A joint meeting of the Federal Open Market Committee and the
Board of Governors of the Federal Reserve System was held in the offices of the
Board of Governors in Washington, D.C., on Tuesday, March 16, 2010, at 8:00 a.m.
PRESENT:
Ben Bernanke, Chairman
William C. Dudley, Vice Chairman
James
Bullard
Elizabeth Duke
Thomas M. Hoenig
Donald L. Kohn
Sandra
Pianalto
Eric Rosengren
Daniel K. Tarullo
Kevin Warsh
Christine Cumming, Charles L. Evans, Richard W. Fisher, Narayana
Kocherlakota, and Charles I. Plosser, Alternate Members of the Federal Open
Market Committee
Jeffrey M. Lacker, Dennis P. Lockhart, and Janet L. Yellen, Presidents of the
Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively
Brian F. Madigan, Secretary and Economist
Matthew M. Luecke, Assistant
Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith,
Assistant Secretary
Scott G. Alvarez, General Counsel
Thomas C. Baxter,
Deputy General Counsel
Nathan Sheets, Economist
David J. Stockton,
Economist
Thomas A. Connors, William B. English, Steven B. Kamin, Lawrence Slifman,
Christopher J. Waller, and David W. Wilcox, Associate Economists
Brian Sack, Manager, System Open Market Account
Jennifer J. Johnson, Secretary of the Board, Office of the Secretary, Board
of Governors
Patrick M. Parkinson, Director, Division of Bank Supervision and Regulation,
Board of Governors
Robert deV. Frierson, Deputy Secretary, Office of the Secretary, Board of
Governors
Charles S. Struckmeyer, Deputy Staff Director, Office of the Staff Director
for Management, Board of Governors
James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of
Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of
Governors
Sherry Edwards and Andrew T. Levin, Senior Associate Directors, Division of
Monetary Affairs, Board of Governors; David Reifschneider and William Wascher,
Senior Associate Directors, Division of Research and Statistics, Board of
Governors
Michael G. Palumbo, Deputy Associate Director, Division of Research and
Statistics, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of
Governors
Min Wei, Senior Economist, Division of Monetary Affairs, Board of Governors
Penelope A. Beattie, Assistant to the Secretary, Office of the Secretary,
Board of Governors
Valerie Hinojosa and Randall A. Williams, Records Management Analysts,
Division of Monetary Affairs, Board of Governors
James M. Lyon, First Vice President, Federal Reserve Bank of Minneapolis
Jamie J. McAndrews and Harvey Rosenblum, Executive Vice Presidents, Federal
Reserve Banks of New York and Dallas, respectively
David Altig, Craig S. Hakkio, Loretta J. Mester, Glenn D. Rudebusch, Mark E.
Schweitzer, Daniel G. Sullivan, and John A. Weinberg, Senior Vice Presidents,
Federal Reserve Banks of Atlanta, Kansas City, Philadelphia, San Francisco,
Cleveland, Chicago, and Richmond, respectively
Giovanni Olivei, Vice President, Federal Reserve Bank of Boston
Joshua Frost, Assistant Vice President, Federal Reserve Bank of New York
Jonathan Heathcote, Senior Economist, Federal Reserve Bank of Minneapolis
Developments in Financial Markets and the Federal Reserve's Balance
Sheet
The Manager of the System Open Market Account reported on
developments in domestic and foreign financial markets during the period since
the Committee met on January 26-27, 2010. The net effect of these developments
was that financial conditions had become modestly more supportive of economic
growth. No market strains emerged in conjunction with the Federal Reserve's
closing of nearly all of its remaining special liquidity facilities over the
intermeeting period. On February 1, the Primary Dealer Credit Facility, the
Commercial Paper Funding Facility, the Asset-Backed Commercial Paper Money
Market Mutual Fund Liquidity Facility, and the Term Securities Lending Facility
were closed, and the Federal Reserve's temporary currency swap lines with
foreign central banks expired. Financial markets also adjusted smoothly to the
final offering of funds through the Term Auction Facility on March 8.
The Manager noted that securitized credit markets had not shown substantial
strain from the anticipated end of new credit extensions under the Term
Asset-Backed Securities Loan Facility (TALF), which was scheduled to close on
June 30 for loans backed by new-issue commercial mortgage-backed securities
(CMBS) and on March 31 for loans backed by all other types of collateral.1 Spreads on
asset-backed securities remained tight while issuance--the bulk of which was
being financed outside of TALF--continued to be fairly strong. While the
cumulative volume of borrowing from the TALF had expanded fairly steadily in
recent months, the volume of repayments of TALF loans had also risen as
borrowers were able to secure funding from other sources on more favorable
terms. As a result, the net amount of outstanding TALF credit had leveled out
and would likely decline going forward as a result of continuing repayments.
In his report on System open market operations, the Manager noted that over
the period since the Committee had met in January, the Federal Reserve's total
assets had risen to about $2.3 trillion, as an increase in the System's holdings
of securities was partly offset by the declining usage of the System's credit
and liquidity facilities. The Desk continued to gradually slow the pace of its
purchases of agency mortgage-backed securities (MBS) and agency debt as it moved
toward completing the Committee's previously announced asset purchases by the
end of March. The Desk's purchases of agency MBS were on track to meet the
targeted amount of $1.25 trillion, while its purchases of agency debt would
likely cumulate to slightly less than $175 billion. The Desk continued to engage
in dollar roll transactions in agency MBS securities to facilitate settlement of
its outright purchases. There were no open market operations in foreign
currencies for the System's account over the intermeeting period. By unanimous
vote, the Committee ratified the Desk's transactions. Participants also agreed
that the Desk should continue the interim approach of allowing all maturing
agency debt and all prepayments of agency MBS to be redeemed without
replacement.
In addition, the Manager reported on recent progress in the development of
reserve draining tools, including the initiation of a program for expanding the
set of counterparties in conducting reverse repurchase agreements, and the staff
gave a presentation on potential approaches for tightening the link between
short-term market interest rates and the interest rate paid on reserve balances
held at the Federal Reserve Banks.
Secretary's note: A staff memorandum was provided to members of
the Board of Governors and Federal Reserve Bank presidents summarizing public
comments on last December's Federal Register notice regarding the
establishment of a term deposit facility, but that topic was not discussed at
this meeting.
The staff also briefed the Committee on potential approaches for managing the
Treasury securities held by the Federal Reserve. To date, the Desk had been
reinvesting all maturing Treasury securities by exchanging those holdings for
newly issued Treasury securities, but an alternative strategy would be to allow
some or all of those Treasury securities to mature without reinvestment.
Redeeming all of its maturing Treasury holdings would significantly reduce the
size of the Federal Reserve's balance sheet over coming years and hence could be
helpful in limiting the need to use other reserve draining tools such as reverse
repurchase agreements and term deposits. Redemptions would also lower the
interest rate sensitivity of the Federal Reserve's portfolio over time.
Nevertheless, the initiation of a redemption strategy might generate upward
pressure on market rates, especially if that measure led investors to move up
their expected timing of policy firming. Participants agreed that the Committee
would give further consideration to these matters and that in the interim the
Desk should continue its current practice of reinvesting all maturing Treasury
securities.
Staff Review of the Economic Situation
The information
reviewed at the March 16 meeting suggested that economic activity expanded at a
moderate pace in early 2010. Business investment in equipment and software
seemed to have picked up, consumer spending increased further in January, and
private employment would likely have turned up in February in the absence of the
snowstorms that affected the East Coast. Output in the manufacturing sector
continued to trend higher as firms increased production to meet strengthening
final demand and to slow the pace of inventory liquidation. On the downside,
housing activity remained flat and the nonresidential construction sector
weakened further. Meanwhile, a sizable increase in energy prices pushed up
headline consumer price inflation in recent months; in contrast, core consumer
price inflation was quite low.
Available indicators suggested that the labor market might be stabilizing.
Declines in private payrolls slowed markedly in recent months, and, in the
absence of the snowstorms, private employment probably would have risen in
February. The average workweek for production and nonsupervisory workers fell
back in February after ticking up in January; however, the drop was likely due
to the storms. The unemployment rate was unchanged at 9.7 percent in February,
and the labor force participation rate inched up over the past two months.
However, the level of initial claims for unemployment insurance benefits
remained high.
After increasing briskly in the second half of 2009, industrial production
(IP) continued to expand, on net, in the early months of 2010, rising sharply in
January and remaining little changed in February despite some adverse effects of
the snowstorms. Recent production gains remained broadly based across
industries, as firms continued to boost production to meet rising domestic and
foreign demand and to slow the pace of inventory liquidation. Capacity
utilization in manufacturing rose further, to a level noticeably above its
trough in June, but remained well below its longer-run average. As a result,
incentives for manufacturing firms to expand production capacity were weak. The
available indicators of near-term manufacturing activity pointed to moderate
gains in IP in coming months.
Consumer spending continued to move up. Although sales of new automobiles and
light trucks softened slightly, on average, in January and February, real
outlays for a wide variety of non-auto goods and food services increased
appreciably, and real outlays for other services remained on a gradual uptrend.
In contrast to the modest recovery in spending, measures of consumer sentiment
remained relatively downbeat in February and had improved little, on balance,
since a modest rebound last spring. Household income appeared less supportive of
spending than at the January meeting, reflecting downward revisions to estimates
by the Bureau of Economic Analysis of wages and salaries in the second half of
2009. The ratio of household net worth to income was little changed in the
fourth quarter after two consecutive quarters of appreciable gains.
Activity in the housing sector appeared to have flattened out in recent
months. Sales of both new and existing homes had turned down, while starts of
single-family homes were about unchanged despite the substantial reduction in
inventories of unsold new homes. Some of the recent weakness in sales might have
been due to transactions that had been pulled forward in anticipation of the
originally scheduled expiration of the tax credit for first-time homebuyers in
November 2009; nonetheless, the underlying pace of housing demand likely
remained weak. The slowdown in sales notwithstanding, housing demand was being
supported by low interest rates for conforming fixed-rate 30-year mortgages and
reportedly by a perception that real estate values were near their trough.
Real spending on equipment and software increased at a solid pace in the
fourth quarter of 2009 and apparently rose further early in the first quarter of
2010. Business outlays for motor vehicles seemed to be holding up after a sharp
increase in the fourth quarter, purchases of high-tech equipment appeared to be
rising briskly, and incoming data pointed to some firming in outlays on other
equipment. The recent gains in investment spending were consistent with
improvements in many indicators of business demand. In contrast, conditions in
the nonresidential construction sector generally remained poor. Real outlays on
structures outside of the drilling and mining sector fell again in the fourth
quarter, and nominal expenditures dropped further in January. The weakness was
widespread across categories and likely reflected rising vacancy rates, falling
property prices, and difficult financing conditions for new projects. However,
real spending on drilling and mining structures increased strongly in response
to the earlier rebound in oil and natural gas prices.
The pace of inventory liquidation slowed considerably in late 2009. As
measured in the national income and product accounts, real nonfarm inventories
excluding motor vehicles were drawn down at a much slower pace in the fourth
quarter than in each of the preceding two quarters. Available data for January
indicated a further small liquidation of real stocks early this year in the
manufacturing and wholesale trade sectors. The ratio of book-value inventories
to sales (excluding motor vehicles and parts) edged down again in January and
stood well below the recent peak recorded near the end of 2008. Inventories
remained elevated for equipment, materials, and, to a lesser degree,
construction supplies, while inventories of consumer goods and business supplies
appeared to be low relative to demand.
Although rising energy prices continued to boost overall consumer price
inflation, consumer prices excluding food and energy were soft, as a wide
variety of goods and services exhibited persistently low inflation or outright
price declines. On a 12-month change basis, core personal consumption
expenditures (PCE) price inflation slowed in January 2010 compared with a year
earlier, as a marked and fairly widespread deceleration in market-based core PCE
prices was partly offset by an acceleration in nonmarket prices. Survey
expectations for near-term inflation were unchanged over the intermeeting
period; median longer-term inflation expectations edged down to near the lower
end of the narrow range that prevailed over the previous few years. With regard
to labor costs, the revised data on wages and salaries showed that last year's
deceleration in hourly compensation was even sharper than was evident at the
January meeting.
The U.S. international trade deficit widened in December but narrowed
slightly in January, ending the period a little larger. Both exports and imports
rose sharply in December before pulling back somewhat the following month. For
the period as a whole, the rise in exports was broadly based, with notable gains
in aircraft and industrial supplies. Oil and other industrial supplies accounted
for much of the increase in imports over the two months, while purchases of
consumer products declined.
Economic performance in the advanced foreign economies was mixed in the
fourth quarter, with real gross domestic product (GDP) advancing sharply in
Canada and Japan but rising only slightly in the euro area and the United
Kingdom. That divergence appeared to have persisted in the first quarter, as
indicators pointed to continued rapid economic growth in Canada and moderate
expansion in Japan but somewhat anemic growth in Europe. In the emerging market
economies, rebounding global trade, inventory restocking, and increased domestic
demand supported generally robust fourth-quarter growth. Continued rapid
expansion in China and several other Asian economies offset slowdowns elsewhere
in the region. In Latin America, Mexican activity was buoyed by rising
manufacturing and exports to the United States, while Brazil's economy again
grew briskly. Headline consumer price inflation picked up around the world over
the past two months, principally reflecting increases in food and energy prices.
Excluding food and energy, consumer prices were generally more subdued.
Staff Review of the Financial Situation
The decision by
the Federal Open Market Committee (FOMC) at the January meeting to keep the
target range for the federal funds rate unchanged and to retain the "extended
period" language in the statement was widely anticipated by market participants.
However, investors reportedly read the statement's characterization of the
economic outlook as somewhat more upbeat than they had anticipated, and
Eurodollar futures rates rose a bit in response. The changes to the terms for
primary credit and the Term Auction Facility that were announced on February 18
resulted in a small increase in near-term futures rates, but this reaction
proved short lived, as the statement and subsequent Federal Reserve
communications--including the Chairman's semiannual congressional
testimony--emphasized that the modifications were technical adjustments and did
not signal any near-term shifts in the overall stance of monetary policy.
On balance, incoming economic data led investors to mark down the expected
path of the federal funds rate over the intermeeting period. By contrast, yields
on 2-year and 10-year nominal Treasury securities edged up, on net, over the
period. Yields on Treasury inflation-protected securities (TIPS) rose at all
maturities, reportedly buoyed by investor anticipation of heavier TIPS issuance
and by reduced demand for TIPS by retail investors. Reflecting these
developments, inflation compensation--the difference between nominal yields and
TIPS yields for a given term to maturity--declined over the period, a move that
was supported by the somewhat weaker-than-expected economic data and the
publication of lower-than-expected readings on consumer prices.
Conditions in short-term funding markets remained generally stable over the
intermeeting period. Spreads between London interbank offered rates (Libor) and
overnight index swap (OIS) rates at one- and three-month maturities stayed low,
while six-month spreads edged down somewhat further. Spreads of rates on
A2/P2-rated commercial paper and on AA-rated asset-backed commercial paper over
the AA nonfinancial rate were also little changed at low levels. The Federal
Reserve continued to taper its large-scale asset purchases and wind down the
emergency lending facilities with no apparent adverse effects on financial
markets or institutions.
Broad stock price indexes rose, on net, over the intermeeting period, boosted
in part by favorable earnings reports from the retail sector. Bank equity prices
outperformed the broader equity markets. Option-implied volatility on the
S&P 500 index dropped back to post-crisis lows after increasing earlier in
the period on concerns about Chinese monetary policy tightening and fiscal
strains in Europe. Nonetheless, the gap between the staff's estimate of the
expected real equity return over the next 10 years for S&P 500 firms and the
real 10-year Treasury yield--a rough measure of the equity risk
premium--remained well above its average over the past decade. Yields on
investment-grade corporate bonds, as well as their spreads over yields on
comparable-maturity Treasury securities, were about unchanged over the
intermeeting period; investment-grade risk spreads were near the levels that
prevailed late in 2007. Yields and spreads on speculative-grade bonds edged
down, and secondary-market prices of leveraged loans rose further.
Overall, net debt financing by nonfinancial firms was about zero over the
first two months of 2010, consistent with firms' weak demand for credit and
banks' tight credit policies. Gross public equity issuance by nonfinancial firms
was robust in the fourth quarter of 2009. Since the turn of the year, gross
public equity issuance by nonfinancial firms slowed somewhat, while
announcements of both new share repurchase programs and cash-financed mergers
and acquisitions picked up. Public equity issuance by financial firms declined
in January and February following very strong issuance in December, when several
large banks issued equity to facilitate the repayment of capital received under
the Troubled Asset Relief Program. Gross bond issuance by financial firms
remained solid. The contraction in commercial mortgage debt accelerated in the
fourth quarter. The dollar value of commercial real estate sales remained very
low in February, and the share of properties sold at a nominal loss inched
higher. The delinquency rate on commercial mortgages in securitized pools
increased in January, and the delinquency rate on commercial mortgages at
commercial banks rose in the fourth quarter. The percentage of delinquent
construction loans at banks also ticked higher in the fourth quarter.
Nonetheless, indexes of commercial mortgage credit default swaps changed little,
on balance, over the intermeeting period.
Since the January meeting, yields and spreads on agency MBS were little
changed despite the continued tapering of the Federal Reserve's purchases of
these securities, and residential mortgage interest rates and spreads were
roughly flat. Net issuance of MBS by Fannie Mae and Freddie Mac remained subdued
through the end of January. Consumer credit expanded in January, its first
increase since January 2009. Despite low and stable spreads on consumer
asset-backed securities (ABS), the amount of ABS issued in the first two months
of the year was somewhat below that in the fourth quarter, reflecting the very
weak pace of consumer credit originations late last year. The spread of credit
card interest rates over two-year Treasury yields ticked up in January, while
spreads on new auto loans declined slightly, on net, over the intermeeting
period. Delinquency rates on credit card loans in securitized pools and on auto
loans at captive finance companies remained elevated in January but were down a
bit from their recent peaks.
Total bank credit contracted substantially in January and February. Banks'
securities holdings declined at a modest pace after several months of steady
growth, and total loans on banks' books continued to drop. Commercial and
industrial (C&I) loans continued falling, as spreads of interest rates on
C&I loans over comparable-maturity market instruments climbed further in the
first quarter and nonfinancial firms' need for external finance apparently
remained subdued. Commercial real estate loans also posted significant declines.
Household loans on banks' books contracted as well, in part because of a pickup
in bank securitizations of first-lien residential mortgages with the
government-sponsored enterprises in February. Consumer loans originated by banks
declined, primarily reflecting a large drop in credit card loans. In contrast,
other consumer loans--including auto, student, and tax advance loans--were
roughly flat during January and February.
M2 decreased in January, owing partly to a contraction in liquid deposits.
Many institutions opted out of the Federal Deposit Insurance Corporation's
Transaction Account Guarantee Program because of the higher fees associated with
participation after year-end, reportedly driving depositors to transfer funds
out of transaction accounts and into alternative investments outside of M2. M2
expanded in February, however, as liquid deposits resumed their growth. Small
time deposits and retail money market mutual funds contracted in January and, to
a lesser extent, in February, while currency declined a bit in January but
advanced notably in February. The monetary base rose in both months, as the
increase in reserve balances resulting from the ongoing large-scale asset
purchases by the Federal Reserve more than offset the contraction in balances
associated with the decline in credit outstanding under the System's liquidity
and credit facilities.
Movements in foreign financial markets since the January meeting were
importantly influenced by concerns over fiscal problems in Greece. Spreads on
Greek government debt relative to German bunds widened appreciably before
falling back as press reports indicated that euro-area countries were discussing
a possible aid package for Greece and the Greek government announced further
deficit reduction measures. Spreads on debt issued by several other European
countries followed a similar pattern over the intermeeting period. The Bank of
England (BOE) and the European Central Bank (ECB) held rates steady during the
period, and the BOE elected not to expand its Asset Purchase Facility, which
reached its limit at the end of January. In early March, the ECB announced
several steps to normalize its provision of liquidity. Equity prices in most
foreign countries were up moderately since the January FOMC meeting. Likely
reflecting the concerns about Greece as well as weak economic data in Europe,
the dollar appreciated notably against sterling and the euro over the
intermeeting period. However, the dollar declined against most emerging market
currencies, which were buoyed by brightening growth prospects, leaving the broad
trade-weighted value of the dollar down a bit since the January meeting.
Staff Economic Outlook
In the forecast prepared for the
March FOMC meeting, the staff's outlook for real economic activity was broadly
similar to that at the time of the January meeting. In particular, the staff
continued to anticipate a moderate pace of economic recovery over the next two
years, reflecting the accommodative stance of monetary policy and a further
diminution of the factors that had weighed on spending and production since the
onset of the financial crisis. The staff did make modest downward adjustments to
its projections for real GDP growth in response to unfavorable news on housing
activity, unexpectedly weak spending by state and local governments, and a
substantial reduction in the estimated level of household income in the second
half of 2009. The staff's forecast for the unemployment rate at the end of 2011
was about the same as in its previous projection.
Recent data on consumer prices and unit labor costs led the staff to revise
down slightly its projection for core PCE price inflation for 2010 and 2011; as
before, core inflation was projected to be quite subdued at rates below last
year's pace. Although increased oil prices had boosted overall inflation over
recent months, the staff anticipated that consumer prices for energy would
increase more slowly going forward, consistent with quotes on oil futures
contracts. Consequently, total PCE price inflation was projected to run a little
above core inflation this year and then edge down to the same rate as core
inflation in 2011.
Participants' Views on Current Conditions and the Economic
Outlook
In their discussion of the economic situation and outlook,
participants agreed that economic activity continued to strengthen and that the
labor market appeared to be stabilizing. Incoming information on economic
activity received over the intermeeting period was somewhat mixed but generally
confirmed that the economic recovery was likely to proceed at a moderate pace.
On the positive side, recent data pointed to significant gains in retail sales,
a substantial pickup in business spending on equipment and software, and a
further expansion of goods exports. Moreover, the latest labor market readings
had been mildly encouraging, with a considerable increase in temporary
employment, especially in the manufacturing and information technology sectors.
However, housing starts had remained flat at a depressed level, investment in
nonresidential structures was still declining, and state and local government
expenditures were being depressed by lower revenues. Moreover, consumer
sentiment continued to be damped by very weak labor market conditions, and firms
remained reluctant to add to payrolls or to commit to new capital projects.
Participants saw recent inflation readings as suggesting a slightly greater
deceleration in consumer prices than had been expected. In light of stable
longer-term inflation expectations and the likely continuation of substantial
resource slack, they generally anticipated that inflation would be subdued for
some time.
Participants agreed that financial market conditions remained supportive of
economic growth. Spreads in short-term funding markets were near pre-crisis
levels, and risk spreads on corporate bonds and measures of implied volatility
in equity markets were broadly consistent with historical norms given the
outlook for the economy. Participants were also reassured by the absence of any
signs of renewed strains in financial market functioning as a consequence of the
Federal Reserve's winding down of its special liquidity facilities. In contrast,
bank lending was still contracting and interest rates on many bank loans had
risen further in recent months. Participants anticipated that credit conditions
would gradually improve over time, and they noted the possibility of a
beneficial feedback loop in which the economic recovery would contribute to
stronger bank balance sheets and so to an increased availability of credit to
households and small businesses, which would in turn help boost the economy
further.
While participants saw incoming information as broadly consistent with
continued strengthening of economic activity, they also highlighted a variety of
factors that would be likely to restrain the overall pace of recovery,
especially in light of the waning effects of fiscal stimulus and inventory
rebalancing over coming quarters. While recent data pointed to a noticeable
pickup in the pace of consumer spending during the first quarter, participants
agreed that household spending going forward was likely to remain constrained by
weak labor market conditions, lower housing wealth, tight credit, and modest
income growth. For example, real disposable personal income in January was
virtually unchanged from a year earlier and would have been even lower in the
absence of a substantial rise in federal transfer payments to households.
Business spending on equipment and software picked up substantially over recent
months, but anecdotal information suggested that this pickup was driven mainly
by increased spending on maintaining existing capital and updating technology
rather than expanding capacity. The continued gains in manufacturing production
were bolstered by growing demand from foreign trading partners, especially
emerging market economies. However, a few participants noted the possibility
that fiscal retrenchment in some foreign countries could trigger a slowdown of
those economies and hence weigh on the demand for U.S. exports.
Some labor market indicators displayed positive signals over the intermeeting
period, including a pickup in temporary employment and increased job postings.
Indeed, nonfarm payrolls might well have increased in February in the absence of
weather disruptions. Nevertheless, participants were concerned about the
scarcity of job openings, the elevated level of unemployment, and the extent of
longer-term unemployment, which was seen as potentially leading to the loss of
worker skills. Moreover, the downward trend in initial unemployment insurance
claims appeared to have leveled off in recent weeks, while hiring remained at
historically low rates. Information from business contacts and evidence from
regional surveys generally underscored the degree to which firms' reluctance to
add to payrolls or start large capital projects reflected their concerns about
the economic outlook and uncertainty regarding future government policies. A
number of participants pointed out that the economic recovery could not be
sustained over time without a substantial pickup in job creation, which they
still anticipated but had not yet become evident in the data.
Participants were also concerned that activity in the housing sector appeared
to be leveling off in most regions despite various forms of government support,
and they noted that commercial and industrial real estate markets continued to
weaken. Indeed, housing sales and starts had flattened out at depressed levels,
suggesting that previous improvements in those indicators may have largely
reflected transitory effects from the first-time homebuyer tax credit rather
than a fundamental strengthening of housing activity. Participants indicated
that the pace of foreclosures was likely to remain quite high; indeed, recent
data on the incidence of seriously delinquent mortgages pointed to the
possibility that the foreclosure rate could move higher over coming quarters.
Moreover, the prospect of further additions to the already very large inventory
of vacant homes posed downside risks to home prices.
Participants referred to a wide array of evidence as indicating that
underlying inflation trends remained subdued. The latest readings on core
inflation--which exclude the relatively volatile prices of food and energy--were
generally lower than they had anticipated, and with petroleum prices having
leveled out, headline inflation was likely to come down to a rate close to that
of core inflation over coming months. While the ongoing decline in the implicit
rental cost for owner-occupied housing was weighing on core inflation, a number
of participants observed that the moderation in price changes was widespread
across many categories of spending. This moderation was evident in the
appreciable slowing of inflation measures such as trimmed means and
medians, which exclude the most extreme price movements in each period.
In discussing the inflation outlook, participants took note of signs that
inflation expectations were reasonably well anchored, and most agreed that
substantial resource slack was continuing to restrain cost pressures. Measures
of gains in nominal compensation had slowed, and sharp increases in productivity
had pushed down producers' unit labor costs. Anecdotal information indicated
that planned wage increases were small or nonexistent and suggested that large
margins of underutilized capital and labor and a highly competitive pricing
environment were exerting considerable downward pressure on price adjustments.
Survey readings and financial market data pointed to a modest decline in
longer-term inflation expectations over recent months. While all participants
anticipated that inflation would be subdued over the near term, a few noted that
the risks to inflation expectations and the medium-term inflation outlook might
be tilted to the upside in light of the large fiscal deficits and the
extraordinarily accommodative stance of monetary policy.
Committee Policy Action
In their discussion of monetary
policy for the period ahead, members agreed that it would be appropriate to
maintain the target range of 0 to 1/4 percent for the federal funds rate and to
complete the Committee's previously announced purchases of $1.25 trillion of
agency MBS and about $175 billion of agency debt by the end of March. Nearly all
members judged that it was appropriate to reiterate the expectation that
economic conditions--including low levels of resource utilization, subdued
inflation trends, and stable inflation expectations--were likely to warrant
exceptionally low levels of the federal funds rate for an extended period, but
one member believed that communicating such an expectation would create
conditions that could lead to financial imbalances. A number of members noted
that the Committee's expectation for policy was explicitly contingent on the
evolution of the economy rather than on the passage of any fixed amount of
calendar time. Consequently, such forward guidance would not limit the
Committee's ability to commence monetary policy tightening promptly if evidence
suggested that economic activity was accelerating markedly or underlying
inflation was rising notably; conversely, the duration of the extended period
prior to policy firming might last for quite some time and could even increase
if the economic outlook worsened appreciably or if trend inflation appeared to
be declining further. A few members also noted that at the current juncture the
risks of an early start to policy tightening exceeded those associated with a
later start, because the Committee could be flexible in adjusting the magnitude
and pace of tightening in response to evolving economic circumstances; in
contrast, its capacity for providing further stimulus through conventional
monetary policy easing continued to be constrained by the effective lower bound
on the federal funds rate.
Members noted the importance of continued close monitoring of financial
markets and institutions--including asset prices, levels of leverage, and
underwriting standards--to help identify significant financial imbalances at an
early stage. At the time of the meeting the information collected in this
process, including that by supervisory staff, had not revealed emerging
misalignments in financial markets or widespread instances of excessive
risk-taking. All members agreed that the Committee would continue to monitor the
economic outlook and financial developments and would employ its policy tools as
necessary to promote economic recovery and price stability.
In light of the improved functioning of financial markets, Committee members
agreed that it would be appropriate for the statement to be released following
the meeting to indicate that the previously announced schedule for closing the
Term Asset-Backed Securities Loan Facility was being maintained. The Committee
also discussed possible approaches for formulating and communicating key
elements of its strategy for removing extraordinary monetary policy
accommodation at the appropriate time. No decisions about the Committee's exit
strategy were made at this meeting, but participants agreed to give further
consideration to these issues at a later date.
At the conclusion of the discussion, the Committee voted to authorize and
direct the Federal Reserve Bank of New York, until it was instructed otherwise,
to execute transactions in the System Account in accordance with the following
domestic policy directive:
"The Federal Open Market Committee seeks monetary and financial
conditions that will foster price stability and promote sustainable growth in
output. To further its long-run objectives, the Committee seeks conditions in
reserve markets consistent with federal funds trading in a range from 0 to 1/4
percent. The Committee directs the Desk to complete the execution of its
purchases of about $1.25 trillion of agency MBS and of about $175 billion in
housing-related agency debt by the end of March. The Committee directs the
Desk to engage in dollar roll transactions as necessary to facilitate
settlement of the Federal Reserve's agency MBS transactions. The System Open
Market Account Manager and the Secretary will keep the Committee informed of
ongoing developments regarding the System's balance sheet that could affect
the attainment over time of the Committee's objectives of maximum employment
and price stability."
The vote encompassed approval of the statement below to be released at 2:15
p.m.:
"Information received since the Federal Open Market Committee met in
January suggests that economic activity has continued to strengthen and that
the labor market is stabilizing. Household spending is expanding at a moderate
rate but remains constrained by high unemployment, modest income growth, lower
housing wealth, and tight credit. Business spending on equipment and software
has risen significantly. However, investment in nonresidential structures is
declining, housing starts have been flat at a depressed level, and employers
remain reluctant to add to payrolls. While bank lending continues to contract,
financial market conditions remain supportive of economic growth. Although the
pace of economic recovery is likely to be moderate for a time, the Committee
anticipates a gradual return to higher levels of resource utilization in a
context of price stability.
With substantial resource slack continuing to restrain cost pressures and
longer-term inflation expectations stable, inflation is likely to be subdued
for some time.
The Committee will maintain the target range for the federal funds rate at
0 to 1/4 percent and continues to anticipate that economic conditions,
including low rates of resource utilization, subdued inflation trends, and
stable inflation expectations, are likely to warrant exceptionally low levels
of the federal funds rate for an extended period. To provide support to
mortgage lending and housing markets and to improve overall conditions in
private credit markets, the Federal Reserve has been purchasing $1.25 trillion
of agency mortgage-backed securities and about $175 billion of agency debt;
those purchases are nearing completion, and the remaining transactions will be
executed by the end of this month. The Committee will continue to monitor the
economic outlook and financial developments and will employ its policy tools
as necessary to promote economic recovery and price stability.
In light of improved functioning of financial markets, the Federal Reserve
has been closing the special liquidity facilities that it created to support
markets during the crisis. The only remaining such program, the Term
Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for
loans backed by new-issue commercial mortgage-backed securities and on March
31 for loans backed by all other types of collateral."
Voting for this action: Ben Bernanke, William C. Dudley,
James Bullard, Elizabeth Duke, Donald L. Kohn, Sandra Pianalto, Eric Rosengren,
Daniel K. Tarullo, and Kevin Warsh.
Voting against this action: Thomas M. Hoenig.
Mr. Hoenig dissented because he believed it was no longer advisable to
indicate that economic and financial conditions were likely to warrant
"exceptionally low levels of the federal funds rate for an extended period." Mr.
Hoenig was concerned that communicating such an expectation could lead to the
buildup of future financial imbalances and increase the risks to longer-run
macroeconomic and financial stability. Accordingly, Mr. Hoenig believed that it
would be more appropriate for the Committee to express its anticipation that
economic conditions were likely to warrant "a low level of the federal funds
rate for some time." Such a change in communication would provide the Committee
flexibility to begin raising rates modestly. He further believed that making
such an adjustment to the Committee's target for the federal funds rate sooner
rather than later would reduce longer-run risks to macroeconomic and financial
stability while continuing to provide needed support to the economic recovery.
It was agreed that the next meeting of the Committee would be held on
Tuesday-Wednesday, April 27-28, 2010. The meeting adjourned at 1:00 p.m. on
March 16, 2010.
Notation Vote
By notation vote completed on February 16,
2010, the Committee unanimously approved the minutes of the FOMC meeting held on
January 26-27, 2010.
_____________________________
Brian F.
Madigan
Secretary