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Minutes of the Federal Open Market Committee

December 14, 2010
A meeting of the Federal Open Market Committee was Patrick M. Parkinson, Director, Division of Bank
held in the offices of the Board of Governors in Wash- Supervision and Regulation, Board of Gover-
ington, D.C., on Tuesday, December 14, 2010, at nors
8:30 a.m.
Nellie Liang, Director, Office of Financial Stability
PRESENT: Policy and Research, Board of Governors
Ben Bernanke, Chairman
William C. Dudley, Vice Chairman William Nelson, Deputy Director, Division of
James Bullard Monetary Affairs, Board of Governors
Elizabeth Duke
Thomas M. Hoenig Linda Robertson, Assistant to the Board, Office of
Sandra Pianalto Board Members, Board of Governors
Sarah Bloom Raskin
Eric Rosengren Charles S. Struckmeyer, Deputy Staff Director,
Daniel K. Tarullo Office of the Staff Director, Board of Gover-
Kevin Warsh nors
Janet L. Yellen
David Reifschneider and William Wascher, Senior
Christine Cumming, Charles L. Evans, Richard W. Associate Directors, Division of Research and
Fisher, Narayana Kocherlakota, and Charles I. Statistics, Board of Governors
Plosser, Alternate Members of the Federal
Open Market Committee Andrew T. Levin, Senior Adviser, Office of Board
Members, Board of Governors
Jeffrey M. Lacker and Dennis P. Lockhart, Presi-
dents of the Federal Reserve Banks of Rich- Michael G. Palumbo and Joyce K. Zickler, Deputy
mond and Atlanta, respectively Associate Directors, Division of Research and
Statistics, Board of Governors; Gretchen C.
John F. Moore, First Vice President, Federal Re- Weinbach, Deputy Associate Director, Divi-
serve Bank of San Francisco sion of Monetary Affairs, Board of Governors

William B. English, Secretary and Economist Fabio M. Natalucci, Assistant Director, Division of
Deborah J. Danker, Deputy Secretary Monetary Affairs, Board of Governors
Matthew M. Luecke, Assistant Secretary
David W. Skidmore, Assistant Secretary Randall A. Williams, Records Management Analyst,
Michelle A. Smith, Assistant Secretary Division of Monetary Affairs, Board of Gov-
Scott G. Alvarez, General Counsel ernors
Nathan Sheets, Economist
David J. Stockton, Economist Dale Roskom, First Vice President, Federal Re-
serve Bank of Cleveland
Alan D. Barkema, James A. Clouse, Thomas A.
Connors, Jeff Fuhrer, Steven B. Kamin, Law- Harvey Rosenblum, Daniel G. Sullivan, and John
rence Slifman, Christopher J. Waller, and Da- C. Williams, Executive Vice Presidents, Federal
vid W. Wilcox, Associate Economists Reserve Banks of Dallas, Chicago, and San
Francisco, respectively
Brian Sack, Manager, System Open Market Ac-
count David Altig, Richard P. Dzina, Mark E. Schweitzer,
and Kei-Mu Yi, Senior Vice Presidents, Feder-
Page 2 Federal Open Market Committee

al Reserve Banks of Atlanta, New York, Cleve- In light of ongoing strains in some foreign financial
land, and Minneapolis, respectively markets, the Committee considered a proposal to ex-
tend its dollar liquidity swap arrangements with foreign
Tobias Adrian, Vice President, Federal Reserve central banks past January 31, 2011. After discussing
Bank of New York possible alternative periods for such an extension, the
Committee unanimously approved the following reso-
Satyajit Chatterjee, Senior Economic Adviser, Fed- lution:
eral Reserve Bank of Philadelphia
The Federal Open Market Committee directs
the Federal Reserve Bank of New York to
Alexander L. Wolman, Senior Economist, Federal
extend the existing temporary reciprocal cur-
Reserve Bank of Richmond
rency arrangements (“swap arrangements”)
for the System Open Market Account with
the Bank of Canada, the Bank of England,
the Bank of Japan, the European Central
Developments in Financial Markets and the Fed-
Bank, and the Swiss National Bank. The
eral Reserve’s Balance Sheet
swap arrangements shall now terminate on
The manager of the System Open Market Account
August 1, 2011, unless further extended by
(SOMA) reported on developments in domestic and
the Committee.
foreign financial markets since the Federal Open Mar-
ket Committee (FOMC) met on November 2–3, 2010. Staff Review of the Economic Situation
He also reported on System open market operations, The information reviewed at the December 14 meeting
including the continuing reinvestment into longer-term indicated that economic activity was increasing at a
Treasury securities of principal payments received on moderate rate, but that the unemployment rate re-
the SOMA’s holdings of agency debt and agency- mained elevated. The pace of consumer spending
guaranteed mortgage-backed securities (MBS) as well as picked up in October and November, exports rose ra-
the ongoing purchases of additional Treasury securities pidly in October, and the recovery in business spending
authorized at the November 2–3 FOMC meeting. on equipment and software (E&S) appeared to be con-
Since the last meeting, the Open Market Desk at the tinuing. In contrast, residential and nonresidential con-
Federal Reserve Bank of New York purchased a total struction activity was still depressed. Manufacturing
of about $105 billion of Treasury securities, reflecting production registered a solid gain in October. Non-
about $30 billion of purchases with the proceeds of farm businesses continued to add workers in October
principal payments and about $75 billion as part of the and November, and the average workweek moved up.
authorized expansion of the Federal Reserve’s securi- Longer-run inflation expectations were stable, but core
ties holdings. Purchases were concentrated in nominal inflation continued to trend lower.
Treasury securities with maturities of 2 to 10 years,
Labor demand rose further in recent months, but un-
though some longer-term securities were purchased
employment stayed at a high level. The average in-
along with some Treasury inflation-protected securities
crease in private nonfarm payroll employment in Octo-
(TIPS). The Manager also discussed the Desk’s inten-
ber and November was close to the pace over the pre-
tion to place additional limits on its purchases of indi-
ceding six months, while the average workweek for all
vidual securities, as the Federal Reserve’s holdings of
employees edged higher. The bulk of the private-sector
such securities increased beyond 35 percent of the total
job gains continued to be in the services industries;
outstanding; these limits were intended to help ensure
employment in manufacturing, construction, and retail
that Federal Reserve purchases do not impair the li-
trade declined, on average, in October and November.
quidity in Treasury markets. In addition, the Manager
Employment at state and local governments rose
updated the Committee on the SOMA’s holdings of
slightly over the two-month period. A number of indi-
foreign-currency instruments. There were no open
cators of job openings and hiring plans improved in
market operations in foreign currencies for the Sys-
October and November, and initial claims for unem-
tem’s account over the intermeeting period. By unan-
ployment insurance trended steadily lower through
imous vote, the Committee ratified the Desk’s transac-
November and early December. However, the unem-
tions over the intermeeting period.
ployment rate, which remained at 9.6 percent during
the preceding three months, increased to 9.8 percent in
Minutes of the Meeting of December 14, 2010 Page 3

November, while the labor force participation rate and level of sales likely reflected the payback from the earli-
the employment-population ratio remained depressed. er surge in sales associated with the homebuyer tax cre-
dit and also the moratoriums on sales of bank-owned
Industrial production in the manufacturing sector in-
properties. Measures of house prices declined recently,
creased at a solid pace in October, with advances wide-
and households’ concerns that home values might con-
spread across industries; total industrial production was
tinue to fall, their pessimism about the outlook for em-
unchanged due to an offsetting weather-related drop in
ployment and income, and the tight standards faced by
the output of utilities. The manufacturing capacity util-
many mortgage borrowers appeared to be weighing on
ization rate continued to move up in October, although
it remained significantly below its 1972–2009 average.
Most indicators of near-term industrial activity, such as Real business investment in equipment and software
the new orders diffusion indexes in the national and appeared to be increasing, although the pace of spend-
regional manufacturing surveys, were at levels consis- ing seemed to have moderated from the rapid rate of
tent with moderate gains in industrial production in the the first half of the year. The rise in E&S spending
near term. Motor vehicle assemblies, which rose in during the third quarter, while somewhat slower than
October, fell back in November but were scheduled to earlier in the year, remained solid and broad based, but
move up again in coming months. the available data for the fourth quarter were mixed.
Nominal orders and shipments of nondefense capital
The pace of consumer spending picked up in recent
goods excluding aircraft declined in October, and busi-
months from the modest rate that prevailed earlier in
ness purchases of new vehicles in October and No-
the year. Nominal retail sales, excluding purchases at
vember were down a bit from their third-quarter level.
motor vehicles and parts outlets, posted a strong gain
In contrast, sales of software still appeared to be on a
in November, and revised estimates showed larger in-
solid uptrend, and deliveries of completed aircraft
creases in September and October than previously re-
picked up in November. Surveys of purchasing man-
ported. In addition, sales of new light motor vehicles
agers reported plans to step up capital spending in
stepped up in October and remained at that higher lev-
2011; however, reports from small businesses on their
el in November. A number of factors supporting con-
planned expenditures remained downbeat. Business
sumer spending also improved. Revised data on per-
outlays on nonresidential structures appeared to be de-
sonal income indicated that it was stronger last spring
clining further, with a drop in spending on building
and summer than previously reported. Household net
construction offset only slightly by increased invest-
worth rose further in the third quarter, as an increase in
ment in drilling and mining structures. Overall bor-
equity values more than offset the effect of a drop in
rowing by nonfinancial corporations was robust again
house prices. Consumer sentiment turned more posi-
in November, indicators of credit quality continued to
tive in November and early December, retracing most
improve, and small businesses noted some easing in
of the decline that occurred during the summer. How-
credit availability. However, financing conditions for
ever, while consumer credit outstanding showed signs
commercial real estate remained tight.
of stabilizing after two years of runoffs, credit terms
were still noticeably less favorable than in the past, and Real inventory investment rose sharply in the third
demand for credit appeared to remain weak. quarter, but book-value data for October suggested
that the pace of accumulation was slowing. Although
Activity in the housing market was still quite depressed.
inventory-sales ratios rose during the third quarter, sur-
In October, starts of new single-family homes re-
vey data implied that few businesses perceived invento-
mained at the very low level that had prevailed since
ry stocks as being too high.
August. Moreover, the level of permit issuance, which
is typically a near-term indicator of new homebuilding, Consumer price inflation trended lower in October.
continued to run below starts. The persistence of a The 12-month change in the total personal consump-
large excess supply of existing homes on the market tion expenditures (PCE) price index reached its lowest
and tight credit conditions for construction appeared to level of the past year; the 12-month change in the PCE
constitute a significant restraint on new homebuilding. price index for core goods and services also moved
Demand for housing also remained very weak: Sales of down. In October, core PCE prices were unchanged
new homes in October were at the lowest level in the for a second month, as goods prices declined and pric-
48-year history of the series. Purchases of existing es of non-energy services posted a small increase. The
homes edged lower in October; in part, the still-low broad-based deceleration in underlying inflation was
Page 4 Federal Open Market Committee

also apparent in other measures, such as the trimmed- year. In the euro area, economic performance contin-
mean PCE price index and a diffusion index of PCE ued to diverge across countries. The increase in Ger-
price changes. Despite the rise in agricultural commod- man economic activity in the third quarter was nearly
ity prices, the increase in retail food prices was modest. twice the euro-area average rate, and recent indicators,
In contrast, consumer energy prices continued to rise including PMIs and consumer and business sentiment,
rapidly in October, and spot prices of imported crude showed further solid performance. In contrast, Span-
oil moved higher, on net, during November and early ish economic activity stagnated in the third quarter,
December. The rise in prices of nonfuel industrial Greek GDP extended its decline, and more-recent in-
commodities moderated over the intermeeting period dicators point to continued weakness in peripheral Eu-
as spot prices of metals declined, but the producer ropean economies. Headline inflation rates generally
price index for domestically manufactured intermediate picked up in the foreign economies, driven largely by
goods accelerated in October and November. In No- food and energy prices; measures of inflation excluding
vember and early December, survey measures of food and energy prices were relatively steady.
households’ short- and long-term inflation expectations
Staff Review of the Financial Situation
remained in the ranges that have prevailed since the
The decision by the FOMC at its November meeting to
spring of 2009.
maintain the 0 to ¼ percent target range for the federal
Available measures of labor compensation showed that funds rate was widely anticipated. The decision to ex-
labor cost pressures were still restrained. The 12- pand its holdings of longer-term securities by $600 bil-
month change in average hourly earnings for all em- lion by the end of the second quarter of 2011 was also
ployees remained low in November. In the third quar- roughly in line with market expectations, although
ter, the modest rise in hourly compensation in the non- market participants appeared to expect the purchase
farm business sector was matched by a similar increase program would be increased over time. In the weeks
in productivity. following the November meeting, yields on nominal
Treasury securities increased significantly, as investors
The U.S. international trade deficit narrowed consider-
reportedly revised down their estimates of the ultimate
ably in October, shrinking to its lowest level since the
size of the FOMC’s new asset-purchase program. In-
beginning of the year, as exports surged and imports
coming economic data that were viewed, on balance, as
edged down. The strength in exports was relatively
favorable to the outlook and news of a tentative
broad based. Exports of industrial supplies and agri-
agreement between the Administration and some
cultural goods registered the largest increases, although
members of the Congress regarding a package of fiscal
rising prices accounted for some of those gains. Ex-
measures also reportedly contributed to the backup in
ports of machinery and automotive products also rose
yields. Market participants pointed to abrupt changes
strongly. The decrease in imports was concentrated in
in investor positions, the effects of the approaching
petroleum products, reflecting lower volumes, and in
year-end on market liquidity, and hedging flows asso-
computers. In contrast, imports of consumer goods
ciated with investors’ holdings of MBS as factors that
posted a noticeable increase.
may have amplified the rise in yields. Futures quotes
Recent data releases confirmed that, in the aggregate, suggested that the path for the federal funds rate ex-
the rise in foreign real gross domestic product (GDP) pected by market participants rose over the intermeet-
slowed sharply in the third quarter from the very rapid ing period.
pace earlier in the year. The slowdown was most pro-
The increase in yields on nominal Treasury coupon
nounced in the emerging market economies (EMEs),
securities was accompanied by increases in yields on
where economic activity was restrained by the abate-
TIPS. TIPS-based inflation compensation moved up at
ment of inventory rebuilding and the associated waning
the 5-year horizon amid rising energy prices, but for-
of the rebound in global trade, the unwinding of fiscal
ward inflation compensation 5 to 10 years ahead was
stimulus measures, and a continued tightening of mon-
about unchanged. Yields on investment-grade corpo-
etary policies in several countries. More recent indica-
rate bonds rose about in line with those on compara-
tors for the EMEs, including purchasing managers in-
ble-maturity Treasury securities, leaving risk spreads
dexes (PMIs), pointed to a rebound in economic activi-
about unchanged; spreads on speculative-grade corpo-
ty in the fourth quarter. The advanced foreign econo-
rate bonds moved down somewhat. Secondary-market
mies (AFEs) also saw a slower rise in real economic
prices for leveraged loans rose slightly over the inter-
activity in the third quarter than occurred earlier in the
Minutes of the Meeting of December 14, 2010 Page 5

meeting period, while bid-asked spreads in that market dit quality of nonfinancial corporations continued to
continued to drift down. improve.
Some signs of modest stress emerged in certain short- Conditions in the commercial real estate market re-
term funding markets over the intermeeting period as mained tight. Commercial mortgage debt was esti-
investors focused increasingly on the evolving situation mated to have declined in the third quarter, and the
in Europe. The spread of the three-month London delinquency rates for securitized commercial mortgages
interbank offered rate (or Libor) forward rate agree- and those for existing properties at commercial banks
ment over the three-month forward overnight index increased further. However, some modest signs of
swap (OIS) rate moved a bit higher, on balance, per- improvement continued to surface. Prices of commer-
haps pointing to heightened concerns about future cial real estate changed little, on balance, over Septem-
funding conditions. In the commercial paper market, ber and October, holding in the relatively narrow range
spreads increased on paper issued by financial institu- that had prevailed since the spring when the steep de-
tions with parents in peripheral European countries, cline in these prices ended. Issuance of commercial
and the amount outstanding of such paper declined. mortgage-backed securities increased in November but
Spreads on asset-backed commercial paper were was still far below pre-crisis levels.
somewhat volatile over the intermeeting period. None-
Residential mortgage rates rose considerably over the
theless, spreads on nonfinancial commercial paper re-
intermeeting period, though not by as much as rates on
mained at low levels, as did the spreads of dollar Libor
longer-term Treasury securities. The spread between
over OIS rates at one- and three-month maturities.
mortgage rates and MBS yields dropped back, reversing
Broad U.S. equity price indexes increased moderately, the widening of the spread that occurred over the pre-
on net, over the intermeeting period, in part reflecting ceding several months. Refinancing activity declined in
incoming economic data that were read by investors as response to the higher mortgage rates. Outstanding
suggesting that the recovery could be gaining traction, residential mortgage debt was estimated to have con-
at least outside the housing sector. Stock prices for tracted in the third quarter at about the average rate of
domestic commercial banks were volatile but outper- decline seen over the preceding year. Delinquency
formed broad indexes on balance. Option-implied vol- rates on prime and subprime mortgages ticked down
atility on the S&P 500 index fell modestly, and the but remained extremely elevated.
spread between the staff’s estimate of the expected real
In contrast, the consumer credit market exhibited con-
return on equity for S&P 500 firms and the real 10-year
tinued signs of stabilization. Although consumer credit
Treasury yield—a rough measure of the equity risk
contracted in the third quarter, the decline was the
premium—narrowed a bit, although it remained ele-
smallest since late 2008, and consumer credit edged
vated relative to longer-run norms.
higher in October. The pace of issuance of consumer
In the December 2010 Senior Credit Officer Opinion asset-backed securities in November was slightly above
Survey on Dealer Financing Terms, dealers reported an the average for the year to date, and the delinquency
easing of credit terms over the preceding three months rate on consumer loans at banks declined further in the
with respect to securities financing transactions and third quarter.
across a range of counterparties. Dealers also noted
Commercial bank credit was about flat, on average,
that demand for funding of all types of securities in-
during October and November. Banks continued to
creased over the same reference period.
increase their holdings of securities, while core loans—
Net debt financing by U.S. nonfinancial corporations the sum of commercial and industrial (C&I), real estate,
continued to be robust in November. Gross issuance and consumer loans—decreased moderately. The de-
of corporate bonds was very heavy, particularly for clines were attributable to a drop in consumer loans as
speculative-grade firms. Investor demand for syndi- well as to continued runoffs in commercial real estate
cated leveraged loans also appeared to have remained and home equity loans. In contrast, C&I loans edged
high. Nonfinancial commercial paper outstanding de- up, ending a nearly two-year string of monthly declines.
clined noticeably during October and November, in In addition, the Survey of Terms of Business Lending
part because some firms reportedly shifted to bond conducted in the first week of November showed that
financing. Gross public equity issuance by nonfinancial interest rates on C&I loans were generally little changed
firms through seasoned and initial public offerings was while spreads remained extremely wide.
particularly strong in November. Measures of the cre-
Page 6 Federal Open Market Committee

According to the latest Call Report data, bank profita- The People’s Bank of China raised the required reserve
bility was little changed in the third quarter, remaining ratio for banks a cumulative 150 basis points over the
positive but well below pre-crisis levels. As in the intermeeting period, and other central banks in emerg-
second quarter, banks’ net incomes were supported by ing Asia increased policy rates. China’s Shanghai
declines in loan loss provisioning, while revenues de- Composite Index fell in the wake of Chinese policy
clined. Banks continued to boost regulatory capital actions, while other emerging market stock indexes
ratios, likely, at least in part, in anticipation of the need were mixed over the period. In Latin America, Brazil’s
to eventually meet stricter Basel III standards. central bank also raised reserve requirements late in the
period. The dollar appreciated slightly, on average,
M2 expanded at a moderate rate in November. Inter-
against the emerging market currencies, although it
est rates available on all M2 assets remained very low,
edged down against the Chinese renminbi.
and households continued to shift their holdings of M2
assets toward liquid deposits, which continued to rise Staff Economic Outlook
rapidly, and away from small time deposits and retail With the recent data on production and spending
money market mutual funds. Currency increased stronger, on balance, than the staff anticipated at the
strongly, with indicators suggesting robust demand time of the November FOMC meeting, the staff re-
from abroad. vised up its projected increase in real GDP in the near
term. However, the staff’s outlook for real economic
The foreign exchange value of the dollar, which depre-
activity over the medium term was little changed, on
ciated immediately following the FOMC’s November
net, relative to the projection prepared for the Novem-
announcement of further asset purchases, subsequently
ber meeting. The staff forecast incorporated the as-
appreciated amid intensifying concerns about stresses
sumption that new fiscal actions, some of which had
in the euro area and some apparent reassessment by
not been anticipated in its previous forecast, were likely
investors of the monetary policy outlook in the United
to boost the level of real GDP in 2011 and 2012. But,
States. On net, the dollar ended the intermeeting pe-
compared with the November forecast, a number of
riod up against most currencies, with particularly large
other conditioning assumptions were less favorable:
gains against the euro. The announcement of the Eu-
House prices and housing activity were likely to be
ropean Union (EU)–International Monetary Fund
lower, while interest rates, oil prices, and the foreign
(IMF) financial aid package for Ireland on November
exchange value of the dollar were projected to be high-
28 did little to reverse the depreciation of the euro, as
er, on average, than previously assumed. As a result,
investors reportedly became increasingly concerned
although the staff projection showed a higher level of
about other euro-area economies and the adequacy of
real GDP, the average pace of growth over 2011 and
resources available to support them should they come
2012 was little changed from the November forecast,
under stress. Spreads of sovereign yields in some peri-
and the unemployment rate was still projected to de-
pheral euro-area countries over those on German
cline slowly.
bunds rose to new highs, although they fell back near
the end of the intermeeting period amid reports that The underlying rate of consumer price inflation in re-
the European Central Bank (ECB) had increased its cent months was lower than the staff expected at the
purchases of Irish and Portuguese sovereign debt. time of the November meeting, and the staff forecast
Banks in the euro-area periphery continued to rely anticipated that core PCE prices would rise a bit more
heavily on funding from the ECB, and some signs of slowly in 2011 and 2012 than previously projected. As
increased dollar funding pressures emerged. Implied in earlier forecasts, the persistent wide margin of eco-
short-term interest rates for the coming year shifted nomic slack in the projection was expected to sustain
down in the euro area, as market participants apparent- downward pressure on inflation, but the ongoing stabil-
ly scaled back the pace at which they expected the ECB ity in inflation expectations was anticipated to stem
to normalize policy, but rose in some other AFEs. further disinflation. The staff anticipated that relatively
Ten-year sovereign yields increased significantly rapid increases in energy prices would raise total con-
throughout the AFEs, although by less than yields in sumer price inflation above the core rate in the near
the United States. Headline stock price indexes in the term, but that this upward pressure would dissipate by
AFEs generally ended the period higher, whereas bank 2012.
stocks in Europe declined.
Minutes of the Meeting of December 14, 2010 Page 7

Participants’ Views on Current Conditions and the of government policies. The manufacturing, agricul-
Economic Outlook ture, and energy sectors showed particular signs of
In their discussion of the economic situation and out- strength, and the high-tech sector appeared to be im-
look, meeting participants saw the information received proving. However, nonresidential construction re-
during the intermeeting period as pointing to some mained very weak, apart from drilling and mining. It
improvement in the near-term outlook, and they ex- was noted that credit conditions had eased further, al-
pected that economic growth, which had been mod- though nonfinancial corporations continued to hold
erate, would pick up somewhat going forward. Indica- very high levels of cash.
tors of production and household spending had streng-
Conditions in the labor market appeared to be improv-
thened, and the tone of the labor market was a little
ing on balance. That improvement was reflected in a
better on balance. The new fiscal package was general-
range of recent indicators, including a declining number
ly expected to support the pace of recovery next year.
of new jobless claims, an increase in job openings, and
However, a number of factors were seen as likely to
an uptick in the average workweek. Nonetheless, par-
continue restraining growth, including the depressed
ticipants noted that the pace of hiring was still sluggish;
housing market, employers’ continued reluctance to
indeed, the unemployment rate had edged higher in
add to payrolls, and ongoing efforts by some house-
November, and the employment-population ratio re-
holds and businesses to delever. Moreover, the recov-
mained very low.
ery remained subject to some downside risks, such as
the possibility of a more extended period of weak activ- Interest rates at intermediate and longer maturities rose
ity and lower prices in the housing sector and potential substantially over the intermeeting period, while credit
financial and economic spillovers if the banking and spreads were roughly unchanged and equity prices rose
sovereign debt problems in Europe were to worsen. In moderately. Participants pointed to a number of fac-
light of recent readings on consumer inflation, partici- tors that appeared to have contributed to the significant
pants noted that underlying inflation had continued backup in yields, including an apparent downward reas-
trending downward, but several saw the risk of defla- sessment by investors of the likely ultimate size of the
tion as having receded somewhat. Federal Reserve’s asset-purchase program, economic
data that were seen as suggesting an improved econom-
In the household sector, incoming data on retail sales
ic outlook, and the announcement of a package of fis-
were somewhat stronger than expected, and there were
cal measures that was expected to bolster economic
some reasonably upbeat reports from business contacts
growth and increase the deficit over coming quarters.
regarding holiday spending. Consumer confidence ap-
It was noted that the backup in rates may have been
peared to be improving. Financial obligations and debt
amplified by year-end positioning, as well as by some
service costs had been declining as a share of house-
reported mortgage-related hedging flows. A number of
hold income, and that process was seen as providing
participants indicated that, because the backup in rates
greater latitude for a pickup in discretionary purchases.
appeared to importantly reflect changes in investors’
Nonetheless, there were indications that retail spending
expectations about the size of Federal Reserve asset
by middle- and lower-income households had risen less
purchases, the backup was consistent with purchases
than spending by high-income households, suggestive
helping to keep longer-term yields lower than would
of ongoing financial pressures on those of more mod-
otherwise be the case. Several meeting participants
est means. Furthermore, the housing sector, including
mentioned the communications challenges faced in
residential construction and home sales, continued to
conducting effective policy, including the need to clear-
be depressed. Some participants noted that the ele-
ly convey the Committee’s views while appropriately
vated supply of available homes and the overhang of
airing individual perspectives.
foreclosed homes were contributing to a further decline
in house prices. The lower house prices, in turn, were Measures of underlying inflation continued to trend
seen as reducing household wealth and thus restraining downward over the intermeeting period, with the slow-
growth in consumer spending. down in price increases evident across categories of
goods and services and across different inflation meas-
A number of participants noted that their business con-
ures. Although the prices of some commodities and
tacts had become more optimistic about the outlook
imported goods had risen appreciably, several partici-
for sales and production. Nonetheless, many contacts
pants noted that businesses seemed to have little ability
remained cautious about hiring and investment, with
to pass these increases on to their customers, given the
some reportedly concerned about the potential effects
Page 8 Federal Open Market Committee

significant slack in the economy. Also, the high level of creases in inflation expectations and so in actual infla-
unemployment was limiting gains in wages and thereby tion. To minimize such risks, it was noted that the
contributing to the low level of inflation. TIPS-based Committee should continue its planning for the even-
measures of inflation compensation had risen modestly tual exit from the current exceptionally accommodative
over the intermeeting period, while surveys of house- stance of policy. Other participants noted that, with
holds and professional forecasters continued to suggest substantial resource slack persisting, underlying infla-
that longer-term inflation expectations remained stable. tion might fall further below the levels that the Com-
mittee sees as consistent with its mandate. Nonethe-
Regarding their overall outlook for economic activity,
less, several participants saw the risk of deflation as
participants generally agreed that, even with the posi-
having receded somewhat over recent months.
tive news received over the intermeeting period, the
most likely outcome was a gradual pickup in growth Committee Policy Action
with slow progress toward maximum employment. Members noted that, while incoming information over
However, they held a range of views about the risks to the intermeeting period had increased their confidence
that outlook. A few mentioned the possibility that in the economic recovery, progress toward the Com-
growth could pick up more rapidly than expected, par- mittee’s dual objectives of maximum employment and
ticularly in light of the very accommodative stance of price stability was disappointingly slow. In addition,
monetary policy currently in place. It was noted that members generally expected that progress was likely to
such an acceleration would likely be accompanied by remain modest, with unemployment and inflation de-
significantly more rapid growth in bank lending and in viating from the Committee’s objectives for some time.
the monetary aggregates, suggesting that such indica- Accordingly, in their discussion of monetary policy for
tors might prove to be useful sources of information. the period immediately ahead, nearly all Committee
Others pointed to downside risks to growth. One members agreed to continue expanding the Federal
common concern was that the housing sector could Reserve’s holdings of longer-term securities as an-
weaken further in light of the considerable supply of nounced in November in order to promote a stronger
houses either on the market or likely to come to mar- pace of economic recovery and to help ensure that in-
ket. Another concern was the ongoing deterioration in flation, over time, is at levels consistent with the Com-
the fiscal position of U.S. states and localities, which mittee’s mandate. The Committee decided to maintain
could lead to sharp cuts in spending and increases in its existing policy of reinvesting principal payments
taxes. In addition, participants expressed concerns from its securities holdings into longer-term Treasury
about a possible worsening of the banking and financial securities. In addition, the Committee agreed to con-
strains in Europe, which could spill over to U.S. finan- tinue buying longer-term Treasury securities with the
cial markets and institutions, and so to the broader U.S. intention of purchasing $600 billion of such securities
economy. They observed that market stresses in Eu- by the end of the second quarter of 2011, a pace of
rope intensified during the intermeeting period, requir- about $75 billion per month. While the economic out-
ing an assistance package for Ireland from the EU and look was seen as improving, members generally felt
the IMF, and that after that package was announced, that the change in the outlook was not sufficient to
market attention appeared to shift to other European warrant any adjustments to the asset-purchase program,
countries. Participants noted, however, that the Euro- and some noted that more time was needed to accumu-
pean authorities were taking steps to stabilize condi- late information on the economy before considering
tions in the euro area. any adjustment. Members emphasized that the pace
and overall size of the purchase program would be con-
Regarding the outlook for inflation, participants gener-
tingent on economic and financial developments; how-
ally anticipated that inflation would remain for some
ever, some indicated that they had a fairly high thre-
time below levels judged to be most consistent, over
shold for making changes to the program. The Com-
the longer run, with maximum employment and price
mittee also decided to maintain the target range for the
stability. In particular, most participants expected that
federal funds rate at 0 to ¼ percent and to reiterate its
underlying measures of inflation would bottom out
expectation that economic conditions are likely to war-
around current levels and then move gradually higher
rant exceptionally low levels for the federal funds rate
as the recovery progresses. A few participants pointed
for an extended period. One member dissented from
to the risk that the ongoing expansion of the Federal
the Committee’s policy decision, judging that, in light
Reserve’s balance sheet and the sustained low level of
of the improving economy, a continued high level of
short-term interest rates could trigger undesirable in-
Minutes of the Meeting of December 14, 2010 Page 9

monetary accommodation would increase the risks of unemployment, modest income growth, low-
future economic and financial imbalances. Members er housing wealth, and tight credit. Business
agreed that the Committee should continue to regularly spending on equipment and software is ris-
review the pace of its securities purchases and the ing, though less rapidly than earlier in the
overall size of the program in light of incoming infor- year, while investment in nonresidential
mation—including information on the economic out- structures continues to be weak. Employers
look, the efficacy of the program, and any unintended remain reluctant to add to payrolls. The
consequences that might arise—and make adjustments housing sector continues to be depressed.
as needed to best foster maximum employment and Longer-term inflation expectations have re-
price stability. With respect to the statement to be re- mained stable, but measures of underlying
leased following the meeting, members agreed that only inflation have continued to trend downward.
small changes were necessary to reflect the modest im-
Consistent with its statutory mandate, the
provement in the near-term economic outlook.
Committee seeks to foster maximum em-
At the conclusion of the discussion, the Committee ployment and price stability. Currently, the
voted to authorize and direct the Federal Reserve Bank unemployment rate is elevated, and measures
of New York, until it was instructed otherwise, to ex- of underlying inflation are somewhat low,
ecute transactions in the System Account in accordance relative to levels that the Committee judges
with the following domestic policy directive: to be consistent, over the longer run, with its
dual mandate. Although the Committee an-
“The Federal Open Market Committee seeks
ticipates a gradual return to higher levels of
monetary and financial conditions that will
resource utilization in a context of price sta-
foster price stability and promote sustainable
bility, progress toward its objectives has been
growth in output. To further its long-run
disappointingly slow.
objectives, the Committee seeks conditions
in reserve markets consistent with federal To promote a stronger pace of economic re-
funds trading in a range from 0 to ¼ percent. covery and to help ensure that inflation, over
The Committee directs the Desk to execute time, is at levels consistent with its mandate,
purchases of longer-term Treasury securities the Committee decided today to continue
in order to increase the total face value of expanding its holdings of securities as an-
domestic securities held in the System Open nounced in November. The Committee will
Market Account to approximately $2.6 tril- maintain its existing policy of reinvesting
lion by the end of June 2011. The Commit- principal payments from its securities hold-
tee also directs the Desk to reinvest principal ings. In addition, the Committee intends to
payments from agency debt and agency purchase $600 billion of longer-term Treas-
mortgage-backed securities in longer-term ury securities by the end of the second quar-
Treasury securities. The System Open Mar- ter of 2011, a pace of about $75 billion per
ket Account Manager and the Secretary will month. The Committee will regularly review
keep the Committee informed of ongoing the pace of its securities purchases and the
developments regarding the System’s balance overall size of the asset-purchase program in
sheet that could affect the attainment over light of incoming information and will adjust
time of the Committee’s objectives of maxi- the program as needed to best foster maxi-
mum employment and price stability.” mum employment and price stability.
The vote encompassed approval of the statement be- The Committee will maintain the target
low to be released at 2:15 p.m.: range for the federal funds rate at 0 to
¼ percent and continues to anticipate that
“Information received since the Federal
economic conditions, including low rates of
Open Market Committee met in November
resource utilization, subdued inflation trends,
confirms that the economic recovery is con-
and stable inflation expectations, are likely to
tinuing, though at a rate that has been insuf-
warrant exceptionally low levels for the fed-
ficient to bring down unemployment.
eral funds rate for an extended period.
Household spending is increasing at a mod-
erate pace, but remains constrained by high
Page 10 Federal Open Market Committee

The Committee will continue to monitor the tion of policy accommodation would become more
economic outlook and financial develop- difficult the longer the first step in that process was
ments and will employ its policy tools as ne- delayed. In Mr. Hoenig’s view, the Committee should
cessary to support the economic recovery begin preparing markets for a reduction in policy ac-
and to help ensure that inflation, over time, commodation. Accordingly, he thought the press
is at levels consistent with its mandate.” statement should indicate that sufficient monetary stim-
ulus was in place to support the recovery.
Voting for this action: Ben Bernanke, William C. It was agreed that the next meeting of the Committee
Dudley, James Bullard, Elizabeth Duke, Sandra Pianal- would be held on Tuesday–Wednesday, January 25–26,
to, Sarah Bloom Raskin, Eric Rosengren, Daniel K. 2011. The meeting adjourned at 12:55 p.m. on De-
Tarullo, Kevin Warsh, and Janet L. Yellen. cember 14, 2010.
Voting against this action: Thomas M. Hoenig. Notation Vote
Mr. Hoenig dissented because he judged that economic By notation vote completed on November 22, 2010,
conditions were improving, and that the current highly the Committee unanimously approved the minutes of
accommodative stance of monetary policy was incon- the FOMC meeting held on November 2–3, 2010.
sistent with the Committee’s long-run mandate. Mr.
Hoenig noted that the economic recovery was shifting
from transitory to more sustainable sources of growth
and was picking up momentum. In his assessment,
maintaining highly accommodative monetary policy in
the current economic environment would increase the _____________________________
risk of future imbalances and, over time, cause an in- William B. English
crease in longer-term inflation expectations. Mr. Hoen- Secretary
ig also was concerned that the eventual orderly reduc-