EconoIndicators / Federal Open Market Committee Minutes

Federal Open Market Committee Minutes - Key Quotes

These developments, together with renewed strains in financial markets, suggested that growth in late 2007 and during 2008 was likely to be somewhat more sluggish than participants had indicated in their October projections….

Recent readings on inflation generally were seen as slightly less favorable than in earlier months, partly due to upward revisions to previously published data.

Technorati Tags: FOMC, Fed, Federal, Reserve, inflation

Page 1
Minutes of the Federal Open Market Committee
December 11, 2007
A meeting of the Federal Open Market Committee was
held in the offices of the Board of Governors of the
Federal Reserve System in Washington, D.C., on Tuesday,
December 11, 2007, at 8:00 a.m.
PRESENT:
Mr. Bernanke, Chairman
Mr. Geithner, Vice Chairman
Mr. Evans
Mr. Hoenig
Mr. Kohn
Mr. Kroszner
Mr. Mishkin
Mr. Poole
Mr. Rosengren
Mr. Warsh
Ms. Cumming, Mr. Fisher, Ms. Pianalto, and
Messrs. Plosser and Stern, Alternate Members
of the Federal Open Market Committee
Messrs. Lacker and Lockhart, and Ms. Yellen,
Presidents of the Federal Reserve Banks of
Richmond, Atlanta, and San Francisco, respectively
Mr. Madigan, Secretary and Economist
Ms. Danker, Deputy Secretary
Ms. Smith, Assistant Secretary
Mr. Skidmore, Assistant Secretary
Mr. Alvarez, General Counsel
Mr. Baxter, Deputy General Counsel
Mr. Sheets, Economist
Mr. Stockton, Economist
Messrs. Clouse, Connors, Fuhrer, Kamin, Rasche,
Sellon, Slifman, Sullivan, and Wilcox, Associate
Economists
Mr. Dudley, Manager, System Open Market Account
Mr. Struckmeyer, Deputy Staff Director, Office of
Staff Director for Management
Mr. English, Senior Associate Director, Division of
Monetary Affairs, Board of Governors
Ms. Liang and Mr. Wascher, Associate Directors,
Division of Research and Statistics, Board of
Governors
Mr. Blanchard, Assistant to the Board, Office of
Board Members, Board of Governors
Mr. Meyer, Visiting Reserve Bank Officer, Division
of Monetary Affairs, Board of Governors
Mr. Small, Project Manager, Division of Monetary
Affairs, Board of Governors
Mr. Luecke, Senior Financial Analyst, Division of
Monetary Affairs, Board of Governors
Ms. Low, Open Market Secretariat Specialist, Division
of Monetary Affairs, Board of Governors
Mr. Barron, First Vice President, Federal Reserve
Bank of Atlanta
Mr. Rosenblum, Executive Vice President, Federal
Reserve Bank of Dallas
Mr. Altig, Ms. Perelmuter, Messrs. Rolnick,
Weinberg, and Williams, Senior Vice Presidents,
Federal Reserve Banks of Atlanta, New
York, Minneapolis, Richmond, and San Francisco,
respectively
Messrs. Bryan and Yi, Vice Presidents, Federal Reserve
Banks of Cleveland and Philadelphia, respectively
Mr. McCarthy, Research Officer, Federal Reserve
Bank of New York
The Manager of the System Open Market Account
reported on recent developments in foreign exchange
markets. There were no open market operations in
foreign currencies for the System’s account in the period
since the previous meeting. The Manager also
reported on developments in domestic financial markets
and on System open market operations in government
securities and federal agency obligations during
the period since the previous meeting. By unanimous
vote, the Committee ratified these transactions.
Page 2 Federal Open Market Committee
The Committee approved a foreign currency swap arrangement
with the Swiss National Bank that paralleled
the arrangement with the European Central Bank approved
during the Committee’s conference call on December
6, 2007. With Mr. Poole dissenting, the Committee
voted to direct the Federal Reserve Bank of
New York to establish and maintain a reciprocal currency
(swap) arrangement for the System Open Market
Account with the Swiss National Bank in an amount
not to exceed $4 billion. The Committee authorized
associated draws of up to the full amount of $4 billion,
and the arrangement itself was authorized for a period
of up to 180 days unless extended by the FOMC. Mr.
Poole dissented because he viewed the swap agreement
as unnecessary in light of the size of the Swiss National
Bank’s dollar-denominated foreign exchange reserves.
The information reviewed at the December meeting
indicated that, after the robust gains of the summer,
economic activity decelerated significantly in the fourth
quarter. Consumption growth slowed, and survey
measures of sentiment dropped further. Many readings
from the business sector were also softer: Industrial
production fell in October, as did orders and shipments
of capital goods. Employment gains stepped down
during the four months ending in November from
their pace earlier in the year. Headline consumer price
inflation moved higher in September and October as
energy prices increased significantly; core inflation also
rose but remained moderate.
The slowing in private employment gains was due in
large part to the ongoing weakness in the housing market.
Employment in residential construction posted its
fourth month of sizable declines in November, and
employment in housing-related sectors such as finance,
real estate, and building-material and garden-supply
retailers continued to trend down. Elsewhere, factory
jobs declined again, while employment in most serviceproducing
industries continued to move up. Aggregate
hours of production or nonsupervisory workers edged
up in October and November. Some indicators from
the household survey also suggested softening in the
labor market, but the unemployment rate held steady at
4.7 percent through November.
Industrial production fell in October after small increases
in the previous two months. The index for
motor vehicles and parts fell for the third consecutive
month, and the index for construction supplies moved
down for the fourth straight month. Materials output
also declined in October, with production likely curbed
by weak demand from the construction and motor vehicle
sectors. Production in high-tech industries, however,
increased modestly, and commercial aircraft production
registered another solid gain. In November,
output appeared to have edged up in manufacturing
sectors (with the exception of the motor vehicles sector)
for which weekly physical product data were available.
After posting notable gains in the summer, real consumer
spending was nearly flat in September and October.
Spending on goods excluding motor vehicles
was little changed on net over that period. Spending
on services edged down, reflecting an extraordinarily
large drop in securities commissions in September.
The most recent readings on weekly chain store sales as
well as industry reports and surveys suggested subdued
gains in November and an uneven start to the holiday
shopping season. Sales of light motor vehicles in November
remained close to the pace that had prevailed
since the second quarter. Real disposable income was
about unchanged in September and October. The
Reuters/University of Michigan index of consumer
sentiment ticked down further in early December as
respondents took a more pessimistic view of the outlook
for their personal finances and for business conditions
in the year ahead.
In the housing market, new home sales were below
their third-quarter pace, and sales of existing homes
were flat in October following sharp declines in August
and September. These declines likely were exacerbated
by the deterioration in nonprime mortgage markets and
by the higher interest rates and tighter lending conditions
for jumbo loans. Single-family housing starts
stepped down again in October after substantial declines
in the June-September period. Yet, because of
sagging sales, builders made only limited progress in
paring down their substantial inventories. Single-family
permit issuance continued along the steep downward
trajectory that had begun two years earlier, which
pointed toward further slowing in homebuilding over
the near term. Multifamily starts rebounded in October
from an unusually low reading in September, and
the level of multifamily starts was near the midpoint of
the range in which this series had fluctuated over the
past ten years.
Real spending on equipment and software posted a
solid increase in the third quarter. In October, however,
orders and shipments of nondefense capital goods
excluding aircraft declined, suggesting that some decelMinutes
of the Meeting of December 11, 2007 Page 3
eration in spending was under way in the fourth quarter.
The October decline in orders and shipments was
led by weakness in the high-tech sector: Shipments of
computers and peripheral equipment declined while the
industrial production index for computers was flat; orders
and shipments for communications equipment
plunged. Some of that weakness may have been attributable
to temporary production disruptions stemming
from the wildfires in Southern California; cutbacks in
demand from large financial institutions affected by
market turmoil may have contributed as well. In the
transportation equipment category, purchases of medium
and heavy trucks changed little, and orders data
suggested that sales would remain near their current
levels in the coming months. Orders for equipment
outside high-tech and transportation rose in October,
but shipments were about flat, pointing to a weaker
fourth quarter for business spending after two quarters
of brisk increases. Some prominent surveys of business
conditions remained consistent with modest gains
in spending on equipment and software during the
fourth quarter, but other surveys were less sanguine. In
addition, although the cost of capital was little changed
for borrowers in the investment-grade corporate bond
market, costs for borrowers in the high-yield corporate
bond market were up significantly. In the third quarter,
corporate cash flows appeared to have dropped off,
leaving firms with diminished internally generated
funds for financing investment. Data available through
October suggested that nonresidential building activity
remained vigorous.
Real nonfarm inventory investment excluding motor
vehicles increased slightly faster in the third quarter
than in the second quarter. Outside of motor vehicles,
the ratio of book-value inventories to sales had ticked
up slightly in September but remained near the low end
of its range in recent years. Book-value estimates of
the inventory investment of manufacturers—the only
inventory data available beyond the third quarter—
were up in October at about the third-quarter pace.
The U.S. international trade deficit narrowed slightly in
September as an increase in exports more than offset
higher imports. The September gain in exports primarily
reflected higher exports of goods; services exports
recorded moderate growth. Exports of agricultural
products exhibited particularly robust growth, with
both higher prices and greater volumes. Exports of
industrial supplies and consumer goods also moved up
smartly in September. Automotive products exports, in
contrast, were flat, and capital goods exports fell, led by
a decline in aircraft. The increase in imports primarily
reflected higher imports of capital goods, with imports
of computers showing particularly strong growth. Imports
of automotive products, consumer goods, and
services also increased. Imports of petroleum, however,
were flat, and imports of industrial supplies fell.
Output growth in the advanced foreign economies
picked up in the third quarter. In Japan, real output
rebounded, led by exports. In the euro area, GDP
growth returned to a solid pace in the third quarter on
the back of a strong recovery in investment. In Canada
and the United Kingdom, output growth moderated
but remained robust, as vigorous domestic demand was
partly offset by rapid growth of imports. Indicators of
fourth-quarter activity in the advanced foreign economies
were less robust on net. Confidence indicators
had deteriorated in most major economies in the wake
of the financial turmoil and remained relatively weak.
In November, the euro-area and U.K. purchasing managers
indexes for services were well below their level
over the first half of the year; nevertheless they pointed
to moderate expansion. Labor market conditions generally
remained relatively strong in recent months. Incoming
data on emerging-market economies were positive
on balance. Overall, growth in emerging Asia
moderated somewhat in the third quarter from its double-
digit pace in the second quarter, but remained
strong. Economic growth was also solid in Latin
America, largely reflecting stronger-than-expected activity
in Mexico.
In the United States, headline consumer price inflation
increased in September and October from its low rates
in the summer as the surge in crude oil prices began to
be reflected in retail energy prices. In addition, though
the rise in food prices in October was slower than in
August and September, it remained above that of core
consumer prices. Excluding food and energy, inflation
was moderate, although it was up from its low rates in
the spring. The pickup in core consumer inflation over
this period reflected an acceleration in some prices that
were unusually soft last spring, such as those for apparel,
prescription drugs, and medical services, as well
as nonmarket prices. On a twelve-month-change basis,
core consumer price inflation was down noticeably
from a year earlier. In October, the producer price
index for core intermediate materials moved up only
slightly for a second month, and the twelve-month increase
in these prices was considerably below that of
the year-earlier period. This pattern reflected, in part, a
deceleration in the prices of a wide variety of construcPage
4 Federal Open Market Committee
tion materials, such as cement and gypsum, and in the
prices of some metal products. In response to rising
energy prices, household survey measures of expectations
for year-ahead inflation picked up in November
and then edged higher in December. Households’
longer-term inflation expectations also edged up in
both November and December. Average hourly earnings
increased faster in November than in the previous
two months. Over the twelve months that ended in
November, however, this wage measure rose a bit more
slowly than over the previous twelve months.
At its October meeting, the FOMC lowered its target
for the federal funds rate 25 basis points, to 4½ percent.
The Board of Governors also approved a 25 basis
point decrease in the discount rate, to 5 percent,
leaving the gap between the federal funds rate target
and the discount rate at 50 basis points. The Committee’s
statement noted that, while economic growth was
solid in the third quarter and strains in financial markets
had eased somewhat on balance, the pace of economic
expansion would likely slow in the near term,
partly reflecting the intensification of the housing correction.
The Committee indicated that its action, combined
with the policy action taken in September, should
help forestall some of the adverse effects on the
broader economy that might otherwise arise from the
disruptions in financial markets and should promote
moderate growth over time. Readings on core inflation
had improved modestly during the year, but the statement
noted that recent increases in energy and commodity
prices, among other factors, may put renewed
upward pressure on inflation. In this context, the
Committee judged that some inflation risks remained
and indicated that it would continue to monitor inflation
developments carefully. The Committee also
judged that, after this action, the upside risks to inflation
roughly balanced the downside risks to growth.
The Committee said that it would continue to assess
the effects of financial and other developments on
economic prospects and would act as needed to foster
price stability and sustainable economic growth.
The Committee’s action at its October meeting was
largely expected by market participants, although the
assessment that the upside risks to inflation balanced
the downside risks to growth was not fully anticipated
and apparently led investors to revise up slightly the
expected path for policy. During the intermeeting period,
the release of the FOMC minutes and associated
summary of economic projections, as well as various
data releases, elicited only modest market reaction. In
contrast, markets were buffeted by concerns about the
potential adverse effects on credit availability and economic
growth of sizable losses at large financial institutions
and of financial market strains in general. Market
participants marked down their expected path for policy
substantially, and by the time of the December
meeting, investors were virtually certain of a rate cut.
Two-year Treasury yields fell on net over the intermeeting
period by an amount about in line with revisions to
policy expectations. Ten-year Treasury yields also declined,
but less than shorter-term yields. The steepening
of the yield curve was due mostly to sharply lower
short- and intermediate-term forward rates, consistent
with investors’ apparently more pessimistic outlook for
economic growth. TIPS yields fell less than their
nominal counterparts, implying modest declines in inflation
compensation both at the five-year and longer
horizons.
After showing some signs of improvement in late September
and October, conditions in financial markets
worsened over the intermeeting period. Heightened
worries about counterparty credit risk, balance sheet
constraints, and liquidity pressures affected interbank
funding markets and commercial paper markets, where
spreads over risk-free rates rose to levels that were, in
some cases, higher than those seen in August. Strains
in those markets were exacerbated by concerns related
to year-end pressures. In longer-term corporate markets,
both investment- and speculative-grade credit
spreads widened considerably; issuance slowed but remained
strong. In housing finance, subprime mortgage
markets stayed virtually shut, and spreads on jumbo
loans apparently widened further. Spreads on conforming
mortgage products also widened after reports
of losses and reduced capital ratios at the housingrelated
government-sponsored enterprises. Broadbased
equity indexes were volatile and ended the period
down noticeably. Financial stocks were especially hard
hit, dropping substantially more than the broad indexes.
Similar stresses were evident in the financial
markets of major foreign economies. The tradeweighted
foreign exchange value of the dollar against
major currencies moved up, on balance, over the intermeeting
period.
Debt in the domestic nonfinancial sector was estimated
to be increasing somewhat more slowly in the fourth
quarter than in the third quarter. Nonfinancial business
debt continued to expand strongly, supported by solid
bond issuance and by a small rebound in the issuance
of commercial paper. Bank loans outstanding also conMinutes
of the Meeting of December 11, 2007 Page 5
tinued to rise rapidly. Household mortgage debt was
expected to expand at a reduced rate in the fourth
quarter, reflecting softer home prices and declining
home sales, as well as a tightening in credit conditions
for some borrowers. Nonmortgage consumer credit in
the fourth quarter appeared to be expanding at a moderate
pace. In November, M2 growth picked up
slightly from its October rate. While liquid deposits
continued to grow slowly, heightened demand for
safety and liquidity appeared to boost holdings of retail
money market mutual funds. Small time deposits continued
to expand, likely in part due to high rates offered
by some depository institutions to attract retail deposits.
Currency outstanding was about flat in November.
In the forecast prepared for this meeting, the staff revised
down its estimate of growth in aggregate economic
activity in the fourth quarter. Although thirdquarter
real GDP was revised up sharply, most available
indicators of activity in the fourth quarter were
more downbeat than had previously been expected.
Faster inventory investment contributed importantly to
the upward revision to third-quarter real GDP, but part
of that upswing was expected to be unwound in the
fourth quarter. The available data for domestic final
sales also suggested a weaker fourth quarter than had
been anticipated. In particular, real personal consumption
expenditures had been about unchanged in September
and October, and the contraction in singlefamily
construction had intensified. Providing a bit of
an offset to these factors, however, was further improvement
in the external sector. The staff also
marked down its projection for the rise in real GDP
over the remainder of the forecast period. Real GDP
was anticipated to increase at a rate noticeably below its
potential in 2008. Conditions in financial markets had
deteriorated over the intermeeting period and were expected
to impose more restraint on residential construction
as well as consumer and business spending in
2008 than previously expected. In addition, compared
with the previous forecast, higher oil prices and lower
real income were expected to weigh on the pace of real
activity throughout 2008 and 2009. By 2009, however,
the staff projected that the drag from those factors
would lessen and that an improvement in mortgage
credit availability would lead to a gradual recovery in
the housing market. Accordingly, economic activity
was expected to increase at its potential rate in 2009.
The external sector was projected to continue to support
domestic economic activity throughout the forecast
period. Reflecting upward revisions to previously
published data, the forecast for core PCE price inflation
for 2007 was a bit higher than in the preceding
forecast; core inflation was projected to hold steady
during 2008 as the indirect effects of higher energy
prices on prices of core consumer goods and services
were offset by the slight easing of resource pressures
and the expected deceleration in the prices of nonfuel
imported goods. The forecast for headline PCE inflation
anticipated that retail energy prices would rise
sharply in the first quarter of 2008 and that food price
inflation would outpace core price inflation in the beginning
of the year. As pressures from these sources
lessened over the remainder of 2008 and in 2009, both
core and headline price inflation were projected to edge
down, and headline inflation was expected to moderate
to a pace slightly below core inflation.
In their discussion of the economic situation and outlook,
participants generally noted that incoming information
pointed to a somewhat weaker outlook for
spending than at the time of the October meeting. The
decline in housing had steepened, and consumer outlays
appeared to be softening more than anticipated,
perhaps indicating some spillover from the housing
correction to other components of spending. These
developments, together with renewed strains in financial
markets, suggested that growth in late 2007 and
during 2008 was likely to be somewhat more sluggish
than participants had indicated in their October projections.
Still, looking further ahead, participants continued
to expect that, aided by an easing in the stance of
monetary policy, economic growth would gradually
recover as weakness in the housing sector abated and
financial conditions improved, allowing the economy to
expand at about its trend rate in 2009. Participants
thought that recent increases in energy prices likely
would boost headline inflation temporarily, but with
futures prices pointing to a gradual decline in oil prices
and with pressures on resource utilization seen as likely
to ease a bit, most participants continued to anticipate
some moderation in core and especially headline inflation
over the next few years.
Participants discussed in detail the resurgence of
stresses in financial markets in November. The renewed
stresses reflected evidence that the performance
of mortgage-related assets was deteriorating further,
potentially increasing the losses that were being borne
in part by a number of major financial firms, including
money-center banks, housing-related governmentsponsored
enterprises, investment banks, and financial
guarantors. Moreover, participants recognized that
some lenders might be exposed to additional losses:
Page 6 Federal Open Market Committee
Delinquency rates on credit card loans, auto loans, and
other forms of consumer credit, while still moderate,
had increased somewhat, particularly in areas hard hit
by house price declines and mortgage defaults. Past
and prospective losses appeared to be spurring lenders
to tighten further the terms on new extensions of
credit, not just in the troubled markets for nonconforming
mortgages but, in some cases, for other forms
of credit as well. In addition, participants noted that
some intermediaries were facing balance sheet pressures
and could become constrained by concerns about
rating-agency or regulatory capital requirements.
Among other factors, banks were experiencing unanticipated
growth in loans as a result of continuing illiquidity
in the market for leveraged loans, persisting
problems in the commercial paper market that had
sparked draws on back-up lines of credit, and more
recently, consolidation of assets of off-balance-sheet
affiliates onto banks’ balance sheets.
Concerns about credit risk and the pressures on banks’
balance sheet capacity appeared to be contributing to
diminished liquidity in interbank markets and to a pronounced
widening in term spreads for periods extending
through year-end. A number of participants noted
some potential for the Federal Reserve’s new Term
Auction Facility and accompanying actions by other
central banks to ameliorate pressures in term funding
markets. Participants recognized, however, that uncertainties
about values of mortgage-related assets and
related losses, and consequently strains in financial
markets, could persist for quite some time.
Some participants cited more-positive aspects of recent
financial developments. A number of large financial
intermediaries had been able to raise substantial
amounts of new capital. Moreover, credit losses and
asset write-downs at regional and community banks
had generally been modest; these institutions typically
were not facing balance sheet pressures and reportedly
had not tightened lending standards appreciably, except
for those on real estate loans. And, although spreads
on corporate bonds had widened over the intermeeting
period, especially for speculative-grade issues, the cost
of credit to most nonfinancial firms remained relatively
low; nonfinancial firms outside of the real estate and
construction sectors generally reported that credit conditions,
while somewhat tighter, were not restricting
planned investment spending; and consumer credit
remained readily available for most households. Nonetheless,
participants agreed that heightened financial
stress posed increased downside risks to growth and
made the outlook for the economy considerably more
uncertain.
Participants noted the marked deceleration in consumer
spending in the national data. Real personal
consumption expenditures had shown essentially no
growth in September and October, suggesting that
tighter credit conditions, higher gasoline prices, and the
continuing housing correction might be restraining
growth in real consumer spending. Retailers reported
weaker results in many regions of the country, but in
some, retailers saw solid growth. Job growth rebounded
somewhat in October and November, and
participants expected continuing gains in employment
and income to support rising consumer spending,
though they anticipated slower growth of jobs, income,
and spending than in recent years. However, consumer
confidence recently had dropped by a sizable amount,
leading some participants to voice concerns that
household spending might increase less than currently
anticipated.
Recent data and anecdotal information indicated that
the housing sector was weaker than participants had
expected at the time of the Committee’s previous meeting.
In light of elevated inventories of unsold homes
and the higher cost and reduced availability of nonconforming
mortgage loans, participants agreed that the
housing correction was likely to be both deeper and
more prolonged than they had anticipated in October.
Moreover, rising foreclosures and the resulting increase
in the supply of homes for sale could put additional
downward pressure on prices, leading to a greater decline
in household wealth and potentially to further
disruptions in the financial markets.
Indicators of capital investment for the nation as a
whole suggested solid but appreciably less rapid growth
in business fixed investment during the fourth quarter
than the third. Participants reported that firms in some
regions and industries had indicated they would scale
back capital spending, while contacts in other parts of
the country or industries reported no such change.
Similarly, business sentiment had deteriorated in many
parts of the country, but in other areas firms remained
cautiously optimistic. Anecdotal evidence generally
suggested that inventories were not out of line with
desired levels. Even so, participants expected that inventory
accumulation would slow from its elevated
third-quarter pace. Several participants remarked that,
unlike residential real estate, commercial and industrial
real estate activity remained solid in their Districts. But
Minutes of the Meeting of December 11, 2007 Page 7
participants also noted the deterioration in the secondary
market for commercial real estate loans and the
possible effects of that development, should it persist,
on building activity.
The available data showed strong growth abroad and
solid gains in U.S. exports. Participants noted that rising
foreign demand was benefiting U.S. producers of
manufactured goods and agricultural products, in particular.
Exports were unlikely to continue growing at
the robust rate reported for the third quarter, but participants
anticipated that the combination of the weaker
dollar and still-strong, though perhaps less-rapid,
growth abroad would mean continued firm growth in
U.S. exports. Several participants observed, however,
that strong growth in foreign economies and U.S. exports
might not persist if global financial conditions
were to deteriorate further.
Recent readings on inflation generally were seen as
slightly less favorable than in earlier months, partly due
to upward revisions to previously published data.
Moreover, earlier increases in energy and food prices
likely would imply higher headline inflation in the next
few months, and past declines in the dollar would put
upward pressure on import prices. Some participants
said that higher input costs and rising prices of imports
were leading more firms to seek price increases for
goods and services. However, few business contacts
had reported unusually large wage increases. Downward
revisions to earlier compensation data, along with
the latest readings on compensation and productivity,
indicated only moderate pressure on unit labor costs.
With futures prices pointing to a gradual decline in oil
prices and with an anticipation of some easing of pressures
on resource utilization, participants generally continued
to see core PCE inflation as likely to trend down
a bit over the next few years, as in their October projections,
and headline inflation as likely to slow more
substantially from its currently elevated level. Nonetheless,
participants remained concerned about upside
risks to inflation stemming from elevated prices of energy
and non-energy commodities; some also cited the
weaker dollar. Participants agreed that continued stable
inflation expectations would be essential to achieving
and sustaining a downward trend to inflation, that wellanchored
expectations couldn’t be taken for granted,
and that policymakers would need to continue to watch
inflation expectations closely.
In the Committee’s discussion of monetary policy for
the intermeeting period, members judged that the softening
in the outlook for economic growth warranted
an easing of the stance of policy at this meeting. In
view of the further tightening of credit and deterioration
of financial market conditions, the stance of monetary
policy now appeared to be somewhat restrictive.
Moreover, the downside risks to the expansion, resulting
particularly from the weakening of the housing sector
and the deterioration in credit market conditions,
had risen. In these circumstances, policy easing would
help foster maximum sustainable growth and provide
some additional insurance against risks. At the same
time, members noted that policy had already been
eased by 75 basis points and that the effects of those
actions on the real economy would be evident only
with a lag. And some data, including readings on the
labor market, suggested that the economy retained forward
momentum. Members generally saw overall inflation
as likely to be lower next year, and core inflation as
likely to be stable, even if policy were eased somewhat
at this meeting; but they judged that some inflation
pressures and risks remained, including pressures from
elevated commodity and energy prices and the possibility
of upward drift in the public’s expectations of inflation.
Weighing these considerations, nearly all members
judged that a 25 basis point reduction in the
Committee’s target for the federal funds rate would be
appropriate at this meeting. Although members agreed
that the stance of policy should be eased, they also recognized
that the situation was quite fluid and the economic
outlook unusually uncertain. Financial stresses
could increase further, intensifying the contraction in
housing markets and restraining other forms of spending.
Some members noted the risk of an unfavorable
feedback loop in which credit market conditions restrained
economic growth further, leading to additional
tightening of credit; such an adverse development
could require a substantial further easing of policy.
Members also recognized that financial market conditions
might improve more rapidly than members expected,
in which case a reversal of some of the rate cuts
might become appropriate.
The Committee agreed that the statement to be released
after this meeting should indicate that economic
growth appeared to be slowing, reflecting the intensification
of the housing correction and some softening in
business and consumer spending, and that strains in
financial markets had increased. The characterization
of the inflation situation could be largely unchanged
from that of the previous meeting. Members agreed
that the resurgence of financial stresses in November
had increased uncertainty about the outlook. Given the
Page 8 Federal Open Market Committee
heightened uncertainty, the Committee decided to refrain
from providing an explicit assessment of the balance
of risks. The Committee agreed on the need to
remain exceptionally alert to economic and financial
developments and their effects on the outlook, and
members would be prepared to adjust the stance of
monetary policy if prospects for economic growth or
inflation were to worsen.
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 in the immediate future
seeks conditions in reserve markets consistent
with reducing the federal funds rate to an average
of around 4¼ percent.”
The vote encompassed approval of the statement below
to be released at 2:15 p.m.:
“The Federal Open Market Committee decided
today to lower its target for the federal funds
rate 25 basis points to 4¼ percent.
Incoming information suggests that economic
growth is slowing, reflecting the intensification
of the housing correction and some softening in
business and consumer spending. Moreover,
strains in financial markets have increased in recent
weeks. Today’s action, combined with the
policy actions taken earlier, should help promote
moderate growth over time.
Readings on core inflation have improved modestly
this year, but elevated energy and commodity
prices, among other factors, may put upward
pressure on inflation. In this context, the
Committee judges that some inflation risks remain,
and it will continue to monitor inflation
developments carefully.
Recent developments, including the deterioration
in financial market conditions, have increased
the uncertainty surrounding the outlook
for economic growth and inflation. The Committee
will continue to assess the effects of financial
and other developments on economic
prospects and will act as needed to foster price
stability and sustainable economic growth.
Votes for this action: Messrs. Bernanke, Geithner,
Evans, Hoenig, Kohn, Kroszner, Mishkin,
Poole, and Warsh.
Votes against this action: Mr. Rosengren.
Mr. Rosengren dissented because he regarded the
weakness in the incoming economic data and in the
outlook for the economy as warranting a more aggressive
policy response. In his view, the combination of a
deteriorating housing sector, slowing consumer and
business spending, high energy prices, and illfunctioning
financial markets suggested heightened risk
of continued economic weakness. In light of that possibility,
a more decisive policy response was called for
to minimize that risk. In any case, he felt that wellanchored
inflation expectations and the Committee’s
ability to reverse course on policy would limit the inflation
risks of a larger easing move, should the economy
instead prove significantly stronger than anticipated.
It was agreed that the next meeting of the Committee
would be held on Tuesday-Wednesday, January 29-30,
2008.
The meeting adjourned at 1:15 p.m.
Notation Vote
By notation vote completed on November 19, 2007,
the Committee unanimously approved the minutes of
the FOMC meeting held on October 30-31, 2007.
Conference Call
On December 6, 2007, in a joint session of the Federal
Open Market Committee and the Board of Governors,
Board members and Reserve Bank presidents reviewed
conditions in domestic and foreign financial markets
and discussed two proposals aimed at improving market
functioning. The first proposal was for the establishment
of a temporary Term Auction Facility (TAF),
which would provide term funding to eligible depository
institutions through an auction mechanism beginning
in mid-December. Meeting participants recognized
that a TAF would not address all of the factors
giving rise to stresses in money and credit markets, noMinutes
of the Meeting of December 11, 2007 Page 9
tably the ongoing concerns about credit quality and
balance sheet pressures. Nonetheless, most participants
viewed the TAF, which would provide liquidity
to more counterparties and against a broader range of
collateral than used for open market operations, as a
potentially useful tool. Some mentioned that a TAF
could help alleviate year-end pressures in money markets.
A few participants, however, questioned the need
for and the likely efficacy of the proposal, expressed
concerns about the longer-run incentive effects of a
TAF, and felt that the possible drawbacks could well
outweigh any benefits.∗ Participants generally regarded
the second proposal, to set up a foreign exchange swap
arrangement with the European Central Bank, as a
positive step in international cooperation to address
elevated pressures in short-term dollar funding markets.
At the conclusion of the discussion, with Mr. Poole
dissenting, the Committee voted to direct the Federal
∗ Secretary’s Note: The Board of Governors approved the
TAF via notation vote on December 10, 2007 after the staff
finalized its proposal for specifications of the TAF.
Reserve Bank of New York to establish and maintain a
reciprocal currency (swap) arrangement for the System
Open Market Account with the European Central
Bank in an amount not to exceed $20 billion. Within
that aggregate limit, draws of up to $10 billion were
authorized, and the arrangement itself was authorized
for a period of up to 180 days, unless extended by the
FOMC. Mr. Poole dissented because he viewed the
swap agreement as unnecessary in light of the size of
the European Central Bank’s dollar-denominated foreign
exchange reserves.
_____________________________
Brian F. Madigan
Secretary