectations. Conditions          and yields on Treasury securities had
across a number of financial markets         increased, volatility in both equity and
were judged to have improved over the        debt markets had ebbed somewhat, and
intermeeting period, but financial mar-      a range of credit risk premiums had
kets remained fragile and strains in         moved down. Participants noted that the
some markets had intensified. Although       better tone of financial markets had
participants anticipated that further im-    been helped by the apparent willingness
provement in market conditions would         and ability of financial institutions to
occur only slowly and that some back-        raise new capital. Investors’ confidence
sliding was possible, the generally bet-     had probably also been buoyed by cor-
ter state of financial markets had caused    porate earnings reports for the first
participants to mark down the odds that      quarter, which suggested that profit
economic activity could be severely dis-     growth outside of the financial sector
rupted by a further substantial deteriora-   remained solid, and also by the resolu-
tion in the financial environment. Eco-      tion of the difficulties of a major
nomic activity was anticipated to be         broker-dealer in mid-March. Moreover,
weakest over the next few months, with       the various liquidity facilities intro-
many participants judging that real          duced by the Federal Reserve in recent
GDP was likely to contract slightly in       months were thought to have bolstered
the first half of 2008. GDP growth was       market liquidity and aided a return to
expected to begin to recover in the sec-     more orderly market functioning. But
ond half of this year, supported by          participants emphasized that financial
accommodative monetary policy and            markets remained under considerable
fiscal stimulus, and to increase further     stress, noted that the functioning of
in 2009 and 2010. Views varied about         many markets remained impaired, and
the likely pace and vigor of the recov-      expressed concern that some of the
ery through 2009, although all partici-      recent recovery in markets could prove
pants projected GDP growth to be at or       fragile. Strains in short-term funding
above trend in 2010. Incoming informa-       markets had intensified over the inter-
tion on the inflation outlook since the      meeting period, in part reflecting con-
March FOMC meeting had been mixed.           tinuing pressures on the liquidity posi-
Readings on core inflation had im-           tions of financial institutions. Despite a
proved somewhat, but some of this            narrowing of spreads on corporate
improvement was thought likely to re-        bonds, credit conditions were seen as
                                            Minutes of FOMC Meetings, April 269

remaining tight. The Senior Loan Offi-      remained a key source of downside risk
cer Opinion Survey on Bank Lending          to participants’ projections for eco-
Practices conducted in April indicated      nomic growth.
that banks had tightened lending stan-         Growth in consumer spending ap-
dards and pricing terms on loans to both    peared to have slowed to a crawl in
businesses and households. Participants     recent months and consumer sentiment
stressed that it could take some time for   had fallen sharply. The pressure on
the financial system to return to a more    households’ real incomes from higher
normal footing, and a number of par-        energy prices and the erosion of wealth
ticipants were of the view that financial   resulting from continuing declines in
headwinds would probably continue to        house prices likely contributed to the
restrain economic activity through          deceleration in consumer outlays. Re-
much of next year. Even so, the likeli-     ports from contacts in the banking and
hood that the functioning of the finan-     financial services sectors indicated that
cial system would deteriorate substan-      the availability of both consumer credit
tially further with significant adverse     and home equity lines had tightened
implications for the economic outlook       considerably further in recent months
was judged by participants to have          and that delinquency rates on household
receded somewhat since the March            credit had continued to drift upwards.
FOMC meeting.                               Consumer sentiment and spending had
   The housing market had continued to      also been held down by the softening in
weaken since the previous meeting, and      labor markets—nonfarm payroll em-
participants saw little indication of a     ployment had fallen for the third con-
bottoming out in either housing activity    secutive month in March and the unem-
or prices. Housing starts and the de-       ployment rate had moved up. The
mand for new homes had declined fur-        restraint on spending emanating from
ther, house prices in many parts of the     weakness in labor markets was ex-
country were falling faster than they       pected to increase over coming quar-
had towards the end of 2007, and inven-     ters, with participants projecting the
tories of unsold homes remained quite       unemployment rate to pick up further
elevated. A small number of partici-        this year and to remain elevated in
pants reported tentative signs that hous-   2009.
ing activity in a few areas of the coun-       Consumption spending was likely to
try might be beginning to pick up, and      be supported in the near term by the
a narrowing of credit risk spreads on       fiscal stimulus package, which was
AAA indexes of sub-prime mortgages          expected to boost spending temporarily
in recent weeks was also noted. None-       in the middle of this year. Some partici-
theless, the outlook for the housing        pants suggested that the weak economic
market remained bleak, with housing         environment could increase the propen-
demand likely to be affected by restric-    sity of households to use their tax
tive conditions in mortgage markets,        rebates to pay down existing debt and
fears that house prices would fall fur-     so might diminish the impact of the
ther, and weakening labor markets. The      package. However, it was also noted
possibility that house prices could de-     that the tightening in credit availability
cline by more than anticipated, and that    might mean a significant number of
the effects of such a decline could be      households may be credit constrained
amplified through their impact on finan-    and this might increase the proportion
cial institutions and financial markets,    of the rebates that is spent. The timing
270 95th Annual Report, 2008

and magnitude of the impact of the           meeting had been mixed. Recent read-
stimulus package on GDP was also seen        ings on core inflation had improved
as depending on the extent to which the      somewhat, although participants noted
boost to consumption spending is ab-         that some of that improvement probably
sorbed by a temporary run-down in            reflected transitory factors. Moreover,
firms’ inventories or by an increase in      the increase in crude oil prices to record
imports rather than by an expansion in       levels, together with rapid increases
domestic output.                             in food and import prices in recent
   The outlook for business spending         months, was likely to put upward pres-
remained decidedly downbeat. Indica-         sure on inflation over the next few
tors of business sentiment were low,         quarters. Prices embedded in futures
and reports from business contacts sug-      contracts continued to point to a
gested that firms were scaling back          leveling-off of energy and commodity
their capital spending plans. Several        prices. Although these futures contracts
participants reported that uncertainty       probably remained the best basis for
about the economic outlook was leading       projecting movements in commodity
firms to defer spending projects until       prices, participants emphasized the con-
prospects for economic activity became       siderable uncertainty attending the
clearer. The tightening in the supply of     likely path of commodity prices and
business credit was also seen as holding     cautioned that commodity prices in
back investment, with some firms ap-         recent years had often advanced more
parently reluctant to reduce their liquid-   quickly than had been implied by fu-
ity positions in the current environment.    tures contracts. Several participants
Spending on nonresidential construction      reported that business contacts had
projects continued to slow, although the     expressed growing concerns about the
extent of that slowing varied across the     increase in their input costs and that
country. A few participants reported         there were signs that an increasing
that the commercial real estate market       number of firms were seeking to pass
in some areas remained relatively firm,      on these higher costs to their customers
supported by low vacancy rates.              in the form of higher prices. Other par-
   The strength of U.S. exports re-          ticipants noted, however, that the extent
mained a notable bright spot. Growth in      of the pass-through of higher energy
exports, which had been supported by         and food prices to core retail prices
solid advances in foreign economies          appeared relatively limited to date, and
and by declines in the foreign exchange      that profit margins in the nonfinancial
value of the dollar, had partially insu-     sector remained reasonably high, sug-
lated the output and profits of U.S. com-    gesting that there was some scope for
panies, especially those in the manu-        firms to absorb cost increases without
facturing sector, from the effects of        raising prices. Available data and anec-
weakening domestic demand. Several           dotal reports indicated that gains in
participants voiced concern, however,        labor compensation remained moderate,
that the pace of activity in the rest of     and some participants suggested that
the world could slow in coming quar-         wage growth was unlikely to pick up
ters, suggesting that the impetus pro-       sharply in coming quarters if, as antici-
vided from net exports might well            pated, labor markets remained relatively
diminish.                                    soft. However, several participants were
   The information received on the in-       of the view that wage inflation tended
flation outlook since the March FOMC         to lag increases in prices and so may
                                             Minutes of FOMC Meetings, April 271

not provide a useful guide to emerging       ronment. Several participants expressed
price pressures.                             the view that the easing in monetary
   On balance, participants expected the     policy since last fall had not as yet led
recent increases in oil and food prices      to a loosening in overall financial con-
to continue to boost overall consumer        ditions, but rather had prevented finan-
price inflation in the near term; thereaf-   cial conditions from tightening as much
ter, total inflation was projected to mod-   as they otherwise would have in re-
erate, with all participants expecting       sponse to escalating strains in financial
total PCE inflation of between 11⁄2 per-     markets. This view suggested that the
cent and 2 percent by 2010. Participants     stimulus from past monetary policy eas-
stressed that the expected moderation in     ing would be felt mainly as conditions
inflation was dependent on the contin-       in financial markets improved.
ued stability of inflation expectations. A      In the Committee’s discussion of
number of participants voiced concern        monetary policy for the intermeeting
that long-term inflation expectations        period, most members judged that pol-
could drift upwards if headline inflation    icy should be eased by 25 basis points
remained elevated for a protracted per-      at this meeting. Although prospects for
iod or if the recent substantial policy      economic activity had not deteriorated
easing was misinterpreted by the public      significantly since the March meeting,
as suggesting that Committee members         the outlook for growth and employment
had a greater tolerance for inflation than   remained weak and slack in resource
previously thought. The possibility that     utilization was likely to increase. An
inflation expectations could increase        additional easing in policy would help
was viewed as a key upside risk to the       to foster moderate growth over time
inflation outlook. However, participants     without impeding a moderation in infla-
emphasized that appropriate monetary         tion. Moreover, although the likelihood
policy, combined with effective com-         that economic activity would be se-
munication of the Committee’s commit-        verely disrupted by a sharp deteriora-
ment to price stability, would mitigate      tion in financial markets had apparently
this risk.                                   receded, most members thought that the
   Participants stressed the difficulty of   risks to economic growth were still
gauging the appropriate stance of policy     skewed to the downside. A reduction in
in current circumstances. Some partici-      interest rates would help to mitigate
pants noted that the level of the federal    those risks. However, most members
funds target, especially when compared       viewed the decision to reduce interest
with the current rate of inflation, was      rates at this meeting as a close call. The
relatively low by historical standards.      substantial easing of monetary policy
Even taking account of current financial     since last September, the ongoing steps
headwinds, such a low rate could sug-        taken by the Federal Reserve to provide
gest that policy was reasonably accom-       liquidity and support market function-
modative. However, other participants        ing, and the imminent fiscal stimulus
observed that the pronounced strains in      would help to support economic activ-
banking and financial markets imparted       ity. Moreover, although downside risks
much greater uncertainty to such assess-     to growth remained, members were also
ments and meant that measures of the         concerned about the upside risks to the
stance of policy based on the real fed-      inflation outlook, given the continued
eral funds rate were not likely to pro-      increases in oil and commodity prices
vide a reliable guide in the current envi-   and the fact that some indicators sug-
272 95th Annual Report, 2008

gested that inflation expectations had             The vote encompassed approval of
risen in recent months. Nonetheless,            the statement below to be released at
most members agreed that a further,             2:15 p.m.:
modest easing in the stance of policy
                                                   The Federal Open Market Committee
was appropriate to balance better the           decided today to lower its target for the fed-
risks to achieving the Committee’s dual         eral funds rate 25 basis points to 2 percent.
objectives of maximum employment                   Recent information indicates that eco-
and price stability over the medium run.        nomic activity remains weak. Household
   The Committee agreed that the state-         and business spending has been subdued
                                                and labor markets have softened further.
ment to be released after the meeting           Financial markets remain under consider-
should take note of the substantial pol-        able stress, and tight credit conditions and
icy easing to date and the ongoing mea-         the deepening housing contraction are likely
sures to foster market liquidity. In light      to weigh on economic growth over the next
of these significant policy actions, the        few quarters.
risks to growth were now thought to be             Although readings on core inflation have
                                                improved somewhat, energy and other com-
more closely balanced by the risks to           modity prices have increased, and some
inflation. Accordingly, the Committee           indicators of inflation expectations have
felt that it was no longer appropriate for      risen in recent months. The Committee
the statement to emphasize the down-            expects inflation to moderate in coming
side risks to growth. Given these cir-          quarters, reflecting a projected leveling-out
                                                of energy and other commodity prices and
cumstances, future policy adjustments           an easing of pressures on resource utiliza-
would depend on the extent to which             tion. Still, uncertainty about the inflation
economic and financial developments             outlook remains high. It will be necessary to
affected the medium-term outlook for            continue to monitor inflation developments
growth and inflation. In that regard,           carefully.
                                                   The substantial easing of monetary policy
several members noted that it was un-           to date, combined with ongoing measures to
likely to be appropriate to ease policy in      foster market liquidity, should help to pro-
response to information suggesting that         mote moderate growth over time and to
the economy was slowing further or              mitigate risks to economic activity. The
even contracting slightly in the near           Committee will continue to monitor eco-
                                                nomic and financial developments and will
term, unless economic and financial             act as needed to promote sustainable eco-
developments indicated a significant            nomic growth and price stability.
weakening of the economic outlook.
                                                     Votes for this action: Messrs. Ber-
   At the conclusion of the discussion,              nanke, Geithner, Kohn, Kroszner, and
the Committee voted to authorize and                 Mishkin, Ms. Pianalto, Messrs. Stern
direct the Federal Reserve Bank of New               and Warsh. Votes against this action:
York, until it was instructed otherwise,             Messrs. Fisher and Plosser.
to execute transactions in the System              Messrs. Fisher and Plosser dissented
Account in accordance with the follow-          because they preferred no change in the
ing domestic policy directive:                  target federal funds rate at this meeting.
   The Federal Open Market Committee            Although the economy had been weak,
seeks monetary and financial conditions that    it had evolved roughly as expected
will foster price stability and promote sus-    since the previous meeting. Stresses in
tainable growth in output. To further its       financial markets also had continued,
long-run objectives, the Committee in the
immediate future seeks conditions in reserve    but the Federal Reserve’s liquidity fa-
markets consistent with reducing the federal    cilities were helpful in that regard and
funds rate to an average of around 2 percent.   the more worrisome development in
                                             Minutes of FOMC Meetings, April 273

their view was the outlook for inflation.    ducing the burden and complexity
Rising prices for food, energy, and          associated with the current system of
other commodities; signs of higher in-       reserve requirements and ensuring that
flation expectations; and a negative real    the Committee’s interest rate targets
federal funds rate raised substantial        could be reliably achieved. Participants
concerns about the prospects for infla-      noted that frameworks for monetary
tion. Mr. Plosser cited the recent rapid     policy implementation employed in
growth of monetary aggregates as addi-       other countries span a wide range and
tional evidence that the economy had         that the experiences of these countries
ample liquidity after the aggressive eas-    provided useful information for the
ing of policy to date. Mr. Fisher was        Federal Reserve’s consideration of al-
concerned that an adverse feedback           ternative approaches. They agreed that
loop was developing by which lowering        further study was required to narrow the
the funds rate had been pushing down         range of options under consideration
the exchange value of the dollar, con-       and that it would be important to con-
tributing to higher commodity and im-        sult closely with depository institutions
port prices, cutting real spending by        and others in the design of a new
businesses and households, and there-        system.
fore ultimately impairing economic ac-          It was agreed that the next meeting of
tivity. To help prevent inflation ex-        the Committee would be held on Tues-
pectations from becoming unhinged,           day−Wednesday, June 24–25, 2008.
both Messrs. Fisher and Plosser felt the        The meeting adjourned at 1:00 p.m.
Committee should put additional em-
phasis on its price stability goal at this
point, and they believed that another
                                             Notation Votes
reduction in the funds rate at this meet-    By notation vote completed on March
ing could prove costly over the longer       20, 2008, the Committee unanimously
run.                                         approved a resolution that added non-
   In a joint session of the Federal Open    agency AAA-rated commercial-mort-
Market Committee and the Board of            gage-backed securities to the list of col-
Governors, meeting participants turned       lateral acceptable in connection with the
to a discussion of the implications of       Term Securities Lending Facility.
the payment of interest on reserves for         By notation vote completed on April
monetary policy implementation. Fol-         7, 2008, the Committee unanimously
lowing passage of the Financial Ser-         approved the minutes of the FOMC
vices Regulatory Relief Act of 2006,         meeting held on March 18, 2008.
which will permit the Federal Reserve
to reduce reserve requirements and to                               Brian F. Madigan
pay interest on reserves beginning in                                       Secretary
2011, the staff had undertaken work to
explore and evaluate alternative ap-         Addendum:
proaches to monetary policy implemen-        Summary of Economic Projections
tation using these new authorities. After
a staff presentation summarizing the         In conjunction with the April 2008
work to date, policymakers discussed         FOMC meeting, the members of the
the potential advantages and disadvan-       Board of Governors and the presidents
tages of several of the alternative ap-      of the Federal Reserve Banks, all of
proaches. Considerations included re-        whom participate in the deliberations of
274 95th Annual Report, 2008

Table 1. Economic Projections of Federal Reserve Governors and Reserve Bank Presidents
                Percent

                                                          2008                         2009                        2010
Central Tendency1
  Growth of real GDP . . . . . . . . . . . . .          0.3   to   1.2               2.0   to   2.8              2.6   to   3.1
    January projections . . . . . . . . . . .           1.3   to   2.0               2.1   to   2.7              2.5   to   3.0
  Unemployment rate . . . . . . . . . . . . . .         5.5   to   5.7               5.2   to   5.7              4.9   to   5.5
    January projections . . . . . . . . . . .           5.2   to   5.3               5.0   to   5.3              4.9   to   5.1
  PCE inflation . . . . . . . . . . . . . . . . . . .   3.1   to   3.4               1.9   to   2.3              1.8   to   2.0
    January projections . . . . . . . . . . .           2.1   to   2.4               1.7   to   2.0              1.7   to   2.0
  Core PCE inflation . . . . . . . . . . . . . .        2.2   to   2.4               1.9   to   2.1              1.7   to   1.9
    January projections . . . . . . . . . . .           2.0   to   2.2               1.7   to   2.0              1.7   to   1.9
Range2
  Growth of real GDP . . . . . . . . . . . . .          0.0   to   1.5               1.8   to   3.0              2.0   to   3.4
    January projections . . . . . . . . . . .           1.0   to   2.2               1.8   to   3.2              2.2   to   3.2
  Unemployment rate . . . . . . . . . . . . . .         5.3   to   6.0               5.2   to   6.3              4.8   to   5.9
    January projections . . . . . . . . . . .           5.0   to   5.5               4.9   to   5.7              4.7   to   5.4
  PCE inflation . . . . . . . . . . . . . . . . . . .   2.8   to   3.8               1.7   to   3.0              1.5   to   2.0
    January projections . . . . . . . . . . .           2.0   to   2.8               1.7   to   2.3              1.5   to   2.0
  Core PCE inflation . . . . . . . . . . . . . .        1.9   to   2.5               1.7   to   2.2              1.3   to   2.0
    January projections . . . . . . . . . . .           1.9   to   2.3               1.7   to   2.2              1.4   to   2.0

   Note: Projections of the growth of real GDP, of PCE                   ployment rate in the fourth quarter of the year indicated.
inflation, and of core PCE inflation are percent changes                 Each participant’s projections are based on his or her
from the fourth quarter of the previous year to the fourth               assessment of appropriate monetary policy.
quarter of the year indicated. PCE inflation and core PCE                   1. The central tendency excludes the three highest and
inflation are the percentage rates of change in, respec-                 three lowest projections for each variable in each year.
tively, the price index for personal consumption expendi-                   2. The range for a variable in a given year includes all
tures and the price index for personal consumption                       participants’ projections, from lowest to highest, for that
expenditures excluding food and energy. Projections for                  variable in that year.
the unemployment rate are for the average civilian unem-




the FOMC, provided projections for the                                   growth to be much weaker in 2008 than
rates of economic growth, unemploy-                                      last year, owing primarily to a contin-
ment, and inflation in 2008, 2009, and                                   ued contraction of housing activity, a
2010. Projections were based on infor-                                   reduction in the availability of house-
mation available through the conclusion                                  hold and business credit, and rising
of the April meeting, on each partici-                                   energy prices. The unemployment rate
pant’s assumptions regarding a range of                                  was expected to increase significantly.
factors likely to affect economic out-                                   However, output growth further ahead
comes, and on his or her assessment of                                   was projected to pick up by enough to
appropriate monetary policy. “Appro-                                     begin to reverse some of the increase in
priate monetary policy” is defined as                                    the unemployment rate by 2010. In
the future policy that, based on current                                 light of the recent surge in the prices
information, is deemed most likely to                                    of oil and other commodities, inflation
foster outcomes for economic activity                                    was expected to remain elevated in
and inflation that best satisfy the par-                                 2008. Inflation was projected to moder-
ticipant’s interpretation of the Federal                                 ate in 2009 and 2010 as the prices of
Reserve’s dual objectives of maximum                                     crude oil and other commodities level
employment and price stability.                                          out and economic slack damps cost
   The projections, which are summa-                                     and price pressures. Most participants
rized in table 1 and chart 1, suggest that                               judged that the uncertainty around their
FOMC participants expected economic                                      projections for both output growth and
                                          Minutes of FOMC Meetings, April 275




inflation was greater than normal. Most   The Outlook
viewed the risks to output as weighted
to the downside. Participants were        The central tendency of participants’
roughly evenly divided as to whether      projections for real GDP growth in
the risks to the inflation outlook are    2008, at 0.3 to 1.2 percent, was consid-
broadly balanced or skewed to the         erably lower than the central tendency
upside.                                   of the projections provided in conjunc-
276 95th Annual Report, 2008

tion with the January FOMC meeting,             With output growth well below trend
which was 1.3 to 2.0 percent. Partici-       this year, most participants expected
pants viewed activity as likely to be        that the unemployment rate would
particularly weak in the first half of       move up. The central tendency of par-
2008; some rebound was anticipated in        ticipants’ projections for the average
the second half of the year. Incoming        rate of unemployment in the fourth
data on spending and employment              quarter of 2008 was 5.5 to 5.7 percent,
already indicated a softening economy        above the 5.2 to 5.3 percent unemploy-
this year. Real incomes were being held      ment rate forecasted in January and
down by higher oil prices; falling house     consistent with significant slack in labor
prices had reduced household wealth;         markets and the economy. Most partici-
and households and businesses were           pants expected the unemployment rate
facing tighter credit conditions. Exports    to edge down in 2009 and 2010.
were seen as a notable source of                The steep run-up in the prices of oil
strength this year owing to continued        and other commodities since January
economic growth overseas and the de-         was the primary factor leading partici-
preciation of the dollar over the past       pants to revise up sharply their projec-
year or so. Many participants also said      tions for overall inflation in the near
that the substantial easing of monetary      term. In contrast, the central tendencies
policy since last year and the fiscal        of the projections for core PCE inflation
stimulus package should help to support      in 2008 increased only moderately,
spending in the second half of the year.     from 2.0 to 2.2 percent in January to
Beyond 2008, factors projected to buoy       2.2 to 2.4 percent in April, reflecting
economic growth included the contin-         the effects of higher food and energy
ued effects of an accommodative stance       prices on other goods and services and
of monetary policy in conjunction with       the rise in import prices associated with
a gradual easing of financial market         the decline in the dollar and higher
strains, a stabilization in housing mar-     inflation in our trading partners.
kets, and a leveling-off of oil and             Rates of both overall and core infla-
commodity prices. Participants were en-      tion were expected to decline over the
couraged by steps taken at major fi-         next two years, reflecting a flattening
nancial institutions to bolster their bal-   out of the prices of oil and other com-
ance sheets and to raise new capital.        modities consistent with futures market
Some expressed the view that financial       prices and the effects of significant eco-
market sentiment may have swung ex-          nomic slack. Participants’ projections
cessively to the pessimistic side, and       for 2010 were importantly influenced
that risk spreads would come down and        by their judgments about the measured
credit would become more available as        rates of inflation consistent with the
risk aversion diminishes. Also, demand       Federal Reserve’s dual mandate to pro-
and supply in the housing market             mote maximum employment and price
should become better aligned as the de-      stability and about the time frame over
cline in house prices increases the          which policy should aim to attain those
affordability of homeownership and the       rates given current economic condi-
decline in housing starts reduces the        tions. Many participants judged that,
supply of new homes. Most participants       given the recent adverse shocks to both
expected real GDP to grow roughly at         aggregate demand and inflation, policy
their estimates of its trend rate in 2009    would be able to foster only a gradual
and somewhat above trend in 2010.            return of key macroeconomic variables
                                              Minutes of FOMC Meetings, April 277

to their longer-run sustainable or opti-      Some noted that downside risks to
mal levels. Consequently, the rate of         aggregate demand implied a risk of
unemployment was projected by many            greater economic slack and correspond-
participants to remain above its longer-      ing downside risks to price pressures.
run sustainable level even in 2010, and       However, many participants (noticeably
inflation was viewed likely still to be a     more than in January) saw the upside
bit above levels that some participants       risks to inflation as greater than the
judged would be consistent with the           downside risks to inflation. In particu-
Federal Reserve’s dual mandate.               lar, the pass-through of recent increases
                                              in energy and commodity prices as well
                                              as of past dollar depreciation to con-
Risks to the Outlook
                                              sumer prices could be greater than ex-
Most participants viewed the risks to         pected. In addition, some participants ex-
their GDP projections as weighted to          pressed concern that commodity prices
the downside and the associated risks to      may not flatten out as implied by fu-
their projections of the unemployment         tures prices, thus putting further up-
rate as tilted to the upside. The possibil-   ward pressure on prices. Finally, infla-
ity that house prices could decline more      tion expectations could become less
steeply than anticipated, putting fur-        firmly anchored if the current elevated
ther downward pressure on residential         rates of inflation were to persist for
investment and consumption, was per-          longer than anticipated or if the public
ceived as a significant risk to the out-      were to misinterpret the recent substan-
look for economic growth and employ-          tial policy easing as reflecting less re-
ment. Another risk was the possibility        solve among Committee members to
that foreign economies might slow             maintain low and stable inflation.
more than expected, damping U.S. ex-             Participants continued to view uncer-
ports. Financial market conditions con-       tainty about the outlook for economic
tinued to pose serious risks—stock            activity as higher than normal, with
prices had declined on net since the          some noting that economic slowdowns
January meeting and credit conditions         are generally associated with heightened
had tightened further for both house-         uncertainty as are episodes of unusual
holds and firms. Although several par-        credit restraint. In addition, participants
ticipants noted that financial strains had    expressed notably more uncertainty
eased somewhat in April, most agreed          about their inflation projections than
that overall financial conditions re-         they had in January, reflecting in part
mained tighter than at the beginning of       the difficulty of assessing the opposing
the year. The potential for adverse inter-    effects of increased economic slack and
actions, in which weaker economic             higher energy prices. (Table 2 provides
activity could lead to a worsening of         estimates of average ranges of forecast
financial conditions and a reduced avail-     uncertainty for GDP growth, unemploy-
ability of credit, which in turn could fur-   ment, and inflation since 1987.7)
ther damp economic growth, continued
to be viewed as a worrisome possibility.
   Regarding risks to the inflation out-         7. The box “Forecast Uncertainty” at the end
look, participants pointed to the possi-      of this summary discusses the sources and inter-
                                              pretation of uncertainty in economic forecasts and
bility that economic slack could put          explains the approach used to assess the uncer-
either more or less downward pressure         tainty and risks attending participants’ projec-
on costs and prices than anticipated.         tions.
278 95th Annual Report, 2008

Table 2. Average Historical Projection Error                   was also apparent in projections for the
         Ranges                                                unemployment rate. The dispersion of
                 Percentage points                             projections for output and employment
                                       2008   2009   2010      in 2008 seemed largely to reflect differ-
             1
Real GDP . . . . . . . . . . . . . .   ±1.0   ±1.3   ±1.4      ing assessments of the effect of finan-
Unemployment rate2 . . . . .           ±0.4   ±0.7   ±1.0      cial market conditions on real activity,
Total consumer prices3 . . .           ±0.7   ±1.0   ±1.0
                                                               the speed with which credit conditions
   Note: Error ranges shown are measured as plus or            might improve, and the depth and dura-
minus the root mean squared error of projections that
were released in the spring from 1987 through 2007 for         tion of the housing market contraction.
the current and following two years by various private         For 2009, views differed notably about
and government forecasters. As described in the box
“Forecast Uncertainty,” under certain assumptions, there
                                                               the pace at which output and employ-
is about a 70 percent probability that actual outcomes for     ment would recover, with some partici-
real GDP, unemployment, and consumer prices will be in         pants concerned that financial strains
ranges implied by the average size of projection errors
made in the past. Further information is in David Reif-        could prove more persistent than most
schneider and Peter Tulip (2007), “Gauging the Uncer-          participants expected. The dispersion of
tainty of the Economic Outlook from Historical Forecast-
ing Errors,” Finance and Economics Discussion Series
                                                               participants’ longer-term projections
#2007-60 (November).                                           was also affected to some degree by dif-
   1. Projection is percent change, fourth quarter of the      ferences in their judgments about the
previous year to fourth quarter of the year indicated.
   2. Projection is the fourth-quarter average of the civil-   economy’s trend growth rate and the
ian unemployment rate (percent).                               unemployment rate that would be con-
   3. Measure is the overall consumer price index, the
price measure that has been most widely used in govern-        sistent over time with maximum em-
ment and private economic forecasts. Projection is per-        ployment. The dispersion of the projec-
cent change, fourth quarter of the previous year to the        tions for PCE inflation in 2008 and
fourth quarter of the year indicated.
                                                               2009 had widened somewhat since
Diversity of Participants’ Views                               January, reflecting different views on
                                                               the extent to which recent increases in
Charts 2(a) and 2(b) provide more
                                                               the prices of oil and other commodities
detail on the diversity of participants’
                                                               would pass through into higher con-
views. The dispersions of participants’
projections for real GDP growth in                             sumer prices, on whether the prices of
2008 and 2009 were roughly equally                             oil and other commodities would flatten
wide in January and April, but for 2010                        out as implied in futures market prices,
the dispersion was a bit wider in April.                       and on the influence that inflation ex-
Relative to the projections made in June                       pectations would exert on inflation over
2007, just before the onset of financial                       the short and medium run. Participants’
market turbulence, the diversity in                            inflation projections further out were
views about real activity had widened                          influenced by their views of the rate of
considerably.8 This increased dispersion                       inflation consistent with the Federal
                                                               Reserve’s dual objectives and the time
   8. The June 2007 projections were included in
                                                               it would take to achieve these goals
the Board’s Monetary Policy Report to the Con-                 given current economic conditions and
gress in July 2007.                                            appropriate policy.
Minutes of FOMC Meetings, April 279
280 95th Annual Report, 2008
                                               Minutes of FOMC Meetings, April 281



Forecast Uncertainty
The economic projections provided by the        jections are broadly balanced, the num-
members of the Board of Governors and           bers reported in table 2 would imply a
the presidents of the Federal Reserve           probability of about 70 percent that
Banks inform discussions of monetary            actual GDP would expand between
policy among policymakers and can aid           2.0 percent to 4.0 percent in the current
public understanding of the basis for pol-      year, 1.7 percent to 4.3 percent in the
icy actions. Considerable uncertainty at-       second year, and 1.6 percent to 4.4 per-
tends these projections, however. The           cent in the third year. The corresponding
economic and statistical models and rela-       70 percent confidence intervals for over-
tionships used to help produce economic         all inflation would be 1.3 percent to
forecasts are necessarily imperfect de-         2.7 percent in the current year and
scriptions of the real world. And the           1.0 percent to 3.0 percent in the second
future path of the economy can be af-           and third years.
fected by myriad unforeseen develop-               Because current conditions may differ
ments and events. Thus, in setting the          from those that prevailed on average
stance of monetary policy, participants         over history, participants provide judg-
consider not only what appears to be the        ments as to whether the uncertainty
most likely economic outcome as embod-          attached to their projections of each vari-
ied in their projections, but also the range    able is greater than, smaller than, or
of alternative possibilities, the likelihood    broadly similar to typical levels of fore-
of their occurring, and the potential costs     cast uncertainty in the past as shown in
to the economy should they occur.               table 2. Participants also provide judg-
   Table 2 summarizes the average his-          ments as to whether the risks to their
torical accuracy of a range of forecasts,       projections are weighted to the upside,
including those reported in past Monetary       downside, or are broadly balanced. That
Policy Reports and those prepared by            is, participants judge whether each vari-
Federal Reserve Board staff in advance of       able is more likely to be above or below
meetings of the Federal Open Market             their projections of the most likely out-
Committee. The projection error ranges          come. These judgments about the uncer-
shown in the table illustrate the consider-     tainty and the risks attending each par-
able uncertainty associated with economic       ticipant’s projections are distinct from
forecasts. For example, suppose a partici-      the diversity of participants’ views about
pant projects that real GDP and total con-      the most likely outcomes. Forecast
sumer prices will rise steadily at annual       uncertainty is concerned with the risks
rates of, respectively, 3 percent and 2 per-    associated with a particular projection,
cent. If the uncertainty attending those        rather than with divergences across a
projections is similar to that experienced      number of different projections.
in the past and the risks around the pro-
282 95th Annual Report, 2008

Meeting Held on                                         Mr. Cole, Director, Division of Bank-
June 24–25, 2008                                            ing Supervision and Regulation,
                                                            Board of Governors
A meeting of the Federal Open Market                    Mr. Struckmeyer, Deputy Staff Direc-
Committee was held in the offices of                        tor, Office of Staff Director for
the Board of Governors of the Federal                       Management, Board of Governors
Reserve System in Washington, D.C.,                     Mr. Blanchard, Assistant to the Board,
on Tuesday, June 24, 2008 at 2:00 p.m.                      Office of Board Members, Board
and continued on Wednesday, June 25,                        of Governors
2008 at 9:00 a.m.                                       Mr. Frierson,9 Deputy Secretary, Office
                                                             of the Secretary, Board of Gover-
Present:
                                                             nors
    Mr. Bernanke, Chairman
    Mr. Geithner, Vice Chairman                         Ms. Bailey,9 Deputy Director, Division
    Mr. Fisher                                              of Banking Supervision and Regu-
    Mr. Kohn                                                lation, Board of Governors
    Mr. Kroszner
    Mr. Mishkin                                         Mr. Clouse, Deputy Director, Division
    Ms. Pianalto                                            of Monetary Affairs, Board of
    Mr. Plosser                                             Governors
    Mr. Stern                                           Mr. Parkinson,9 Deputy Director, Divi-
    Mr. Warsh                                               sion of Research and Statistics,
     Ms. Cumming, Messrs. Evans, Lacker,                    Board of Governors
         and Lockhart, and Ms. Yellen,                  Ms. Barger,9 Deputy Director, Division
         Alternate Members of the Federal                   of Banking Supervision and Regu-
         Open Market Committee                              lation, Board of Governors
     Messrs. Bullard, Hoenig, and Rosen-                Mr. Stehm,9 Associate Director, Divi-
         gren, Presidents of the Federal                    sion of Reserve Bank Operations
         Reserve Banks of St. Louis, Kan-                   and Payment Systems, Board of
         sas City, and Boston, respectively                 Governors
     Mr. Madigan, Secretary and Economist               Messrs. Reifschneider and Wascher,
     Ms. Danker, Deputy Secretary                           Associate Directors, Division of
     Mr. Skidmore, Assistant Secretary                      Research and Statistics, Board of
     Ms. Smith, Assistant Secretary                         Governors
     Mr. Alvarez, General Counsel
     Mr. Baxter, Deputy General Counsel                 Mr. Gagnon, 10 Visiting Associate
     Mr. Sheets, Economist                                  Director, Division of Monetary
     Mr. Stockton, Economist                                Affairs, Board of Governors
     Messrs. Connors, English, and Kamin,               Mr. Wright, Deputy Associate Director,
         Ms. Mester, Messrs. Rolnick,                       Division of Monetary Affairs,
         Rosenblum, Slifman, Tracy, and                     Board of Governors
         Wilcox, Associate Economists
                                                                  ˇ
                                                        Mr. Zakrajsek, Assistant Director, Divi-
     Mr. Dudley, Manager, System Open                        sion of Monetary Affairs, Board
         Market Account                                      of Governors
     Ms. J. Johnson,9 Secretary, Office of              Mr. Erceg,10 Assistant Director, Divi-
         the Secretary, Board of Governors                  sion of International Finance,
                                                            Board of Governors

  9. Attended portion of the meeting relating to
the supervisory report concerning investment          10. Attended portions of the meeting through
banks and related policy issues.                   the policy vote.
                                                Minutes of FOMC Meetings, June 283

    Mr. Oliner, Senior Adviser, Division of     velopments in foreign exchange mar-
        Research and Statistics, Board of       kets. There were no open market opera-
        Governors                               tions in foreign currencies for the
    Mr. Gross,9 Special Assistant to the        System’s account in the period since the
        Board, Office of Board Members,         previous meeting. The Manager also
        Board of Governors                      reported on developments in domestic
    Ms. Tevlin,10 Senior Economist, Divi-       financial markets and on System open
        sion of Research and Statistics,        market operations in government secu-
        Board of Governors                      rities and federal agency obligations
    Mr. Ammer,10 Senior Economist, Divi-        during the period since the previous
        sion of International Finance,          meeting. By unanimous vote, the Com-
        Board of Governors                      mittee ratified these transactions.
                                                   The information reviewed at the June
    Ms. Beechey, Economist, Division of
        Monetary Affairs, Board of Gov-         meeting indicated that economic activ-
        ernors                                  ity had remained soft in recent months.
                                                Manufacturing activity had deteriorated,
    Ms. Dykes, Project Manager, Division        business investment in equipment ap-
        of Monetary Affairs, Board of
        Governors                               peared to have moved down, and resi-
                                                dential construction had continued its
    Mr. Luecke, Section Chief, Division of      steep descent. Labor market conditions
        Monetary Affairs, Board of Gov-         had weakened further, and consumer
        ernors
                                                sentiment was at historical lows, but
    Ms. Beattie,9 Assistant to the Secretary,   despite these developments, consumer
        Office of the Secretary, Board of       spending appeared resilient. Core con-
        Governors                               sumer price inflation had been stable
    Ms. Low, Open Market Secretariat            over recent months, but headline infla-
        Specialist, Division of Monetary        tion had remained elevated because of
        Affairs, Board of Governors             further substantial increases in food and
    Ms. Hughes,9 Staff Assistant, Office of     energy prices.
        the Secretary, Board of Governors          Labor demand continued to weaken
    Mr. Barron, First Vice President, Fed-      in April and May. Private payroll em-
        eral Reserve Bank of Atlanta            ployment fell at a slower rate than ear-
                                                lier in the year, but the decline in jobs
    Mr. Fuhrer, Executive Vice President,
        Federal Reserve Bank of Boston          was again widespread, with the excep-
                                                tion of nonbusiness services. As a re-
    Messrs. Altig, Angulo,9 Rasche, Sch-        sult, aggregate hours of private produc-
        weitzer, Sellon, and Weinberg,          tion or nonsupervisory workers fell, on
        Senior Vice Presidents, Federal
        Reserve Banks of Atlanta, New           average, in April and May. The un-
        York, St. Louis, Cleveland, Kan-        employment rate jumped from 5.0 per-
        sas City, and Richmond, respec-         cent in April to 5.5 percent in May and
        tively                                  was now about a percentage point
    Messrs. Fernald and Fisher, and Ms.         above its level of a year ago. The in-
        McLaughlin, Vice Presidents,            crease from April to May was accompa-
        Federal Reserve Banks of San            nied by a rise in labor force participa-
        Francisco, Chicago, and New             tion, especially among young people.
        York, respectively
                                                   Industrial production contracted in
 The Manager of the System Open                 April and May at a slightly faster pace
Market Account reported on recent de-           than in the first quarter. Manufacturing
284 95th Annual Report, 2008

output also fell in April and was un-       sulted in continued reductions of inven-
changed in May; over the two months,        tories of unsold new homes, the slow
factory production slowed across a          pace of sales left the ratio of unsold
broad range of industries. Production in    new homes to sales at elevated levels
the high-tech sector continued to ex-       not seen since the early 1980s. Sales of
pand but at only a modest rate. The fac-    existing homes remained little changed
tory utilization rate edged down further    through April at a low level. However,
in April and May to a level below its       the index of pending sales agree-
first-quarter average and was well          ments—an indicator of existing home
below its recent high in the third quar-    sales in coming months—jumped in
ter of 2007.                                April to its highest reading in six
   The growth of real consumer spend-       months. Conditions in mortgage credit
ing appeared to have picked up moder-       markets remained tight, particularly for
ately from its sluggish pace in the first   nonprime borrowers and for those seek-
quarter. Real outlays on goods other        ing nonconforming mortgages.
than motor vehicles increased at a             In the business sector, real spending
robust pace, on average, in April and       on equipment and software appeared to
May. However, retail purchases of mo-       move down a bit further in April and
tor vehicles fell to a low level. More      May following a slight decrease in the
broadly, households’ financial condi-       first quarter. Business outlays on trans-
tions appeared to have weakened in          portation equipment continued to fall
recent months. Real disposable personal     sharply. The data on shipments and
income had been rising only slowly          orders of nondefense capital goods
since last summer, restrained by the        through May suggested that spending
gradual deterioration in labor market       on high-tech equipment and software
conditions and sharp increases in food      was expanding sluggishly, while outlays
and energy prices. The ratio of house-      for other equipment remained weak.
hold wealth to income had dropped           The slower pace of capital expenditures
sharply in the first quarter, reflecting    appeared consistent with a general dete-
substantial net declines in broad equity    rioration of business conditions, includ-
prices and further depreciation of house    ing a deceleration of sales, a pessimistic
prices. Measures of consumer sentiment      tone across monthly surveys of business
fell further in April and May; the May      conditions, and tighter standards and
readings from the Reuters/University of     terms on business credit. Real spending
Michigan Surveys of Consumers and           on nonresidential construction contin-
the Conference Board Consumer Confi-        ued to rise in the first quarter, but at a
dence Survey were near their low points     substantially slower rate than over the
reached during the early 1990s.             previous two years. The architectural
   Activity in the housing sector re-       billing index plummeted recently, and
mained very weak in April and May.          vacancy rates for commercial properties
Single-family housing starts posted fur-    ticked up.
ther declines, leaving the pace of con-        Real nonfarm inventories excluding
struction in this sector down about two-    motor vehicles rose only slightly in the
thirds from the peak in early 2006;         first quarter, as firms cut production to
starts of multifamily homes were a bit      keep inventories aligned with the slug-
below their average over the last           gish pace of sales. The ratio of book-
10 years. Although production cuts in       value inventories to sales (excluding
the single-family housing sector re-        motor vehicles) ticked down in April
                                               Minutes of FOMC Meetings, June 285

and had changed relatively little, on net,     India appeared to have continued ex-
since the middle of 2007. Despite              panding at the rapid rates seen in 2007.
sharply lower sales of motor vehicles,         Inflation stayed high, on balance, in all
the modest pace of production allowed          regions, as recent price increases for
inventories to fall further through May.       food and energy added to global infla-
Production at automakers was re-               tionary pressures.
strained by both weak demand and dis-             Headline consumer price inflation in
ruptions caused by labor disputes.             the United States remained elevated in
   The U.S. international trade deficit        April and May, mostly because of large
widened in April, as a jump in imports         increases in food and energy prices.
outweighed a rise in exports. Most cate-       Excluding these categories, core prices
gories of goods imports rebounded in           rose at a relatively subdued rate in these
April from lower levels in March, espe-        two months. Average hourly earnings
cially petroleum products, the prices of       increased in April and May at a slower
which had moved sharply higher. Im-            pace than in the first quarter, bringing
ports of non-oil industrial supplies,          the change over the 12 months ending
capital goods, and automotive products         in May below the pace over the previ-
also surged in April, whereas imports of       ous 12 months. The employment cost
consumer goods expanded more slowly.           index for hourly compensation rose
The increase in exports was broad-             moderately in the first quarter and at a
based, with strong increases in exports        similar rate to recent years.
of industrial supplies, capital and con-          At its April 29–30 meeting, the Fed-
sumer goods, and automotive products.          eral Open Market Committee (FOMC)
   Economic activity in advanced for-          lowered its target for the federal funds
eign economies appeared to have ex-            rate 25 basis points, to 2 percent. In
panded moderately in the first quarter,        addition, the Board of Governors ap-
but the pace of that activity varied           proved a decrease of 25 basis points in
markedly across economies. In the euro         the discount rate, to 21⁄4 percent. The
area and Japan, strong investment con-         Committee’s statement noted that re-
tributed to a sharp acceleration in out-       cent information indicated that eco-
put. Economic growth in the United             nomic activity remained weak; house-
Kingdom moderated because of a slow-           hold and business spending had been
down in real estate and business activi-       subdued, and labor markets had soft-
ties. Falling exports and inventories sub-     ened further. Financial markets re-
tracted from Canadian output growth.           mained under considerable stress, and
Recent data pointed to broad softness          tight credit conditions and the deepen-
across the advanced foreign economies          ing housing contraction were likely to
in the second quarter, consistent with a       weigh on economic growth over the
weakening of consumer and business             next few quarters. Although readings on
confidence. Indicators for emerging            core inflation had improved somewhat,
market economies pointed to continued          energy and other commodity prices had
solid growth in the first quarter, albeit at   increased, and some indicators of infla-
a slower pace than last year among             tion expectations had risen in recent
Latin American economies. In particu-          months. The Committee expected infla-
lar, economic activity in Mexico slowed        tion to moderate in coming quarters,
further in the first quarter, in the wake      reflecting a projected leveling-out of
of weaker growth in the United States.         energy and other commodity prices and
In contrast, real output in China and          an easing of pressures on resource utili-
286 95th Annual Report, 2008

zation. Still, uncertainty about the infla-      Conditions eased somewhat in some
tion outlook remained high, and the           U.S. financial markets over the inter-
Committee noted that it would be nec-         meeting period but nonetheless re-
essary to continue to monitor inflation       mained strained. Functioning of short-
developments closely. The Committee           term funding markets showed some
stated that the substantial easing of         improvement; spreads in interbank
monetary policy to date, combined with        funding markets generally declined, as
ongoing measures to foster market             did spreads on lower-rated commercial
liquidity, should help to promote mod-        paper. However, liquidity in the market
erate growth over time and to mitigate        for interbank loans at maturities beyond
risks to economic activity. The Com-          three months remained thin, and the
mittee indicated that it would continue       spreads quoted on those instruments
to monitor economic and financial             were little changed. Demand for funds
developments and act as needed to pro-        from the Term Auction Facility re-
mote sustainable economic growth and          mained substantial, but stop-out rates
price stability.                              relative to minimum bid rates declined
   The expected path of monetary pol-         considerably relative to prior auctions,
icy moved down following the Com-             likely in response to increased auction
mittee’s decision at its April meeting to     sizes. Depository institutions’ use of
reduce the target federal funds rate by       primary credit borrowing increased, on
25 basis points. Although the decision        balance, over the intermeeting period.
had largely been anticipated by finan-        Credit outstanding through the Primary
cial markets, investors had assigned          Dealer Credit Facility declined signifi-
some odds to an unchanged target rate.        cantly over the intermeeting period.
Subsequently, money market futures            Conditions in the market for Treasury
rates rose substantially, on net, as          repurchase agreements appeared to
stronger-than-expected data on spend-         improve somewhat, but conditions were
ing and on labor markets along with           still poor for lower-quality collateral.
somewhat improved conditions in fi-           Supported by sales and redemptions of
nancial markets appeared to impart            Treasury securities from the System
greater confidence about prospects for        Open Market Account and exchanges
economic activity. Nominal Treasury           under the Term Securities Lending
yields also rose noticeably, and the          Facility, yields on overnight Treasury
Treasury yield curve flattened. Mea-          repurchase agreements were around
sures of short-term inflation compensa-       typical spreads to the effective federal
tion derived from yields on inflation-        funds rate during much of the inter-
indexed Treasury securities increased         meeting period, but “haircuts” applied
over the intermeeting period, due in          by lenders on non-Treasury collateral
part to sharply higher prices for oil and     remained elevated. Term Securities
agricultural commodities. Measures of         Lending Facility auctions held since the
longer-term inflation compensation            April FOMC meeting were generally
remained around the middle of their           undersubscribed.
recent elevated range. Some survey               In longer-term credit markets, yields
measures of households’ expectations          on investment- and speculative-grade
of near-term inflation rose sharply,          corporate bonds had risen significantly
while survey measures of longer-term          since the end of April but by slightly
expectations ranged from unchanged to         less than yields on comparable-maturity
slightly higher.                              Treasury securities, implying a further
                                            Minutes of FOMC Meetings, June 287

modest narrowing of credit spreads.         deceleration seemed to reflect primarily
Corporate bond issuance surged in May,      an unwinding of heightened demand
as some nonfinancial firms reduced          for the relative safety and liquidity of
their reliance on short-term debt in        money market mutual funds that had
favor of bond financing. Commercial         boosted M2 in prior months.
paper outstanding declined, and busi-          In the forecast prepared for the meet-
ness lending by banks decelerated,          ing, the staff raised its projection for the
partly reflecting continued low issuance    growth of real gross domestic product
of leveraged loans as well as tighter       (GDP) for 2008. The available indica-
credit standards and terms at banks.        tors of spending, particularly those for
Over the intermeeting period, spreads       consumption and business investment,
of rates on conforming residential mort-    suggested that economic activity in the
gages over comparable-maturity Trea-        first half of the year had been somewhat
sury securities remained about flat.        firmer than previously expected. The
Spreads on jumbo mortgages, however,        staff projection prepared for the meet-
widened somewhat and credit avail-          ing pointed to modest expansion in real
ability for jumbo-mortgage borrowers        GDP in the first half of 2008 followed
continued to be tight. In the secondary     by a slight slowdown in growth in the
market, issuance of mortgage-backed         second half, when several factors were
securities by government-sponsored en-      likely to restrain spending, including
terprises was strong, but issuance of       lower household wealth, slower real
securities backed by nonconforming          income growth due to sharply higher oil
residential mortgages and commercial        prices, and tight credit conditions. The
mortgages remained low. Broad stock         pace of economic activity was projected
prices were somewhat volatile but de-       to pick up in 2009 as those effects
clined modestly, on net, over the inter-    waned and weakness in housing con-
meeting period. The surge in oil prices     struction abated. Despite this accelera-
weighed on equity prices outside of the     tion, the trajectory of economic growth
energy sector, and a more pessimistic       anticipated through 2009 implied no-
outlook for future earnings in the finan-   ticeable slack in resource utilization.
cial sector caused stocks of financial         The staff’s projection for price infla-
institutions to decline significantly.      tion in core personal consumption ex-
   Conditions in the money markets of       penditures (PCE) for 2008 as a whole
many major foreign economies re-            was unchanged; recent readings on core
mained strained, showing little im-         PCE inflation were better than antici-
provement since late April despite          pated and led the staff to lower its pro-
ongoing activities of foreign central       jection for the first half of the year. But
banks aimed at easing liquidity pres-       some of the recent improvement was
sures in funding markets. Yields on         seen as reflecting transitory factors, and
sovereign debt in the advanced foreign      the forecast of core inflation for the sec-
economies moved up approximately in         ond half of this year and next year was
line with increases in comparable Trea-     marked up to incorporate the likely
sury yields in the United States. The       pass-through of the recent jumps in the
trade-weighted foreign exchange value       prices of energy and other commodities,
of the dollar against major currencies      and the reversal of these transitory fac-
rose.                                       tors. The further large increase in en-
   M2 rose much more slowly in April        ergy prices also prompted an upward
and May than in the first quarter. The      revision of the forecast of headline PCE
288 95th Annual Report, 2008

inflation in the second half of 2008, and   would probably continue to expand
headline inflation was expected to ex-      slowly over the next several quarters,
ceed core inflation by a considerable       restrained by a range of factors, includ-
margin this year. However, in view of a     ing strains in financial markets and in-
projected leveling-out of energy prices     stitutions and the resulting tightness of
and the anticipated slack in resource       credit conditions; ongoing weakness in
utilization, headline inflation was ex-     the housing sector; and the increases in
pected to decline considerably in 2009      energy and agricultural commodity
from its pace in the second half of         prices. And, although the incoming data
2008, and core inflation was forecasted     suggested reduced odds that these fac-
to edge lower.                              tors would cause an appreciable con-
   In conjunction with the FOMC meet-       traction of economic activity in the near
ing in June, all meeting participants       term, participants continued to see sig-
(Federal Reserve Board members and          nificant downside risks to growth. At
Reserve Bank presidents) provided pro-      the same time, however, the outlook for
jections for economic growth, the           inflation had deteriorated. Recent in-
unemployment rate, and inflation for        creases in energy and some other com-
the years 2008 through 2010. The pro-       modity prices would boost inflation
jections are described in the Summary       sharply in coming months. A leveling-
of Economic Projections, which is           out of energy prices and continued
attached as an addendum to these min-       slack in resource utilization were ex-
utes. A number of participants noted        pected to lead inflation to moderate in
that, given the recent large adverse        2009 and 2010. However, participants
shocks to output and inflation, their       had become more concerned about
projections even late in the forecast       upside risks to the inflation outlook—
period did not fully reveal their percep-   including the possibility that persistent
tions of longer-run sustainable rates of    advances in energy and food prices
economic growth and unemployment or         could spur increases in long-run infla-
the measured rates of inflation that        tion expectations.
would be consistent with price stability.      Although financial market conditions
In this context, participants discussed     generally appeared to have improved
several possible refinements of the         somewhat over the intermeeting period,
Committee’s approach to projections         most participants viewed markets as
that could provide a clearer indication     remaining under considerable stress.
of participants’ views about these vari-    Some participants noted that the avail-
ables and agreed to consider this matter    ability of the liquidity facilities that the
further.                                    Federal Reserve had introduced in
   In their discussion of the economic      recent months had probably bolstered
situation and outlook, FOMC partici-        the confidence of investors and lenders
pants noted that spending in recent         and thus was likely responsible for part
months had evidently been less weak         of the improvement in market function-
than anticipated, leading participants to   ing. Term spreads in interbank funding
revise up their assessment of economic      markets had declined, but remained
growth in the first half of 2008. None-     elevated by historical standards. The
theless, most participants judged that      leveraged loan market had improved
the slightly firmer path of spending did    somewhat and corporate bond issuance
not presage a near-term strengthening       had been strong. However, the equity
of the expansion. Economic activity         prices of many investment and commer-
                                              Minutes of FOMC Meetings, June 289

cial banks had declined over the inter-       gages, automobile loans, and home
meeting period, reflecting increased          equity lines of credit were becoming
concern about asset quality and the out-      harder to obtain, and some existing
look for profits. The deteriorating con-      home equity lines were being cut, even
dition of some financial guarantors and       for consumers with good credit scores.
mortgage insurers contributed to wor-         The possibilities that the decline in
ries about banks. Investors remained          house prices would be more protracted
chary of securitized products, such as        than previously anticipated, that spill-
mortgage credits not guaranteed by a          overs from the decline in housing
government-sponsored enterprise or            wealth to consumption could be larger
agency. A number of financial institu-        than expected, and that the household
tions had been successful in raising new      saving rate might rise more steeply than
capital, but reportedly on less favorable     currently projected were seen as posing
terms than before. Participants judged        downside risks to consumption spend-
that many financial institutions would        ing going forward.
need to continue to recapitalize and             Participants judged that the outlook
reduce their leverage. Some anticipated       for the housing market remained bleak,
that this process could well be pro-          with falling prices, slow sales, high
tracted, and that financial intermedia-       inventories of unsold homes, and fur-
tion consequently would be impeded for        ther declines in construction activity
some time, holding back growth well           over coming months. Although a few
into 2009. Overall, financial market          participants saw tentative signs that the
conditions, while better in many re-          housing market might be bottoming out
spects, appeared to remain fragile, and       in some parts of the country, most
participants judged that potential further    aggregate indicators of housing activity
adverse financial market developments         pointed to continued weakness. Also,
still posed downside risks to economic        mortgage rates had increased, and the
activity.                                     equity prices of housing-related firms
   Recent data pointed to more resil-         had fallen over the intermeeting period,
ience in consumer spending in the sec-        after having stabilized earlier in the
ond quarter than had been expected.           year, suggesting renewed pessimism
However, most participants thought that       among investors about prospects for the
much of the recent strength probably          housing industry. Rising foreclosures
indicated only a more delayed slowing         were seen as likely to continue to add to
in consumer spending than had been            downward pressure on house prices.
expected rather than a more favorable            Business spending was expected to
trend. Falling wealth and real income,        remain sluggish, as tight credit con-
tightening credit conditions, rising en-      ditions, uncertainty about economic
ergy prices, and sharply declining con-       growth, and the rising costs of inputs—
sumer sentiment were seen as likely to        especially energy and raw materials—
restrain consumer spending later this         appeared to be making firms quite cau-
year, particularly after the effects of the   tious and inclined to defer capital
fiscal stimulus waned. Lenders were           expenditures. Businesses had been able
exhibiting greater caution in extending       to raise a considerable volume of funds
credit to households, partly in response      in bond markets of late, and profits and
to actual and expected increases in           cash flow were still strong in the nonfi-
delinquency rates on household credit.        nancial business sector. But some re-
Participants reported that second mort-       gional banks that had experienced sub-
290 95th Annual Report, 2008

stantial credit losses were expected to     increases in the prices of energy, food,
adopt a significantly more conservative     and imports, and they expected headline
lending posture, further limiting the       inflation to rise in the very near term.
availability of credit to small busi-       However, core inflation had been stable
nesses. Although the available data         of late, and participants anticipated that
indicated that spending on nonresiden-      a leveling-out of energy prices and
tial construction projects had remained     slack in labor and product markets
relatively robust in recent months, par-    would contribute to a moderation of
ticipants thought that this strength        inflation pressures over time. Reports
might have reflected projects initiated     on the ability of firms to pass cost
some time ago, when the economic out-       increases on to customers were mixed,
look and credit conditions were more        but some participants commented that
favorable, and they expected poor busi-     the global nature of inflationary pres-
ness sentiment and tighter credit to lead   sures could make imports more expen-
commercial construction to soften later     sive and give firms greater scope to
this year and next year. Some anecdotal     raise prices. Some participants noted
reports of recently delayed or canceled     that wage growth had been quite mod-
new construction projects supported         erate, reinforcing a view that longer-
this view.                                  term inflation expectations and labor
   Regarding economic activity in var-      cost pressures had remained fairly well
ious business sectors, participants re-     contained. However, others commented
ported continued overall softness in        that wages might accelerate with a lag
manufacturing, especially in the hous-      only after inflation expectations had
ing-related and motor vehicle sectors.      moved higher, and that it would be very
Flooding in the Midwest had disrupted       costly to subsequently bring those ex-
transportation and damaged corn and         pectations back down. Participants’
soybean crops. However, production in       views of the recent evidence on infla-
the energy and steel sectors appeared to    tion expectations varied. Some noted
be strengthening, and industry contacts     that the increase was greatest for short-
generally reported that demand for ex-      term survey measures of households’
ported goods was buoyant. Labor mar-        inflation expectations, which may be
kets in most regions continued to           influenced disproportionately by con-
weaken gradually. Most participants         sumers’ perceptions of changes in the
anticipated persistent slack in labor       prices of food and gasoline; those par-
markets, with the unemployment rate         ticipants judged that underlying infla-
rising further through next year, before    tion trends had not risen nearly as much
declining slightly in 2010.                 and anticipated that such survey mea-
   The current account deficit had nar-     sures would reverse their recent in-
rowed significantly on balance in recent    creases as headline inflation moderated.
quarters, and still-solid foreign growth    However, others saw the signs of a rise
was expected to contribute to a further     in inflation expectations as more broad-
narrowing of the real U.S. trade deficit    based and were concerned that this
in coming quarters. However, a few          development could signal an erosion of
participants commented that this effect     confidence in the Committee’s commit-
might fade over time, as they expected      ment to price stability and, absent effec-
demand in foreign economies to slow.        tive action by the Committee, could
   Participants were concerned about        impart greater momentum to the infla-
the inflationary consequences of recent     tion process. Participants agreed that
                                            Minutes of FOMC Meetings, June 291

the possibilities of greater pass-through   balance sheet pressures, and in these
of cost increases into prices, higher       circumstances credit availability was
long-run inflation expectations feeding     likely to remain constrained for some
into labor costs and other prices, and      time. At the same time, however, the
further increases in energy prices all      near-term outlook for inflation had
posed upside risks to inflation that had    deteriorated, and the risks that under-
intensified since the time of the April     lying inflation pressures could prove to
FOMC meeting.                               be greater than anticipated appeared to
   Some participants noted that certain     have risen. Members commented that
measures of the real federal funds rate,    the continued strong increases in energy
especially those using actual or fore-      and other commodity prices would
casted headline inflation, were now         prompt a difficult adjustment process
negative, and very low by historical        involving both lower growth and higher
standards. In the view of these partici-    rates of inflation in the near term. Mem-
pants, the current stance of monetary       bers were also concerned about the
policy was providing considerable sup-      heightened potential in current circum-
port to aggregate demand and, if the        stances for an upward drift in long-run
negative real federal funds rate was        inflation expectations. With increased
maintained, it could well lead to higher    upside risks to inflation and inflation
trend inflation. In this view, a signifi-   expectations, members believed that the
cant portion of the easing in monetary      next change in the stance of policy
policy since last fall was aimed at pro-
                                            could well be an increase in the funds
viding insurance against the risk of an
                                            rate; indeed, one member thought that
especially severe weakening in eco-
                                            policy should be firmed at this meeting.
nomic activity and, with downside risks
                                            However, in the view of most members,
having diminished somewhat, some
firming in policy would be appropriate      the outlook for both economic activity
very soon, if not at this meeting. How-     and price pressures remained very un-
ever, other participants observed that      certain, and thus the timing and magni-
the high level of risk spreads and the      tude of future policy actions was quite
restricted availability of credit sug-      unclear. Against this backdrop, most
gested that overall financial conditions    members judged that an unchanged fed-
were not especially accommodative; in-      eral funds rate at this meeting repre-
deed, borrowing costs for many house-       sented an appropriate balancing of the
holds and businesses were higher than       risks to the economic outlook and was
they had been last summer.                  consistent, for now, with a policy path
   In the Committee’s discussion of         that would support an eventual decline
monetary policy for the intermeeting        in both inflation and unemployment.
period, members generally agreed that       Nonetheless, members recognized that
the risks to growth had diminished          circumstances could change quickly
somewhat since the time of the last         and noted that they might need to
FOMC meeting while the upside risks         respond promptly to incoming informa-
to inflation had increased. Nonetheless,    tion about the evolution of risks.
the risks to growth remained tilted to         At the conclusion of the discussion,
the downside. Conditions in some fi-        the Committee voted to authorize and
nancial markets had improved, but           direct the Federal Reserve Bank of New
many financial institutions continued to    York, until it was instructed otherwise,
experience significant credit losses and    to execute transactions in the System
292 95th Annual Report, 2008

Account in accordance with the follow-           funds rate at this meeting. While the
ing domestic policy directive:                   financial system was still frail and
   The Federal Open Market Committee             downside risks to growth remained, the
seeks monetary and financial conditions that     risk that inflation would fail to moder-
will foster price stability and promote sus-     ate as expected by the Committee had
tainable growth in output. To further its        increased substantially over the inter-
long-run objectives, the Committee in the        meeting period. Relatively strong de-
immediate future seeks conditions in reserve     mand for oil and other commodities
markets consistent with maintaining the fed-
eral funds rate at an average of around          abroad, as well as increased labor and
2 percent.                                       other operating costs in the emerging
                                                 economies, was boosting prices of glo-
   The vote encompassed approval of              bally traded goods and services. Mr.
the statement below to be released at            Fisher was especially concerned about
2:15 p.m.:                                       behavioral changes among business op-
   The Federal Open Market Committee             erators that appeared to be accommo-
decided today to keep its target for the fed-    dating inflationary pressures. In particu-
eral funds rate at 2 percent.                    lar, firms increasingly appeared to be
   Recent information indicates that overall
economic activity continues to expand,           planning to pass through their higher
partly reflecting some firming in household      input costs to final goods prices in order
spending. However, labor markets have soft-      to protect their profit margins. Overall,
ened further and financial markets remain        Mr. Fisher viewed inflation expecta-
under considerable stress. Tight credit con-     tions as becoming less well anchored.
ditions, the ongoing housing contraction,
and the rise in energy prices are likely to      To help restrain inflation expectations
weigh on economic growth over the next           and inflation, Mr. Fisher felt it would
few quarters.                                    be appropriate for the Committee to
   The Committee expects inflation to mod-       tighten the stance of monetary policy.
erate later this year and next year. However,       In a joint session of the Federal Open
in light of the continued increases in the
prices of energy and some other commodi-         Market Committee and the Board of
ties and the elevated state of some indicators   Governors, meeting participants turned
of inflation expectations, uncertainty about     to a consideration of policy issues re-
the inflation outlook remains high.              garding investment banks and other pri-
   The substantial easing of monetary policy     mary securities dealers. Participants
to date, combined with ongoing measures to
foster market liquidity, should help to pro-
                                                 discussed the financial activities and
mote moderate growth over time. Although         condition of primary dealers as well as
downside risks to growth remain, they            the objectives of, procedures for, and
appear to have diminished somewhat, and          experience to date in administering the
the upside risks to inflation and inflation      Primary Dealer Credit Facility (PDCF)
expectations have increased. The Committee       and the Term Securities Lending Facil-
will continue to monitor economic and
financial developments and will act as           ity (TSLF). (The PDCF and the TSLF
needed to promote sustainable economic           had been established in March in re-
growth and price stability.                      sponse to unusual and exigent condi-
     Votes for this action: Messrs. Ber-         tions in financial markets.) In view of
     nanke, Geithner, Kohn, Kroszner, and        the continuing significant strains in
     Mishkin, Ms. Pianalto, Messrs. Plosser,     financial markets, participants also dis-
     Stern, and Warsh. Votes against this        cussed the possibility of extending the
     action: Mr. Fisher.                         PDCF and the TSLF past year-end. In
   Mr. Fisher dissented because he pre-          addition, they reviewed progress in ne-
ferred an increase in the target federal         gotiations with staff of the Securities
                                            Minutes of FOMC Meetings, June 293

and Exchange Commission regarding           monetary policy” is defined as the fu-
a memorandum of understanding in-           ture policy that, based on current infor-
tended to govern arrangements for shar-     mation, is deemed most likely to foster
ing information on broker-dealers and       outcomes for economic activity and in-
for cooperation in the supervision of       flation that best satisfy the participant’s
primary dealers. Finally, participants      interpretation of the Federal Reserve’s
exchanged views on longer-run issues        dual objectives of maximum employ-
regarding appropriate arrangements for      ment and price stability.
supervision and regulation of invest-          FOMC participants generally ex-
ment banks and other securities dealers     pected that, over the remainder of this
and for the access of such firms to cen-    year, output would expand at a pace
tral bank liquidity, as well as on pos-     appreciably below its trend rate, owing
sible measures to strengthen financial      primarily to continued weakness in
market functioning and thus enhance         housing markets, the substantial rise in
financial stability.                        energy prices in recent months, and the
   It was agreed that the next meeting of   reduction in the availability of house-
the Committee would be held on Tues-        hold and business credit resulting from
day, August 5, 2008.                        continued strains in financial markets.
   The meeting adjourned at 1:15 p.m.       As indicated in table 1 and figure 1,
                                            output growth further ahead was pro-
Notation Vote                               jected to pick up sufficiently to begin to
                                            reverse some of the increase in the un-
By notation vote completed on May 20,
                                            employment rate by 2010. In light of
2008, the Committee unanimously ap-
                                            the recent surge in the prices of oil and
proved the minutes of the FOMC meet-
                                            agricultural commodities, total inflation
ing held on April 29–30, 2008.
                                            was expected to rise further in coming
                      Brian F. Madigan      months and to be elevated for 2008 as a
                              Secretary     whole. However, many participants ex-
                                            pected that persistent economic slack
                                            and a flattening out of energy and other
Addendum:                                   commodity prices in line with futures
Summary of Economic Projections             market prices would cause overall infla-
                                            tion to decline noticeably in 2009 and
In conjunction with the June 2008           2010. Most participants judged that
FOMC meeting, the members of the            greater-than-normal uncertainty sur-
Board of Governors and the presidents       rounded their projections for both out-
of the Federal Reserve Banks, all of        put growth and inflation. A significant
whom participate in deliberations of the    majority of participants viewed the risks
FOMC, provided projections for eco-         to their forecasts for output growth as
nomic growth, unemployment, and in-         weighted to the downside, and a similar
flation in 2008, 2009, and 2010. Pro-       number saw the risks to the inflation
jections were based on information          outlook as skewed to the upside.
available through the conclusion of the
June meeting, on each participant’s
assumptions regarding a range of fac-       The Outlook
tors likely to affect economic outcomes,    The central tendency of participants’
and on his or her assessment of appro-      projections for real GDP growth in
priate monetary policy. “Appropriate        2008, at 1.0 percent to 1.6 percent, was
294 95th Annual Report, 2008

Table 1. Economic Projections of Federal Reserve Governors and Reserve Bank Presidents,
         June 2008
                Percent

Variable                                                  2008                         2009                        2010
                        1
Central tendency
  Change in real GDP . . . . . . . . . . . . .          1.0   to   1.6               2.0   to   2.8              2.5   to   3.0
    April projection . . . . . . . . . . . . . . .      0.3   to   1.2               2.0   to   2.8              2.6   to   3.1
  Unemployment rate . . . . . . . . . . . . . .         5.5   to   5.7               5.3   to   5.8              5.0   to   5.6
    April projection . . . . . . . . . . . . . . .      5.5   to   5.7               5.2   to   5.7              4.9   to   5.5
  PCE inflation . . . . . . . . . . . . . . . . . . .   3.8   to   4.2               2.0   to   2.3              1.8   to   2.0
    April projection . . . . . . . . . . . . . . .      3.1   to   3.4               1.9   to   2.3              1.8   to   2.0
  Core PCE inflation . . . . . . . . . . . . . .        2.2   to   2.4               2.0   to   2.2              1.8   to   2.0
    April projection . . . . . . . . . . . . . . .      2.2   to   2.4               1.9   to   2.1              1.7   to   1.9
Range2
  Change in real GDP . . . . . . . . . . . . .          0.9   to   1.8               1.9   to   3.0              2.0   to   3.5
    April projection . . . . . . . . . . . . . . .      0.0   to   1.5               1.8   to   3.0              2.0   to   3.4
  Unemployment rate . . . . . . . . . . . . . .         5.5   to   5.8               5.2   to   6.1              5.0   to   5.8
    April projection . . . . . . . . . . . . . . .      5.3   to   6.0               5.2   to   6.3              4.8   to   5.9
  PCE inflation . . . . . . . . . . . . . . . . . . .   3.4   to   4.6               1.7   to   3.0              1.6   to   2.1
    April projection . . . . . . . . . . . . . . .      2.8   to   3.8               1.7   to   3.0              1.5   to   2.0
  Core PCE inflation . . . . . . . . . . . . . .        2.0   to   2.5               1.8   to   2.3              1.5   to   2.0
    April projection . . . . . . . . . . . . . . .      1.9   to   2.5               1.7   to   2.2              1.3   to   2.0

   Note: Projections of change in real gross domestic                    civilian unemployment rate in the fourth quarter of the
product (GDP) and of inflation are from the fourth quar-                 year indicated. Each participant’s projections are based
ter of the previous year to the fourth quarter of the year               on his or her assessment of appropriate monetary policy.
indicated. PCE inflation and core PCE inflation are the                     1. The central tendency excludes the three highest and
percentage rates of change in, respectively, the price                   three lowest projections for each variable in each year.
index for personal consumption expenditures (PCE) and                       2. The range for a variable in a given year includes all
the price index for PCE excluding food and energy. Pro-                  participants’ projections, from lowest to highest, for that
jections for the unemployment rate are for the average                   variable in that year.




noticeably higher than the central ten-                                  some financial markets since April.
dency of the projections provided in                                     Real GDP growth was expected to in-
conjunction with the April FOMC                                          crease in 2009 as the adjustment in the
meeting, which was 0.3 percent to                                        housing sector ran its course, financial
1.2 percent. The upward revision to the                                  markets gradually resumed more-
2008 outlook stemmed primarily from                                      normal functioning, and the downward
better-than-expected data on consumer                                    pressure on real incomes stemming
and business spending received be-                                       from increases in energy and food
tween the April and June FOMC meet-                                      prices in the first half of 2008 began to
ings. Nonetheless, several participants                                  fade. In 2010, economic activity was
noted that the recent firmness in con-                                   projected to expand at or a little above
sumer spending could well prove transi-                                  participants’ estimates of the rate of
tory and that the ongoing housing mar-                                   trend growth.
ket correction, tight credit conditions,                                    With output growth continuing to run
and elevated energy prices would damp                                    below trend in the second half of 2008,
domestic demand in the second half of                                    most participants expected that the un-
this year. Still, the substantial easing of                              employment rate would move up some-
monetary policy since last year and the                                  what over the remainder of this year.
continued strength in exports should                                     The central tendency of participants’
help to support economic growth; in                                      projections for the average rate of un-
addition, strains had eased somewhat in                                  employment in the fourth quarter of
                                         Minutes of FOMC Meetings, June 295




2008 was 5.5 percent to 5.7 percent,     junction with the April FOMC meeting
unchanged from the central tendency of   and consistent with some slack in re-
projections that were provided in con-   source utilization. The central tendency
296 95th Annual Report, 2008

of participants’ projections was for the       ticipants saw as consistent with the
unemployment rate to stabilize in 2009         price stability objective of the Federal
and to edge down in 2010 as output and         Reserve’s dual mandate. Most partici-
employment growth pick up.                     pants saw further declines in both un-
   The surge in the prices of oil and          employment and inflation as likely in
agricultural commodities since April           the period beyond the forecast horizon.
led participants to revise up noticeably
their projections for total inflation in the   Risks to the Outlook
near term. However, the central ten-
dency of participants’ projections for         Most participants viewed the risks to
core PCE inflation in 2008 was 2.2 per-        their projections for GDP growth as
cent to 2.4 percent, unchanged from the        weighted to the downside and the asso-
central tendency in April, as lower-           ciated risks to their projections for the
than-expected rates of core inflation          unemployment rate as tilted to the up-
over recent months offset the expecta-         side. The possibility that house prices
tions of some pass-through of the recent       could decline more steeply than antici-
surge in energy prices into core infla-        pated, further reducing households’
tion over the next few months. Rates of        wealth, restricting their access to credit,
both overall and core inflation were           and eroding the capital of lending insti-
expected to decline over the next two          tutions, continued to be perceived as a
years, reflecting a flattening out of the      significant downside risk to the outlook
prices of oil and other commodities            for economic growth. Although finan-
consistent with futures market prices,         cial markets had shown some further
slack in resource utilization, and longer-     improvement since April, conditions in
term inflation expectations that were          those markets remained strained; a
expected to remain generally well an-          number of participants also pointed to
chored.                                        the risk that further improvement could
   The contour of participants’ projec-        be quite slow and subject to relapse.
tions for output growth, unemployment,         The potential for current tight credit
and inflation was importantly shaped by        conditions to exert an unexpectedly
their judgments about the measured             large restraint on household and busi-
rates of inflation consistent with the         ness spending was also viewed as a sig-
Federal Reserve’s dual mandate to pro-         nificant downside risk to economic ac-
mote maximum employment and price              tivity. An adverse feedback loop, in
stability and about the time horizon           which weaker economic activity led to
over which policy should aim to attain         a further worsening of financial condi-
those rates given current economic con-        tions, which in turn could damp eco-
ditions. Most participants judged that it      nomic growth even further, continued to
might take a substantial period of time        be viewed as a worrisome possibility,
for output and inflation to recover from       though less so than in April. Indeed,
the recent shocks, which had elevated          some participants pointed to the appar-
inflation and damped economic activity.        ent resilience of the U.S. economy in
A number of participants projected that        the face of recent financial distress and
the rate of unemployment might remain          suggested that the adverse effects of
slightly above its longer-run sustainable      financial developments on economic ac-
level even in 2010; total inflation in         tivity outside of the housing sector
2010 was also judged likely to continue        could prove to be more modest than
to run a bit above levels that most par-       anticipated.
                                                     Minutes of FOMC Meetings, June 297

   Most participants viewed the risks to             Table 2. Average Historical Projection Error
their inflation projections as weighted                       Ranges
to the upside. Recent sharp increases in                         Percentage points
energy and food prices and the pass-                 Variable                        2008    2009      2010
through of dollar depreciation into                                       1
                                                     Change in real GDP . . . .      ±0.9    ±1.3      ±1.4
import prices could boost inflation in               Unemployment rate1 . . . . .    ±0.3    ±0.7      ±1.0
                                                     Total consumer prices2 . . .    ±0.6    ±1.0      ±1.0
the near term by more than currently
anticipated. Although participants gen-                 Note: Error ranges shown are measured as plus or
                                                     minus the root mean squared error of projections that
erally assumed that commodity prices                 were released in the summer from 1987 through 2007 for
will flatten out, roughly in line with the           the current and following two years by various private
trajectory implied by futures prices, the            and government forecasters. As described in the box
                                                     “Forecast Uncertainty,” under certain assumptions, there
fact that futures markets had persis-                is about a 70 percent probability that actual outcomes for
tently underpredicted commodity prices               real GDP, unemployment, and consumer prices will be in
in recent experience was viewed as an                ranges implied by the average size of projection errors
                                                     made in the past. Further information is in David Reif-
upside risk to the outlook for inflation.            schneider and Peter Tulip (2007), “Gauging the Uncer-
Participants also saw a risk that infla-             tainty of the Economic Outlook from Historical Forecast-
                                                     ing Errors,” Finance and Economics Discussion Series
tion expectations could become less                  2007-60 (Board of Governors of the Federal Reserve
firmly anchored, particularly if the cur-            System, November).
rent elevated rates of headline inflation               1. For definitions, refer to general note in table 1.
                                                        2. Measure is the overall consumer price index, the
did not moderate as quickly as they                  price measure that has been most widely used in govern-
expected.                                            ment and private economic forecasts. Projection is per-
   Participants continued to view uncer-             cent change, fourth quarter of the previous year to the
                                                     fourth quarter of the year indicated.
tainty about the outlook for economic
activity as higher than normal, with a
number pointing to uncertainty about                 Diversity of Participants’ Views
the duration and effects of the ongoing              Figures 2.A and 2.B provide more de-
financial strains on real activity. In ad-           tail on the diversity of participants’
dition, participants expressed noticeably            views regarding likely economic out-
more uncertainty about their inflation               comes over the projection period. The
projections than they had in January                 dispersion of participants’ projections
and April, a shift in perception that they           for real GDP growth in 2008 was no-
attributed importantly to increased un-              ticeably narrower than in the forecasts
certainty about the future course of                 provided in April, reflecting primarily
energy and food prices and to greater                the accumulation of data about the
uncertainty about the extent of pass-                actual performance of the economy in
through of changes in those prices into              the first half of the year; their views
core inflation. (Table 2 provides esti-              about output growth in coming quarters
mates of forecast uncertainty for real               and in 2009 continued to exhibit appre-
GDP growth, unemployment, and infla-                 ciable dispersion. The dispersion of par-
tion since 1987.11 )                                 ticipants’ projections for real activity
                                                     next year seemed largely to reflect dif-
                                                     fering assessments of the effects of ad-
                                                     verse financial market conditions on
   11. The box “Forecast Uncertainty” at the end     economic growth, the speed with which
of this summary discusses the sources and inter-     credit conditions might improve, and
pretation of uncertainty in economic forecasts and
explains the approach used to assess the uncer-
                                                     the depth and duration of the correction
tainty and risks attending participants’ projec-     in the housing market. Indeed, views
tions.                                               differed notably on the pace at which
298 95th Annual Report, 2008




output and employment would recover        The dispersion of participants’ longer-
in 2009, with some participants ex-        term projections was also affected to
pressing a concern that growth might be    some degree by differences in their
constrained by the persistence of finan-   judgments about the economy’s trend
cial strains over a considerable period.   growth rate and the unemployment rate
                                             Minutes of FOMC Meetings, June 299




that would be consistent over time with      cent increases in energy and food prices
maximum employment. The dispersion           would pass through into higher con-
of the projections for PCE inflation in      sumer prices. In addition, participants
the near term reflected in large part dif-   held differing views on the degree to
fering views on the extent to which re-      which inflation expectations were an-
300 95th Annual Report, 2008



  Forecast Uncertainty
  The economic projections provided by the      past and the risks around the projections
  members of the Board of Governors and         are broadly balanced, the numbers re-
  the presidents of the Federal Reserve         ported in table 2 would imply a probabil-
  Banks inform discussions of monetary          ity of about 70 percent that actual GDP
  policy among policymakers and can aid         would expand 2.1 percent to 3.9 percent
  public understanding of the basis for pol-    in the current year, 1.7 percent to
  icy actions. Considerable uncertainty at-     4.3 percent in the second year, and
  tends these projections, however. The         1.6 percent to 4.4 percent in the third
  economic and statistical models and rela-     year. The corresponding 70 percent con-
  tionships used to help produce economic       fidence intervals for overall inflation
  forecasts are necessarily imperfect de-       would be 1.4 percent to 2.6 percent in
  scriptions of the real world. And the fu-     the current year and 1.0 percent to
  ture path of the economy can be affected      3.0 percent in the second and third years.
  by myriad unforeseen developments and            Because current conditions may differ
  events. Thus, in setting the stance of        from those that prevailed on average
  monetary policy, participants consider not    over history, participants provide judg-
  only what appears to be the most likely       ments as to whether the uncertainty
  economic outcome as embodied in their         attached to their projections of each vari-
  projections, but also the range of alterna-   able is greater than, smaller than, or
  tive possibilities, the likelihood of their   broadly similar to typical levels of fore-
  occurring, and the potential costs to the     cast uncertainty in the past as shown in
  economy should they occur.                    table 2. Participants also provide judg-
     Table 2 summarizes the average his-        ments as to whether the risks to their
  torical accuracy of a range of forecasts,     projections are weighted to the upside,
  including those reported in past Monetary     downside, or are broadly balanced. That
  Policy Reports and those prepared by          is, participants judge whether each vari-
  Federal Reserve Board staff in advance of     able is more likely to be above or below
  meetings of the Federal Open Market           their projections of the most likely out-
  Committee. The projection error ranges        come. These judgments about the uncer-
  shown in the table illustrate the consider-   tainty and the risks attending each par-
  able uncertainty associated with economic     ticipant’s projections are distinct from
  forecasts. For example, suppose a partici-    the diversity of participants’ views about
  pant projects that real gross domestic        the most likely outcomes. Forecast
  product (GDP) and total consumer prices       uncertainty is concerned with the risks
  will rise steadily at annual rates of, re-    associated with a particular projection,
  spectively, 3 percent and 2 percent. If the   rather than with divergences across a
  uncertainty attending those projections       number of different projections.
  is similar to that experienced in the


chored and the role that expectations           rate of inflation consistent with the Fed-
might play in the inflation process over        eral Reserve’s dual objectives and the
the short and medium term. Partic-              time it would take to achieve these
ipants’ inflation projections further           goals given current economic condi-
ahead were shaped by the views of the           tions and appropriate policy.
                                               Meetings of the FOMC, August 301

Meeting Held on                                  Ms. Liang, Messrs. Reifschneider and
August 5, 2008                                       Wascher, Associate Directors,
                                                     Division of Research and Statis-
A meeting of the Federal Open Market                 tics, Board of Governors
Committee was held in the offices of             Mr. Levin, Deputy Associate Director,
the Board of Governors of the Federal                Division of Monetary Affairs,
Reserve System in Washington, D.C.,                  Board of Governors
on Tuesday, August 5, 2008 at 8:30               Mr. Small, Project Manager, Division
a.m.                                                 of Monetary Affairs, Board of
Present:                                             Governors
    Mr. Bernanke, Chairman                       Mr. Luecke, Section Chief, Division of
    Mr. Geithner, Vice Chairman                      Monetary Affairs, Board of Gov-
    Ms. Duke                                         ernors
    Mr. Fisher
    Mr. Kohn                                     Ms. Wei, Economist, Division of
    Mr. Kroszner                                     Monetary Affairs, Board of Gov-
    Mr. Mishkin                                      ernors
    Ms. Pianalto
    Mr. Plosser                                  Ms. Low, Open Market Secretariat
    Mr. Stern                                        Specialist, Division of Monetary
    Mr. Warsh                                        Affairs, Board of Governors

    Messrs. Evans, Lacker, and Lockhart,         Mr. Connolly, First Vice President,
        and Ms. Yellen, Alternate Mem-               Federal Reserve Bank of Boston
        bers of the Federal Open Market          Messrs. Fuhrer and Judd, Executive
        Committee                                    Vice Presidents, Federal Reserve
    Messrs. Bullard, Hoenig, and Rosen-              Banks of Boston and San Fran-
        gren, Presidents of the Federal              cisco, respectively
        Reserve Banks of St. Louis, Kan-         Messrs. Altig, Hakkio, Rasche, and
        sas City, and Boston, respectively           Sullivan, Senior Vice Presidents,
    Mr. Madigan, Secretary and Economist             Federal Reserve Banks of Atlanta,
    Ms. Danker, Deputy Secretary                     Kansas City, St. Louis, and Chi-
    Mr. Skidmore, Assistant Secretary                cago, respectively
    Ms. Smith, Assistant Secretary               Messrs. Danzig and Duca, Vice Presi-
    Mr. Alvarez, General Counsel                     dents, Federal Reserve Banks of
    Mr. Ashton, Assistant General Counsel            New York and Dallas, respectively
    Mr. Sheets, Economist
                                                 Mr. Weber, Senior Research Officer,
    Messrs. Connors, English, Kamin, Sni-            Federal Reserve Bank of Minne-
        derman, and Wilcox, Associate                apolis
        Economists
                                                 Mr. Hetzel, Senior Economist, Federal
    Mr. Dudley, Manager, System Open                 Reserve Bank of Richmond
        Market Account
                                                 Mr. Sill, Economic Advisor, Federal
    Mr. Blanchard, Assistant to the Board,           Reserve Bank of Philadelphia
        Office of Board Members, Board
        of Governors                             Mr. Del Negro, Officer, Federal
                                                     Reserve Bank of New York
    Ms. Bailey, Deputy Director, Division
        of Banking Supervision and Regu-        The Manager of the System Open
        lation, Board of Governors           Market Account reported on recent
    Mr. Struckmeyer, Deputy Staff Direc-     developments in foreign exchange mar-
        tor, Office of Staff Director for    kets. There were no open market opera-
        Management, Board of Governors       tions in foreign currencies for the Sys-
302 95th Annual Report, 2008

tem’s account in the period since the           Industrial production declined in the
previous meeting. The Manager also           second quarter after having been flat
reported on developments in domestic         over the previous two quarters. Motor
financial markets and on System open         vehicle assemblies tumbled in the sec-
market operations in government secu-        ond quarter because of soft demand and
rities and federal agency obligations        the effects of strikes. Production of
during the period since the previous         high-tech equipment continued to ex-
meeting. By unanimous vote, the Com-         pand at a moderate pace; however, the
mittee ratified these transactions.          available indicators of high-tech manu-
   The information reviewed at the Au-       facturing activity pointed to slower pro-
gust meeting indicated that the econ-        duction in the current quarter. The out-
omy expanded at a moderate pace in the       put of other manufacturing industries
second quarter, but recent financial         contracted, on balance, in the second
market developments highlighted some         quarter, and indicators of near-term pro-
of the stresses that the economy faced       duction generally pointed to further
going forward. Both consumer and             declines, including a sizable retrench-
business spending recorded gains in the      ment in the scheduled production of
second quarter, and net exports contrib-     motor vehicles. The factory utilization
uted importantly to the rise in real gross   rate held steady in June at a rate below
domestic product (GDP). However,             its long-run average but was still well
residential construction continued to        above its low rate from 2001 through
                                             2002.
fall sharply, the labor market weakened
                                                Real personal consumption expendi-
further, and industrial production de-
                                             tures (PCE) rose modestly in the second
clined. Core consumer price inflation
                                             quarter after posting weak gains in the
remained relatively stable, while head-
                                             previous two quarters. However, real
line inflation was elevated as a result of   outlays for goods other than motor
large increases in food and energy           vehicles dropped noticeably in June
prices.                                      after three months of robust gains. Sales
   Labor demand continued to contract        of motor vehicles, which had begun to
in July. Private nonfarm payroll em-         weaken earlier in the year, fell sharply
ployment fell in July at a pace only a bit   in June and again in July. Tax rebates
less than the average monthly rate dur-      provided a notable, albeit temporary
ing the first six months of the year. By     boost to income since the end of April,
industry, the pattern of job losses was      but real disposable income excluding
roughly similar to those earlier in the      rebates was essentially flat in the sec-
year, although July’s report showed a        ond quarter. The ratio of wealth to
smaller decline in construction than ear-    income likely declined again in the sec-
lier. Nonbusiness services, which in-        ond quarter, as equity prices declined,
clude health and education, remained         on balance, and house prices continued
the only notable source of net additions     to fall. Consumer sentiment rose a bit in
to employment. Both the average work-        July but remained at a depressed level.
week and aggregate hours edged down             Residential construction activity con-
in July. The unemployment rate rose in       tinued to descend rapidly but at a some-
July and was about 1 percentage point        what slower pace than during the sec-
above its level of a year earlier, while     ond half of last year. Single-family
the labor force participation rate was       housing starts fell further in June, leav-
about unchanged.                             ing the pace of construction in this sec-
                                              Meetings of the FOMC, August 303

tor well below its December reading.        offset a moderate increase in imports.
Starts of multifamily homes jumped in       Most major categories of non-oil im-
June to a level well above the range of     ports rose in May; imports of consumer
readings seen over the past two years.      goods increased rapidly. In contrast, the
However, available information sug-         value of petroleum imports fell back
gested that this increase could be traced   despite higher prices, and imports of
to more-stringent building codes that       automotive products also fell. The in-
took effect in New York City on July 1,     crease in exports was supported by
which apparently led developers to          strong exports of industrial supplies,
move up some planned apartment pro-         particularly petroleum products, and
jects. Even though cuts in new con-         services.
struction continued to trim the level of       Across the advanced foreign econo-
new home inventories, the months’ sup-      mies, information received since the
ply of new homes remained quite high        last meeting pointed to subdued growth
because of the ongoing reductions in        in the second quarter and increas-
the demand for new houses. Sales of         ing inflation pressures. Weak second-
existing single-family homes fell in        quarter data on industrial production
June. Tight conditions in the mortgage      and sentiment in the euro area as well
credit markets continued to restrain        as on consumer expenditures and ex-
housing demand, particularly for bor-       ports in Japan suggested that the first-
rowers seeking nonconforming mort-          quarter strength in output growth was
gages. House prices remained on a           not sustained. Conditions worsened
downward trajectory.                        considerably in the United Kingdom,
   In the business sector, real spending    with a deepening slump in the housing
on equipment and software declined in       sector. In all the major advanced for-
the second quarter as outlays on trans-     eign economies, rising food and fuel
portation equipment dropped sharply.        prices continued to drive overall infla-
Spending on computers and software          tion to recent highs, but core measures
rose at a moderate rate in the second       of inflation generally rose only mod-
quarter, while outlays on other equip-      estly. Recent indicators for emerging
ment improved a bit last quarter after      market economies pointed to some
having declined in the preceding two        slowing of growth in the second quar-
quarters. Data through June continued       ter. Real GDP growth in China moder-
to show a robust increase in nonresiden-    ated but remained strong. Incoming
tial construction activity. However, va-    data suggested further slowing else-
cancy rates for commercial properties       where in emerging Asia, and second-
ticked up in the first quarter, and the     quarter activity appeared to have re-
architectural billings index registered a   mained sluggish in Mexico. Headline
string of weak readings from February       inflation rose further in much of the
to June.                                    developing world, largely owing to
   Real nonfarm inventories excluding       higher food and energy prices, and sev-
motor vehicles fell sharply in the sec-     eral countries continued to face upward
ond quarter. The ratio of book-value        pressure on core inflation as well.
inventories to sales (excluding motor          Headline consumer price inflation in
vehicles) ticked down again in May.         the United States stepped up in recent
   The U.S. international trade deficit     months, largely as a result of sizable
narrowed in May, as a large increase in     increases in food and energy prices.
exports of goods and services more than     Excluding these categories, core con-
304 95th Annual Report, 2008

sumer price inflation was elevated in        should help promote moderate growth
June but, on balance, was running this       over time. Although downside risks to
year at about the same rate as last year.    growth remained, they appeared to have
Some survey-based measures of year-          diminished somewhat, and the upside
ahead inflation expectations moved up        risks to inflation and inflation expecta-
sharply in recent months; longer-term in-    tions increased. The Committee indi-
flation expectations were little changed     cated that it would continue to monitor
recently but remained above their levels     economic and financial developments
at the end of 2007. Excluding food and       and would act as needed to promote
energy, sharp increases in the prices of     sustainable economic growth and price
products and services at earlier stages      stability.
of processing continued to put upward           The market’s expected path of mone-
pressures on business costs and con-         tary policy moved down following the
sumer prices. Unit labor costs appar-        announcement of the Committee’s deci-
ently continued to increase at a re-         sion at its June meeting to leave the
strained pace during the second quarter,     target federal funds rate unchanged. Al-
reflecting only moderate gains in            though the decision was largely an-
worker compensation and relatively           ticipated, the policy statement was
strong productivity performance, with        reportedly viewed by investors as plac-
little sign of higher overall inflation      ing more emphasis on the downside
passing through to higher worker com-        risks to growth than they had antici-
pensation.                                   pated. Subsequently, the semiannual
   At its June 24–25 meeting, the Fed-       Monetary Policy Report to the Con-
eral Open Market Committee (FOMC)            gress and the accompanying testimony
kept its target for the federal funds rate   also led investors to mark down the ex-
at 2 percent. The Committee’s state-         pected path for the federal funds rate, as
ment noted that recent information indi-     did intensifying concerns about the
cated that overall economic activity         health of financial institutions and the
continued to expand, partly because of       outlook for the housing-related gov-
some firming in household spending.          ernment-sponsored enterprises (GSEs).
However, labor markets softened fur-         Consistent with the revision in policy
ther and financial markets remained          expectations, yields on short- and me-
under considerable stress. Tight credit      dium-term nominal Treasury coupon
conditions, the ongoing housing con-         securities fell over the intermeeting
traction, and the rise in energy prices      period. Yields on long-term Treasury
were likely to weigh on economic             securities declined less than those on
growth over the next few quarters. The       shorter-term instruments, and the yield
Committee expected inflation to moder-       curve steepened. Measures of shorter-
ate later this year and next. However, in    horizon inflation compensation derived
light of the continued increases in the      from yields on inflation-indexed Trea-
prices of energy and some other com-         sury securities dropped over the inter-
modities and the elevated state of some      meeting period as energy prices re-
indicators of inflation expectations,        versed some of their earlier rise, while
uncertainty about the inflation outlook      measures of longer-term inflation com-
remained high. The Committee stated          pensation rose slightly.
that the substantial easing of monetary         Functioning in the interbank funding
policy to date, combined with ongoing        markets remained strained over the
measures to foster market liquidity,         intermeeting period. Spreads of the
                                              Meetings of the FOMC, August 305

London interbank offered rate, or Libor,    potential consequences of financial
over comparable-maturity overnight          strains for the broader economy over
index swap rates were unchanged to          the intermeeting period. On July 13, the
slightly higher, and spreads on lower-      Treasury Department proposed a plan to
rated nonfinancial and asset-backed         support the liquidity and solvency of
commercial paper remained well above        the two GSEs, and the Board of Gover-
historical norms. Depository institu-       nors of the Federal Reserve System
tions’ use of both overnight and term       announced that the Federal Reserve
primary credit borrowing continued to       Bank of New York was authorized to
be strong during the intermeeting           lend to the two institutions if necessary,
period, peaking in late June amid           reducing somewhat market concerns
quarter-end pressures. However, new         about the GSEs. Concerns eased further
extensions of credit through the Primary    as Congress passed legislation, which
Dealer Credit Facility (PDCF) were          was subsequently signed by the Presi-
negligible during July. On July 30, the     dent, authorizing the Treasury to pro-
Board of Governors and the FOMC             vide liquidity and capital to the GSEs.
announced enhancements to existing          Over the intermeeting period, spreads
liquidity facilities, including extension   of rates on conforming residential mort-
of the PDCF and the Term Securities         gages over those on comparable-
Lending Facility through January 30,        maturity Treasury securities moved
2009. Conditions in the market for          higher. Offer rates on 30-year jumbo
Treasury repurchase agreements were
                                            mortgages also rose, and credit for non-
fairly stable, although there was some
                                            conforming mortgages remained diffi-
deterioration of conditions in the market
                                            cult to obtain. In the secondary market,
for agency collateral.
                                            issuance of mortgage-backed securities
   In longer-term credit markets, yields
on both investment- and speculative-        by GSEs appeared to have slowed in
grade corporate bonds rose over the         July from its strong second-quarter
intermeeting period even though com-        pace, while issuance of securities
parable-maturity Treasury yields de-        backed by nonconforming loans and of
clined slightly, which resulted in a wid-   commercial mortgage-backed securities
ening of already elevated spreads.          remained nil.
Corporate bond issuance slowed further,        Pressures in the money markets of
as did lending by banks to businesses       many major foreign economies eased
and households, and issuance of lever-      slightly over the intermeeting period.
aged loans remained very weak. Broad        Yields on sovereign debt in the ad-
equity price indexes were volatile and      vanced foreign economies fell, mainly
declined modestly, on net, between the      because of declines in inflation com-
June and August FOMC meetings.              pensation. The trade-weighted index of
Stock prices of financial firms fell        the dollar against the currencies of
sharply in mid-July but subsequently        major trading partners rose a bit on net.
recouped most of those losses. Energy          M2 expanded at a moderate pace in
sector stocks significantly underper-       July, reversing the deceleration in May
formed the broad indexes owing to           and June. The expansion was broad
recent declines in oil prices.              based, reflecting an acceleration in liq-
   Uncertainties about the financial con-   uid deposits as well as renewed inflows
dition of Fannie Mae and Freddie Mac        to retail money market mutual funds
added to market worries about the           and small time deposits.
306 95th Annual Report, 2008

   In the forecast prepared for the meet-   households and businesses. Growth in
ing, the staff marked down its forecast     overall economic activity was generally
of real GDP growth in the second half       expected to be weak during the remain-
of 2008 and in 2009. Although the           der of 2008 before recovering modestly
increase in real GDP in the second          next year, and nearly all meeting par-
quarter was a bit faster than anticipated   ticipants saw continuing downside risks
at the time of the June meeting, the        to growth. Recent readings on inflation
labor market continued to weaken sig-       had been high, but growth in unit labor
nificantly, financial conditions re-        costs had remained subdued and com-
mained unfavorable, consumer and            modity prices had declined of late. Ac-
business confidence was downbeat, and       cordingly, most participants anticipated
manufacturing activity was contracting.     that inflation would moderate in coming
All told, the staff continued to expect     quarters. However, participants also ex-
that real GDP would rise at less than its   pressed significant concerns about the
potential rate through the first half of    upside risks to inflation, particularly the
next year. Nonetheless, real GDP            risk that longer-term inflation expecta-
growth was anticipated to return to its     tions could become unmoored.
potential rate in the second half of 2009      Many participants referred to the
as housing activity leveled out and         adverse financial sector developments
financial conditions became less restric-   that had occurred over the intermeeting
tive. Core PCE price inflation was ex-      period. Heightened investor apprehen-
pected to pick up somewhat in the sec-      sion about the viability of Fannie Mae
ond half of this year, mostly as a result   and Freddie Mac had eased following
of the upward pressures from this year’s    legislative action, but pressures on these
run-ups in prices of energy and imports.    firms continued. Reflecting these
Core inflation was then expected to         strains, interest rates on residential
edge down in 2009 as the impetus from       mortgages had moved upward, a devel-
prior increases in the prices of imports,   opment that was seen as potentially
energy, and other commodities abated        exacerbating the contraction in the
and the margin of slack in resource use     housing sector. Commercial banks had
widened.                                    reported that terms and standards had
   In their discussion of the economic      been tightened on nearly all categories
situation and outlook, many FOMC par-       of loans. Declining mortgage asset val-
ticipants noted that recent developments    ues increased capital pressures on lend-
suggested that economic activity was        ers exposed to real estate markets.
likely to remain damped for several         While some financial institutions had
quarters. Although economic growth in       strengthened their balance sheets with
the second quarter had apparently been      new capital issues, raising new capital
boosted by fiscal stimulus, resilience in   had become increasingly difficult.
consumption spending even before tax        Moreover, broad equity price indexes
rebates were distributed, and robust        had declined and borrowing costs for
gains in exports, recent indicators         nonfinancial firms had increased, in-
pointed to a near-term deceleration in      cluding a recent rise in corporate bond
household spending and to softer export     yields across most risk categories.
demand. Moreover, increasing concerns       Many participants believed that these
about financial institutions had contrib-   developments were likely to restrain
uted to a widening of some risk spreads     aggregate demand and economic
and a further tightening of credit to       growth. Others, however, thought that
                                              Meetings of the FOMC, August 307

the extent of such adverse effects was         Growth in exports had provided sub-
likely to be limited, noting that bank      stantial impetus to overall demand in
lending had continued to grow at a          the second quarter. However, many par-
moderate pace and that consumption          ticipants observed that decelerating ac-
and business capital spending had in-       tivity in some foreign economies would
creased in the second quarter despite       tend to dampen export gains going for-
the tightening of credit terms.             ward. Indeed, recent indications of a
   While consumer spending had been         slowing global economy may have con-
bolstered temporarily by the effects of     tributed to the marked declines in the
the tax rebates, retail sales had weak-     prices of oil and some other commodi-
ened during late spring and auto sales      ties over the intermeeting period.
had dropped sharply in both June and           Participants pointed to potential in-
July. The unemployment rate jumped          teractions between financial stresses
during the intermeeting period, and par-    and the housing market contraction as
ticipants generally anticipated that pay-   the primary source of continuing down-
roll employment would decline further       side risks to growth. Many participants
in coming months. For example, auto-        noted that the financial system re-
motive parts suppliers in one District      mained fragile, with some expressing
had reported plans for laying off work-     continued concern about the possibility
ers, idling production, and closing sev-    of an adverse feedback loop in which
eral plants. Lower equity prices and the    tighter conditions in the mortgage mar-
                                            ket would contribute to further declines
ongoing deterioration in house prices
                                            in the housing sector and additional
had reduced household wealth signifi-
                                            losses for lenders, leading to further
cantly, while real incomes had been
                                            tightening of lending terms and stan-
diminished by earlier increases in the
                                            dards. In contrast, several other partici-
prices of food and energy. All of these     pants suggested that risks to the finan-
factors—in conjunction with tightened       cial system had receded, partly as a
access to auto loans, home equity lines     result of the implementation by the Fed-
of credit, and other consumer loans—        eral Reserve of special liquidity facili-
were viewed as pointing towards weak        ties, and that prevailing credit condi-
growth in personal consumption expen-       tions were broadly consistent with the
ditures during the second half of 2008.     typical patterns observed during periods
   The weaker outlook for consumer          of weak growth or recession.
demand, along with tighter credit condi-       Headline inflation was generally ex-
tions for businesses, was expected to       pected to moderate in coming quarters,
weigh on business spending going for-       reflecting importantly an anticipated
ward. Moreover, some signs of weak-         leveling-out of prices for energy and
ness in the commercial real estate sector   other commodities. Although measures
were seen as suggesting a slower pace       of core inflation might well edge up
of investment in nonresidential struc-      later this year, given the pass-through to
tures over coming quarters, although        final goods prices of earlier increases in
that deceleration might be gradual due      the prices of energy and other inputs,
to the lags in the planning and execu-      most participants anticipated that core
tion of such projects. However, the         inflation would edge back down during
elevated level of energy prices was         2009. Some participants reported that
boosting investment in the oil-pro-         firms were increasingly using various
ducing industry.                            pricing strategies—such as escalation
308 95th Annual Report, 2008

clauses or the imposition of fuel sur-          In the Committee’s discussion of
charges—to pass higher costs on to           monetary policy for the intermeeting
their customers, who were apparently         period, members agreed that labor mar-
becoming less resistant to such price        kets had softened further, that financial
adjustments. However, one participant        markets remained under considerable
mentioned the difficult pricing deci-        stress, and that these factors—in con-
sions of manufacturers who face a com-       junction with still-elevated energy
bination of elevated input costs along       prices and the ongoing housing con-
with weakening demand for their prod-        traction—would likely weigh on eco-
ucts. And a number of participants           nomic growth in coming quarters. In
noted that the outlook for slack in          addition, members saw continuing
resource utilization should tend to limit    downside risks to this outlook, particu-
the extent of pass-through, contain the      larly reflecting possible further deterio-
degree of inflation spillover to goods       ration in financial conditions. Members
and services without high commodity          generally anticipated that inflation
content, and reinforce the anticipated       would moderate; however, they empha-
moderation in inflation.                     sized the risks to the inflation outlook
   Participants expressed significant con-   posed by persistent high readings on
cerns about the upside risks to inflation,   headline inflation and a possible un-
especially the risk that persistently high   mooring of inflation expectations.
headline inflation could result in an        Against this backdrop, nearly all mem-
unmooring of long-run inflation expec-       bers judged that leaving the federal
tations. Some viewed the upside risks to     funds rate unchanged at this meeting
inflation as having diminished modestly      was appropriate and would most effec-
over the intermeeting period, mainly as      tively promote progress toward the
a result of the drop in the prices of oil    Committee’s dual objectives of maxi-
and some other commodities as well as        mum employment and price stability.
the greater likelihood of persistent eco-    Most members did not see the current
nomic slack. However, others viewed          stance of policy as particularly accom-
these risks as having increased, particu-    modative, given that many households
larly in light of continued elevated read-   and businesses were facing elevated
ings on headline inflation, the low level    borrowing costs and reduced credit
of the real federal funds rate, anecdotal    availability due to the effects of finan-
information suggesting that firms were       cial market strains as well as macroeco-
having more success in passing higher        nomic risks. Although members gener-
costs on to their customers, and some        ally anticipated that the next policy
signs of an upward drift over recent         move would likely be a tightening, the
months in investors’ expectations and        timing and extent of any change in pol-
uncertainty regarding inflation over the     icy stance would depend on evolving
longer run; moreover, the recent decline     economic and financial developments
in energy prices might well be reversed      and the implications for the outlook for
in coming months. A number of partici-       economic growth and inflation.
pants worried about the possibility that        At the conclusion of the discussion,
core inflation might fail to moderate        the Committee voted to authorize and
next year unless the stance of monetary      direct the Federal Reserve Bank of New
policy was tightened sooner than cur-        York, until it was instructed otherwise,
rently anticipated by financial markets.     to execute transactions in the System
                                                   Meetings of the FOMC, August 309

Account in accordance with the follow-           inflation expectations, which were at
ing domestic policy directive:                   risk of drifting higher. While the finan-
   The Federal Open Market Committee             cial system remained fragile and eco-
seeks monetary and financial conditions that     nomic growth was sluggish and could
will foster price stability and promote sus-     weaken further, he saw a greater risk to
tainable growth in output. To further its        the economy from upward pressures on
long-run objectives, the Committee in the        inflation. In his view, businesses had
immediate future seeks conditions in reserve     become more inclined to raise prices to
markets consistent with maintaining the fed-
eral funds rate at an average of around          pass on the higher costs of imported
2 percent.                                       goods and higher energy costs, the lat-
                                                 ter of which were well above their lev-
   The vote encompassed approval of
                                                 els of late 2007. Accordingly, he sup-
the statement below to be released at
                                                 ported a policy tightening at this
2:15 p.m.:
                                                 meeting.
   The Federal Open Market Committee                It was agreed that the next meeting of
decided today to keep its target for the fed-    the Committee would be held on Tues-
eral funds rate at 2 percent.
   Economic activity expanded in the second      day, September 16, 2008.
quarter, partly reflecting growth in con-           The meeting adjourned at 1:50 p.m.
sumer spending and exports. However, labor
markets have softened further and financial
markets remain under considerable stress.        Conference Call
Tight credit conditions, the ongoing housing
contraction, and elevated energy prices are
                                                 On July 24, 2008, the Federal Open
likely to weigh on economic growth over          Market Committee met in a joint ses-
the next few quarters. Over time, the sub-       sion with the Board of Governors to
stantial easing of monetary policy, com-         consider several proposals to extend or
bined with ongoing measures to foster mar-       enhance Federal Reserve System liquid-
ket liquidity, should help to promote            ity facilities. In light of continued sig-
moderate economic growth.
   Inflation has been high, spurred by the       nificant stresses in financial markets
earlier increases in the prices of energy and    and the experience to date with the
some other commodities, and some indica-         Term Auction Facility (TAF), the Term
tors of inflation expectations have been         Securities Lending Facility (TSLF), and
elevated. The Committee expects inflation        the Primary Dealer Lending Facility
to moderate later this year and next year, but
the inflation outlook remains highly uncer-      (PDCF), the staff proposed modifica-
tain.                                            tions to these programs. The modifica-
   Although downside risks to growth             tions included auctioning options on up
remain, the upside risks to inflation are also   to an additional $50 billion of TSLF
of significant concern to the Committee.         loans and lengthening the term to matu-
The Committee will continue to monitor
economic and financial developments and          rity of all loans made under the TAF to
will act as needed to promote sustainable        84 days. Contingent upon Board ap-
economic growth and price stability.             proval of the change to TAF loans, the
     Votes for this action: Messrs. Bernanke     Committee was asked to consider an
     and Geithner, Ms. Duke, Messrs. Kohn,       expansion of the existing currency swap
     Kroszner, and Mishkin, Ms. Pianalto,        arrangement with the European Central
     Messrs. Plosser, Stern, and Warsh.          Bank to facilitate a similar change in
     Votes against this action: Mr. Fisher.      the term of dollar credits auctioned by
  Mr. Fisher dissented because he fa-            the ECB. Finally, policymakers were
vored an increase in the target federal          asked to vote on extending the avail-
funds rate to help restrain inflation and        ability of the TSLF and PDCF past the
310 95th Annual Report, 2008

year-end, a topic that had been dis-            With Mr. Plosser dissenting, the Com-
cussed on a preliminary basis at the          mittee voted to approve the resolution
joint Board/FOMC meeting on June 25,          below. Mr. Plosser dissented because he
2008.                                         viewed the net benefit of the TSLF
   In the discussion, meeting partici-        options as being insufficient to justify
pants exchanged views on issues en-           adding them to the support already
tailed in administering the TAF and           being provided to market liquidity.
term primary discount window credit.
                                              TSLF Options Authorization
Issues regarding credit risk and collat-
eral requirements received particular         In addition to the current authorizations
attention.                                    granted to the Federal Reserve Bank of
   Some participants raised questions         New York to engage in term securities
about the net benefit of approving and        lending transactions, the Federal Open
announcing the proposed changes at            Market Committee authorizes the Fed-
this time, asking, for example, whether       eral Reserve Bank of New York to offer
such an announcement could suggest            options on up to $50 billion in addi-
that the Federal Reserve saw financial        tional draws on the Facility, subject to
markets as more fragile than expected         the other terms and conditions previ-
or whether adjustments to the liquidity       ously established for the Facility.
facilities could cause market analysts to        Mr. Lockhart voted as alternate mem-
infer that the System intended to keep        ber at this meeting.
the facilities in place permanently. Most     Notation Votes
participants expressed general support
for the proposals as improving the Sys-       By notation vote completed on July 14,
tem’s tools for supporting market li-         2008, the Committee unanimously
quidity. However, there was consider-         approved the minutes of the FOMC
able sentiment for altering the TAF           meeting held on June 24–25, 2008.
proposal to allow for both 28- and              By notation vote completed on July
84-day credits, and the Chairman di-          29, 2008, the Committee unanimously
rected the staff to confer, to consult fur-   approved the following resolution:
ther with policymakers, and to revise         Swap Authorization
the proposal accordingly for notation
votes in the near future by the Board         The Federal Open Market Committee
and the FOMC.                                 directs the Federal Reserve Bank of
   At this meeting, the Committee             New York to increase the amount avail-
unanimously approved the following            able from the System Open Market
resolution:                                   Account under the existing reciprocal
                                              currency arrangement (“swap” arrange-
TSLF Extension Authorization                  ment) with the European Central Bank
                                              to an amount not to exceed $55 billion.
The FOMC extends until January 30,            Within that aggregate limit, draws of up
2009, its authorizations for the Federal      to $25 billion are hereby authorized.
Reserve Bank of New York to engage            The swap arrangement continues to be
in transactions with primary dealers          authorized through January 30, 2009,
through the Term Securities Lending           unless extended by the Federal Open
Facility, subject to the same collateral,     Market Committee.
interest rate and other conditions previ-                           Brian F. Madigan
ously established by the Committee.                                          Secretary
                                             Minutes of the FOMC, September 311

Meeting Held on                                 Mr. Parkinson, Deputy Director, Divi-
September 16, 2008                                  sion of Research and Statistics,
                                                    Board of Governors
A meeting of the Federal Open Market            Mr. Struckmeyer, Deputy Staff Direc-
Committee was held in the offices of                tor, Office of Staff Director for
the Board of Governors of the Federal               Management, Board of Governors
Reserve System in Washington, D.C.,             Mr. Gagnon, Visiting Associate Direc-
on Tuesday, September 16, 2008 at 8:30              tor, Division of Monetary Affairs,
a.m.                                                Board of Governors
Present:                                        Messrs. Reifschneider and Wascher,
    Mr. Bernanke, Chairman                          Associate Directors, Division of
    Ms. Duke                                        Research and Statistics, Board of
    Mr. Fisher                                      Governors
    Mr. Kohn                                    Mr. Oliner, Senior Adviser, Division of
    Mr. Kroszner                                    Research and Statistics, Board of
    Ms. Pianalto                                    Governors
    Mr. Plosser
    Mr. Stern                                   Mr. Small, Project Manager, Division
    Mr. Warsh                                       of Monetary Affairs, Board of
                                                    Governors
    Ms. Cumming, Messrs. Evans, Lacker,
        and Lockhart, and Ms. Yellen,           Mr. Luecke, Section Chief, Division of
        Alternate Members of the Federal            Monetary Affairs, Board of Gov-
        Open Market Committee                       ernors
    Messrs. Bullard, Hoenig, and Rosen-         Mr. Carlson, Economist, Division of
        gren, Presidents of the Federal             Monetary Affairs, Board of Gov-
        Reserve Banks of St. Louis, Kan-            ernors
        sas City, and Boston, respectively
                                                Ms. Low, Open Market Secretariat
    Mr. Madigan, Secretary and Economist            Specialist, Division of Monetary
    Ms. Danker, Deputy Secretary                    Affairs, Board of Governors
    Mr. Skidmore, Assistant Secretary
    Ms. Smith, Assistant Secretary              Mr. Moore, First Vice President, Fed-
    Mr. Alvarez, General Counsel                    eral Reserve Bank of San Fran-
    Mr. Sheets, Economist                           cisco
    Mr. Stockton, Economist                     Mr. Judd, Executive Vice President,
    Messrs. Connors, English, Kamin,                Federal Reserve Bank of San
       Rolnick, Rosenblum, Slifman,                 Francisco
       Tracy, and Wilcox, Associate             Mr. Altig, Ms. Baum, Messrs. Rasche,
       Economists                                   Schweitzer, Sellon, and Tootell,
    Mr. Dudley, Manager, System Open                Senior Vice Presidents, Federal
        Market Account                              Reserve Banks of Atlanta, New
                                                    York, St. Louis, Cleveland, Kan-
    Mr. Cole, Director, Division of Bank-           sas City, and Boston, respectively
        ing Supervision and Regulation,
        Board of Governors                      Mr. Krane, Vice President, Federal
                                                    Reserve Bank of Chicago
    Mr. Blanchard, Assistant to the Board,
        Office of Board Members, Board          Mr. Chatterjee, Senior Economic
        of Governors                                Adviser, Federal Reserve Bank of
                                                    Philadelphia
    Mr. Clouse, Deputy Director, Division
        of Monetary Affairs, Board of           Mr. Wolman, Senior Economist, Fed-
        Governors                                   eral Reserve Bank of Richmond
312 95th Annual Report, 2008

   The Manager of the System Open           rose rapidly for a third straight month in
Market Account reported on recent de-       July but then edged down in August,
velopments in foreign exchange mar-         because of a sharp drop in energy
kets. There were no open market opera-      prices. Core consumer price inflation
tions in foreign currencies for the         remained elevated in July and eased
System’s account in the period since the    somewhat in August.
previous meeting. The Manager also             The labor market continued to
reported on developments in domestic        weaken. According to the August em-
financial markets and on System open        ployment report, private payroll em-
market operations in government secu-       ployment fell by a bit more than the
rities and federal agency obligations       average seen earlier this year. Most
during the period since the previous        major industry groups shed jobs; manu-
meeting. By unanimous vote, the Com-        facturing posted a particularly notice-
mittee ratified these transactions.         able loss. Job losses in the construction
   In light of severe stresses in dollar    industry diminished over July and Au-
funding markets, the Committee consid-      gust despite the ongoing contraction in
ered a proposal intended to provide         residential investment. Hiring in non-
the flexibility necessary to respond        business services, which include the
promptly to requests from foreign cen-      education and health industries, and in
tral banks to engage in temporary recip-    natural resources and mining increased
rocal currency (“swap”) arrangements        in line with recent trends. The average
to be used in supporting dollar liquidity   workweek held steady and aggregate
in their jurisdictions. After the discus-   hours edged lower. The unemployment
sion, the Committee voted unanimously       rate jumped 0.4 percentage point, to
to authorize its Foreign Currency Sub-      6.1 percent, in August, while the labor
committee to direct the Federal Reserve     force participation rate held steady.
Bank of New York as needed to expand           Industrial production fell sharply in
existing swap arrangements and to enter     August after edging up in July. Motor
into new arrangements with foreign          vehicle assemblies dropped in August
central banks to address strains in         as automakers scaled back production
money markets. This authority extends       following a sharp decline in vehicle
through January 30, 2009.                   sales in July. The output of high-tech
   The information reviewed at the Sep-     equipment rose at a moderate rate in the
tember meeting indicated that economic      first half of the year, but indicators of
activity decelerated considerably in        production gains in the high-tech sector
recent months. The labor market dete-       pointed toward relatively subdued
riorated further in August as private       growth in the third quarter. The output
payrolls declined and the unemploy-         of other manufacturing sectors declined
ment rate moved markedly higher.            for a third consecutive month in Au-
Industrial output was little changed in     gust, and indicators of near-term pro-
July, but fell sharply in August. Con-      duction suggested that the industrial
sumer spending weakened noticeably in       sector was likely to remain soft over the
recent months. Meanwhile, residential       next few months. For most major indus-
investment continued to decline steeply     try groups, factory utilization rates in
through midyear. In contrast, business      August remained below their long-run
investment in equipment and structures      averages.
generally held up through July. On the         Real personal consumption expendi-
inflation front, overall consumer prices    tures (PCE) turned down in June and
                                             Minutes of the FOMC, September 313

declined more noticeably in July; over       especially for borrowers seeking non-
the two months, outlays for motor vehi-      conforming mortgages. Several indexes
cles dropped markedly and spending on        indicated that house prices had declined
other goods weakened substantially.          substantially over the past 12 months,
The recent weakness in consumer              and these prices appeared to remain on
spending on goods excluding motor            a downward trajectory.
vehicles contrasted sharply with solid          In the business sector, investment in
growth in the spring. Outlays for ser-       equipment and software fell in the sec-
vices were reported to have increased        ond quarter, largely reflecting a sharp
modestly in June and July. Total nomi-       drop in spending on motor vehicles. In
nal retail sales decreased in August.        contrast, growth of real outlays for non-
Real disposable income was boosted           transportation equipment posted a mod-
significantly by the tax rebates in the      erate gain. The data on nominal orders
second quarter; excluding the tempo-         and shipments of nondefense capital
rary rebates, real disposable income fell    goods excluding aircraft rose substan-
in that quarter and continued to move        tially in July, although some of the gain
lower in July. Early September readings      in nominal shipments may have re-
on consumer sentiment rose from the          flected unusually large price increases.
low levels recorded over the past sev-       Moreover, as in previous months,
eral months.                                 orders and shipments were likely sup-
   Residential construction activity con-    ported in July by increased foreign
tinued to decline steeply through mid-       demand. Real nonresidential investment
year. In July, both single-family hous-      increased at a robust rate in the second
ing starts and permit issuance fell          quarter; however, nominal expenditures
further. In the multifamily sector, starts   declined in July, and forward-looking
dropped back in July to a rate more in       indicators remained downbeat. Vacancy
line with its historical range. June’s       rates for commercial properties moved
spike in multifamily starts was related      higher in the first half of the year and
to more-stringent building codes that        the architectural billings index contin-
took effect in New York City on July 1,      ued to register weak readings.
which apparently led developers to pull         Real nonfarm inventories excluding
forward the start date of some planned       motor vehicles fell in the second quar-
apartment projects. Recent cutbacks in       ter. The book value of manufacturing
new residential construction reduced         and trade inventories (excluding motor
the level of new home inventories, and       vehicles) stepped up modestly in July
the relative stability in sales of new       from the second-quarter level, but the
homes allowed those inventory reduc-         ratio of these inventories to sales held
tions to begin to bring down the             steady.
months’ supply of new homes for sale.           The U.S. international trade deficit
Even so, the months’ supply of new           widened in July, as a surge in the value
homes for sale remained extremely            of imports of goods and services more
elevated relative to the level that pre-     than offset strong growth in exports.
vailed before the downturn in the hous-      Imports in July were led by a rapid
ing market. Sales of existing single-        increase in imports of oil, reflecting
family homes were relatively flat since      both higher volumes and higher prices,
the end of last year. Tight conditions in    and were supported by a rise in imports
mortgage markets over the summer             of industrial supplies, capital goods, and
continued to restrain housing demand,        services. The strength in exports was
314 95th Annual Report, 2008

broadly based but benefited in particu-     increase moderately with no sign of
lar from robust exports of automotive       acceleration.
products.                                      At its August meeting, the Federal
   Economic indicators pointed to a         Open Market Committee (FOMC) kept
marked deceleration of economic activ-      the target federal funds rate unchanged
ity in the advanced foreign economies.      at 2 percent. The Committee’s state-
In the second quarter, gross domestic       ment noted that economic activity
product (GDP) was flat in Canada and        expanded in the second quarter, partly
the United Kingdom and fell in both         reflecting growth in consumer spending
Japan and the euro area. In July, em-       and exports. However, labor markets
ployment continued to weaken in Japan,      had softened further and financial mar-
and retail sales fell in the euro area.     kets remained under considerable stress.
Headline inflation in the major ad-         Tight credit conditions, the ongoing
vanced foreign economies stayed el-         housing contraction, and elevated en-
evated. Data received over the inter-       ergy prices were likely to weigh on eco-
meeting period showed a further             nomic growth over the next few quar-
slowing of growth in emerging market        ters. The Committee stated that, over
economies. For Mexico, anemic growth        time, the substantial easing of monetary
in the second quarter followed a slight     policy, combined with ongoing mea-
contraction in the first. In Asia, output   sures to foster market liquidity, should
decelerated significantly in the second     help to promote moderate economic
                                            growth. Inflation had been high, spurred
quarter, as growth moderated in China
                                            by the earlier increases in the prices of
and weakened more sharply in several
                                            energy and some other commodities,
other economies. Headline inflation
                                            and some indicators of inflation expec-
rose in some developing countries but
                                            tations had been elevated. The Commit-
fell in others.                             tee expected inflation to moderate later
   Headline consumer prices in the          this year and next year, but the inflation
United States declined slightly in Au-      outlook remained highly uncertain.
gust after having risen rapidly during      Although downside risks to growth
the preceding three months. Energy          remained, the upside risks to inflation
prices dropped steeply, and the rate of     were also of significant concern to the
increase in food prices moderated           Committee. The Committee indicated
somewhat. Core consumer prices rose a       that it would continue to monitor eco-
bit more slowly in August than they had     nomic and financial developments and
in June and July. Excluding food and        would act as needed to promote sustain-
energy, producer prices rose modestly       able economic growth and price stabil-
in August, although prices for capital      ity.
goods other than motor vehicles and            Over the intermeeting period, inves-
high-tech equipment posted a large          tors marked down considerably their
increase. During recent months, some        expectations for the path of monetary
cost pressures eased as the prices of       policy. Policy expectations were largely
crude oil and other commodities de-         unaffected by the outcome of the
clined and non-oil import prices decel-     August FOMC meeting, as the Commit-
erated. Some measures of inflation          tee’s decision to leave the target federal
expectations were down notably over         funds rate unchanged was broadly
the intermeeting period. Measures of        anticipated and the accompanying state-
hourly labor compensation continued to      ment was reportedly in line with inves-
                                            Minutes of the FOMC, September 315

tor expectations. Subsequently, the         intermeeting period, and liquidity in
expected future path of monetary policy     non-Treasury, nonagency term repo
dropped amid increasing concerns            markets remained poor.
about the health of financial institu-         In longer-term credit markets, yields
tions. The market’s expectation for the     on investment-grade corporate bonds
onset of policy tightening was also         were not much changed, but yields on
pushed back as labor market conditions      speculative-grade bonds rose somewhat.
weakened and oil prices declined fur-       Risk spreads on corporate bonds
ther, developments that were seen as        jumped, as comparable-maturity Trea-
tempering inflation pressures. Yields on    sury yields dropped; most of the in-
nominal Treasury coupon securities          crease in risk spreads occurred late in
declined over the intermeeting period       the intermeeting period. Corporate bond
while yields on inflation-indexed Trea-     issuance moderated a bit further in
sury securities were roughly unchanged,     August, while growth of bank lending
which left inflation compensation no-       to businesses was tepid. Broad equity
ticeably lower. The decrease in inflation   indexes declined over the intermeeting
compensation was most pronounced at         period. Financial sector equity indexes
shorter horizons, likely reflecting the     were volatile and ended the period
drop in oil prices.                         down sharply.
   Conditions in short-term funding            Liquidity conditions in the money
markets remained strained for most of       markets of major foreign economies
the intermeeting period and deteriorated    deteriorated over the intermeeting
considerably just before the FOMC           period. Sovereign bond yields moved
meeting. The spreads of London inter-       down, mainly reflecting declines in
bank offered rates, or Libor, over          inflation compensation. On a trade-
comparable-maturity overnight index         weighted basis, the dollar rose against
swap rates, especially those beyond the     the currencies of our major trading part-
one-month horizon, moved up from            ners.
already-high levels. In the commercial         M2 contracted slightly in August fol-
paper market, spreads on lower-rated        lowing a generally weak performance
nonfinancial and asset-backed commer-       over the previous few months. The
cial paper fluctuated in an elevated        August data showed a considerable
range, as did spreads on financial paper.   reallocation among the components of
Depository institutions continued to bid    M2. Liquid deposits and retail money
aggressively for 28-day funds at the        funds fell while small time deposits
Term Auction Facility (TAF) during the      surged as some banks and thrifts bid
intermeeting period, and demand for         aggressively for these deposits.
funds was strong at both of the 84-day         On September 7, the Treasury De-
TAF auctions. The amount of overnight       partment and the Federal Housing
primary credit outstanding was about        Finance Agency announced that Fannie
unchanged at a high level, while term       Mae and Freddie Mac had been placed
primary credit continued to rise. No        into conservatorship and that Treasury
credit was extended through the Pri-        would establish a backstop lending
mary Dealer Credit Facility until the       facility for the government-sponsored
final week of the intermeeting period.      enterprises (GSEs), purchase preferred
Conditions in markets for repurchase        stock in the GSEs as necessary to
agreements, or repos, against some          ensure that they maintain a positive net
types of collateral deteriorated over the   worth, and initiate a program to
316 95th Annual Report, 2008

purchase mortgage-backed securities          dition of other large financial firms,
(MBS). Following the announcement,           including American International
spreads on Fannie Mae and Freddie            Group, a prominent insurance and
Mac debt and on agency MBS nar-              financial services company. To further
rowed, while share prices for their com-     support market liquidity and to help
mon and preferred stock fell. Auctions       keep the federal funds rate near its tar-
of GSE debt following the conservator-       get, the Federal Reserve conducted very
ship announcement reportedly attracted       large reserve- adding open market
heavy demand, but market participants        operations the day before and the morn-
indicated that liquidity in the secondary    ing of the FOMC meeting. Market
market for GSE debt remained some-           expectations for the path of monetary
what lower than normal. Before the           policy moved down sharply. Yields on
conservatorship announcement, interest       nominal Treasury securities dropped
rates on 30-year fixed-rate mortgages        steeply, and credit spreads on corporate
had declined less than those on com-         bonds widened significantly. Equity
parable-maturity Treasury securities,        markets were volatile and equity prices
leaving mortgage spreads at the top of       dropped considerably.
their range of the past two decades. Fol-        In the forecast prepared for the meet-
lowing the Treasury announcement,            ing, the staff left its projection for real
rates and spreads on new conforming          GDP growth in the second half of 2008
fixed-rate mortgages dropped sharply.        little changed from the previous meet-
   In the days immediately before the        ing, but it marked down its forecast for
FOMC meeting, Lehman Brothers                2009 slightly. Real GDP was estimated
Holdings filed for bankruptcy, Bank of       to have increased at a solid pace in the
America announced that it would              second quarter; however, the available
acquire Merrill Lynch, and market con-       indicators pointed to a sharp decelera-
cerns about the health of other financial    tion in economic activity in the third
institutions increased. To address poten-    quarter. Consumer spending softened
tial liquidity pressures in financial mar-   appreciably in recent months, and hous-
kets associated with these develop-          ing construction remained on a steep
ments, the Federal Reserve announced         downtrend. Some of the weakness in
several additional initiatives, including    the household sector appeared to reflect
an expansion of collateral eligible for      the ongoing deterioration in the labor
the Primary Dealer Credit Facility and       market, but the effects of the earlier
the Term Securities Lending Facility         run-up in oil prices, weakened balance
(TSLF), increases in the size and fre-       sheets, and restrictive financial condi-
quency of TSLF auctions, and a tempo-        tions also likely put the finances of
rary relaxation of the limitations on bro-   many households and businesses under
kerdealers’ access to funding from           pressure. The staff continued to expect
affiliated depository institutions. In ad-   that real GDP would advance slowly in
dition, a consortium of 10 major banks       the fourth quarter of 2008 and at a
announced the creation of a liquidity        faster rate in 2009, but still less than
pool from which participants could           that of its potential. Real GDP growth
draw collateralized loans. Despite these     was expected to pick up to slightly
enhanced liquidity measures, short-term      above the rate of potential growth in
funding markets remained severely            2010, as the restraint on household and
strained, reflecting investors’ height-      business spending associated with fi-
ened concerns about the financial con-       nancial market turmoil gradually eases
                                              Minutes of the FOMC, September 317

and the contraction in the housing sec-       a further tightening of credit availability
tor comes to an end. The staff’s outlook      to households and firms. Meeting par-
for both core and overall PCE inflation       ticipants were highly uncertain about
over the next two years also changed          future financial developments and their
little. The staff continued to project that   implications for the broader economy.
core inflation would edge lower in 2009       There was agreement that the liquidity
and 2010 as the prices of imports,            facilities established by the Federal
energy, and other commodities deceler-        Reserve over the past year had been
ate and the margin of resource slack          helpful in ameliorating strains in finan-
remains relatively wide.                      cial markets, but it was also noted that
    In their discussion of the economic       the capital of banks and other financial
situation and outlook, FOMC partici-          institutions would need to be bolstered
pants noted that financial market strains     in order to strengthen the functioning of
had intensified in the days before the        the financial system and ease con-
meeting and that these strains could          straints on credit.
potentially weigh further on economic            Strains on the financial system, and
activity. Participants agreed that eco-       their interactions with housing develop-
nomic growth was likely to be sluggish        ments and the real economy more
in the second half of 2008. Several par-      broadly, continued to restrain aggregate
ticipants had marked down their near-         demand and pose substantial downside
term outlook for economic activity and        risks to the expected path for economic
some judged that downside risks had           activity. The fall in employment in
increased, but most continued to expect       August highlighted concerns that an
a gradual recovery in 2009. Despite           adverse dynamic was taking hold, in
concern that recent high inflation read-      which economic weakness increased fi-
ings suggested that price pressures           nancial firms’ losses, leading to tighter
could persist, participants generally         credit conditions and thus causing a fur-
thought that the outlook for inflation        ther softening in economic activity.
had improved, mainly reflecting the           However, some participants cited indi-
recent declines in the prices of oil and      cations that the pace of decline in house
other commodities, the stronger foreign       prices might begin to slow in coming
exchange value of the dollar, and the         months, which would serve to limit the
weakening of the labor market.                strains on lenders. Mortgage rates had
    Participants noted that stresses on       fallen after action on the GSEs, inven-
financial markets and institutions had        tories of houses for sale had fallen, and
increased. The announcement of gov-           reports from contacts in some parts of
ernment support for Fannie Mae and            the nation suggested a possible bottom-
Freddie Mac appeared to have had a            ing of the housing sector might not be
positive impact on financial markets,         far off, although the differences in the
most importantly on the primary and           prospects for housing across states and
secondary markets for residential mort-       regions seemed to be large. All in all,
gages. However, the bankruptcy of Leh-        the contraction in the housing sector
man Brothers and market concerns              and the adverse implications for the
about other financial institutions were       performance of mortgage-related finan-
causing a wide variety of financial           cial assets continued to represent a drag
firms to experience increasing difficulty     on economic performance.
in obtaining funding and raising capital,        Recent readings on consumer spend-
a development that was likely to lead to      ing had been weak despite the tax
318 95th Annual Report, 2008

rebates, which were mostly paid out by       with increased economic slack would
mid-July; these indicators suggested         tend to damp inflation. Various mea-
that consumption may remain soft as          sures of inflation expectations had de-
the effects of the stimulus fade over the    clined since the last meeting, and nomi-
near term. Falling real estate prices        nal wage increases had continued to be
were likely to continue to reduce house-     moderate. Indeed, with solid growth in
hold wealth, and the eroding quality of      productivity, unit labor costs had been
consumer loans had the potential to lead     well contained. Still, reports from busi-
to a further tightening of credit condi-     ness contacts suggested that firms were
tions. Many participants worried that        continuing to attempt to pass through to
the deterioration in labor market condi-     their customers previous increases in
tions over the summer would damp the         the costs of energy and other raw mate-
growth of income and depress con-            rials and would resist reversing previ-
sumer confidence, further holding back       ous price increases. Participants noted
consumption.                                 that recent readings on core and head-
   Business spending had held up well        line inflation had been elevated, and
over the summer, and inventories ap-         they expressed concern that high infla-
peared to be well managed. However,          tion might become embedded in expec-
reports from business contacts sug-          tations and retain considerable momen-
gested that new commercial real estate       tum.
projects were difficult to finance. With        Members agreed that keeping the
credit conditions generally tight and        federal funds rate unchanged at this
economic prospects relatively uncertain,     meeting was appropriate. The current
investment spending was likely to be on      low real federal funds rate appeared
the soft side going forward.                 necessary to provide adequate counter-
   Foreign economic growth had slowed        weight to the restraining effects of tight
in recent months and the dollar had          credit conditions and of continued de-
risen broadly; both of these develop-        clines in the housing market on spend-
ments suggested that the contributions       ing and output. Committee members
to U.S. GDP growth from net exports          generally saw the current stance of
would likely be less strong than it had      monetary policy as consistent with a
been of late. Some participants noted        gradual strengthening of economic
that financial strains were increasing in    growth beginning next year, although
many foreign countries. However, a           they recognized that recent financial
beneficial side effect of the global slow-   developments had boosted the down-
down was the falling prices of oil and       side risks to the economic outlook.
other commodities, which would help          Inflation risks appeared to have dimin-
to bolster real incomes of U.S. house-       ished in response to the declines in the
holds.                                       prices of energy and other commodities,
   Participants generally were some-         the recent strengthening of the dollar,
what more confident about the outlook        and the outlook for somewhat greater
for some moderation in inflation over        economic slack, and Committee mem-
the forecast horizon. Recent substantial     bers were a bit more optimistic that
declines in the prices of oil and other      inflation would moderate in coming
commodities should help to contain           quarters. However, the possibility that
broader price pressures in coming quar-      core inflation would not moderate as
ters. In addition, the effects of the        anticipated was still a significant con-
stronger dollar on import prices along       cern. With substantial downside risks to
                                                  Minutes of the FOMC, October 319

growth and persisting upside risks to           bined with ongoing measures to foster mar-
inflation, members judged that leaving          ket liquidity, should help to promote moder-
                                                ate economic growth.
the federal funds rate unchanged at this           Inflation has been high, spurred by the
time suitably balanced the risks to the         earlier increases in the prices of energy and
outlook. Some members emphasized                some other commodities. The Committee
that if intensifying financial strains led      expects inflation to moderate later this year
to a significant worsening of the growth        and next year, but the inflation outlook
                                                remains highly uncertain.
outlook, a policy response could be                The downside risks to growth and the
required; however, such a response was          upside risks to inflation are both of signifi-
not called for at this meeting. Indeed, it      cant concern to the Committee. The Com-
was noted that, with elevated inflation         mittee will monitor economic and financial
still a concern and growth expected to          developments carefully and will act as
                                                needed to promote sustainable economic
pick up next year if financial strains          growth and price stability.
diminish, the Committee should also
                                                     Votes for this action: Mr. Bernanke,
remain prepared to reverse the policy                Mses. Cumming and Duke, Messrs.
easing put in place over the past year in            Fisher, Kohn, and Kroszner, Ms. Pian-
a timely fashion.                                    alto, Messrs. Plosser, Stern, and Warsh.
   At the conclusion of the discussion,              Votes against this action: None. Ms.
the Committee voted to authorize and                 Cumming voted as the alternate for Mr.
                                                     Geithner.
direct the Federal Reserve Bank of New
York, until it was instructed otherwise,           It was agreed that the next meeting of
to execute transactions in the System           the Committee would be held on Tues-
Account in accordance with the follow-          day−Wednesday, October 28–29, 2008.
ing domestic policy directive:                     The meeting adjourned at 12:30 p.m.
   The Federal Open Market Committee
seeks monetary and financial conditions that    Notation Vote
will foster price stability and promote sus-    By notation vote completed on August
tainable growth in output. To further its       25, 2008, the Committee unanimously
long-run objectives, the Committee in the
immediate future seeks conditions in reserve    approved the minutes of the FOMC
markets consistent with maintaining the fed-    meeting held on August 5, 2008.
eral funds rate at an average of around
2 percent.                                                               Brian F. Madigan
                                                                                 Secretary
   The vote encompassed approval of
the statement below to be released at
2:15 p.m.:                                      Meeting Held on
                                                October 28–29, 2008
   The Federal Open Market Committee
decided today to keep its target for the fed-   A meeting of the Federal Open Market
eral funds rate at 2 percent.                   Committee was held in the offices of
   Strains in financial markets have in-        the Board of Governors of the Federal
creased significantly and labor markets have
weakened further. Economic growth appears       Reserve System in Washington, D.C.,
to have slowed recently, partly reflecting a    on Tuesday, October 28, 2008 at 2:00
softening of household spending. Tight          p.m. and continued on Wednesday,
credit conditions, the ongoing housing con-     October 29, 2008 at 9:00 a.m.
traction, and some slowing in export growth
are likely to weigh on economic growth          Present:
over the next few quarters. Over time, the          Mr. Bernanke, Chairman
substantial easing of monetary policy, com-         Mr. Geithner, Vice Chairman
320 95th Annual Report, 2008

   Ms. Duke                                     Messrs. Levin and Nelson, Associate
   Mr. Fisher                                       Directors, Division of Monetary
   Mr. Kohn                                         Affairs, Board of Governors
   Mr. Kroszner
   Ms. Pianalto                                 Ms. Kole, Assistant Director, Division
   Mr. Plosser                                      of International Finance, Board of
   Mr. Stern                                        Governors
   Mr. Warsh                                    Mr. McCarthy, Visiting Reserve Bank
   Ms. Cumming, Messrs. Evans, Lacker,              Officer, Division of Monetary
       and Lockhart, and Ms. Yellen,                Affairs, Board of Governors
       Alternate Members of the Federal         Mr. Oliner, Senior Adviser, Division of
       Open Market Committee                        Research and Statistics, Board of
   Messrs. Bullard, Hoenig, and Rosen-              Governors
       gren, Presidents of the Federal          Mr. Small, Project Manager, Division
       Reserve Banks of St. Louis, Kan-             of Monetary Affairs, Board of
       sas City, and Boston, respectively           Governors
   Mr. Madigan, Secretary and Economist         Messrs. Bassett and Luecke, Section
   Ms. Danker, Deputy Secretary                     Chiefs, Division of Monetary
   Mr. Skidmore, Assistant Secretary                Affairs, Board of Governors
   Ms. Smith, Assistant Secretary
   Mr. Alvarez, General Counsel                 Mr. Morin, Senior Economist, Division
   Mr. Baxter, Deputy General Counsel               of Research and Statistics, Board
   Mr. Sheets, Economist                            of Governors
   Mr. Stockton, Economist
                                                Ms. Low, Open Market Secretariat
   Messrs. Connors, English, and Kamin,             Specialist, Division of Monetary
       Ms. Mester, Messrs. Rosenblum,               Affairs, Board of Governors
       Slifman, Sniderman, and Wilcox,
                                                Mr. Moore, First Vice President, Fed-
       Associate Economists
                                                    eral Reserve Bank of Cleveland
   Mr. Dudley, Manager, System Open
                                                Mr. Fuhrer, Executive Vice President,
       Market Account
                                                    Federal Reserve Bank of Boston
   Ms. Bailey, Deputy Director, Division        Messrs. Altig and McAndrews, Ms.
       of Banking Supervision and Regu-             Mosser, Messrs. Rasche, Sullivan,
       lation, Board of Governors                   and Williams, Senior Vice Presi-
   Mr. Clouse, Deputy Director, Division            dents, Federal Reserve Banks of
       of Monetary Affairs, Board of                Atlanta, New York, New York, St.
       Governors                                    Louis, Chicago, and San Fran-
                                                    cisco, respectively
   Mr. Struckmeyer,12 Deputy Staff Direc-
        tor, Office of Staff Director for       Messrs. Clark and Hornstein, Vice
        Management, Board of Governors             Presidents, Federal Reserve Banks
                                                   of Kansas City and Richmond,
   Mr. Blanchard, Assistant to the Board,          respectively
       Office of Board Members, Board
       of Governors                             Mr. Weber, Senior Research Officer,
                                                    Federal Reserve Bank of Minne-
   Messrs. Reifschneider and Wascher,               apolis
       Associate Directors, Division of
       Research and Statistics, Board of       The Manager of the System Open
       Governors                            Market Account reported on recent
                                            developments in foreign exchange mar-
                                            kets. There were no open market opera-
 12. Attended Wednesday’s session only.     tions in foreign currencies for the Sys-
                                                Minutes of the FOMC, October 321

tem’s account in the period since the            The FOMC amends paragraph 1.A. of the
previous meeting. The Manager also            Authorization for Foreign Currency Opera-
reported on developments in domestic          tions to include the New Zealand dollar in
                                              the list of foreign currencies in which the
financial markets and on System open          Federal Reserve Bank of New York may
market operations in government secu-         transact for the System Open Market
rities and federal agency obligations         Account.
during the period since the previous
meeting. By unanimous vote, the Com-             Meeting participants also discussed a
mittee ratified these transactions.           proposal to set up temporary liquidity-
   In the discussion of System open           related swap arrangements with the cen-
market operations over the period, it         tral banks of Mexico, Brazil, Korea,
was noted that reserve management had         and Singapore. In their remarks, partici-
become more complex as a result of the        pants focused on the outlook for com-
large provision of reserves associated        plementarity between these swaps and
with the recent expansion of the Federal      the new short-term liquidity facility that
Reserve’s liquidity facilities; in particu-   the International Monetary Fund was
lar, the effective federal funds rate had     considering; on the governance and
been persistently below the FOMC’s            structure of the swap lines; and on the
target. While the payment of interest on      particular countries included. Several
reserves seemed to be helpful in miti-        participants pointed to the international
gating downward pressure on the funds         reserves held by the countries and the
rate, a number of institutions evidently      importance of ensuring that these tem-
were willing to sell funds at interest        porary swap lines, like the others that
rates below that paid on excess reserve       had been established during this period,
balances. Anecdotal reports suggested         be used only for the purposes intended.
that this was particularly the case for       On balance, the Committee concluded
those institutions that are not eligible to   that in current circumstances the swap
receive interest on the balances they         arrangements with these four large and
maintain at the Federal Reserve. Going        systemically important economies were
forward, however, the interest rate on        appropriate, and it unanimously ap-
excess reserve balances could be ad-          proved the following resolutions.
justed, and it might establish a more
effective floor on the federal funds rate        The FOMC directs the Federal Reserve
                                              Bank of New York to establish and maintain
over time as more depository institu-         a reciprocal currency arrangement (“swap
tions revise their strategies in the fed-     arrangement”) for the System Open Market
eral funds market in light of the pay-        Account with each of (i) the Banco Central
ment of interest on reserves.                 do Brasil, (ii) the Bank of Korea, (iii) the
   In view of a further widening in           Banco de Mexico, and (iv) the Monetary
financial market strains internationally,     Authority of Singapore. Each such swap
                                              arrangement would be for an aggregate
the Committee considered proposals to         amount not to exceed $30 billion. Drawings
establish temporary reciprocal currency       under the arrangement require approval.
(“swap”) arrangements with several            Unless extended by the Committee, each
additional foreign central banks. Mem-        such swap arrangement shall expire on April
bers unanimously approved the follow-         30, 2009.
ing resolution, which effectively permit-        The FOMC amends paragraph 1.A. of the
                                              Authorization for Foreign Currency Opera-
ted the Foreign Currency Subcommittee         tions to include the Brazilian real, the
to establish a swap line with the Re-         Korean won, and the Singapore dollar in the
serve Bank of New Zealand.                    list of foreign currencies in which the Fed-
322 95th Annual Report, 2008

eral Reserve Bank of New York may trans-    tions. The housing market remained
act for the System Open Market Account.     weak, with construction activity, new
   The FOMC delegates to the Foreign Cur-   home sales, and home prices falling fur-
rency Subcommittee the authority to
approve individual drawing requests of up   ther. Business spending on equipment
to $5 billion under each of the aforemen-   and software appeared to have declined
tioned swap arrangements with the Banco     again in the third quarter, and indicators
Central do Brasil, the Bank of Korea, the   of investment in structures weakened.
Banco de Mexico, and the Monetary           Economic activity in many foreign
Authority of Singapore.
                                            economies slowed in recent months.
   A number of adverse financial devel-     Headline consumer inflation measures,
opments influenced economic and             pulled down by declines in consumer
financial market conditions over the        energy prices, moderated in August and
intermeeting period. Lehman Brothers        September. Core consumer inflation
Holdings had filed for bankruptcy the       measures also eased somewhat in these
day before the meeting of the Commit-       two months.
tee in September. In large part because        The labor market continued to
of losses on Lehman debt, the net asset     weaken. According to the September
value of a major money market mutual        labor market report, the unemployment
fund fell below $1 per share, spurring a    rate remained at 6.1 percent, but private
substantial outflow from money market       payroll employment fell faster than the
mutual funds and straining their liquid-    average pace earlier in the year. Most
ity. The rapid deterioration of American    major industry groups shed jobs. The
International Group, Inc. (AIG), and        manufacturing, construction, and tem-
Wachovia Corporation, along with the        porary help industries continued to
closing of Washington Mutual, led to        experience sizable losses in employ-
intensified market concerns about the       ment; meanwhile, retail trade and finan-
condition of financial institutions. In     cial services registered larger declines
this environment, investors pulled back     than earlier in the year. Nonbusiness
from risk-taking, funding markets for       services added jobs, but at the slowest
terms beyond overnight largely ceased       rate of the year. The average workweek
to function at times, credit risk spreads   and aggregate hours declined in Sep-
rose sharply, and equity prices regis-      tember, and weekly unemployment
tered steep declines.                       insurance claims continued to rise in
   The information reviewed at the          October.
October meeting indicated that eco-            Industrial production dropped sharply
nomic conditions deteriorated in recent     in September. Although much of the
months. The labor market weakened           decline was due to the effects of the
further in September as private payrolls    recent hurricanes and a strike at an air-
fell at a faster pace than earlier in the   craft manufacturer, most major indus-
year and the unemployment rate re-          tries experienced slow or declining out-
mained above 6 percent. Industrial pro-     put in recent months. Motor vehicle
duction fell in September, although         assemblies were unchanged in the third
much of the drop was related to effects     quarter at a low level. The pace of high-
of recent hurricanes and a strike at an     tech equipment production slowed in
aircraft manufacturer. Consumer spend-      the third quarter relative to its rate in
ing declined, reflecting stagnant real      the first half of the year, reportedly in
income, tighter credit, declining wealth,   part because tight credit conditions
and concerns about economic condi-          were restraining demand. Available in-
                                              Minutes of the FOMC, October 323

formation suggested that demand and         unsold houses, the slower rate of sales
production in this sector were likely       kept the months’ supply of new homes
to remain relatively subdued over the       very elevated relative to the level that
coming months. The output of other          had prevailed before the downturn in
manufacturing sectors declined in the       the housing market. Sales of existing
third quarter. While standard indicators    single-family homes in September were
of near-term production suggested fac-      somewhat higher than they had been
tory output would decline further over      earlier in the year, likely supported by
the next few months, the recovery of        increases in foreclosure-related sales.
production in industries affected by the    Tight conditions in mortgage markets
hurricanes was expected to offset these     continued to restrain housing demand,
declines to a degree. The factory utili-    especially for borrowers needing non-
zation rate fell in September to well       conforming mortgages. Several indexes
below its long-run average.                 indicated that house prices declined
   Real personal consumption expendi-       substantially over the 12 months
tures (PCE) apparently declined in Sep-     through August.
tember for the fourth consecutive              In the business sector, investment in
month. Motor vehicle sales fell back to     equipment and software appeared to
their very low July pace, and prelimi-      weaken further in the third quarter.
nary reports indicated that the slump       Nominal shipments of nondefense capi-
continued into October, as tighter credit   tal goods excluding aircraft were flat in
conditions were restraining demand.         the third quarter, while orders for those
Purchases of goods other than motor         goods declined. Demand for high-tech
vehicles were estimated to have fallen      equipment appeared to have softened
noticeably. Real outlays on services        considerably, and spending on non-
other than energy increased only mod-       high-tech, non-transportation equipment
estly in July and August. Real dispos-      was estimated to have fallen. Transpor-
able income, excluding the effects of       tation equipment investment was held
tax rebates and the emergency unem-         down in the third quarter by falling
ployment benefits, was little changed in    sales for medium and heavy trucks and
July and August from the second-            by a strike-induced drop in aircraft
quarter average. Measures of consumer       deliveries in September. Nominal ex-
sentiment dropped in October to near or     penditures on nonresidential structures
below their low levels of midyear, with     declined for the second consecutive
the Conference Board measure excep-         month in August. Forward-looking indi-
tionally low.                               cators turned more downbeat: Vacancy
   Residential construction activity con-   rates for commercial properties rose
tinued to decline steeply through the       further, property values declined, and
third quarter. In September, both single-   the architectural billings index fell in
family housing starts and permit issu-      September. Furthermore, the latest
ance fell. In the multifamily sector,       Senior Loan Officer Opinion Survey on
starts edged up in September but re-        Bank Lending Practices indicated that
mained toward the lower end of their        banks tightened lending standards for
two-year range. New home sales in           commercial real estate loans over the
August and September were at a pace         past three months.
well below that of the first half of the       The book-value data for manufactur-
year. Although the cutbacks in home-        ing and trade inventories suggested that
building had reduced the inventory of       the real value of inventories continued
324 95th Annual Report, 2008

to decline over the summer through         for the euro area suggested some decel-
August, but a number of indicators sug-    eration in prices.
gested that stocks in some industries         In emerging market economies, data
remained above desired levels. The         received over the intermeeting period
days’ supply of light motor vehicles at    showed a continued slowing of real
dealers had risen, on balance, through     activity. Real GDP growth in China
the year and was rather high in Septem-    moved down in the third quarter. Indus-
ber. The ratio of book-value inventories   trial production contracted in recent
to sales in the manufacturing and trade    months for many countries. External
sectors, excluding motor vehicles, rose    balances deteriorated significantly in
in August, particularly in a number of     many emerging market economies as
durable goods sectors. In addition, the    exports to advanced economies slowed.
index of customers’ inventories in the     Headline inflation in emerging market
Institute of Supply Management’s man-      economies eased, reflecting falling oil
ufacturing survey indicated that inven-    and food prices.
tories remained above desired levels.         Headline consumer prices in the
   The U.S. international trade deficit    United States were estimated to have
narrowed in August, with a decline in      risen only modestly in September, ex-
the value of imports more than offset-     tending the recent moderation of overall
ting a fall in the value of exports of     inflation following the rapid increases
goods and services. A drop in the value    earlier in the year. Consumer energy
of petroleum imports, which reflected      prices fell for the second consecutive
both lower volumes and a decrease in       month, while retail food prices contin-
prices, exceeded an increase in non-oil    ued to climb at a rapid pace, boosted by
imports that was driven by a rise in       the substantial run-up in farm commod-
imports of consumer goods and indus-       ity prices through midyear. Core con-
trial supplies. Exports of automotive      sumer price inflation rose somewhat
products fell sharply in August after a    during the third quarter, reflecting the
surge in July, and exports of consumer     pass-through of previous increases in
goods, industrial supplies, and services   the costs of energy and materials and
moved down after strong increases          import prices. Those upward price pres-
in previous months. Aircraft exports       sures diminished recently: Prices of oil
surged, but sales of other capital goods   and other commodities fell sharply over
declined.                                  the intermeeting period, and non-oil
   The data for the advanced foreign       import prices as well as producer prices
economies during the intermeeting          of intermediate materials excluding
period generally suggested that eco-       food and energy declined in September.
nomic activity was weakening further,      Some survey measures of inflation
and confidence indicators in these areas   expectations declined during the period.
declined as the financial crisis wors-     Available measures of hourly labor
ened. Labor market conditions deterio-     compensation increased at about the
rated in these economies, with the         same moderate pace as over the past
exception of Canada. Real gross domes-     several years.
tic product (GDP) fell in the United          At its September meeting, the Fed-
Kingdom in the third quarter. Headline     eral Open Market Committee (FOMC)
inflation continued to be elevated in      kept the target federal funds rate un-
many economies, but the most recent        changed at 2 percent. The Committee’s
consumer price indexes for Japan and       statement noted that strains in financial
                                              Minutes of the FOMC, October 325

markets had increased significantly and     expected path for the federal funds rate.
that labor markets had weakened fur-        Yields on short-term nominal Treasury
ther. Economic growth appeared to           coupon securities declined over the
have slowed recently, which partly re-      intermeeting period, reportedly as a
flected a softening of household spend-     result of substantial flight-to-quality
ing. Tight credit conditions, the ongo-     flows and heightened demand for li-
ing housing contraction, and some           quidity. In contrast, higher term premi-
slowing in export growth were likely to     ums and expectations of increases in the
weigh on economic growth over the           supply of Treasury securities associated
next few quarters. The Committee            with the Emergency Economic Stabili-
stated that, over time, the substantial     zation Act and other initiatives seemed
easing of monetary policy, combined         to put upward pressure on longer-term
with ongoing measures to foster market      nominal Treasury yields. Yields on
liquidity, should help promote moderate     longer-term inflation-indexed Treasury
economic growth. Inflation had been         securities, which are relatively illiquid,
high, spurred by the earlier increases in   rose more sharply than did those on
the prices of energy and some other         nominal securities. Measures of infla-
commodities. The Committee expected         tion compensation based on differences
inflation to moderate later this year and   between nominal and inflation-indexed
next year, but the inflation outlook        Treasury yields were quite volatile over
remained highly uncertain. The down-        the intermeeting period and, because of
side risks to growth and the upside risks   shifting liquidity premiums, likely pro-
to inflation were both of significant       vided less information than usual con-
concern to the Committee. The Com-          cerning inflation expectations or infla-
mittee indicated that it would continue     tion uncertainty.
to monitor economic and financial de-          In the wake of the failures or near
velopments carefully and would act as       failures of several large financial insti-
needed to promote sustainable eco-          tutions, short-term funding markets
nomic growth and price stability.           came under significant additional pres-
   Over the intermeeting period, market     sure over the intermeeting period, and
participants marked down their expecta-     the Federal Reserve and other central
tions for the path of the federal funds     banks took a number of actions to pro-
rate for the next two years. The Com-       vide liquidity and improve market func-
mittee’s decision to leave the target       tioning. In the overnight federal funds
federal funds rate unchanged at the Sep-    market, financial institutions became
tember FOMC meeting led some in-            more selective about the counterparties
vestors to scale back expectations for      with whom they were willing to trade.
policy easing over the next year. Subse-    The overnight London interbank offered
quently, however, market expectations       rate (Libor) rose substantially, and the
reversed in response to the heightened      spread of term Libor rates over com-
financial turmoil and to generally          parable-maturity overnight index swap
weaker-than-expected economic data.         (OIS) rates rose sharply from already-
The Committee’s decision to reduce the      high levels. The demand for commer-
target federal funds rate 50 basis points   cial paper declined as prime money
as part of a coordinated action with        market mutual funds experienced large
other central banks on October 8, along     net outflows after the net asset value of
with the accompanying statement, led        one such fund fell below $1 per share.
investors to mark down further the          As a consequence, risk spreads on com-
326 95th Annual Report, 2008

mercial paper rose considerably and          deteriorated in the secondary market for
were very volatile. Amid strong flows        syndicated leveraged loans, with prices
into government-only money market            falling to new lows and bid-asked
mutual funds, the demand for short-          spreads widening notably. Broad equity
dated Treasury bills rose, and these         price indexes declined sharply over the
securities traded with very low yields       intermeeting period, and option-implied
despite sizable new issuance during the      volatility on the S&P 500 index rose
period. The market for repurchase            well above its previous record high.
agreements (repos) also experienced          The Senior Loan Officer Opinion Sur-
significant dislocations during the inter-   vey pointed to further tightening of
meeting period. Partly because of high       terms and standards for consumer loans.
demand for Treasury securities, the          Consumer credit increased at its slowest
overnight repo rate for Treasury general     pace in more than 15 years during the
collateral was near zero for much of the     three months ending in August. Condi-
period, and failures to deliver Treasury     tions in the municipal bond market
securities reached record highs. Repo        were also poor over much of the inter-
rates on agency collateral also were         meeting period.
volatile, and liquidity in non-Treasury,        The strains from the banking and
non-agency repo markets was poor.            credit crisis intensified and took on a
Conditions in short-term funding mar-        more global aspect over the intermeet-
kets improved somewhat following the         ing period. This development and the
announcements of a U.S. government           related erosion of the economic outlook
guarantee of certain liabilities of U.S.     and reduction in inflationary pressures
banking organizations and similar ac-        led many central banks to reduce their
tions by foreign authorities, the expan-     policy rates, including in the interna-
sion of swap arrangements between the        tionally coordinated action announced
Federal Reserve and other central            on October 8. Liquidity conditions in
banks, and a number of initiatives by        the money markets of major foreign
the Federal Reserve and the Treasury to      economies deteriorated further. Spreads
address the pressures on money market        between term Libor and OIS rates in
mutual funds and the commercial paper        euros and sterling rose from already-
market.                                      elevated levels, although by less than in
   In longer-term credit markets, yields     dollars. Sovereign bond yields in the
and spreads on investment-grade and          advanced foreign economies were vola-
speculative-grade corporate bonds in-        tile; nominal yield curves in many
creased, while indexes of credit default     countries steepened on net. Equity mar-
swap (CDS) spreads for investment-           ket indexes fell sharply in the advanced
grade financial and nonfinancial firms       economies as well as in emerging mar-
reached unprecedented levels. Liquidity      ket economies, which until recently had
in the corporate bond and CDS markets        not been hit as hard by the financial
was strained. Issuance of investment-        turmoil. The dollar appreciated against
grade corporate bonds was moderate in        most currencies, with the prominent
September and October, while there           exception of the Japanese yen.
was little issuance of speculative-grade        In the United States, M2 accelerated
bonds. Commercial and industrial loans       sharply in September, and it appeared to
continued to expand rapidly in early         be on pace for another large increase in
October, as firms drew on existing bank      October, apparently reflecting a height-
lines of credit. However, conditions         ened preference by households and
                                                Minutes of the FOMC, October 327

firms for safe assets. Liquid deposits        from money market mutual funds. On
expanded strongly in September, but           October 7, the Board announced the
leveled off in early October. Small time      creation of the Commercial Paper Fund-
deposits increased briskly in September       ing Facility (CPFF), which provides a
and early October as banks and thrifts        liquidity backstop to U.S. issuers of
reportedly continued to bid aggressively      highly rated commercial paper through
for these deposits. Retail money funds,       a special-purpose vehicle that purchases
which were little changed in September,       three-month unsecured commercial
experienced significant net inflows in        paper and ABCP directly from eligible
early October. In contrast, institutional     issuers. On October 21, it publicized the
money funds, which are not included in        creation of the Money Market Investor
M2, experienced substantial outflows          Funding Facility (MMIFF), under
during this period.                           which the Federal Reserve Bank of
   In response to the extraordinary           New York will provide funding to a
stresses in financial markets, the Fed-       series of special-purpose vehicles to
eral Reserve together with other U.S.         facilitate an industry-supported initia-
government agencies and many foreign          tive to finance the purchase of certain
central banks and governments imple-          highly rated certificates of deposit, bank
mented a number of unprecedented pol-         notes, and commercial paper from U.S.
icy initiatives during the intermeeting       money market mutual funds. The
period. Early in the period, the condi-       AMLF, CPFF, and MMIFF were in-
tion of AIG, a large complex financial        tended to improve the liquidity in short-
institution, deteriorated rapidly. In view    term debt markets and ease the strains
of the likely systemic implications and       in credit markets more broadly.
the potential for significant adverse            In addition, to address the sizable
effects on the economy of a disorderly        demand for dollar funding in foreign
failure of AIG, the Federal Reserve           jurisdictions, the FOMC authorized the
Board on September 16, with the sup-          expansion of its existing swap lines
port of the Treasury, authorized the          with the European Central Bank and
Federal Reserve Bank of New York to           Swiss National Bank; by the end of the
lend up to $85 billion to the firm to         intermeeting period, the formal quantity
assist it in meeting its obligations and to   limits on these lines had been elimi-
facilitate the orderly sale of some of its    nated. The quantity limits were also
businesses. On October 8, the Federal         lifted on new swap lines set up with the
Reserve announced a supplemental              Bank of Japan and the Bank of Eng-
liquidity arrangement for AIG.                land. The FOMC authorized new swap
   The Federal Reserve Board also ap-         lines with five other central banks dur-
proved a number of new facilities to          ing the period. In domestic markets, the
address strains in short-term funding         Federal Reserve raised the regular auc-
markets. On September 19, it an-              tion amounts of the 28- and 84-day
nounced the Asset-Backed Commercial           maturity Term Auction Facility (TAF)
Paper Money Market Mutual Fund                auctions to $150 billion each. Also, the
Liquidity Facility (AMLF), which ex-          Federal Reserve announced two for-
tends nonrecourse loans at the primary        ward TAF auctions for $150 billion
credit rate to U.S. depository institu-       each, to be conducted in November to
tions and bank holding companies to           provide funding over year-end. In total,
finance the purchase of high-quality          up to $900 billion of TAF credit over
asset-backed commercial paper (ABCP)          year-end was authorized.
328 95th Annual Report, 2008

   Despite the substantial provision of     Credit extended through the Primary
liquidity by the Federal Reserve and        Dealer Credit Facility rose rapidly
other central banks, functioning in         ahead of quarter-end; although it sub-
many credit markets remained very           sided subsequently, the amount of credit
poor, a situation that reflected market     outstanding remained well above the
participants’ uncertainty about their       levels seen before mid-September. The
liquidity needs and their future access     Term Securities Lending Facility
to funding as well as concerns about the    (TSLF) auctions conducted over the in-
health of many financial institutions. To   termeeting period had very high de-
strengthen confidence in U.S. financial     mand; in addition, dealers exercised
institutions, the Treasury, the Federal     most of the options for TSLF loans
Reserve, and the Federal Deposit Insur-     spanning the September quarter-end.
ance Corporation (FDIC) issued a joint         Two initiatives were introduced over
statement on October 14, which in-          the intermeeting period to help manage
cluded several elements. First, the Trea-   the expansion of the balance sheet and
sury announced a voluntary capital pur-     promote control of the federal funds
chase plan under which eligible             rate. First, on September 17, the Trea-
financial institutions could sell pre-      sury announced a temporary Supple-
ferred shares to the U.S. government.       mentary Financing Program at the
Second, the FDIC provided a temporary       request of the Federal Reserve. Under
guarantee of the senior unsecured debt
                                            this program, the Treasury issued short-
of all FDIC-insured institutions and
                                            term bills over and above its regular
their holding companies, as well as all
                                            borrowing program, with the proceeds
balances in non-interest-bearing trans-
                                            deposited at the Federal Reserve. This
action deposit accounts. The statement
included notice that nine major finan-      facility helped offset the provision of
cial institutions had agreed to partici-    reserves to the banking system through
pate in both the capital purchase pro-      the various liquidity facilities. Second,
gram and the FDIC guarantee program.        employing authority granted under the
Third, the Federal Reserve announced        Emergency Economic Stabilization Act,
details of the CPFF, which was sched-       the Federal Reserve Board announced
uled to begin on October 27. After this     on October 6 that it would pay interest
joint statement and the announcements       on required and excess reserve balances
of similar programs in a number of          beginning on October 9. The payment
other countries, financial market pres-     of interest on excess reserve balances
sures appeared to ease somewhat,            was intended to assist in maintaining
though conditions remained strained.        the federal funds rate close to the target
   The expansion of existing liquidity      set by the Committee. Initially, the
facilities as well as the creation of new   interest rate on required reserves was
facilities contributed to a notable in-     set at the average target federal funds
crease in the size of the Federal Re-       rate over each reserve maintenance
serve’s balance sheet. The amount of        period less 10 basis points, while the
primary credit outstanding rose consid-     rate on excess reserves was set at the
erably over the intermeeting period,        lowest target federal funds rate over
with both foreign and domestic deposi-      each reserve maintenance period less
tory institutions making use of the dis-    75 basis points. On October 22, the rate
count window. TAF credit outstanding        on excess reserves was adjusted to be
more than doubled over the period.          the lowest target federal funds rate dur-
                                               Minutes of the FOMC, October 329

ing the maintenance period less 35 basis     energy, materials, and import prices and
points.                                      of resource slack were expected to be
   In the forecast prepared for the meet-    greater than at the time of the Septem-
ing, the staff lowered its projection for    ber FOMC meeting. Core inflation was
economic activity in the second half of      projected to slow considerably in 2009
2008 as well as in 2009 and 2010. Real       and then to edge down further in 2010.
GDP appeared to have declined in the            In conjunction with this FOMC meet-
third quarter, and the few available indi-   ing, all participants—that is, Federal
cators that reflected conditions follow-     Reserve Board members and Reserve
ing the intensification of the financial     Bank presidents—provided annual pro-
market turmoil in mid-September              jections for economic growth, the un-
pointed to another decline in the fourth     employment rate, and inflation for the
quarter. The declines in stock-market        period 2008 through 2011. The projec-
wealth, low levels of consumer senti-        tions are described in the Summary of
ment, weakened household balance             Economic Projections, which is at-
sheets, and restrictive credit conditions    tached as an addendum to these min-
were likely to hinder household spend-       utes.
ing over the near term. Business expen-         In their discussion of the economic
ditures also probably would be held          situation and outlook, FOMC meeting
back by a weaker sales outlook and           participants indicated that the worsen-
tighter credit conditions. The staff ex-     ing financial situation, the slowdown in
pected that real GDP would continue to       growth abroad, and incoming informa-
contract somewhat in the first half of       tion on economic activity had led them
2009 and then rise in the second half,       to mark down significantly their out-
with the result that real GDP would be       look for growth. While economic activ-
about unchanged for the year. Although       ity had evidently already been slowing
futures markets pointed to a lower tra-      over the summer, the turmoil in recent
jectory for oil prices than at the time of   weeks had apparently resulted in tighter
the September meeting, real activity         financial conditions and greater uncer-
was expected to be restrained by further     tainty among businesses and house-
contraction in residential investment,       holds about economic prospects, further
reduced household wealth, continued          limiting their ability and willingness to
tight credit conditions, and a deteriora-    make significant spending commit-
tion of foreign economic performance.        ments. Recent measures of business and
In 2010, real GDP growth was expected        consumer sentiment had fallen to his-
to pick up to near the rate of potential     torical lows. Participants generally ex-
growth, as the restraints on household       pected the economy to contract moder-
and business spending from the finan-        ately in the second half of 2008 and the
cial market tensions were anticipated to     first half of 2009, and agreed that the
begin to ease and the contraction in the     downside risks to growth had in-
housing market to come to an end. With       creased. While some expected an im-
growth below its potential rate for an       proving financial situation to contribute
extended period, the unemployment rate       to a recovery in growth by mid-2009,
was expected to rise significantly           others judged that the period of eco-
through early 2010. The staff reduced        nomic weakness could persist for some
its forecast for both core and overall       time. Several participants indicated that
PCE inflation, as the disinflationary        they expected some fiscal stimulus in
effects of the receding cost pressures of    coming quarters, but they were uncer-
330 95th Annual Report, 2008

tain about the extent and duration of the    tighter than prior to the recent disrup-
resulting support to economic activity.      tions. Moreover, some participants
Participants agreed that in coming quar-     noted that the specifics and effective-
ters inflation was likely to move down       ness of some government programs to
to levels consistent with price stability,   support financial markets and institu-
reflecting the recent declines in the        tions remained unclear.
prices of energy and other commodities,         Participants indicated that the in-
the appreciation of the dollar, and the      crease in financial turmoil had already
expected widening of margins of re-          had an impact on business decisions.
source slack. Indeed, some saw a risk        Reports from contacts in many parts of
that over time inflation could fall below    the country suggested that the weaker
levels consistent with the Federal Re-       and less certain economic outlook was
serve’s dual objectives of price stability   leading businesses to cancel capital and
and maximum employment.                      other discretionary expenditures and lay
   Participants noted that financial con-    off workers. Several participants noted
ditions had worsened significantly over      that even businesses that had previously
the intermeeting period. The failure or      been largely unaffected by the financial
near failure of a number of major finan-     turbulence were now experiencing diffi-
cial institutions had deepened market        culties obtaining new credit, and some
concerns about counterparty credit risk      businesses were said to be drawing
and liquidity risk. As a result, financial   down lines of credit preemptively rather
intermediaries had cut back on lending       than risk the lines becoming unavail-
to some counterparties, particularly for     able. Contacts indicated that fewer
terms beyond overnight, and in general       commercial real estate construction
were conserving liquidity and capital.       projects were being undertaken. Resi-
Moreover, risk aversion of investors         dential construction activity remained
increased, driving credit spreads sharply    extremely subdued, with the stock of
higher. Survey results and anecdotal         unsold homes still very elevated.
information also suggested that credit          Meeting participants noted that real
conditions had tightened significantly       consumer spending had been weaken-
further for businesses and households.       ing through the summer, responding to
Equity prices had varied widely and          lower employment and tighter credit.
were substantially lower, on net. Partici-   Moreover, households, like businesses,
pants saw the potential for financial        were reportedly reacting to the shift-
strains to intensify if some investors,      ing economic circumstances in recent
such as hedge funds, found it necessary      weeks by cutting expenditures further.
to sell assets and as lending institutions   Spending on consumer durables, such
built reserves against losses. Partici-      as automobiles, and discretionary items
pants were concerned that the negative       had been particularly hard hit, and
spiral in which financial strains lead to    retailers anticipated very weak holiday
weaker spending, which in turn leads to      spending.
higher loan losses and a further deterio-       Participants noted that the financial
ration in financial conditions, could per-   turmoil had increasingly become an
sist for a while longer. While the global    international phenomenon, leading to a
efforts to recapitalize banks and guaran-    marked deterioration in global growth
tee deposits had helped stabilize the        prospects. While advanced foreign
situation, risk spreads remained higher,     economies had already shown signs of
asset prices lower, and credit conditions    slowing, they had been significantly
                                               Minutes of the FOMC, October 331

affected by the worsening of financial       for some time, inflation could fall
strains over the intermeeting period.        below levels consistent with the Federal
Moreover, a number of emerging mar-          Reserve’s dual mandate for promoting
ket economies, which had heretofore          price stability and maximum employ-
been less influenced by the financial        ment, a development that would pose
developments in industrial countries,        important policy challenges in light of
had in recent weeks been significantly       the already-low level of the Commit-
affected, as the increasing strains in       tee’s federal funds rate target.
financial markets led global investors to       Participants discussed a number of
pull back from exposures to such econ-       issues relating to broader monetary pol-
omies. As a result, interest rates on        icy strategy. Over the past year, the
emerging market debt had shot up and         Federal Reserve’s response to the finan-
prices of emerging market equity had         cial turbulence had encompassed sub-
dropped sharply. Participants saw the        stantial monetary policy easing, the pro-
stronger dollar and weaker growth            vision of large volumes of liquidity
abroad as likely to restrain future          through standard and extraordinary
growth in U.S. exports.                      means, and facilitating the resolution of
   Participants agreed that inflation was    troubled, systemically important finan-
likely to diminish materially in coming      cial institutions. Participants judged that
quarters. Commodity prices had fallen        the policy actions had been helpful and
sharply, the dollar had strengthened         well calibrated to their assessment of
notably, and considerable economic           the developing situation. Several par-
slack was anticipated. Moreover, some        ticipants observed that it would be cru-
survey measures of inflation expecta-        cial for such policy actions to be un-
tions had declined as had those derived      wound appropriately as the financial
from inflation-linked Treasury securi-       situation normalized. However, partici-
ties, although recent movements in the       pants also observed that unfolding eco-
latter measures were likely influenced       nomic developments could require the
in part by increases in the premiums         FOMC to further lower its target for the
required to hold the relatively illiquid     federal funds rate in the future and to
inflation-indexed securities. Some par-      review the adequacy of its liquidity
ticipants indicated that their business      facilities.
contacts had reported reduced pricing           In the discussion of monetary policy
power and lower markups. Against this        for the intermeeting period, Committee
backdrop, participants generally ex-         members agreed that significant easing
pected inflation to decline to levels con-   in policy was warranted at this meeting
sistent with price stability. A few par-     in view of the marked deterioration in
ticipants noted that disruptions to the      the economic outlook and anticipated
credit intermediation process and the        reduction in inflation pressures. The
inefficiencies associated with shifts of     recent substantial tightening in financial
resources among economic sectors             conditions, the sharp downshift in
could be expected to reduce aggregate        spending here and abroad, and the rapid
supply as well as restrain aggregate         abatement of upside inflation risks all
demand; as a consequence, such factors       suggested that a forceful policy re-
could limit the effect of slower output      sponse would be appropriate. Some
growth on rates of resource slack and        members were concerned that the effec-
inflation. Others, though, saw a risk that   tiveness of cuts in the target federal
if resource utilization remained weak        funds rate may have been diminished
332 95th Annual Report, 2008

by the financial dislocations, suggesting      immediate future seeks conditions in reserve
that further policy action might have          markets consistent with reducing the federal
                                               funds rate to an average of around 1 percent.
limited efficacy in promoting a recov-
ery in economic growth. And some also             The vote encompassed approval of
noted that the Committee had limited           the statement below to be released at
room to lower its federal funds rate tar-      2:15 p.m.:
get further and should therefore con-             The Federal Open Market Committee
sider moving slowly. However, others           decided today to lower its target for the fed-
maintained that the possibility of re-         eral funds rate 50 basis points to 1 percent.
duced policy effectiveness and the lim-           The pace of economic activity appears to
                                               have slowed markedly, owing importantly to
ited scope for reducing the target fur-        a decline in consumer expenditures. Busi-
ther were reasons for a more aggressive        ness equipment spending and industrial pro-
policy adjustment; an easing of policy         duction have weakened in recent months,
should contribute to a beneficial reduc-       and slowing economic activity in many for-
tion in some borrowing costs, even if a        eign economies is damping the prospects for
                                               U.S. exports. Moreover, the intensification
given rate reduction currently would           of financial market turmoil is likely to exert
elicit a smaller effect than in more typi-     additional restraint on spending, partly by
cal circumstances, and more aggressive         further reducing the ability of households
easing should reduce the odds of a             and businesses to obtain credit.
deflationary outcome. Members also                In light of the declines in the prices of
saw the substantial downside risks to          energy and other commodities and the
                                               weaker prospects for economic activity, the
growth as supporting a relatively large        Committee expects inflation to moderate in
policy move at this meeting, though            coming quarters to levels consistent with
even after today’s 50 basis point action,      price stability.
the Committee judged that downside                Recent policy actions, including today’s
risks to growth would remain. Members          rate reduction, coordinated interest rate cuts
                                               by central banks, extraordinary liquidity
anticipated that economic data over the        measures, and official steps to strengthen
upcoming intermeeting period would             financial systems, should help over time to
show significant weakness in economic          improve credit conditions and promote a
activity, and some suggested that addi-        return to moderate economic growth. Never-
tional policy easing could well be ap-         theless, downside risks to growth remain.
                                               The Committee will monitor economic and
propriate at future meetings. In any           financial developments carefully and will
event, the Committee agreed that it            act as needed to promote sustainable eco-
would take whatever steps were neces-          nomic growth and price stability.
sary to support the recovery of the                 Votes for this action: Messrs. Bernanke
economy.                                            and Geithner, Ms. Duke, Messrs.
   At the conclusion of the discussion,             Fisher, Kohn, and Kroszner, Ms. Pian-
the Committee voted to authorize and                alto, Messrs. Plosser, Stern, and Warsh.
direct the Federal Reserve Bank of New              Votes against this action: None.
York, until it was instructed otherwise,          It was agreed that the next meeting of
to execute transactions in the System          the Committee would be held on Tues-
Account in accordance with the follow-         day, December 16, 2008.
ing domestic policy directive:                    The meeting adjourned at 11:45 a.m.
   The Federal Open Market Committee
seeks monetary and financial conditions that   Conference Calls
will foster price stability and promote sus-
tainable growth in output. To further its      On September 29, 2008, the Committee
long-run objectives, the Committee in the      met by conference call to review recent
                                               Minutes of the FOMC, October 333

developments and to consider changes         functioning of the commercial paper
to swap arrangements with foreign cen-       market. Since the September 16 FOMC
tral banks. Amid signs of growing            meeting, indicators of economic activity
strains in money markets, the discus-        in both the United States and in major
sion focused on recent Federal Reserve       foreign countries had come in weaker
actions and on potential expansions in       than expected. In the United States,
official liquidity facilities. In light of   automobile sales, capital goods ship-
severe pressures in dollar funding mar-      ments, and private payrolls had fallen
kets abroad, the Committee unani-            notably. Elsewhere, indicators of eco-
mously approved both extending the           nomic activity and sentiment had dete-
liquidity-related swap arrangements          riorated in a broad range of important
with foreign central banks an additional     foreign economies. Prices of crude oil
three months, through April 30, 2009,        and other commodities had dropped
and increasing substantially the sizes of    substantially, and some measures of
those existing arrangements. The en-         inflation expectations had declined. Par-
larged facilities would support the          ticipants agreed that downside risks to
provision of U.S. dollar liquidity in        economic growth had increased and
amounts of up to $30 billion by the          upside risks to inflation had diminished.
Bank of Canada, $80 billion by the           Participants discussed the considerable
Bank of England, $120 billion by the         expansion of Federal Reserve liquidity
Bank of Japan, $15 billion by Dan-           in recent months. Most agreed that
marks Nationalbank, $240 billion by          these actions to provide liquidity had
the European Central Bank, $15 billion       had a beneficial impact. Nonetheless,
by the Norges Bank, $30 billion by the       financial conditions were exerting con-
Reserve Bank of Australia, $30 billion       siderable restraint on economic activity.
by Sveriges Riksbank, and $60 billion           All members judged that a significant
by the Swiss National Bank. In addi-         easing in policy at this time was appro-
tion, the Committee was briefed on           priate to foster moderate economic
plans for implementation of a provision      growth and to reduce the downside
in pending legislation that would allow      risks to economic activity. Members
the Federal Reserve to begin immedi-         also welcomed the opportunity to coor-
ately to pay interest on reserves held by    dinate this policy action with similar
depository institutions, and on the pro-     measures by the Bank of Canada, the
posed acquisition of Wachovia by Citi-       Bank of England, the European Central
group.                                       Bank, Sveriges Riksbank, and the Swiss
   On October 7, 2008, the Committee         National Bank. By showing that policy-
again met by conference call. Stresses       makers around the globe were working
in financial markets had continued to        closely together, had a similar view of
increase: Interest-rate spreads in inter-    global economic conditions, and were
bank funding markets had widened             willing to take strong actions to address
markedly, corporate and municipal            those conditions, coordinated action
bond yields had risen, and equity prices     could help to bolster consumer and bus-
had dropped sharply. For the first time      iness confidence and so yield greater ec-
in many years, the net asset value of a      onomic benefits than unilateral action.
major money market fund had fallen              At the conclusion of the discussion,
below $1 per share; this event sparked a     the Committee voted to authorize and
flight out of prime money market funds       direct the Federal Reserve Bank of New
and caused a severe impairment of the        York, until it was instructed otherwise,
334 95th Annual Report, 2008

to execute transactions in the System             Reserve Bank of New York may transact for
Account in accordance with the follow-            the System Open Market Account.
ing domestic policy directive:                      By notation vote completed on Octo-
   The Federal Open Market Committee              ber 6, 2008, the Committee unani-
seeks monetary and financial conditions that      mously approved the minutes of the
will foster price stability and promote sus-      FOMC meeting held on September 16,
tainable growth in output. To further its         2008.
long-run objectives, the Committee in the           By notation vote completed October
immediate future seeks conditions in reserve
markets consistent with reducing the federal      11, 2008 the Committee unanimously
funds rate to an average of around 11⁄2 per-      approved the following resolution:
cent.
                                                     The Federal Open Market Committee
   The vote encompassed approval of               authorizes the Federal Reserve Bank of New
the statement below:                              York (FRBNY) to increase the amounts
                                                  available from the System Open Market
   The Federal Open Market Committee has          Account under the existing reciprocal cur-
decided to lower its target for the federal       rency arrangements (“swap” arrangements)
funds rate 50 basis points to 11⁄2 percent.       with the Bank of England, the European
The Committee took this action in light of        Central Bank, the Bank of Japan, and the
evidence pointing to a weakening of eco-          Swiss National Bank to meet the amounts
nomic activity and a reduction in inflation-      requested by those central banks in connec-
ary pressures.                                    tion with their fixed-rate tender auctions.
   Incoming economic data suggest that the        The FRBNY must report to the Committee
pace of economic activity has slowed mark-        each time the aggregate draws by one of
edly in recent months. Moreover, the inten-       these central banks increases the level out-
sification of financial market turmoil is         standing for that bank by an increment of
likely to exert additional restraint on spend-    $200 billion over the level outstanding on
ing, partly by further reducing the ability of    October 10, 2008.
households and businesses to obtain credit.
Inflation has been high, but the Committee                                Brian F. Madigan
believes that the decline in energy and other                                     Secretary
commodity prices and the weaker prospects
for economic activity have reduced the
upside risks to inflation.                        Addendum:
   The Committee will monitor economic            Summary of Economic Projections
and financial developments carefully and
will act as needed to promote sustainable         In conjunction with the October 28–29,
economic growth and price stability.              2008 FOMC meeting, the members of
     Votes for this action: Messrs. Bernanke      the Board of Governors and the presi-
     and Geithner, Ms. Duke, Messrs.              dents of the Federal Reserve Banks, all
     Fisher, Kohn, and Kroszner, Ms. Pian-        of whom participate in deliberations of
     alto, Messrs. Plosser, Stern, and Warsh.
     Votes against this action: None.             the FOMC, provided projections for
                                                  economic growth, unemployment, and
Notation Votes                                    inflation in 2008, 2009, 2010, and 2011.
                                                  Projections were based on information
By notation vote completed September              available through the conclusion of the
21, 2008 the Committee unanimously                meeting, on each participant’s assump-
approved the following resolution:                tions regarding a range of factors likely
                                                  to affect economic outcomes, and on his
   The FOMC amends paragraph 1.A. of the
Authorization for Foreign Currency Opera-         or her assessment of appropriate mone-
tions to include Australian dollars in the list   tary policy. “Appropriate monetary pol-
of foreign currencies in which the Federal        icy” is defined as the future policy that,
                                                                            Minutes of the FOMC, October 335

Table 1. Economic Projections of Federal Reserve Governors and Reserve Bank Presidents,
         October 2008
                Percent

Variable                                                   2008              2009                 2010                 2011
                        1
Central tendency
  Change in real GDP . . . . . . . . . . . . .          0.0   to   0.3    –0.2 to 1.1          2.3   to   3.2       2.8 to 3.6
    June projection . . . . . . . . . . . . . . .       1.0   to   1.6    2.0 to 2.8           2.5   to   3.0          n/a
  Unemployment rate . . . . . . . . . . . . . .         6.3   to   6.5     7.1 to 7.6          6.5   to   7.3       5.5 to 6.6
    June projection . . . . . . . . . . . . . . .       5.5   to   5.7    5.3 to 5.8           5.0   to   5.6          n/a
  PCE inflation . . . . . . . . . . . . . . . . . . .   2.8   to   3.1     1.3 to 2.0          1.4   to   1.8       1.4 to 1.7
    June projection . . . . . . . . . . . . . . .       3.8   to   4.2    2.0 to 2.3           1.8   to   2.0          n/a
  Core PCE inflation . . . . . . . . . . . . . .        2.3   to   2.5     1.5 to 2.0          1.3   to   1.8       1.3 to 1.7
    June projection . . . . . . . . . . . . . . .       2.2   to   2.4    2.0 to 2.2           1.8   to   2.0          n/a
Range2
  Change in real GDP . . . . . . . . . . . . .          –0.3 to 0.5       –1.0 to 1.8          1.5   to   4.5       2.0 to 5.0
    June projection . . . . . . . . . . . . . . .       0.9 to 1.8        1.9 to 3.0           2.0   to   3.5          n/a
  Unemployment rate . . . . . . . . . . . . . .          6.3 to 6.6        6.6 to 8.0          5.5   to   8.0       4.9 to 7.3
    June projection . . . . . . . . . . . . . . .       5.5 to 5.8        5.2 to 6.1           5.0   to   5.8          n/a
  PCE inflation . . . . . . . . . . . . . . . . . . .    2.7 to 3.6        1.0 to 2.2          1.1   to   1.9       0.8 to 1.8
    June projection . . . . . . . . . . . . . . .       3.4 to 4.6        1.7 to 3.0           1.6   to   2.1          n/a
  Core PCE inflation . . . . . . . . . . . . . .         2.1 to 2.5        1.3 to 2.1          1.1   to   1.9       0.8 to 1.8
    June projection . . . . . . . . . . . . . . .       2.0 to 2.5        1.8 to 2.3           1.5   to   2.0          n/a

   Note: Projections of change in real gross domestic                    civilian unemployment rate in the fourth quarter of the
product (GDP) and of inflation are from the fourth quar-                 year indicated. Each participant’s projections are based
ter of the previous year to the fourth quarter of the year               on his or her assessment of appropriate monetary policy.
indicated. PCE inflation and core PCE inflation are the                     1. The central tendency excludes the three highest and
percentage rates of change in, respectively, the price                   three lowest projections for each variable in each year.
index for personal consumption expenditures (PCE) and                       2. The range for a variable in a given year includes all
the price index for PCE excluding food and energy. Pro-                  participants’ projections, from lowest to highest, for that
jections for the unemployment rate are for the average                   variable in that year.




based on current information, is deemed                                  and other commodities and the widen-
most likely to foster outcomes for eco-                                  ing slack in resource utilization, partici-
nomic activity and inflation that best                                   pants expected that inflation would drop
satisfy the participant’s interpretation of                              markedly in coming quarters. Partici-
the Federal Reserve’s dual objectives                                    pants generally judged that the degree
of maximum employment and price sta-                                     of uncertainty surrounding their projec-
bility.                                                                  tions for both economic activity and
   Given the recent intensification and                                  inflation was greater than historical
broadening of the global financial cri-                                  norms. Most participants viewed the
sis, FOMC participants viewed the out-                                   risks to the growth outlook as skewed
look for economic growth and employ-                                     to the downside, and nearly all of them
ment as having worsened significantly                                    saw the risks to the inflation outlook as
since June. As indicated in Table 1 and                                  either balanced or tilted to the down-
depicted in Figure 1, participants ex-                                   side.
pected that real GDP growth would
remain very weak next year and that the
subsequent pace of recovery would be                                     The Outlook
quite slow; they also anticipated that the                               Participants’ projections for real GDP
unemployment rate would increase sub-                                    growth in 2008 had a central tendency
stantially further. In view of the recent                                of 0 to 0.3 percent, compared with the
sharp declines in the prices of energy                                   central tendency of 1 to 1.6 percent for
336 95th Annual Report, 2008




the growth projections that were made      whole were due almost entirely to sub-
last June. The downward revisions in       stantial shifts in their views of second-
their growth forecasts for the year as a   half growth. A number of participants
                                               Minutes of the FOMC, October 337

noted that incoming data on consumer            Participants anticipated that labor
spending and employment had been             market conditions would continue to
weaker than expected during the sum-         deteriorate over the coming year. Their
mer, even prior to the intensification of    projections for the unemployment rate
the financial crisis. Many participants      during the fourth quarter of this year
highlighted the recent decline in con-       had a central tendency of 6.3 to 6.5 per-
sumer confidence and the extent to           cent, an upward shift of more than
                                             1⁄2 percentage point from their June pro-
which households were swiftly curbing
their outlays in response to large losses    jections and a further rise from Septem-
in stock-market and housing wealth and       ber’s unemployment rate of 6.1 per-
deterioration in labor market conditions.    cent—which was the latest available
Severe dislocations in credit markets        figure at the time of the FOMC meet-
were also seen as weighing heavily on        ing. Looking further ahead, the central
consumer spending and business invest-       tendency of participants’ unemploy-
ment.                                        ment rate projections was 7.1 to 7.6 per-
   Participants’ growth projections had      cent for 2009, 6.5 to 7.3 percent for
a central tendency of –0.2 to 1.1 percent    2010, and 5.5 to 6.6 percent for 2011.
for 2009, 2.3 to 3.2 percent for 2010,       Most participants judged that the unem-
and 2.8 to 3.6 percent for 2011, as most     ployment rate in 2011 would still be
participants expected that the near-term     above its longer-run sustainable level
weakness in economic activity would          and hence would be likely to decline
                                             further in the period beyond the forecast
continue into next year and that the sub-
                                             horizon.
sequent recovery would be relatively
                                                The central tendency of participants’
gradual. Growth in 2009 was likely to
                                             projections for total PCE inflation in
be restrained by persistent credit market
                                             2008 declined to 2.8 to 3.1 percent,
strains and ongoing adjustments in the       about a percentage point lower than the
housing sector, as well as by weak fun-      central tendency of their projections last
damentals for household and business         June. Participants noted that this down-
spending. Indeed, many participants an-      ward revision in the near-term inflation
ticipated that financial market stresses     outlook mainly reflected the recent
would recede only slowly, notwith-           sharp decline in the prices of energy
standing the extraordinary measures          and other commodities, apparently trig-
that had been taken to enhance liquidity     gered by the global slowdown in eco-
and stabilize financial markets and          nomic activity. Most participants also
institutions. Participants also noted that   marked down their forecasts for infla-
demand for exports was likely to be          tion beyond 2008, reflecting their ex-
damped in coming quarters by the sig-        pectations of widening resource slack
nificantly weaker economic outlook for       over coming quarters as well as gradual
many U.S. trading partners. Participants     pass-through of the drop in the prices of
expected that more robust economic           energy and raw materials. The central
expansion would resume in 2010, and          tendency of participants’ projections for
most anticipated that growth would rise      total PCE inflation was 1.3 to 2 percent
further in 2011 to a pace that would         for 2009, 1.4 to 1.8 percent for 2010,
temporarily exceed its longer-run sus-       and 1.4 to 1.7 percent for 2011. Partici-
tainable rate and hence would help           pants generally projected that inflation
reduce the degree of slack in resource       at the end of the projection period
utilization.                                 would be close to or a bit below their
338 95th Annual Report, 2008

assessments of the measured rates of                 Table 2. Average Historical Projection Error
inflation consistent with the Federal                         Ranges
Reserve’s dual mandate for promoting                             Percentage points
price stability and maximum employ-                  Variable                     2008   2009    2010   2011
ment.                                                                    1
                                                     Change in real GDP . . . . ±0.6     ±1.3    ±1.4   ±1.4
                                                     Unemployment rate1 . . . . . ±0.2   ±0.6    ±0.9   ±1.0
Risks to the Outlook                                 Total consumer prices2 . . . ±0.3   ±1.0    ±1.0   ±1.0

Participants continued to view uncer-                   Note: Error ranges shown are measured as plus or
                                                     minus the root mean squared error of projections that
tainty about the outlook for economic                were released in the autumn from 1987 through 2007 for
activity as higher than normal.13 The                the current and following three years by various private
risks to their projections for GDP                   and government forecasters. As described in the box
                                                     “Forecast Uncertainty,” under certain assumptions, there
growth were judged as being skewed to                is about a 70 percent probability that actual outcomes for
the downside and the associated risks to             real GDP, unemployment, and consumer prices will be in
                                                     ranges implied by the average size of projection errors
their projections for the unemployment               made in the past. Further information is in David Reif-
rate were tilted to the upside. Partici-             schneider and Peter Tulip (2007), “Gauging the Uncer-
pants emphasized the considerable de-                tainty of the Economic Outlook from Historical Forecast-
                                                     ing Errors,” Finance and Economics Discussion Series
gree of uncertainty about the future                 2007-60 (Board of Governors of the Federal Reserve
course of the financial crisis and its               System, November).
impact on the real economy. Previous                    1. For definitions, refer to general note in table 1.
                                                        2. Measure is the overall consumer price index, the
episodes of financial market turmoil                 price measure that has been most widely used in govern-
might not provide much information                   ment and private economic forecasts. Projection is per-
                                                     cent change, fourth quarter of the previous year to the
about the likely trajectory going for-               fourth quarter of the year indicated.
ward, given the severity of the current
crisis and the extraordinary government
measures that had been taken. Several                uncertainty might be associated with
participants highlighted the risk of a               gauging the magnitude and stimulative
persistent negative feedback loop be-                effects of other policy tools such as
tween credit markets and economic                    quantitative easing.
activity, while others referred to the                  As in June, most participants contin-
possibility that financial market func-              ued to view the uncertainty surrounding
tioning might normalize more rapidly                 their inflation projections as higher than
and hence that the adverse effects of the            historical norms. The majority of par-
crisis might be somewhat smaller than                ticipants judged the risks to the inflation
anticipated in their modal outlook.                  outlook as roughly balanced, and a
Some participants noted that further                 number of others viewed these risks as
monetary policy easing could eventu-                 skewed to the downside—a marked shift
ally become constrained by the lower                 from June, when the risks to inflation
bound of zero on nominal interest rates,             were generally seen as tilted to the
in which case an elevated degree of                  upside. Many participants noted that
                                                     their assessments regarding the down-
                                                     side risks to inflation were linked to
   13. Table 2 provides estimates of forecast
uncertainty since 1987 for the change in real        their judgments regarding the magnitude
GDP, the unemployment rate, and total consumer       of downside risks to economic activity.
price inflation. At the end of this summary, the     Some participants also noted that
box “Forecast Uncertainty” discusses the sources     heightened volatility of prices for en-
and interpretation of uncertainty in economic
forecasts and explains the approach used to assess
                                                     ergy and other commodities was con-
the uncertainty and risks attending participants’    tributing to the elevated degree of un-
projections.                                         certainty regarding the inflation outlook.
                                               Minutes of the FOMC, October 339

Diversity of Views                              Figures 2.C and 2.D provide corre-
Figures 2.A and 2.B provide further          sponding information regarding the di-
detail on the diversity of participants’     versity of participants’ views regarding
views regarding likely outcomes for          the inflation outlook. The dispersion in
real GDP growth and the unemploy-            participants’ projections for 2009 and
ment rate, respectively. For both vari-      2010 was substantially greater than in
ables, the dispersion of participants’       June, primarily reflecting differences in
projections for 2008 was noticeably          their views about how much slack in
narrower than in the forecasts provided      resource utilization was likely to de-
in June, mainly due to the accumulation      velop and about the extent to which that
of incoming data regarding the perfor-       slack would place downward pressure
mance of the economy to date. In con-        on increases in wages and prices. Some
trast, participants’ projections for 2009    participants indicated that their inflation
and 2010 exhibited substantially greater     projections for 2011 were roughly in
dispersion than in June, mainly reflect-     line with their assessments of the mea-
ing the diversity of views regarding the     sured rate of inflation consistent with
duration of the financial crisis and the     the Federal Reserve’s dual mandate for
magnitude and persistence of its impact      promoting price stability and maximum
on the real economy. The dispersion in       employment; other participants antici-
participants’ projections was also af-       pated that inflation in 2011 would be a
fected to some degree by differences in      bit below their assessments of the man-
their estimates of the longer-run rates of   date-consistent inflation rate, mainly
output growth and unemployment to            reflecting the lagged effects of weak
which the economy would converge             economic activity and the relatively
under appropriate policy and in the          sluggish pace of recovery.
absence of any further shocks.
340 95th Annual Report, 2008
Minutes of the FOMC, October 341
342 95th Annual Report, 2008
Minutes of the FOMC, October 343
344 95th Annual Report, 2008



 Forecast Uncertainty
 The economic projections provided by the       jections are broadly balanced, the num-
 members of the Board of Governors and          bers reported in table 2 would imply a
 the presidents of the Federal Reserve          probability of about 70 percent that
 Banks inform discussions of monetary           actual GDP would expand between
 policy among policymakers and can aid          2.4 percent to 3.6 percent in the current
 public understanding of the basis for pol-     year, 1.7 percent to 4.3 percent in the
 icy actions. Considerable uncertainty at-      second year, and 1.6 percent to 4.4 per-
 tends these projections, however. The          cent in the third and fourth years. The
 economic and statistical models and rela-      corresponding 70 percent confidence
 tionships used to help produce economic        intervals for overall inflation would be
 forecasts are necessarily imperfect de-        1.7 percent to 2.3 percent in the current
 scriptions of the real world. And the          year and 1.0 percent to 3.0 percent in the
 future path of the economy can be af-          second, third, and fourth years.
 fected by myriad unforeseen develop-              Because current conditions may differ
 ments and events. Thus, in setting the         from those that prevailed on average
 stance of monetary policy, participants        over history, participants provide judg-
 consider not only what appears to be the       ments as to whether the uncertainty
 most likely economic outcome as embod-         attached to their projections of each vari-
 ied in their projections, but also the range   able is greater than, smaller than, or
 of alternative possibilities, the likelihood   broadly similar to typical levels of fore-
 of their occurring, and the potential costs    cast uncertainty in the past as shown in
 to the economy should they occur.              table 2. Participants also provide judg-
    Table 2 summarizes the average his-         ments as to whether the risks to their
 torical accuracy of a range of forecasts,      projections are weighted to the upside,
 including those reported in past Monetary      downside, or are broadly balanced. That
 Policy Reports and those prepared by           is, participants judge whether each vari-
 Federal Reserve Board staff in advance of      able is more likely to be above or below
 meetings of the Federal Open Market            their projections of the most likely out-
 Committee. The projection error ranges         come. These judgments about the uncer-
 shown in the table illustrate the consider-    tainty and the risks attending each par-
 able uncertainty associated with economic      ticipant’s projections are distinct from
 forecasts. For example, suppose a partici-     the diversity of participants’ views about
 pant projects that real GDP and total con-     the most likely outcomes. Forecast un-
 sumer prices will rise steadily at annual      certainty is concerned with the risks
 rates of, respectively, 3 percent and 2 per-   associated with a particular projection,
 cent. If the uncertainty attending those       rather than with divergences across a
 projections is similar to that experienced     number of different projections.
 in the past and the risks around the pro-
                                             Meetings of the FOMC, December 345

Meeting Held on                                   Ms. Johnson,15 Secretary, Office of the
December 15–16, 2008                                  Secretary, Board of Governors
                                                  Mr. Struckmeyer, Deputy Staff Direc-
A meeting of the Federal Open Market                  tor, Office of Staff Director for
Committee was held in the offices of                  Management, Board of Governors
the Board of Governors of the Federal             Mr. Blanchard, Assistant to the Board,
Reserve System in Washington, D.C.,                   Office of Board Members, Board
on Monday, December 15, 2008 at 2:00                  of Governors
p.m. and continued on Tuesday,
                                                  Messrs. Clouse and Parkinson, 1 4
December 16, 2008 at 9:00 a.m.                       Deputy Directors, Divisions of
Present:                                             Monetary Affairs and Research
    Mr. Bernanke, Chairman                           and Statistics, respectively, Board
    Ms. Duke                                         of Governors
    Mr. Fisher                                    Mr. Frierson, 15 Deputy Secretary,
    Mr. Kohn                                          Office of the Secretary, Board of
    Mr. Kroszner                                      Governors
    Ms. Pianalto
    Mr. Plosser                                   Messrs. Leahy, 1 5 Nelson, 1 6 Reif-
    Mr. Stern                                        schneider, and Wascher, Associate
    Mr. Warsh                                        Directors, Divisions of Interna-
                                                     tional Finance, Monetary Affairs,
    Ms. Cumming, Messrs. Evans, Lacker,              Research and Statistics, and
        and Lockhart, and Ms. Yellen,                Research and Statistics, respec-
        Alternate Members of the Federal             tively, Board of Governors
        Open Market Committee
                                                  Mr. Gagnon, 15 Visiting Associate
    Messrs. Bullard, Hoenig, and Rosen-               Director, Division of Monetary
        gren, Presidents of the Federal               Affairs, Board of Governors
        Reserve Banks of St. Louis, Kan-
        sas City, and Boston, respectively        Ms. Shanks, 15 Associate Secretary,
                                                      Office of the Secretary, Board of
    Mr. Madigan, Secretary and Economist              Governors
    Ms. Danker, Deputy Secretary
    Mr. Skidmore, Assistant Secretary             Messrs. Perli and Reeve, Deputy Asso-
    Ms. Smith, Assistant Secretary                    ciate Directors, Divisions of
    Mr. Alvarez, General Counsel                      Monetary Affairs and Interna-
    Mr. Ashton,14 Assistant General Coun-             tional Finance, respectively, Board
        sel                                           of Governors
    Mr. Sheets, Economist
    Mr. Stockton, Economist                       Mr. Covitz, Assistant Director, Divi-
                                                      sion of Research and Statistics,
    Messrs. Connors, English, and Kamin,              Board of Governors
        Ms. Mester, Messrs. Rolnick,
        Rosenblum, Slifman, and Wilcox,           Ms. Goldberg,15 Visiting Reserve Bank
        Associate Economists                          Officer, Division of International
                                                      Finance, Board of Governors
    Mr. Dudley, Manager, System Open
        Market Account
    Mr. Cole, Director, Division of Bank-
        ing Supervision and Regulation,
        Board of Governors                      15. Attended the portion of the meeting relat-
                                             ing to the zero lower bound on nominal interest
                                             rates.
                                                16. Attended the meeting through the discus-
                                             sion of the zero lower bound on nominal interest
 14. Attended Tuesday’s session.             rates.
346 95th Annual Report, 2008

   Mr. Zakrajsek,15 Assistant Director,         The Manager of the System Open
       Division of Monetary Affairs,         Market Account reported on recent
       Board of Governors                    developments in foreign exchange mar-
   Messrs. Meyer15 and Oliner, Senior        kets. There were no open market opera-
       Advisers, Divisions of Monetary       tions in foreign currencies for the Sys-
       Affairs and Research and Statis-      tem’s account in the period since the
       tics, respectively, Board of Gover-   previous meeting. The Manager also
       nors
                                             reported on developments in domestic
   Mr. Small, Project Manager, Division      financial markets and on System open
       of Monetary Affairs, Board of         market operations in government secu-
       Governors                             rities and federal agency obligations
   Messrs. Ahmed and Luecke, Section         during the period since the previous
       Chiefs, Divisions of International    meeting. By unanimous vote, the Com-
       Finance and Monetary Affairs,         mittee ratified these transactions.
       respectively, Board of Governors         The information reviewed at the
   Ms. Aaronson, Senior Economist, Divi-     December meeting pointed to a signifi-
       sion of Research and Statistics,      cant contraction in economic activity in
       Board of Governors                    the fourth quarter. Conditions in the
                                             labor market deteriorated considerably
   Messrs. Gapen and McCabe,15 Econo-
       mists, Divisions of Monetary          in recent months as most major industry
       Affairs and Research and Statis-      groups shed jobs. Private payrolls con-
       tics, respectively, Board of Gover-   tinued to fall at a faster pace than ear-
       nors                                  lier in the year, and the unemployment
   Ms. Beattie,15 Assistant to the Secre-    rate rose to 6.7 percent. Industrial pro-
       tary, Office of the Secretary,        duction, excluding special hurricane-
       Board of Governors                    and strike-related effects, fell further in
                                             November, and consumer spending de-
   Ms. Low, Open Market Secretariat          clined across a broad range of spend-
       Specialist, Division of Monetary
       Affairs, Board of Governors           ing categories over recent months. The
                                             housing market weakened again as con-
   Mr. Werkema, First Vice President,        struction activity, new home sales, and
       Federal Reserve Bank of Chicago       home prices declined further. In the
   Mr. Fuhrer, Executive Vice President,     business sector, investment in equip-
       Federal Reserve Bank of Boston        ment and software appeared to continue
                                             to contract. Financial markets saw a
   Messrs. Altig, Hilton, Potter, Rasche,    further pullback in risk-taking, spurred
       Rudebusch, Schweitzer, Sellon,
       Sullivan, and Weinberg, Senior        in part by the more pessimistic outlook
       Vice Presidents, Federal Reserve      for economic activity; this situation
       Banks of Atlanta, New York, New       led to lower equity prices, higher risk
       York, St. Louis, San Francisco,       spreads, and tighter constraints in credit
       Cleveland, Kansas City, Chicago,      markets, all of which intensified the
       and Richmond, respectively
                                             decline in real activity. On the inflation
   Mr. Burke,15 Assistant Vice President,    front, headline consumer prices de-
       Federal Reserve Bank of New           clined in recent months, as energy
       York                                  prices continued to fall and consumer
   Mr. Eggertsson,15 Senior Economist,       food price increases moderated.
       Federal Reserve Bank of New              The labor market continued to
       York                                  worsen. According to the November
                                               Meetings of the FOMC, December 347

employment report, payroll employ-             month in October, with the slowdown
ment fell at a rapid pace over the pre-        evident in nearly all broad spending
ceding three months, with substantial          categories. Sales of light motor vehi-
losses across a wide range of industry         cles, which slumped in October, fell
groups, including manufacturing, con-          further in November, but the available
struction, retail, financial activities, and   information on retail sales suggested a
business services. Indicators of hiring        small increase in real outlays for other
plans also dropped steeply in Novem-           consumer goods. The annualized three-
ber, and other labor market indicators         month change in spending on services
suggested that jobs remained in short          in October was just one-third of the rate
supply. The unemployment rate climbed          registered in the first half of 2008. Pre-
to 6.7 percent in November, while the          liminary data for October and Novem-
labor force participation rate fell after      ber suggested that overall fourth-quarter
remaining steady for much of the year.         real spending would receive a modest
New claims for unemployment insur-             boost from recent price declines for gas-
ance rose sharply through early Decem-         oline. Real incomes were also boosted
ber.                                           by the reversal in energy prices, though
   Industrial production, excluding spe-       the negative wealth effects of continued
cial hurricane- and strike-related effects,    declines in equity and house prices
fell markedly in November after sizable        likely offset this somewhat. Measures
declines in the preceding two months.          of consumer sentiment released in
The recent contraction in industrial out-      November and December remained
put was broadly based. The steep pace          low, and available evidence suggested
of decline in the production of con-           further tightening in consumer credit
sumer goods reflected not only cutbacks        conditions in recent months.
in motor vehicle assemblies but also              Real construction activity continued
drops in the output of other goods, such       to decline in November. Single-family
as appliances, furniture, and products         housing starts and permit issuance fell
related to home improvement. The pro-          further. In the multifamily sector, starts
duction of business equipment was held         dropped sharply in November while
down by declines in the output of both         permit issuance remained on a down-
industrial and high-tech equipment. The        trend. Housing demand remained weak,
output of construction supplies ex-            and although the number of unsold new
tended its decline after a brief pause in      single-family homes continued to move
the middle of the year, and the contrac-       lower, inventories remained elevated
tion in the production of materials            relative to the current pace of sales.
intensified. In particular, steel produc-      Sales of existing single-family homes
tion plummeted, and the output of              changed little, although a drop in pend-
organic chemicals contracted notice-           ing home sales in October pointed to
ably. For most major industry groups,          further declines in the near term. The
factory utilization rates declined rela-       comparative strength of existing home
tive to their levels in July and remained      sales appeared to be attributable partly
below their long-run averages. Avail-          to increases in foreclosure-related and
able forward-looking indicators pointed        other distressed sales. Financing condi-
to a significant downturn in manufac-          tions for prime borrowers appeared to
turing output in coming months.                ease slightly after the Federal Reserve’s
   Real personal consumption expendi-          announcement that it would purchase
tures (PCE) fell for the fifth straight        agency debt and agency mortgage-
348 95th Annual Report, 2008

backed securities (MBS) to support           was more than offset by a significant
mortgage financing, while the market         decline in exports. Much of the decline
for nonconforming loans remained im-         in exports was the result of drops in
paired. Several indexes indicated that       agricultural goods and industrial sup-
house prices continued to decline sub-       plies, which largely reflected a decrease
stantially.                                  in the prices of these goods. The decline
   In the business sector, investment in     in imports was led by lower imports of
equipment and software appeared to be        non-oil industrial supplies, capital
contracting at a faster rate in the fourth   goods, and automotive products, al-
quarter than during the third quarter.       though these declines were partly offset
While the decline in the previous quar-      by an increase in the value of oil
ter was concentrated in computers and        imports.
transportation equipment, declines in           Economic activity in most advanced
spending in the fourth quarter were          foreign economies contracted in the
more widespread. Shipments of nonde-         third quarter, driven by sharp declines
fense capital goods excluding aircraft       in investment and by significant nega-
fell in October, and orders continued to     tive contributions of net exports, as the
decline sharply. Investment demand           global recession took hold more
seemed to be weighed down by weak            strongly. Incoming data pointed to an
fundamentals and increased uncertainty       even weaker pace of activity in the
about the state of the economy, while        fourth quarter. In Canada, however, real
prospects for future investment activity     gross domestic product (GDP) in-
reflected in surveys of business condi-      creased at a faster-than-expected pace
tions and sentiment worsened in recent       in the third quarter, though consumption
months. In addition, credit conditions       and investment continued to soften. In
remained tight. Real nonresidential          the euro area and the United Kingdom,
investment declined in the third quarter     purchasing managers indexes fell in
after nearly three years of robust expan-    November to levels associated with
sion, and nominal expenditures edged         severe contractions in economic activ-
down further in October. Vacancy rates       ity. Labor market conditions in the
rose and property values fell in the first   advanced economies deteriorated fur-
three quarters of the year.                  ther, with most countries experiencing
   Real nonfarm inventories (excluding       rising unemployment rates. In Japan,
motor vehicles), which had dropped           real GDP fell in the third quarter as
noticeably in the second quarter, fell       domestic demand declined and private
again in the third quarter. The book         investment fell for the second consecu-
value of manufacturing and wholesale         tive quarter. After peaking in the third
trade inventories (excluding motor           quarter, consumer price inflation mod-
vehicles) showed a further drawdown in       erated in all advanced foreign econo-
October. However, the ratio of these         mies, primarily as a result of falling
inventories to sales increased noticeably    energy and food prices. Economic
in September and October. The pur-           activity in most emerging market
chasing managers survey for November         economies decelerated sharply in the
indicated that many purchasing agents        third quarter, though a surge in agricul-
saw their customers’ inventories as too      tural output helped to support activity in
high.                                        Mexico, and the Brazilian economy
   The U.S. international trade deficit      continued to expand rapidly. In Asia,
widened in October, as a fall in imports     output decelerated significantly, as the
                                            Meetings of the FOMC, December 349

pace of real activity moderated in China    ness equipment spending and industrial
and several other economies saw             production had weakened in recent
declines in real GDP. Recent readings       months, and slowing economic activity
on production, sales, and exports sug-      in many foreign economies was damp-
gest that emerging market economies         ing the prospects for U.S. exports.
weakened further in the current quarter.    Moreover, the intensification of finan-
Headline inflation generally declined       cial market turmoil was likely to exert
across emerging market economies, pri-      additional restraint on spending, partly
marily because of lower food and            by further reducing the ability of house-
energy prices and, in some cases,           holds and businesses to obtain credit.
weaker economic activity.                   The Committee noted that, in light of
   In the United States, headline con-      the declines in the prices of energy and
sumer prices declined in recent months      other commodities and the weaker pros-
while core consumer price inflation         pects for economic activity, it expected
slowed further. With energy prices fall-    inflation to moderate in coming quarters
ing sharply and the rate of increase in     to levels consistent with price stability.
food prices moderating, headline PCE        The Committee also noted that recent
prices fell in October, and data from the   policy actions, including the rate reduc-
consumer price index (CPI) indicated        tion that was approved at the October
that the decline extended into Novem-       28-29 meeting, coordinated interest rate
ber. Core PCE prices were unchanged         cuts by central banks, extraordinary
in October, and based on the CPI,           liquidity measures, and official steps to
appeared to have been unchanged again       strengthen financial systems, should
in November. The recent slowing in          help over time to improve credit condi-
core consumer price inflation was wide-     tions and promote a return to moderate
spread and likely reflected not only the    economic growth. Nevertheless, down-
weak pace of economic activity but also     side risks to economic activity remained
the easing of some earlier cost pressures   and the Committee indicated that it
as the prices of crude oil, gasoline, and   would monitor economic and financial
other commodities declined. Excluding       developments carefully and act as
food and energy, producer prices rose       needed to promote sustainable eco-
modestly again in November, as prices       nomic growth and price stability.
at earlier stages of processing continued      Over the intermeeting period, inves-
to retreat for the third consecutive        tors marked down their expectations for
month. Measures of inflation expecta-       the path of monetary policy. Policy
tions continued to fall or hold steady      expectations were largely unaffected by
during the intermeeting period. Mea-        the outcome of the October 28-29
sures of nominal hourly labor compen-       FOMC meeting, as the Committee’s
sation continued to increase moderately     decision to reduce the target federal
in the third quarter.                       funds rate was broadly anticipated and
   At its October 28–29 meeting, the        the accompanying statement was
Federal Open Market Committee               reportedly in line with investor expecta-
(FOMC) lowered its target for the fed-      tions. Subsequently, however, the
eral funds rate 50 basis points to 1 per-   expected future path of monetary policy
cent. The Committee’s statement noted       dropped amid data releases that sug-
that economic activity appeared to have     gested a weaker outlook for economic
slowed markedly, due importantly to a       activity and lower inflation than had
decline in consumer expenditures. Busi-     been anticipated, along with continued
350 95th Annual Report, 2008

strains in financial markets that          as was the auction of options for 13-day
weighed on investor sentiment. Yields      Schedule 2 TSLF loans straddling the
on nominal Treasury coupon securities      end of the year.
declined significantly over the inter-        Conditions in markets for repurchase
meeting period in response to safe-        agreements, or repos, arranged using
haven demands as well as the down-         certain types of collateral deteriorated
ward revisions in the economic outlook     over the intermeeting period, and
and the expected policy path. Mean-        liquidity for repos backed by non-
while, yields on inflation-indexed Trea-   Treasury, non-agency collateral re-
sury securities declined by smaller        mained poor. Amid high demand for
amounts, leaving inflation compensa-       safe investments, the overnight Trea-
tion lower. Although the decline in        sury general collateral (GC) repo rate
inflation compensation occurred amid       remained very low and fell to around
sharp decreases in inflation measures      zero late in the intermeeting period.
and energy prices, it was likely ampli-    Still, failures to deliver in the Treasury
fied by increased investor preference      market declined substantially from the
for the greater liquidity of nominal       levels reached in October and overnight
Treasury securities relative to that of    securities lending from the System
inflation-protected Treasury securities.   Open Market Account portfolio fell
   Conditions in short-term funding        sharply. Heavy demand for safe instru-
markets remained strained for most of      ments was also apparent in the Treasury
the intermeeting period, though some       bill market, where yields turned nega-
signs of improvement were evident.         tive at times. During the intermeeting
The spreads of London interbank of-        period, the Treasury announced that it
fered rates, or Libor, over com-           would not roll over bills related to the
parable-maturity overnight index swap      Supplementary Financing Program in
rates declined noticeably across most      order to preserve flexibility in the con-
maturities early in the intermeeting       duct of debt management policy, and
period; however, some of this decline      uncertainty about supply reportedly
was reversed once maturities began to      exacerbated poor liquidity conditions in
lengthen past year-end. Trading in         the bill market. Despite the decline in
longer-term interbank funding markets      spreads of agency and mortgage-backed
reportedly remained thin. Credit out-      repo rates over Treasury GC rates later
standing under the Federal Reserve’s       in the period, strains in these markets re-
Term Auction Facility (TAF) increased      mained evident, with bid-asked spreads
to about $448 billion because of           and haircuts very elevated.
expanded auction sizes. Recent auctions       In contrast, conditions in the com-
for both 28-day and 84-day credit from     mercial paper (CP) market improved
the TAF were undersubscribed, and bid-     over the intermeeting period, likely as a
ding for the two forward TAF auctions      reflection of recent measures taken in
during the intermeeting period was very    support of this market. Spreads on
light. Meanwhile, primary credit out-      30-day A1/P1 and asset-backed com-
standing remained high, although it had    mercial paper (ABCP) continued to nar-
declined somewhat in recent weeks.         row after the Commercial Paper Fund-
Use of the Primary Dealer Credit Facil-    ing Facility (CPFF) became operational
ity dropped significantly. A number of     on October 27, although spreads subse-
the Term Securities Lending Facility       quently reversed a portion of the
(TSLF) auctions were oversubscribed,       declines as maturities crossed over
                                             Meetings of the FOMC, December 351

year-end. In contrast, spreads on com-       impaired, and premiums for the on-the-
mercial paper not eligible for purchase      run ten-year nominal Treasury security
under the CPFF remained elevated. The        rose from levels that were already
dollar amounts of unsecured financial        elevated. The market for commercial
CP and ABCP outstanding rebounded            mortgage-backed securities experienced
from their October lows, though issu-        a particularly pronounced selloff.
ance into the CPFF more than                    Reflecting investor concerns about
accounted for this increase. Credit out-     the conditions of financial institutions,
standing under the Asset-Backed Com-         spreads on credit default swaps for U.S.
mercial Paper Money Market Mutual            banks widened sharply, and those for
Fund Liquidity Facility fell by more         insurance companies remained elevated.
than half over the intermeeting period.      To support market stability, the U.S.
The Money Market Investor Funding            government on November 23 entered
Facility program registered no activity.     into an agreement with Citigroup to
   As financial market conditions wors-      provide a package of capital, guaran-
ened over the intermeeting period, in-       tees, and liquidity access. In other
vestors seemed to become more con-           developments, banking organizations
cerned about the likelihood of a deep        began to take advantage of the Fed-
and prolonged recession. In addition,        eral Deposit Insurance Corporation’s
the Treasury Department’s announce-          (FDIC) Temporary Liquidity Guarantee
ment that funds from the Troubled            Program; eleven institutions issued
Asset Relief Program would not be            bonds under the program.
used to purchase securities backed by           In view of the tightening of credit
mortgage-related and other assets ap-        conditions for consumers and small
peared to prompt negative price reac-        businesses, the Federal Reserve an-
tions in several financial markets. Stock    nounced on November 25 the creation
prices of financial corporations fell con-   of the Term Asset-Backed Securities
siderably, while broad equity indexes        Loan Facility to support the markets for
declined, on net, amid high volatility.      asset-backed securities collateralized by
Yields on investment-grade bonds             student loans, auto loans, credit card
moved lower, but risk spreads on these       loans, and loans guaranteed by the
instruments over comparable-maturity         Small Business Administration. The
Treasury securities widened substan-         facility, developed jointly with the
tially as yields on Treasury securities      Treasury, was expected to be opera-
fell more. Yields and risk spreads on        tional by February 2009, and discus-
speculative-grade bonds soared, and          sions with market participants about
credit default swap spreads on spec-         operational details of this facility were
ulative-grade, as well as investment-        ongoing.
grade, corporate bonds widened further.         The Federal Reserve also announced
Gross issuance of bonds by nonfinan-         on November 25 that, to help reduce the
cial investment-grade companies con-         cost and increase the availability of
tinued at a solid pace, but issuance of      residential mortgage credit, it would
speculative-grade bonds remained at          initiate a program to purchase up to
zero. Issuance of leveraged syndicated       $100 billion in direct obligations of
loans was also extremely weak. Strains       housing-related government-sponsored
were evident in a number of other            enterprises (GSEs) and up to $500 bil-
financial markets as well. The function-     lion in MBS backed by Fannie Mae,
ing of Treasury markets remained             Freddie Mac, and Ginnie Mae. Agency
352 95th Annual Report, 2008

debt spreads, which had widened early        for an extended period. The dollar
in the period, narrowed somewhat after       declined on balance against the curren-
the announcement. Subsequent pur-            cies of major U.S. trading partners.
chases of agency debt by the Open               In the forecast prepared for the meet-
Market Desk at the Federal Reserve           ing, the staff revised down sharply its
Bank of New York led to a further            outlook for economic activity in 2009
reduction in agency spreads. Likely          but continued to project a moderate
reflecting in part these developments,       recovery in 2010. Real GDP appeared
conditions in the primary residential        likely to decline substantially in the
mortgage market improved. The interest       fourth quarter of 2008 as conditions in
rate on 30-year fixed-rate conforming        the labor market deteriorated more
mortgages declined, which prompted a         steeply than previously anticipated; the
noticeable increase in mortgage refi-        decline in industrial production intensi-
nancing.                                     fied; consumer and business spending
   M2 expanded at a considerably             appeared to weaken; and financial
slower rate in November than October.        conditions, on balance, continued to
Retail money funds contracted after a        tighten. Rising unemployment, the
surge in October that reflected safe-        declines in stock market wealth, low
haven inflows to Treasury-only funds.        levels of consumer sentiment, weak-
Small time deposits increased some-          ened household balance sheets, and
what more slowly than in October,            restrictive credit conditions were likely
although the rate of expansion remained      to continue to hinder household spend-
quite rapid as banks continued to bid        ing over the near term. Homebuilding
aggressively for these deposits. Flows       was expected to contract further. Busi-
into demand deposits covered by the          ness expenditures were also likely to be
FDIC’s new temporary guarantee pro-          held back by a weaker sales outlook
gram were significant and apparently         and tighter credit conditions. Oil prices,
reflected shifts out of savings accounts     which dropped significantly during the
as well as redirection of funds by           intermeeting period, were assumed to
banks’ customers away from other             rise over the next two years in line with
money market instruments. Currency           the path indicated by futures market
continued its strong increase, apparently    prices, but to remain below the levels of
boosted by solid foreign demand for          October 2008. All told, real GDP was
U.S. banknotes.                              expected to fall much more sharply in
   Liquidity conditions in the money         the first half of 2009 than previously
markets of major foreign economies           anticipated, before slowly recovering
improved but remained strained over          over the remainder of the year as the
the intermeeting period. Movements in        stimulus from monetary and assumed
stock prices were mixed in the ad-           fiscal policy actions gained traction and
vanced foreign economies, although           the turmoil in the financial system
equity prices generally rose in emerging     began to recede. Real GDP was pro-
market economies. In response to evi-        jected to decline for 2009 as a whole
dence of a slowdown in economic              and to rise at a pace slightly above the
activity and a rapid waning of inflation-    rate of potential growth in 2010. Amid
ary pressures, central banks around the      the weaker outlook for economic activ-
world eased policy sharply. Sovereign        ity over the next year, the unemploy-
bond yields fell, reflecting prospects for   ment rate was likely to rise significantly
lower inflation and lower policy rates       into 2010, to a level higher than pro-
                                            Meetings of the FOMC, December 353

jected at the time of the October 28–29     nature of the economic slowdown were
FOMC meeting. The disinflationary           seen by some participants as suggesting
effects of increased slack in resource      the distinct possibility of a prolonged
utilization, diminished pressures from      contraction, although that was not
energy and materials prices, declines in    judged to be the most likely outcome.
import prices, and further moderate         Inflation pressures had diminished
reductions in inflation expectations        appreciably as energy and other com-
caused the staff to reduce its forecast     modity prices dropped and economic
for both core and overall PCE inflation.    activity slumped. Looking forward, par-
Core inflation was projected to slow        ticipants agreed that inflationary pres-
considerably in 2009 and then to edge       sures looked set to moderate further in
down further in 2010.                       coming quarters, reflecting recent de-
   In their discussion of the economic      clines in commodity prices and rising
situation and outlook, all meeting par-     slack in resource markets, and several
ticipants agreed that the economic          saw risks that inflation could drop for a
downturn had intensified over the fall.     time below rates they viewed as most
Although some financial markets exhib-      consistent over time with the Federal
ited signs of improved functioning,         Reserve’s dual mandate for maximum
financial conditions generally remained     employment and price stability.
very strained. Credit conditions contin-       Meeting participants observed that
ued to tighten for both households and      financial strains continued to exert a
businesses, and ongoing declines in         powerful drag on economic activity and
equity prices further reduced household     that the adverse feedback loop between
wealth. Conditions in the housing mar-      financial conditions and economic per-
ket weakened again and house prices         formance had intensified. Although
declined further. Against this backdrop,    improvements were evident in some
measures of business and consumer           markets, particularly those for highly
confidence fell to new lows, and private    rated commercial paper and for inter-
spending continued to contract. Em-         bank funds, financial markets generally
ployment and production indicators          remained under severe stress. Equity
weakened further as businesses re-          prices continued to drop amid high
sponded very rapidly to the fall-off in     volatility, further reducing household
demand. Participants expected eco-          wealth. Rising risk spreads kept the cost
nomic activity to contract sharply in the   of issuing corporate bonds at a high
fourth quarter of 2008 and in early         level—especially for lower-rated
2009. Most projected that the economy       firms—even though Treasury yields
would begin to recover slowly in the        had declined sharply since the October
second half of 2009, aided by substan-      28–29 meeting. Securitization markets,
tial monetary policy easing and by          which over recent years had been an
anticipated fiscal stimulus. Meeting par-   important channel in credit intermedia-
ticipants generally agreed that the         tion, remained largely dysfunctional,
uncertainty surrounding the outlook         with the exception of those for mort-
was considerable and that downside          gages guaranteed by the GSEs. The
risks to even this weak trajectory for      sharp drops and unusual volatility in the
economic activity were a serious con-       prices of many financial assets since the
cern. Indeed, the severe ongoing finan-     beginning of the fourth quarter were
cial market strains, the large reductions   likely to cause more losses for financial
in household wealth, and the global         institutions, and a number of partici-
354 95th Annual Report, 2008

pants noted that loan delinquencies         desirable in the longer term, could put
were increasing significantly in the con-   additional downward pressure on con-
sumer sector, adding to pressures on        sumer spending in coming quarters. The
banks’ balance sheets and reinforcing       latest housing data suggested a contin-
banks’ cautious lending stance. As a        ued substantial contraction in that sec-
consequence, credit conditions for both     tor. The recent decline in mortgage
businesses and households had tight-        rates had sparked some refinancing and
ened further, with banks generally          purchase activity, but the extent of the
adopting stricter lending standards and     longer-term impact of lower rates on
declining to renew or paring back exist-    housing demand remained uncertain.
ing credit lines.                              Meeting participants noted that eco-
   Participants observed that the effects   nomic conditions had deteriorated sub-
of the financial turmoil, increased         stantially in recent months in both
uncertainty, and drops in confidence        advanced and emerging market econo-
and demand were becoming increas-           mies. As a consequence, demand for
ingly evident in the business sector.       U.S. exports had weakened, held back
Business contacts across the country        also by the strengthening of the dollar
expected considerable near-term weak-       since the summer. Going forward, glo-
ness in sales and declining pricing         bal demand was expected to remain
power. Some meeting participants            weak, and thus growth in exports was
reported especially sharp drops in new      unlikely to provide much support for
orders in their Districts. Even sectors     U.S. activity. However, the weakness in
that had performed relatively well until    the global economy was contributing to
recently, such as mining and drilling,      lower prices of energy and other com-
were experiencing reduced activity,         modities, which should boost real
mostly due to the decline in commodity      incomes and provide modest support to
prices. Agricultural activity was also      household spending.
showing signs of weakness. Business            Participants agreed that falling prices
sentiment had deteriorated sharply since    for energy and other commodities and
September, likely contributing to steep     diminished economic activity had
drops in employment and production.         resulted in an appreciable reduction in
Participants anticipated that, with the     inflationary pressures. Those pressures
deteriorating economic outlook and          were seen as likely to continue to abate
tightening of credit conditions, capital    because of the emergence of substantial
expenditures were likely to be soft in      slack in resource utilization and dimin-
coming quarters.                            ishing pricing power. Participants were
   Many participants noted that the         uncertain about the extent to which
decline in household wealth resulting       inflation would fall. Some saw inflation
from large drops in equity and house        leveling out near desired levels, while
prices, together with tighter credit con-   others expressed concern that inflation
ditions, rapidly increasing unemploy-       might decline below levels consistent
ment, and deteriorating consumer senti-     with price stability in the medium term.
ment, was contributing to a sharp           Participants generally agreed that infla-
contraction in consumer spending.           tion expectations were an important
Some participants pointed out that          determinant of future price dynamics.
reduced consumer wealth and concerns        Some noted that those expectations,
about employment could lead to a fur-       especially at longer horizons, appeared
ther increase in saving, which, although    well anchored. However, some survey
                                             Meetings of the FOMC, December 355

evidence suggested that firms expected       the importance of explicitly condition-
prices to continue to decline as they had    ing communication regarding future
over the previous few months. Several        policy on the evolution of the economic
participants observed that monitoring        outlook. Another possible form of com-
measures of inflation expectations for       munication that participants discussed
signs of disinflationary dynamics would      was a more explicit indication of their
be especially important going forward.       views on what longer-run rate of infla-
   In a joint session of the Federal Open    tion would best promote their goals of
Market Committee and the Board of            maximum employment and price stabil-
Governors, meeting participants dis-         ity. The added clarity in that regard
cussed extensively how in current cir-       might help forestall the development of
cumstances the Committee could best          expectations that inflation would
support the resumption of sustainable        decline below desired levels, and hence
economic growth and promote the              keep real interest rates low and support
maintenance of price stability over the      aggregate demand.
medium term. Participants noted that            Meeting participants also discussed
very low levels of the federal funds rate    how best to employ the Federal
had the potential to help buoy aggregate     Reserve’s balance sheet to promote
demand and economic activity, but they       monetary policy goals. The Federal
also had potential costs in terms of the     Reserve had already adopted a series of
functioning of certain financial markets     programs that were providing liquidity
and some financial institutions. Most        support to a range of institutions and
participants judged that the benefits in     markets, and participants generally
terms of support for the overall econ-       agreed that a continued focus on the
omy of federal funds rates close to, but     quantity and the composition of Federal
slightly above, zero probably out-           Reserve assets would be necessary and
weighed the adverse effects. With the        desirable. Specifically, participants dis-
federal funds rate already trading at        cussed the merits of purchasing large
very low levels as a result of the large     quantities of longer-term securities such
volume of excess reserves associated         as agency debt, agency mortgage-
with the Federal Reserve’s liquidity         backed securities, and Treasury securi-
operations, participants agreed that the     ties. The available evidence indicated
Committee would need to focus on             that such purchases would reduce yields
other tools to impart additional mone-       on those instruments, and lower yields
tary stimulus to the economy in the near     on those securities would tend to reduce
term. One broad class of such tools was      borrowing costs for a range of private
the use of FOMC communication with           borrowers, although participants were
the public to provide more information       uncertain as to the likely size of such
regarding future policy intentions. In       effects. Participants also generally
particular, participants judged that com-    believed that the special liquidity and
municating the Committee’s expecta-          lending facilities implemented or
tion that short-term interest rates were     announced recently would support the
likely to stay exceptionally low for         availability of credit to businesses and
some time could be useful because it         households and thus help sustain eco-
could lead to pricing of longer-term         nomic activity. Many participants
interest rates consistent with the path of   thought that the Federal Reserve should
monetary policy that policymakers saw        continue to consider whether expanding
as most likely. Participants emphasized      some of the existing facilities and creat-
356 95th Annual Report, 2008

ing new facilities could be helpful. Par-   the normal bank intermediation mecha-
ticipants emphasized that the ultimate      nism appeared to be impaired, and
objective of special lending facilities     banks may not be willing to lend their
and asset purchases was to support          excess reserves. Conversely, a decline
overall market functioning, financial       in excess reserves or the monetary base
intermediation, and economic growth.        would not necessarily be contractionary
Participants acknowledged that the          if it occurred in the context of improv-
effective federal funds rate probably       ing financial market conditions. A few
would need to remain very low for           of those who supported quantitative
some time. However, they also recog-        base or reserve targets did so because
nized that, as economic activity recov-     they saw them as helping to coordinate
ered and financial conditions normal-       the actions of the Board of Governors,
ized, the use of certain policy tools       which is responsible for authorizing
would need to be scaled back, the size      most special liquidity and lending
of the balance sheet and level of excess    facilities, and the Committee, which is
reserves would need to be reduced, and      responsible for open market operations.
the Committee’s policy framework            Most participants, however, were of the
would return to focus on the level of the   view that such coordination would best
federal funds rate.                         be achieved by continued close coop-
   A number of participants observed        eration and consultation between the
that, under the approach of conducting      Committee and the Board. Going for-
monetary policy by acquiring a variety      ward, consideration will be given to
of assets as needed to address financial    whether various quantitative measures
and macroeconomic strains, the quan-        would be useful in calibrating and
tity of excess reserves and the size of     communicating the stance of monetary
the Federal Reserve’s balance sheet         policy.
would be determined by the Federal             In the discussion of monetary policy
Reserve’s asset purchases and the usage     for the intermeeting period, Committee
of its lending facilities. It was likely    members recognized that the large vol-
that, during the period of financial tur-   ume of excess reserves had already
moil, the size of the Federal Reserve’s     resulted in federal funds rates signifi-
balance sheet would need to be main-        cantly below the target federal funds
tained at a high level. Participants dis-   rate and the interest rate on excess
cussed the potential advantages and         reserves. They agreed that maintaining
disadvantages of setting quantitative       a low level of short-term interest rates
targets for bank reserves or the mone-      and relying on the use of balance sheet
tary base. Some were of the view that       policies and communications about
quantitative targets for an increasing      monetary policy would be effective and
reserve base could be effective in pre-     appropriate in light of the sharp deterio-
venting deflationary dynamics and use-      ration of the economic outlook and the
ful in communicating to the public the      appreciable easing of inflationary pres-
Committee’s determination to take the       sures. Maintaining that level of the fed-
steps needed to avoid such an outcome.      eral funds rate implied a substantial fur-
Several other participants, however,        ther reduction in the target federal funds
noted that increases in excess reserves     rate. Even with the additional use of
or the monetary base, by themselves,        nontraditional policies, the economic
might not have a significant stimulative    outlook would remain weak for a time
effect on the economy or prices because     and the downside risks to economic
                                              Meetings of the FOMC, December 357

activity would be substantial. Moreover,      were likely to warrant exceptionally
inflation would continue to fall, reflect-    low levels of the federal funds rate for
ing both the drop in commodity prices         some time. The members emphasized
that had already occurred and the             that their expectation about the path of
buildup of economic slack; indeed some        the federal funds rate was conditioned
members saw significant risks that            on their view of the likely path of eco-
inflation could decline and persist for a     nomic activity.
time at uncomfortably low levels.                Members also discussed how best to
   Members debated how best to com-           communicate the focus of the Federal
municate their decisions regarding            Reserve’s policy going forward. Mem-
monetary policy actions. Since the large      bers agreed that the statement should
amount of excess reserves in the system       indicate that all available tools would
would limit the Federal Reserve’s con-        be employed to promote the resumption
trol over the federal funds rate, several     of sustainable economic growth and to
members thought that it might be pref-        preserve price stability. They also
erable not to set a specific target for the   agreed that the statement should note
federal funds rate. Indeed, those mem-        that it was the Committee’s intention to
bers felt that lack of an explicit target     sustain the size of the Federal Reserve’s
could be helpful, in that it would focus      balance sheet at a high level through
attention on the shift in the policy          open market operations and other mea-
framework from targeting the federal          sures to support financial markets and
funds rate to the use of balance sheet        stimulate the economy. In addition to
policies and communications about             the already-announced asset purchases
monetary policy as a way of providing         and liquidity programs, members con-
further monetary stimulus. A few mem-         curred that the statement should indi-
bers stressed that the absence of an          cate that the Committee stands ready to
explicit federal funds rate target would      expand purchases of agency debt and
give banks added flexibility in pricing       agency mortgage-backed securities, and
loans and deposits in the current envi-       that it is evaluating the potential bene-
ronment of unusually low interest rates.      fits of purchasing longer-term Treasury
However, other members noted that not         securities.
announcing a target might confuse mar-           In light of the use of additional tools
ket participants and lead investors to        for implementing monetary policy, the
believe that the Federal Reserve was          Committee revised the form of the
unable to control the federal funds rate      directive to the Open Market Desk of
when it could, in fact, still influence the   the Federal Reserve Bank of New York.
effective federal funds rate through          In addition to specifying that it now
adjustments of the interest rate on           seeks conditions in reserve markets
excess reserves and the primary credit        consistent with federal funds trading in
rate. The members decided that it             a range of 0 to 1⁄4 percent, the Commit-
would be preferable for the Committee         tee instructed the Desk to purchase up
to communicate explicitly that it wanted      to $100 billion in housing-related GSE
federal funds to trade at very low rates;     debt and up to $500 billion in agency-
accordingly, the Committee decided to         guaranteed MBS by the end of the sec-
announce a target range for the federal       ond quarter of 2009. Members agreed
funds rate of 0 to 1⁄4 percent. Members       that they should not specify the precise
also agreed that the statement should         timing of these purchases, but that they
indicate that weak economic conditions        should leave discretion to the Desk to
358 95th Annual Report, 2008

intervene depending on market and               available data indicate that consumer spend-
broader economic conditions. The                ing, business investment, and industrial pro-
directive also noted that the Manager of        duction have declined. Financial markets
                                                remain quite strained and credit conditions
the System Open Market Account and              tight. Overall, the outlook for economic
the Secretary of the FOMC would keep            activity has weakened further.
the Committee informed of develop-                 Meanwhile, inflationary pressures have
ments regarding the System’s balance            diminished appreciably. In light of the
sheet that could affect the attainment of       declines in the prices of energy and other
the Committee’s statutory objectives.           commodities and the weaker prospects for
                                                economic activity, the Committee expects
At the conclusion of the discussion, the        inflation to moderate further in coming
Committee voted to authorize and direct         quarters.
the Federal Reserve Bank of New York,              The Federal Reserve will employ all
until it was instructed otherwise, to ex-       available tools to promote the resumption of
ecute transactions in the System                sustainable economic growth and to pre-
Account in accordance with the follow-          serve price stability. In particular, the Com-
                                                mittee anticipates that weak economic con-
ing domestic policy directive:                  ditions are likely to warrant exceptionally
   The Federal Open Market Committee            low levels of the federal funds rate for some
seeks monetary and financial conditions that    time.
will foster price stability and promote sus-       The focus of the Committee’s policy
tainable growth in output. To further its       going forward will be to support the func-
long-run objectives, the Committee seeks        tioning of financial markets and stimulate
conditions in reserve markets consistent        the economy through open market opera-
with federal funds trading in a range of 0 to   tions and other measures that sustain the
1⁄4 percent. The Committee directs the Desk     size of the Federal Reserve’s balance sheet
to purchase GSE debt and agency-                at a high level. As previously announced,
guaranteed MBS during the intermeeting          over the next few quarters the Federal
period with the aim of providing support to     Reserve will purchase large quantities of
the mortgage and housing markets. The tim-      agency debt and mortgage-backed securities
ing and pace of these purchases should          to provide support to the mortgage and
depend on conditions in the markets for         housing markets, and it stands ready to
such securities and on a broader assessment     expand its purchases of agency debt and
of conditions in primary mortgage markets       mortgage-backed securities as conditions
and the housing sector. By the end of the       warrant. The Committee is also evaluating
second quarter of next year, the Desk is        the potential benefits of purchasing longer-
expected to purchase up to $100 billion in      term Treasury securities. Early next year,
housing-related GSE debt and up to $500         the Federal Reserve will also implement the
billion in agency-guaranteed MBS. The Sys-      Term Asset-Backed Securities Loan Facility
tem Open Market Account Manager and the         to facilitate the extension of credit to house-
Secretary will keep the Committee informed      holds and small businesses. The Federal
of ongoing developments regarding the Sys-      Reserve will continue to consider ways of
tem’s balance sheet that could affect the       using its balance sheet to further support
attainment over time of the Committee’s         credit markets and economic activity.
objectives of maximum employment and                 Votes for this action: Mr. Bernanke,
price stability.                                     Mses. Cumming and Duke, Messrs.
   The vote encompassed approval of                  Fisher, Kohn, and Kroszner, Ms. Pian-
the statement below to be released at                alto, Messrs. Plosser, Stern, and Warsh.
                                                     Votes against this action: None. Ms.
2:15 p.m.:                                           Cumming voted as the alternate for Mr.
  The Federal Open Market Committee                  Geithner.
decided today to establish a target range for
the federal funds rate of 0 to 1⁄4 percent.        The Committee also continued its
   Since the Committee’s last meeting, labor    discussion of possible refinements to
market conditions have deteriorated, and the    the Committee’s approach to projec-
                                            Meetings of the FOMC, December 359

tions that could provide additional         Notation Votes
information about participants’ views of
                                            By notation vote completed on Novem-
longer-run sustainable rates of eco-
                                            ber 18, 2008, the Committee unani-
nomic growth and unemployment and
                                            mously approved the minutes of the
the measured rates of inflation that
                                            FOMC meeting held on October 28–29,
would be consistent with price stability,
                                            2008.
but it made no decisions regarding these
                                               By notation vote completed on
issues. Finally, staff briefed the Com-
                                            November 26, 2008, the Committee
mittee on the progress of plans for
                                            unanimously approved the extension
implementing the Federal Reserve’s
                                            until April 30, 2009, of its authorization
Term Asset-Backed Securities Loan
Facility, which had initially been          for the Federal Reserve Bank of New
announced on November 25, 2008.             York to engage in transactions with pri-
   It was agreed that the next meeting of   mary dealers through the Term Securi-
the Committee would be held on              ties Lending Facility, subject to the
Tuesday–Wednesday, January 27–28,           same collateral, interest rate, and other
2009.                                       conditions previously established by the
   The meeting adjourned at 3:00 p.m.       Committee.
on December 16, 2008.                                              Brian F. Madigan
                                                                             Secretary
                                                                                    361




Litigation
During 2008, the Board of Governors          and preliminary injunction. On Septem-
was a party in seven lawsuits or appeals     ber 30, 2008, the plaintiff appealed the
filed that year and in four other cases      district court’s order to the United
pending from previous years, for a total     States Court of Appeals for the Second
of eleven cases. In 2007, the Board had      Circuit (No. 08-4810).
been a party in a total of eight cases. As      Smith v. Bernanke, No. 08-6353 (U.S.
of December 31, 2008, seven cases            Supreme Court, filed September 3,
were pending.                                2008), was a petition for certiorari seek-
   Murray v. Board of Governors, No.         ing review of the Sixth Circuit’s affir-
08-cv-15147 (E.D. Michigan, filed            mance of the dismissal of plaintiff’s
December 15, 2008), is a challenge to        complaint relating to his concerns about
the constitutionality of federal expendi-    the closure of his bank account. On
tures relating to American International     October 23, 2008, the petition for cer-
Group (AIG).                                 tiorari was denied.
   Bumgarner v. Paulson, Bernanke, et           Jones v. Greenspan, No. 08-5092
al., No. 08-cv-5245 (D. New Jersey,          (D.C. Circuit, filed April 21, 2008), is
amended complaint filed November 21,         an appeal of district court orders in an em-
2008), challenges the implementation of      ployment discrimination case granting
the Economic Emergency Stabilization         the Board’s motions for summary judg-
Act of 2008.                                 ment and dismissal of the plaintiff’s
   Bloomberg, L.P. v. Board of Gover-        claims (see 402 F. Supp. 2d 294, 445 F.
nors, No. 08-cv-9595 (S.D. New York,         Supp. 2d 52, and 493 F. Supp. 2d 18).
filed November 7, 2008), is a case              Interactive Media Entertainment and
brought under the Freedom of Informa-        Gaming Association, Inc. v. Federal
tion Act.                                    Reserve System, No. 07-2625 (D. New
   Cobble v. Bernanke, No. 3:08-cv-          Jersey, filed June 5, 2007), was an
516-S (W.D. Kentucky, filed September        action challenging the implementation
29, 2008), was a petition and request        of the Unlawful Internet Gambling En-
for injunction barring congressional         forcement Act of 2006. On March 5,
consideration of federal legislation re-     2008, the court granted the govern-
garding the credit crisis. On October 6,     ment’s motion to dismiss the action.
2008, the district court denied the in-         Chandler v. Bernanke, No. 06-2082
junction, and on November 21, 2008,          (D. District of Columbia, filed Decem-
the court dismissed the action.              ber 6, 2006), is an employment dis-
   Schulz v. United States Federal           crimination action.
Reserve System, No. 1:08-cv-991 (N.D.           Barnes v. Greenspan, No. 04-CV-
New York, filed September 18, 2008),         1989 (CKK) (D. District of Columbia,
is an action relating to the Federal         filed November 15, 2004), was a case
Reserve’s loan to American Interna-          under the Age Discrimination in Em-
tional Group. On September 25, 2008,         ployment Act. The case was dismissed
the district court denied plaintiff’s re-    by stipulation of the parties on Novem-
quest for a temporary restraining order      ber 5, 2008.
362 95th Annual Report, 2008

  Artis v. Greenspan, No. 01-0400 (D.      this action on August 15, 2001. On
District of Columbia, filed February 22,   January 31, 2007, the District Court
2001), is an employment discrimination     granted the Board’s renewed motion to
action. An identical action, No. 99-2073   dismiss the action. 474 F. Supp. 2d 16.
(EGS) (D. District of Columbia, filed      The plaintiffs’ motion to alter or amend
August 3, 1999), was consolidated with     judgment is pending.                   Á

				
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