FOMC Minutes 2.19

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Minutes of the Federal Open Market CommitteeJanuary 2829, 2014

A meeting of the Federal Open Market Committee washeld in the offices of the Board of Governors of the

Federal Reserve System in Washington, D.C., onTuesday, January 28, 2014, at 2:00 p.m. and continuedon Wednesday, January 29, 2014, at 9:00 a.m.

PRESENT:Ben Bernanke, ChairmanWilliam C. Dudley, Vice ChairmanRichard W. FisherNarayana KocherlakotaSandra PianaltoCharles I. PlosserJerome H. PowellJeremy C. SteinDaniel K. TarulloJanet L. Yellen

Christine Cumming, Charles L. Evans, Jeffrey M. Lack-er, Dennis P. Lockhart, and John C. Williams, Al-ternate Members of the Federal Open MarketCommittee

James Bullard, Esther L. George, and Eric Rosengren,Presidents of the Federal Reserve Banks of St.Louis, Kansas City, and Boston, respectively

William B. English, Secretary and EconomistMatthew M. Luecke, Deputy SecretaryMichelle A. Smith, Assistant SecretaryScott G. Alvarez, General CounselThomas C. Baxter, Deputy General CounselSteven B. Kamin, EconomistDavid W. Wilcox, Economist

James A. Clouse, Thomas A. Connors, Evan F.Koenig, Thomas Laubach, Michael P. Leahy,Loretta J. Mester, Paolo A. Pesenti, SamuelSchulhofer-Wohl, Mark E. Schweitzer, and William

Wascher, Associate Economists

Simon Potter, Manager, System Open Market Account

Lorie K. Logan, Deputy Manager, System Open Mar-ket Account

Michael S. Gibson, Director, Division of Banking Su-pervision and Regulation, Board of Governors

Nellie Liang, Director, Office of Financial Stability Pol-icy and Research, Board of Governors

Stephen A. Meyer and William Nelson, Deputy Direc-tors, Division of Monetary Affairs, Board of Gov-ernors

Jon W. Faust, Special Adviser to the Board, Office ofBoard Members, Board of Governors

Linda Robertson and David W. Skidmore, Assistants tothe Board, Office of Board Members, Board ofGovernors

Trevor A. Reeve, Senior Associate Director, Divisionof International Finance, Board of Governors

Joyce K. Zickler, Senior Adviser, Division of MonetaryAffairs, Board of Governors

Daniel M. Covitz and Michael T. Kiley, Associate Di-rectors, Division of Research and Statistics, Boardof Governors

Jane E. Ihrig, Deputy Associate Director, Division ofMonetary Affairs, Board of Governors

Edward Nelson, Assistant Director, Division of Mone-tary Affairs, Board of Governors; John J. Stevens,Assistant Director, Division of Research and Statis-tics, Board of Governors

Jeremy B. Rudd, Adviser, Division of Research andStatistics, Board of Governors

Dana L. Burnett, Section Chief, Division of MonetaryAffairs, Board of Governors

Burcu Duygan-Bump, Senior Project Manager, Divi-

sion of Monetary Affairs, Board of Governors

David H. Small, Project Manager, Division of Mone-tary Affairs, Board of Governors

Andrew Figura, Group Manager, Division of Researchand Statistics, Board of Governors

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Michele Cavallo, Senior Economist, Division of Inter-national Finance, Board of Governors

Yuriy Kitsul, Economist, Division of Monetary Affairs,Board of Governors

Randall A. Williams, Records Project Manager, Divi-sion of Monetary Affairs, Board of Governors

Kenneth C. Montgomery, First Vice President, FederalReserve Bank of Boston

David Altig, Glenn D. Rudebusch, and Daniel G. Sulli-van, Executive Vice Presidents, Federal ReserveBanks of Atlanta, San Francisco, and Chicago, re-spectively

Troy Davig, Geoffrey Tootell, and Christopher J. Wal-

ler, Senior Vice Presidents, Federal Reserve Banksof Kansas City, Boston, and St. Louis, respectively

Robert L. Hetzel, Senior Economist, Federal ReserveBank of Richmond

Annual Organizational MattersIn the agenda for this meeting, it was reported that ad-vices of the election of the following members and al-ternate members of the Federal Open Market Commit-tee (the Committee) for a term beginning January 28,2014, had been received and that these individuals hadexecuted their oaths of office.

The elected members and alternate members were asfollows:

William C. Dudley, President of the Federal ReserveBank of New York, with Christine Cumming, FirstVice President of the Federal Reserve Bank of NewYork, as alternate

Charles I. Plosser, President of the Federal ReserveBank of Philadelphia, with Jeffrey M. Lacker, Presidentof the Federal Reserve Bank of Richmond, as alternate

Sandra Pianalto, President of the Federal Reserve Bankof Cleveland, with Charles L. Evans, President of theFederal Reserve Bank of Chicago, as alternate____________________ Versions of the current Committee documents areavailable at www.federalreserve.gov/monetarypolicy/rules_authorizations.htm.

Richard W. Fisher, President of the Federal ReserveBank of Dallas, with Dennis P. Lockhart, President ofthe Federal Reserve Bank of Atlanta, as alternate

Narayana Kocherlakota, President of the Federal Re-serve Bank of Minneapolis, with John C. Williams,

President of the Federal Reserve Bank of San Francis-co, as alternate

By unanimous vote, the Committee selected BenBernanke to serve as Chairman through January 31,2014, and Janet L. Yellen to serve as Chairman, effec-tive February 1, 2014, until the selection of her succes-sor at the first regularly scheduled meeting of theCommittee in 2015.

By unanimous vote, the following officers of theCommittee were selected to serve until the selection of

their successors at the first regularly scheduled meetingof the Committee in 2015:

William C. Dudley Vice ChairmanWilliam B. English Secretary and EconomistMatthew M. Luecke Deputy SecretaryMichelle A. Smith Assistant SecretaryScott G. Alvarez General CounselThomas C. Baxter Deputy General CounselRichard M. Ashton Assistant General CounselSteven B. Kamin EconomistDavid W. Wilcox Economist

James A. ClouseThomas A. ConnorsEvan F. KoenigThomas LaubachMichael P. LeahyLoretta J. MesterPaolo A. PesentiSamuel Schulhofer-WohlMark E. SchweitzerWilliam Wascher Associate Economists

By unanimous vote, the Federal Reserve Bank of New

York was selected to execute transactions for the Sys-tem Open Market Account.

By unanimous vote, the Authorization for DomesticOpen Market Operations was approved with anamendment that makes the structure of paragraphs 1.Aand 1.B more similar. The Guidelines for the Conductof System Open Market Operations in Federal-AgencyIssues remained suspended.

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AUTHORIZATION FOR DOMESTIC OPENMARKET OPERATIONS(As amended effective January 28, 2014)

1. The Federal Open Market Committee authorizesand directs the Federal Reserve Bank of New York, to

the extent necessary to carry out the most recent do-mestic policy directive adopted at a meeting of theCommittee:

A. To buy or sell in the open market U.S. govern-ment securities, including securities of the FederalFinancing Bank, and securities that are direct obliga-tions of, or fully guaranteed as to principal and inter-est by, any agency of the United States, from or tosecurities dealers and foreign and international ac-counts maintained at the Federal Reserve Bank ofNew York, on a cash, regular, or deferred deliverybasis, for the System Open Market Account at mar-

ket prices, and, for such Account, to exchange matur-ing U.S. government and federal agency securitieswith the Treasury or the individual agencies or to al-low them to mature without replacement; andB. To buy or sell in the open market U.S. govern-ment securities, and securities that are direct obliga-tions of, or fully guaranteed as to principal and inter-est by, any agency of the United States, for the Sys-tem Open Market Account under agreements to re-sell or repurchase such securities or obligations (in-cluding such transactions as are commonly referredto as repo and reverse repo transactions) in 65 busi-ness days or less, at rates that, unless otherwise ex-

pressly authorized by the Committee, shall be deter-mined by competitive bidding, after applying reason-able limitations on the volume of agreements withindividual counterparties.

2. The Federal Open Market Committee authorizesthe Federal Reserve Bank of New York to undertaketransactions of the type described in paragraphs 1.Aand 1.B from time to time for the purpose of testingoperational readiness. The aggregate par value of suchtransactions of the type described in paragraph 1.Ashall not exceed $5 billion per calendar year. The out-standing amount of such transactions of the type de-

scribed in paragraph 1.B shall not exceed $5 billion atany given time. These transactions shall be conductedwith prior notice to the Committee.3. In order to ensure the effective conduct of openmarket operations, the Federal Open Market Commit-tee authorizes the Federal Reserve Bank of New Yorkto use agents in agency MBS-related transactions.4. In order to ensure the effective conduct of openmarket operations, the Federal Open Market Commit-tee authorizes the Federal Reserve Bank of New York

to lend on an overnight basis U.S. government securi-ties and securities that are direct obligations of anyagency of the United States, held in the System OpenMarket Account, to dealers at rates that shall be deter-mined by competitive bidding. The Federal ReserveBank of New York shall set a minimum lending fee

consistent with the objectives of the program and applyreasonable limitations on the total amount of a specificissue that may be auctioned and on the amount of se-curities that each dealer may borrow. The Federal Re-serve Bank of New York may reject bids that couldfacilitate a dealers ability to control a single issue asdetermined solely by the Federal Reserve Bank of NewYork. The Federal Reserve Bank of New York maylend securities on longer than an overnight basis to ac-commodate weekend, holiday, and similar trading con-ventions.5. In order to ensure the effective conduct of open

market operations, while assisting in the provision ofshort-term investments or other authorized services forforeign and international accounts maintained at theFederal Reserve Bank of New York and accountsmaintained at the Federal Reserve Bank of New Yorkas fiscal agent of the United States pursuant to section15 of the Federal Reserve Act, the Federal Open Mar-ket Committee authorizes and directs the Federal Re-serve Bank of New York:

A. For the System Open Market Account, to sellU.S. government securities and securities that are di-rect obligations of, or fully guaranteed as to principaland interest by, any agency of the United States tosuch accounts on the bases set forth in paragraph 1.Aunder agreements providing for the resale by suchaccounts of those securities in 65 business days orless on terms comparable to those available on suchtransactions in the market;B. For the New York Bank account, when appro-priate, to undertake with dealers, subject to the con-ditions imposed on purchases and sales of securitiesin paragraph l.B, repurchase agreements in U.S. gov-ernment securities and securities that are direct obli-gations of, or fully guaranteed as to principal and in-terest by, any agency of the United States, and to ar-

range corresponding sale and repurchase agreementsbetween its own account and such foreign, interna-tional, and fiscal agency accounts maintained at theFederal Reserve Bank; andC. For the New York Bank account, when appro-priate, to buy U.S. government securities and obliga-tions that are direct obligations of, or fully guaran-teed as to principal and interest by, any agency of theUnited States from such foreign and international ac-counts maintained at the Federal Reserve Bank under

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agreements providing for the repurchase by such ac-counts of those securities on the same business day.

Transactions undertaken with such accounts under theprovisions of this paragraph may provide for a servicefee when appropriate.6. In the execution of the Committees decision re-

garding policy during any intermeeting period, theCommittee authorizes and directs the Federal ReserveBank of New York, upon the instruction of the Chair-man of the Committee, to (i) adjust somewhat in ex-ceptional circumstances the degree of pressure on re-serve positions and hence the intended federal fundsrate and to take actions that result in material changesin the composition and size of the assets in the SystemOpen Market Account other than those anticipated bythe Committee at its most recent meeting or (ii) under-take transactions of the type described in paragraphs1.A and 1.B in order to appropriately address tempo-

rary disruptions of an operational or highly unusualnature in U.S. dollar funding markets. Any such ad-justment as described in clause (i) shall be made in thecontext of the Committees discussion and decision atits most recent meeting and the Committees long-runobjectives to foster maximum employment and pricestability, and shall be based on economic, financial, andmonetary developments during the intermeeting peri-od. Consistent with Committee practice, the Chair-man, if feasible, will consult with the Committee beforemaking any instruction under this paragraph.

The Committee voted unanimously to amend the Au-

thorization for Foreign Currency Operations, the For-eign Currency Directive, and the Procedural Instruc-tions with Respect to Foreign Currency Operations inthe form shown below. The approval of these docu-ments included approval of the Systems warehousingagreement with the U.S. Treasury. These documentswere modified to incorporate the dollar and foreigncurrency liquidity swap arrangements authorized by aresolution on October 29, 2013. Changes were madeto the Authorization for Foreign Currency Operationsand the Procedural Instructions with Respect to For-eign Currency Operations to align the treatment of the

liquidity swap arrangements and that of the reciprocalcurrency arrangements that have been in place with thecentral banks of Mexico and Canada since 1994 as partof the North American Framework Agreement. TheAuthorization for Foreign Currency Operations wasamended to remove language regarding the transmis-sion of pertinent information on System foreign cur-rency operations to appropriate officials of the Treas-ury Department because this language duplicated lan-

guage in the Program for Security of FOMC Infor-mation.

AUTHORIZATION FOR FOREIGN CURRENCYOPERATIONS(As amended effective January 28, 2014)

1. The Federal Open Market Committee authorizesand directs the Federal Reserve Bank of New York, forthe System Open Market Account, to the extent neces-sary to carry out the Committees foreign currency di-rective and express authorizations by the Committeepursuant thereto, and in conformity with such proce-dural instructions as the Committee may issue fromtime to time:

A. To purchase and sell the following foreign cur-rencies in the form of cable transfers through spot orforward transactions on the open market at home

and abroad, including transactions with the U.S.Treasury, with the U.S. Exchange Stabilization Fundestablished by section 10 of the Gold Reserve Act of1934, with foreign monetary authorities, with theBank for International Settlements, and with otherinternational financial institutions:

Australian dollarsBrazilian reaisCanadian dollarsDanish kronereuroJapanese yenKorean wonMexican pesosNew Zealand dollarsNorwegian kronerPounds sterlingSingapore dollarsSwedish kronorSwiss francs

B. To hold balances of, and to have outstandingforward contracts to receive or to deliver, the foreigncurrencies listed in paragraph A above.

C. To draw foreign currencies and to permit for-eign banks to draw dollars under the arrangementslisted in paragraph 2 below, in accordance with theProcedural Instructions with Respect to Foreign Cur-rency Operations.D. To maintain an overall open position in all for-eign currencies not exceeding $25.0 billion. For thispurpose, the overall open position in all foreign cur-rencies is defined as the sum (disregarding signs) ofnet positions in individual currencies, excluding



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changes in dollar value due to foreign exchange ratemovements and interest accruals. The net position ina single foreign currency is defined as holdings ofbalances in that currency, plus outstanding contractsfor future receipt, minus outstanding contracts forfuture delivery of that currency, i.e., as the sum of

these elements with due regard to sign.2. The Federal Open Market Committee directs theFederal Reserve Bank of New York to maintain for theSystem Open Market Account (subject to the require-ments of section 214.5 of Regulation N, Relations withForeign Banks and Bankers):

A. Reciprocal currency arrangements with the fol-lowing foreign banks:

Foreign bank Amount of arrangement(millions of dollars equivalent)

Bank of Canada 2,000Bank of Mexico 3,000

B. Standing dollar liquidity swap arrangementswith the following foreign banks:

Bank of CanadaBank of EnglandBank of JapanEuropean Central BankSwiss National Bank

C. Standing foreign currency liquidity swap ar-

rangements with the following foreign banks:

Bank of CanadaBank of EnglandBank of JapanEuropean Central BankSwiss National Bank

Dollar and foreign currency liquidity swap arrange-ments have no pre-set size limits. Any new swap ar-rangements shall be referred for review and approvalto the Committee. All swap arrangements are subject

to annual review and approval by the Committee.3. All transactions in foreign currencies undertakenunder paragraph 1.A above shall, unless otherwise ex-pressly authorized by the Committee, be at prevailingmarket rates. For the purpose of providing an invest-ment return on System holdings of foreign currenciesor for the purpose of adjusting interest rates paid orreceived in connection with swap drawings, transac-tions with foreign central banks may be undertaken atnon-market exchange rates.

4. It shall be the normal practice to arrange with for-eign central banks for the coordination of foreign cur-rency transactions. In making operating arrangementswith foreign central banks on System holdings of for-eign currencies, the Federal Reserve Bank of New Yorkshall not commit itself to maintain any specific balance,

unless authorized by the Federal Open Market Com-mittee. Any agreements or understandings concerningthe administration of the accounts maintained by theFederal Reserve Bank of New York with the foreignbanks designated by the Board of Governors undersection 214.5 of Regulation N shall be referred for re-view and approval to the Committee.5. Foreign currency holdings shall be invested toensure that adequate liquidity is maintained to meetanticipated needs and so that each currency portfolioshall generally have an average duration of no morethan 18 months (calculated as Macaulay duration).

Such investments may include buying or selling out-right obligations of, or fully guaranteed as to principaland interest by, a foreign government or agency there-of; buying such securities under agreements for repur-chase of such securities; selling such securities underagreements for the resale of such securities; and hold-ing various time and other deposit accounts at foreigninstitutions. In addition, when appropriate in connec-tion with arrangements to provide investment facilitiesfor foreign currency holdings, U.S. government securi-ties may be purchased from foreign central banks underagreements for repurchase of such securities within 30calendar days.6. All operations undertaken pursuant to the preced-ing paragraphs shall be reported promptly to the For-eign Currency Subcommittee and the Committee. TheForeign Currency Subcommittee consists of theChairman and Vice Chairman of the Committee, theVice Chairman of the Board of Governors, and suchother member of the Board as the Chairman may des-ignate (or in the absence of members of the Boardserving on the Subcommittee, other Board membersdesignated by the Chairman as alternates, and in theabsence of the Vice Chairman of the Committee, theVice Chairmans alternate). Meetings of the Subcom-

mittee shall be called at the request of any member, orat the request of the manager, System Open MarketAccount (manager), for the purposes of reviewingrecent or contemplated operations and of consultingwith the manager on other matters relating to the man-agers responsibilities. At the request of any memberof the Subcommittee, questions arising from such re-views and consultations shall be referred for determina-tion to the Federal Open Market Committee.7. The Chairman is authorized:



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A. With the approval of the Committee, to enterinto any needed agreement or understanding with theSecretary of the Treasury about the division of re-sponsibility for foreign currency operations betweenthe System and the Treasury;B. To keep the Secretary of the Treasury fully ad-

vised concerning System foreign currency operations,and to consult with the Secretary on policy mattersrelating to foreign currency operations;C. From time to time, to transmit appropriate re-ports and information to the National AdvisoryCouncil on International Monetary and FinancialPolicies.

8. All Federal Reserve Banks shall participate in theforeign currency operations for System Account in ac-cordance with paragraph 3G(1) of the Board of Gov-ernors Statement of Procedure with Respect to For-eign Relationships of Federal Reserve Banks dated Jan-

uary 1, 1944.9. The Federal Open Market Committee authorizesthe Federal Reserve Bank of New York to undertaketransactions of the type described in paragraphs 1, 2,and 5, and foreign exchange and investment transac-tions that it may be otherwise authorized to undertakefrom time to time for the purpose of testing operation-al readiness. The aggregate amount of such transac-tions shall not exceed $2.5 billion per calendar year.These transactions shall be conducted with prior noticeto the Committee.

FOREIGN CURRENCY DIRECTIVE

(As amended effective January 28, 2014)

1. System operations in foreign currencies shall gen-erally be directed at countering disorderly market con-ditions, provided that market exchange rates for theU.S. dollar reflect actions and behavior consistent withIMF Article IV, Section 1.2. To achieve this end the System shall:

A. Undertake spot and forward purchases and salesof foreign exchange.B. Maintain reciprocal currency arrangements withforeign central banks in accordance with the Author-

ization for Foreign Currency Operations.C. Maintain standing dollar liquidity swap ar-rangements with foreign banks in accordance withthe Authorization for Foreign Currency Operations.D. Maintain standing foreign currency liquidityswap arrangements with foreign banks in accordancewith the Authorization for Foreign Currency Opera-tions.

E. Cooperate in other respects with central banksof other countries and with international monetaryinstitutions.

3. Transactions may also be undertaken:A. To adjust System balances in light of probablefuture needs for currencies.

B. To provide means for meeting System andTreasury commitments in particular currencies, andto facilitate operations of the Exchange StabilizationFund.C. For such other purposes as may be expresslyauthorized by the Committee.

4. System foreign currency operations shall be con-ducted:

A. In close and continuous consultation and coop-eration with the United States Treasury;B. In cooperation, as appropriate, with foreignmonetary authorities; and

C. In a manner consistent with the obligations ofthe United States in the International Monetary Fundregarding exchange arrangements under IMF ArticleIV.

PROCEDURAL INSTRUCTIONS WITH RESPECTTO FOREIGN CURRENCY OPERATIONS(As amended effective January 28, 2014)

In conducting operations pursuant to the authorizationand direction of the Federal Open Market Committee(the Committee) as set forth in the Authorization for

Foreign Currency Operations and the Foreign Curren-cy Directive, the Federal Reserve Bank of New York,through the manager, System Open Market Account(manager), shall be guided by the following proce-dural understandings with respect to consultations andclearances with the Committee, the Foreign CurrencySubcommittee (the Subcommittee), and the Chair-man of the Committee, unless otherwise directed bythe Committee. All operations undertaken pursuant tosuch clearances shall be reported promptly to theCommittee.1. For the reciprocal currency arrangements author-ized in paragraphs 2.A of the Authorization for Foreign

Currency Operations:A. Drawings must be approved by the Subcommit-tee (or by the Chairman, if the Chairman believesthat consultation with the Subcommittee is not feasi-ble in the time available) if the swap drawing pro-posed by a foreign bank does not exceed the larger of(i) $200 million or (ii) 15 percent of the size of theswap arrangement.



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B. Drawings must be approved by the Committee(or by the Subcommittee, if the Subcommittee be-lieves that consultation with the full Committee isnot feasible in the time available, or by the Chairman,if the Chairman believes that consultation with theSubcommittee is not feasible in the time available) if

the swap drawing proposed by a foreign bank ex-ceeds the larger of (i) $200 million or (ii) 15 percentof the size of the swap arrangement.C. The manager shall also consult with the Sub-committee or the Chairman about proposed swapdrawings by the System.D. Any changes in the terms of existing swap ar-rangements shall be referred for review and approvalto the Chairman. The Chairman shall keep theCommittee informed of any changes in terms, andthe terms shall be consistent with principles dis-cussed with and guidance provided by the Commit-

tee.2. For the dollar and foreign currency liquidity swaparrangements authorized in paragraphs 2.B and 2.C ofthe Authorization for Foreign Currency Operations:

A. Drawings must be approved by the Chairman inconsultation with the Subcommittee. The Chairmanor the Subcommittee will consult with the Commit-tee prior to the initial drawing on the dollar or for-eign currency liquidity swap lines if possible underthe circumstances then prevailing; authority to ap-prove subsequent drawings for either the dollar orforeign currency liquidity swap lines may be delegat-ed to the manager by the Chairman.

B. Any changes in the terms of existing swap ar-rangements shall be referred for review and approvalto the Chairman. The Chairman shall keep theCommittee informed of any changes in terms, andthe terms shall be consistent with principles dis-cussed with and guidance provided by the Commit-tee.

3. Any operation must be approved by:A. The Subcommittee (or by the Chairman, if theChairman believes that consultation with the Sub-committee is not feasible in the time available) if it:

i. Would result in a change in the Systems

overall open position in foreign currencies exceed-ing $300 million on any day or $600 million sincethe most recent regular meeting of the Committee.ii. Would result in a change on any day in theSystems net position in a single foreign currencyexceeding $150 million, or $300 million when theoperation is associated with repayment of swapdrawings.iii. Might generate a substantial volume of trad-ing in a particular currency by the System, even

though the change in the Systems net position inthat currency (as defined in paragraph 1.D of theAuthorization for Foreign Currency Operations)might be less than the limits specified in 3.A.ii.

B. The Committee (or by the Subcommittee, if theSubcommittee believes that consultation with the full

Committee is not feasible in the time available, or bythe Chairman, if the Chairman believes that consulta-tion with the Subcommittee is not feasible in the timeavailable) if it would result in a change in the Sys-tems overall open position in foreign currencies ex-ceeding $1.5 billion since the most recent regularmeeting of the Committee.

4. The Committee authorizes the Federal ReserveBank of New York to undertake transactions of thetype described in paragraphs 1, 2, and 5 of the Authori-zation for Foreign Currency Operations and foreignexchange and investment transactions that it may be

otherwise authorized to undertake from time to timefor the purpose of testing operational readiness. Theaggregate amount of such transactions shall not exceed$2.5 billion per calendar year. These transactions shallbe conducted with prior notice to the Committee.

In its annual reconsideration of the Statement onLonger-Run Goals and Monetary Policy Strategy, par-ticipants generally agreed that only minor updates wererequired at this meeting. It was noted, however, thatbecause this was the third year in which the statementwas being issued, the coming year would be an appro-priate time to consider whether the statement could beenhanced in any way. For example, some participantsadvocated an explicit indication that inflation persis-tently below the Committees 2 percent longer-run ob-jective and inflation persistently above that objectivewould be equally undesirable. Some others suggestedthat the statement could more clearly describe how themandated goals of maximum employment and pricestability are linked with the objective of financial stabil-ity. Following the discussion, the Committee voted toapprove minor wording changes to the statement andto update the statements reference to participants es-timates of the longer-run normal unemployment rate.

Mr. Tarullo abstained from the vote because he contin-ued to think that the statement had not advanced thecause of communicating or achieving greater consensusin the policy views of the Committee.



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STATEMENT ON LONGER-RUN GOALS ANDMONETARY POLICY STRATEGY(As amended effective January 28, 2014)

The Federal Open Market Committee (FOMC) isfirmly committed to fulfilling its statutory mandate

from the Congress of promoting maximum employ-ment, stable prices, and moderate long-term interestrates. The Committee seeks to explain its monetarypolicy decisions to the public as clearly as possible.Such clarity facilitates well-informed decisionmaking byhouseholds and businesses, reduces economic and fi-nancial uncertainty, increases the effectiveness of mon-etary policy, and enhances transparency and accounta-bility, which are essential in a democratic society.

Inflation, employment, and long-term interest ratesfluctuate over time in response to economic and finan-cial disturbances. Moreover, monetary policy actions

tend to influence economic activity and prices with alag. Therefore, the Committees policy decisions reflectits longer-run goals, its medium-term outlook, and itsassessments of the balance of risks, including risks tothe financial system that could impede the attainmentof the Committees goals.

The inflation rate over the longer run is primarily de-termined by monetary policy, and hence the Committeehas the ability to specify a longer-run goal for inflation.The Committee reaffirms its judgment that inflation atthe rate of 2 percent, as measured by the annual changein the price index for personal consumption expendi-tures, is most consistent over the longer run with the

Federal Reserves statutory mandate. Communicatingthis inflation goal clearly to the public helps keep long-er-term inflation expectations firmly anchored, therebyfostering price stability and moderate long-term interestrates and enhancing the Committees ability to promotemaximum employment in the face of significant eco-nomic disturbances.

The maximum level of employment is largely deter-mined by nonmonetary factors that affect the structureand dynamics of the labor market. These factors maychange over time and may not be directly measurable.Consequently, it would not be appropriate to specify a

fixed goal for employment; rather, the Committeespolicy decisions must be informed by assessments ofthe maximum level of employment, recognizing thatsuch assessments are necessarily uncertain and subjectto revision. The Committee considers a wide range ofindicators in making these assessments. Informationabout Committee participants estimates of the longer-run normal rates of output growth and unemploymentis published four times per year in the FOMCs Sum-mary of Economic Projections. For example, in the

most recent projections, FOMC participants estimatesof the longer-run normal rate of unemployment had acentral tendency of 5.2 percent to 5.8 percent.

In setting monetary policy, the Committee seeks tomitigate deviations of inflation from its longer-run goaland deviations of employment from the Committees

assessments of its maximum level. These objectives aregenerally complementary. However, under circum-stances in which the Committee judges that the objec-tives are not complementary, it follows a balanced ap-proach in promoting them, taking into account themagnitude of the deviations and the potentially differ-ent time horizons over which employment and infla-tion are projected to return to levels judged consistentwith its mandate.

The Committee intends to reaffirm these principlesand to make adjustments as appropriate at its annualorganizational meeting each January.

By unanimous vote, the Committee amended its Rulesof Organization to add the position of deputy managerof the System Open Market Account.

By unanimous vote, the Committee amended its Pro-gram for Security of FOMC Information with minorchanges to the review and reporting process forbreaches in the information security rules and with sev-eral other minor updates and clarifications.

By unanimous vote, the Committee selected SimonPotter and Lorie K. Logan to serve at the pleasure ofthe Committee as manager and deputy manager of theSystem Open Market Account, respectively, on the un-derstanding that their selection was subject to their be-ing satisfactory to the Federal Reserve Bank of NewYork.

Secretarys note: Advice subsequently wasreceived that the manager and deputy man-ager selections indicated above were satisfac-tory to the Federal Reserve Bank of NewYork.

Developments in Financial Markets and the Fed-eral Reserves Balance SheetThe manager of the System Open Market Account(SOMA) reported on developments in domestic andforeign financial markets as well as System open marketoperations during the period since the Federal OpenMarket Committee met on December 1718, 2013.The manager also presented an update on the ongoingovernight reverse repurchase agreement (ON RRP)exercise. All operations to date had proceeded



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smoothly. The number of participating counterpartiesand total allotment in the daily operations increased inlate December, in part reflecting the fact that overnightsecured rates were low compared with the fixed rateoffered in the operations as well as the increase in thecap on individual counterparty bids to $3 billion from

$1 billion that was implemented on December 23,2013. Counterparties year-end balance sheet adjust-ments also boosted participation for a time; the ONRRP operations reportedly helped limit downwardpressure on money market rates around year-end.

Following the managers report, meeting participantsdiscussed a proposal to extend the Desks authority toconduct the ON RRP exercise for 12 months and tolift the per-counterparty bid limit. Under the terms ofthe proposal, the interest rate on ON RRPs would re-main between 0 and 5 basis points. The Chair of theFOMC would authorize any changes in the offered rate

or per-counterparty bid limit. Adjustments to the bidlimit would be made in gradual steps, and the Commit-tee would be consulted before the exercise would moveto full allotment. The proposed changes were intendedto allow the Committee to obtain additional infor-mation about the potential usefulness of ON RRP op-erations for affecting market interest rates when thatstep becomes appropriate. Most meeting participantssupported the proposal, with a couple emphasizing thatthe period for which the exercise would be extendedwas likely sufficiently long that counterparties would bewilling to adjust their current money market practices,

thereby providing better information on the possiblemarket effects of such operations. It was remarkedthat the additional insights obtained from the exercisecould be useful in the context of the Committees fu-ture discussions about monetary policy implementationover the medium and longer term. A number of partic-ipants, however, indicated a preference for retaining acap on the per-counterparty bid limit until the Commit-tee has discussed possible approaches to medium-termpolicy implementation, and a few of these participantspreferred to extend the exercise for a shorter period.

Following the discussion, the Committee approved the

following resolution:The Federal Open Market Committee(FOMC) authorizes the Federal ReserveBank of New York to conduct a series offixed-rate, overnight reverse repurchase op-erations involving U.S. Government securi-ties, and securities that are direct obligationsof, or fully guaranteed as to principal and in-terest by, any agency of the United States, for

the purpose of further assessing the potentialrole for such operations in supporting theimplementation of monetary policy. The re-verse repurchase operations authorized bythis resolution shall be offered at a fixed ratethat may vary from zero to five basis points,

and for an overnight term, or such longerterm as is warranted to accommodate week-end, holiday, and similar trading conventions.Any change to the offered rate within therange specified above or the per-counterparty bid limits will require approvalof the Chairman. The System Open MarketAccount manager will notify the FOMC inadvance about any changes to the terms ofoperations. These operations shall be au-thorized through January 30, 2015.

Messrs. Fisher and Plosser dissented because of their

preference for retaining a cap on the maximum size ofcounterparties offers during the extension; Mr. Plosseralso preferred a shorter extension of the exercise.

By unanimous vote, the Committee ratified the OpenMarket Desks domestic transactions over the inter-meeting period. There were no intervention operationsin foreign currencies for the Systems account over theintermeeting period.

Staff Review of the Economic SituationThe information reviewed for the January 2829 meet-ing indicated that the rate of economic growth picked

up in the second half of 2013. Total payroll employ-ment increased in December, but at a slower pace thanin previous months, and the unemployment rate de-clined but was still elevated. Consumer price inflationcontinued to run below the Committees longer-runobjective, while measures of longer-term inflation ex-pectations remained stable.

Overall, labor market indicators appeared consistentwith a gradual ongoing improvement in labor marketconditions. Total nonfarm payroll employment ex-panded by less in December than in the previous twomonths, perhaps partly because of unusually bad

weather. The unemployment rate declined to 6.7 per-cent in December. The labor force participation ratealso decreased, and the employment-to-population ra-tio was little changed. The rate of long-duration un-employment declined, but the share of workers em-ployed part time for economic reasons was littlechanged, and both measures remained elevated.Among other indicators of labor market conditions, therate of job openings edged up in recent months, andthe share of small businesses reporting that they had



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hard-to-fill positions trended up. Measures of firmshiring plans were higher than a year earlier, but the rateof gross private-sector hiring was still low. Initialclaims for unemployment insurance moved down, onbalance, over the intermeeting period, and householdexpectations of the labor market situation improved,

on net, in December and early January.

Manufacturing production increased at a robust pace inthe fourth quarter, with broad-based gains across in-dustries. Indicators of manufacturing production, suchas the readings on new orders from national and re-gional manufacturing surveys, were consistent with afurther expansion in factory output early this year, butautomakers production schedules indicated that thepace of light motor vehicle assemblies would decline inthe first quarter.

Real personal consumption expenditures (PCE) rose at

a faster pace in October and November than in thethird quarter. In December, the components of thenominal retail sales data used by the Bureau of Eco-nomic Analysis to construct its estimate of PCE in-creased strongly, although sales of light motor vehiclesdeclined after posting a large gain in November. Re-cent information on several important factors that in-fluence household spending was somewhat mixed.Households real disposable income was little changedin October and November, and the expiration of theemergency unemployment compensation program atthe end of 2013 was expected to reduce aggregate in-come growth early this year. However, households net

worth likely continued to expand in recent months as aresult of rising equity prices and home values. Con-sumer sentiment in the Thomson Reuters/Universityof Michigan Surveys of Consumers improved, on bal-ance, in December and early January after a decline inthe fall of 2013.

The pace of activity in the housing sector showed sometentative signs of stabilizing, as the effects of the pastyears rise in mortgage rates appeared to wane. Single-family housing starts increased in November and onlypartly reversed that gain in December, while permitsfor new construction rose a little, on balance, in thefourth quarter. New home sales declined in Novemberand December but were nonetheless higher than in thethird quarter, and existing home sales flattened out inDecember after decreasing for several months.

Real private expenditures for business equipment andintellectual property products appeared to strengthen inthe fourth quarter, as nominal shipments of nonde-fense capital goods rose at a solid pace. Althoughnominal new orders for these capital goods declined in

December and Novembers increase was revised down,the level of orders remained above that of shipments,pointing to further increases in shipments in subse-quent months. Other forward-looking indicators, suchas surveys of business conditions and capital spendingplans, were also generally consistent with near-term

gains in business equipment spending. Nominal ex-penditures for nonresidential construction, which hadbeen flat in October, moved higher in November. Da-ta on book-value inventories suggested little change inthe pace of nonfarm inventory investment in the fourthquarter, and the available information did not point tosignificant inventory imbalances in most industries.

Real federal government purchases likely fell sharply inthe fourth quarter because of continued declines indefense spending and the temporary partial shutdownof the federal government in October. Increases in realstate and local government purchases appeared to have

moderated in the fourth quarter. The payrolls of thesegovernments were about unchanged during the fourthquarter, and nominal state and local construction ex-penditures for October and November increased at aslower pace, on net, than in the third quarter.

The U.S. international trade deficit narrowed substan-tially in November, as exports increased and importsfell. The higher value of exports stemmed in large partfrom an increase in sales of petroleum products, whilethe fall in imports was primarily due to a decline inpurchases of crude oil.

Total U.S. consumer price inflation, as measured by thePCE price index, was a little under 1 percent over the12 months ending in November, well below the Com-mittees 2 percent longer-term objective. Over thatperiod, consumer energy prices declined, consumerfood prices rose modestly, and core PCE priceswhich exclude consumer food and energy pricesincreased slightly more than 1 percent. In December,the consumer price index (CPI) rose somewhat fasterthan in recent months, primarily reflecting an upturn inconsumer energy prices; core CPI inflation remainedlow. Both near-term and longer-term inflation expecta-tions from the Michigan survey were little changed, onnet, in December and early January. Over the 12months ending in December, nominal average hourlyearnings for all employees increased slightly faster thanconsumer price inflation.

Foreign economic activity continued to improve, witheconomic growth in the third quarter of 2013 higherthan in the first half of the year and more recent indica-tors suggesting further gains. The pickup was wide-spread, as the euro area registered a second consecutive



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quarter of positive economic growth, the Mexicaneconomy bounced back from a second-quarter contrac-tion, and stronger external demand boosted growth inemerging market economies more generally. At thesame time, inflation continued to run below centralbank targets in several advanced economies, and mone-

tary policy remained expansionary in these economies.Inflation in emerging market economies remainedmoderate on average, although Brazil, India, and Tur-key again tightened monetary policy during the inter-meeting period in response to concerns about inflationand currency depreciation. The policy tightening inTurkey was particularly sharp and followed several daysof heightened financial market pressures toward theend of the intermeeting period. Similar pressures wereevident in some other emerging market economies aswell.

Staff Review of the Financial Situation

Financial market conditions over the intermeeting peri-od were importantly influenced by Federal Reservecommunications, somewhat better-than-expected eco-nomic data releases, and developments in emergingmarket economies. On net, financial conditions in theUnited States remained supportive of growth in eco-nomic activity and employment: Equity prices in-creased a bit, longer-term interest rates declined, andthe dollar appreciated against most other currencies.

While investors were somewhat surprised by theFOMCs decision at its December meeting to reducethe pace of its asset purchases, the policy action and

associated communications appeared to have only alimited effect on market participants outlook for theFederal Reserves balance sheet. Indeed, the Commit-tees decision to cut the pace of purchases and its ra-tionale for doing so seemed to increase investors con-fidence in the economic outlook, a shift that was fur-ther supported by subsequent U.S. economic data re-leases. However, those effects were reversed late in theperiod when investors appeared to pull back from risk-ier assets in reaction to rising concern about develop-ments in some emerging market economies and theirpossible implications for global economic growth.

Results from the Desks survey of primary dealers con-ducted prior to the January meeting indicated that deal-ers anticipated only minor changes to the Committeespostmeeting statement. In addition, the median dealerexpected a $10 billion reduction in the monthly pace ofasset purchases to be announced at each meeting in thefirst three quarters of 2014, with the purchase programending with a final $15 billion reduction at the October2014 meeting.

On balance, 10-and 30-year nominal Treasury yieldsdeclined about 10 basis points and 20 basis points, re-spectively, over the intermeeting period, in part becauseof an increase in safe-haven demands toward the endof the period. The December policy action and subse-quent muted market reaction led to decreased uncer-

tainty about future longer-term interest rates, perhapscontributing to the decline in longer-term rates. Themeasure of 5-year inflation compensation based onTreasury inflation-protected securities increased a little,while inflation compensation 5 to 10 years ahead de-creased somewhat.

Conditions in short-term dollar funding markets gener-ally remained stable. Year-end funding pressures weremodest, and overnight money market rates declinedabout in line with their typical behavior in past years.Repo rates were quite low at the end of the year andremained low through most of January, leading to in-

creased participation in the Federal Reserves ON RRPoperations, with a substantial temporary increase intake-up at year-end. Primarily reflecting the increasedparticipation in the exercise, reserve balances expandedmore slowly and the rate of increase in the monetarybase slowed in December. M2 continued to expandmoderately.

Reflecting the improved outlook for economic activityand despite mixed fourth-quarter earnings results, thestock prices of bank holding companies rose notablyand spreads on credit default swaps for the largest bankholding companies narrowed somewhat. According to

the January Senior Loan Officer Opinion Survey onBank Lending Practices, domestic banks continued toease their lending standards and some loan terms onbalance; they also experienced an increase in demand,on net, in most major loan categories in the fourthquarter.

Broad U.S. equity price indexes edged higher, on net,over the intermeeting period, and equity issuance bynonfinancial corporations increased. Credit remainedwidely available to large nonfinancial corporations.Corporate bond spreads continued to narrow over theintermeeting period, with investment-grade bondspreads reaching their lowest levels in several years andthose on speculative-grade corporate bonds approach-ing pre-crisis levels. Bond issuance by domestic corpo-rations generally stayed strong, commercial and indus-trial loans on banks books increased by a notableamount late in the fourth quarter, and issuance of lev-eraged loans and collateralized loan obligations general-ly continued apace.



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Conditions in the commercial real estate sector recov-ered further in the fourth quarter, with rising propertyprices and fewer distressed sales. In the market forcommercial mortgage-backed securities, investor de-mand remained strong and spreads continued to betight despite high issuance near year-end. Commercial

real estate loans on banks books expanded moderately.

Credit conditions in municipal bond markets generallyremained stable, although a few issuers continued toexperience substantial strain. Available data suggestthat, for the first time in several years, the ratings agen-cy Moodys Investors Service made more upgradesthan downgrades to municipal debt in the fourth quar-ter. However, Moodys put Puerto Rico on watch for adowngrade.

Households continued to face mixed credit conditionsin the fourth quarter. Consumer credit expanded again

in November, boosted by further gains in auto and stu-dent loans, and bank credit data indicate that this ex-pansion likely continued through December. In con-trast, credit card balances were little changed, on net,through November, as underwriting appeared to re-main quite tight. The volume of mortgage applicationsfor home purchases held about steady since the previ-ous FOMC meeting while refinance applications re-mained at very low levels. Mortgage rates declinedslightly, in line with modestly lower yields on agencymortgage-backed securities. Despite tight mortgageavailability and subdued borrowing, house prices con-tinued to increase in November, although not as quick-

ly as earlier in 2013.

Financial market conditions in the advanced foreigneconomies over the intermeeting period generally be-came more supportive of growth. Long-term govern-ment bond yields declined and headline equity indexesincreased, on net, in most of these countries, with bankstock prices in the euro area rising more than broaderindexes. In addition, debt issuance by both govern-ments and banks in the European periphery picked up,and sovereign yield spreads in those countries were flatto down, on balance, over the period. In contrast,amid a ratcheting-up of financial market strains in someemerging market economies, headline stock price in-dexes in most emerging market economies declined,outflows from emerging market mutual funds contin-ued, and yield spreads on dollar-denominated emergingmarket bonds increased. Local-currency yields rose insome emerging market economies, such as Brazil,South Africa, and Turkey, and short-term interbankrates in China were volatile and trended higher over theperiod. The foreign exchange value of the dollar ap-

preciated against most other currencies over the period,with particularly large increases against the Argentinepeso and the Turkish lira.

Staff Economic OutlookIn the economic projection prepared by the staff forthe January FOMC meeting, growth of real gross do-mestic product (GDP) in the second half of 2013 wasestimated to have been stronger than the staff had ex-pected, though some of the strength in inventory in-vestment and net exports was possibly transitory. Thestaffs medium-term forecast for real GDP growth waslittle revised, on balance, as the momentum implied byfaster GDP growth in the second half of 2013 waslargely offset by a higher projected path for the foreignexchange value of the dollar. In addition, the staff re-vised downward its view of the pace at which potentialoutput had increased over recent years and would in-crease this year and next. The staff continued to pro-

ject that real GDP would expand more quickly over thenext few years than in 2013 and that real GDP wouldrise faster than potential output. This acceleration ineconomic activity was expected to be supported bystill-accommodative monetary policy and an easing inthe effects of fiscal policy restraint on economicgrowth, as well as by increases in consumer and busi-ness confidence, further improvements in credit availa-bility and financial conditions, and continued gains inforeign economic growth. The expansion in economicactivity was anticipated to lead to a slow reduction inresource slack over the projection period, and the un-

employment rate was expected to decline gradually,reaching the staffs estimate of its longer-run naturalrate in 2016.

The staffs forecast for inflation was little changed fromthe projection prepared for the previous FOMC meet-ing, although the near-term forecast was revised downa little to reflect recent declines in energy prices. Thestaff continued to forecast that inflation would run wellbelow the Committees 2 percent objective early thisyear but above the low level observed over much of2013. Over the medium term, with longer-run inflationexpectations assumed to remain stable, changes in

commodity and import prices expected to be muted,and slack in labor and product markets receding gradu-ally, inflation was projected to move back slowly to-ward the Committees objective.

In considering recent events in emerging market econ-omies, the staff judged that the effects of recent finan-cial market volatility had not been large enough to havea material effect on the overall outlook for those econ-omies and, similarly, that the spillover effects on the



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United States of developments to date were likely to bemodest. Because conditions were in flux, however,these markets would require careful monitoring.

The staff continued to see a number of risks around itsoutlook. The downside risks to the forecast for realGDP growth were thought to have diminished, but therisks were still seen as tilted a little to the downside be-cause, with the target federal funds rate at its effectivelower bound, the economy was not well positioned towithstand future adverse shocks. At the same time, thestaff viewed the risks around its outlook for the unem-ployment rate and for inflation as roughly balanced.

Participants Views on Current Conditions and theEconomic OutlookIn their discussion of the economic situation and theoutlook, participants generally noted that economicactivity had strengthened more in the second half of

2013 than they had expected at the time of the Decem-ber meeting. In particular, consumer spending hadstrengthened, and business investment appeared to beon a more solid uptrend. Although the governmentshutdown likely damped economic growth somewhat,the extent of restraint on growth from fiscal policy di-minished late in the year. However, several participantsobserved that temporary factors had helped boost realGDP during the second half, pointing specifically tothe substantial contributions from net exports and in-creased inventory investment. As a result, participantsgenerally did not expect the recent pace of economicgrowth to be sustained, but they nonetheless anticipat-

ed that the economy would expand at a moderate pacein coming quarters. That expansion was expected to besupported by highly accommodative monetary policy, afurther easing of fiscal restraint, and a modest addition-al pickup in global economic growth, as well as contin-ued improvement in credit conditions and the ongoingstrengthening in household balance sheets. A numberof participants noted that recent economic news hadreinforced their confidence in their projection of mod-erate economic growth over the medium run. It wasalso noted that recent developments in several emerg-ing market economies, if they continued, could pose

downside risks to the outlook. Overall, most partici-pants still viewed the risks to the outlook for the econ-omy and the labor market as having become morenearly balanced in recent months.

Consumer spending had advanced strongly in late 2013,contributing importantly to the pickup in growth ofeconomic activity. This picture was reinforced by sur-vey data that suggested that consumers had becomemore optimistic about future income gains. While not-

ing that households remained cautious, participantscited a number of factors that were likely to continue tounderpin gains in household spending, including risinghouse prices, growing confidence in the sustainabilityof the economic expansion, increasing payrolls, and thehigh ratio of household wealth to disposable income.

Although the recovery in the housing sector hadslowed somewhat in recent months, a number of par-ticipants reported solid activity in their Districts.Moreover, various factors were seen as likely to sup-port stronger growth in the sector going forward, in-cluding favorable housing affordability, which was inturn partly due to still-low mortgage rates, and demo-graphic trends. However, there were also reasons forbeing cautious about the prospects for housing con-struction, such as recent disappointing news on permitsfor new construction and the possibility that investorsinterest in purchasing properties for the rental market

would recede.

Business contacts in many parts of the country report-ed that they were guardedly optimistic about prospectsfor 2014. While inventory investment would likelycome down from its recent unusually high level, partic-ipants heard more reports that the business sector waswilling to increase spending on capital projects. Anumber of factors were cited as likely to support suchan increase, including the high level of profits, the lowlevel of interest rates, a reduction in policy uncertainty,the easing of lending standards, and large holdings ofliquid assets by corporations.

In discussing financial developments over the inter-meeting period, several participants noted that theCommittees December decision to make a modestreduction in the monthly pace of asset purchases hadnot resulted in an adverse market reaction. Several par-ticipants observed that current market expectations forasset purchases and the future course of the federalfunds rate were reasonably well aligned with partici-pants own expectations of the path for policy. How-ever, one participant expressed concern that longer-term interest rates could rise sharply if market partici-pants expectations of future monetary policy came todeviate from those of policymakers, as appeared tohave happened last summer, while a couple of othersargued that the current highly accommodative stance ofmonetary policy could lead investors to take on exces-sive risk and so undermine longer-term financial stabil-ity. Recent volatility in emerging markets appeared tohave had only a limited effect to date on U.S. financialmarkets. Nevertheless, participants agreed that a num-ber of developments in financial markets needed to be



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watched carefully, including the financing situation ofthe Puerto Rican government and particularly the un-folding events in emerging markets.

In their discussion of recent labor market develop-ments, many participants commented on the relativelysmall increase in payrolls in December and the furtherdecline in the unemployment rate. A number of partic-ipants indicated that the December payrolls figure mayhave been an anomaly, perhaps importantly reflectingbad weather, and it was noted that the initial readingson payrolls in recent years had subsequently tended tobe revised up. In addition, some participants reportedthat their business contacts had become more positiveabout hiring in the year ahead. Participants continuedto debate the reliability of the unemployment rate as anindicator of overall labor market conditions, taking intoaccount the further decline in labor force participationin recent quarters, still-elevated levels of underem-

ployment and long-term unemployment, and the ap-parent absence of wage pressures. Much of the down-ward trend in the labor force participation rate sincethe start of the recession was seen as the result of shiftsin the demographic composition of the workforce andthe retirement of older workers; the extent of the cycli-cal portion of the decline was viewed by some as diffi-cult to gauge at present. A few participants judged thatthe decline in participation for younger and prime-ageworkers likely reflected the slow recovery in jobs andwages and so might be reversed as labor market condi-tions strengthened. In addition, several others pointed

out that broader concepts of the unemployment rate,such as those that include nonparticipants who reportthat they want a job and those working part time whowant full-time work, remained well above the officialunemployment rate, suggesting that considerable labormarket slack remained despite the reduction in the un-employment rate. A few participants noted workershortages in specific regions and occupations, with oneDistrict reporting widespread shortages of skilled laborleading to emerging labor cost pressures. However, anumber of participants saw the low rates of increase inmost measures of wages as consistent with continuedlabor market slack.

Inflation remained below the Committees longer-runobjective over the intermeeting period. Participantsstill anticipated that, with longer-run inflation expecta-tions stable, transitory factors that had been dampinginflation likely to recede, and economic activity pickingup, inflation would move back toward the Committees2 percent objective over the medium run. However,several factors that cast doubt on this outcome werealso mentioned, including slow growth in labor costs,

the lack of pricing power reported by business contactsin various parts of the country, the low level of infla-tion in other advanced economies, and the danger thatinflation expectations at short and medium horizonsmight not be as well anchored as longer-run inflationexpectations. Participants noted that inflation persis-

tently below the Committees objective would poserisks to economic performance and that inflation de-velopments would need to be monitored carefully.

In their discussion of the path for monetary policy,most participants judged that the incoming informationabout the economy was broadly in line with their ex-pectations and that a further modest step down in thepace of purchases was appropriate. A couple of partic-ipants observed that continued low readings on infla-tion and considerable slack in the labor market raisedquestions about the desirability of reducing the pace ofpurchases; these participants judged, however, that a

pause in the reduction of purchases was not justified atthis stage, especially in light of the strength of theeconomy in the second half of 2013. Several partici-pants argued that, in the absence of an appreciablechange in the economic outlook, there should be aclear presumption in favor of continuing to reduce thepace of purchases by a total of $10 billion at eachFOMC meeting. That said, a number of participantsnoted that if the economy deviated substantially fromits expected path, the Committee should be prepared torespond with an appropriate adjustment to the trajecto-ry of its purchases.

Participants agreed that, with the unemployment rateapproaching 6 percent, it would soon be appropriatefor the Committee to change its forward guidance inorder to provide information about its decisions re-garding the federal funds rate after that threshold wascrossed. A range of views was expressed about theform that such forward guidance might take. Someparticipants favored quantitative guidance along thelines of the existing thresholds, while others preferred aqualitative approach that would provide additional in-formation regarding the factors that would guide theCommittees policy decisions. Several participants sug-

gested that risks to financial stability should appearmore explicitly in the list of factors that would guidedecisions about the federal funds rate once the unem-ployment rate threshold is crossed, and several partici-pants argued that the forward guidance should givegreater emphasis to the Committees willingness tokeep rates low if inflation were to remain persistentlybelow the Committees 2 percent longer-run objective.Additional proposals included relying to a greater ex-tent on the Summary of Economic Projections as a



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communications device and including in the guidancean indication of the Committees willingness to adjustpolicy to lean against undesired changes in financialconditions.

A few participants raised the possibility that it might beappropriate to increase the federal funds rate relativelysoon. One participant cited evidence that the equilibri-um real interest rate had moved higher, and a couple ofthem noted that some standard policy rules tended tosuggest that the federal funds rate should be raisedabove its effective lower bound before the middle ofthis year. Other participants, however, suggested thatprescriptions from standard policy rules were not ap-propriate in current circumstances, either because thetarget federal funds rate had been constrained by thelower bound for some time or because the equilibriumreal rate of interest was likely still being held down byvarious factors, including the lingering effects of the

financial crisis, and was significantly below the value ofthe longer-run rate built into standard policy rules.

Committee Policy ActionCommittee members saw the information receivedover the intermeeting period as indicating that growthin economic activity had picked up in recent quarters.Labor market indicators were mixed but on balanceshowed further improvement. The unemployment ratehad declined but remained elevated when judgedagainst members estimates of the longer-run normalrate of unemployment. Household spending and busi-ness fixed investment had advanced more quickly in

recent months than earlier in 2013, while the recoveryin the housing sector had slowed somewhat. Fiscalpolicy was restraining economic growth, although theextent of the restraint had diminished. The Committeeexpected that, with appropriate policy accommodation,the economy would expand at a moderate pace and theunemployment rate would gradually decline towardlevels consistent with the dual mandate. Moreover,members continued to judge that the risks to the out-look for the economy and the labor market had be-come more nearly balanced. Inflation was running be-low the Committees longer-run objective, and this was

seen as posing possible risks to economic performance,but members anticipated that stable inflation expecta-tions and strengthening economic activity would, overtime, return inflation to the Committees 2 percent ob-jective. However, in light of their concerns about thepersistence of low inflation, many members saw a needfor the Committee to monitor inflation developmentscarefully for evidence that inflation was moving backtoward its longer-run objective.

In their discussion of monetary policy in the periodahead, all members agreed that the cumulative im-provement in labor market conditions and the likeli-hood of continuing improvement indicated that itwould be appropriate to make a further measured re-duction in the pace of its asset purchases at this meet-

ing. Members again judged that, if the economy con-tinued to develop as anticipated, further reductionswould be undertaken in measured steps. Members alsounderscored that the pace of asset purchases was noton a preset course and would remain contingent on theCommittees outlook for the labor market and inflationas well as its assessment of the efficacy and costs ofpurchases. Accordingly, the Committee agreed that,beginning in February, it would add to its holdings ofagency mortgage-backed securities at a pace of $30 bil-lion per month rather than $35 billion per month, andwould add to its holdings of longer-term Treasury secu-

rities at a pace of $35 billion per month rather than$40 billion per month. While making a further meas-ured reduction in its pace of purchases, the Committeeemphasized that its holdings of longer-term securitieswere sizable and would still be increasing, which wouldpromote a stronger economic recovery by maintainingdownward pressure on longer-term interest rates, sup-porting mortgage markets, and helping to make broad-er financial conditions more accommodative. TheCommittee also reiterated that it would continue itsasset purchases, and employ its other policy tools asappropriate, until the outlook for the labor market hasimproved substantially in a context of price stability.

In considering forward guidance about the target feder-al funds rate, all members agreed to retain the thresh-olds-based language employed in recent statements. Inaddition, the Committee decided to repeat the qualita-tive guidance, introduced in December, clarifying that arange of labor market indicators would be used whenassessing the appropriate stance of policy once the un-employment rate threshold had been crossed. Mem-bers also agreed to reiterate language indicating theCommittees anticipation, based on its current assess-ment of additional measures of labor market condi-tions, indicators of inflation pressures and inflationexpectations, and readings on financial developments,that it would be appropriate to maintain the currenttarget range for the federal funds rate well past the timethat the unemployment rate declines below 6 percent,especially if projected inflation continues to run belowthe Committees longer-run objective.

Members also discussed other elements of the policystatement to be issued following the meeting. Mem-bers agreed on updating the description of the state of



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the economy to reflect the recent strength of house-hold and business spending and to note that, althoughthe labor market showed further improvement on bal-ance, the recent indicators were mixed. Members didnot see an appreciable change in the balance of risksand so left the statements description of risks un-

changed.

At the conclusion of the discussion, the Committeevoted to authorize and direct the Federal Reserve Bankof New York, until it was instructed otherwise, to exe-cute transactions in the SOMA in accordance with thefollowing domestic policy directive:

Consistent with its statutory mandate, theFederal Open Market Committee seeksmonetary and financial conditions that willfoster maximum employment and price sta-bility. In particular, the Committee seeks

conditions in reserve markets consistent withfederal funds trading in a range from 0 to percent. The Committee directs the Deskto undertake open market operations as nec-essary to maintain such conditions. Begin-ning in February, the Desk is directed topurchase longer-term Treasury securities at apace of about $35 billion per month and topurchase agency mortgage-backed securitiesat a pace of about $30 billion per month.The Committee also directs the Desk to en-gage in dollar roll and coupon swap transac-tions as necessary to facilitate settlement of

the Federal Reserves agency mortgage-backed securities transactions. The Commit-tee directs the Desk to maintain its policy ofrolling over maturing Treasury securities intonew issues and its policy of reinvesting prin-cipal payments on all agency debt and agencymortgage-backed securities in agencymortgage-backed securities. The SystemOpen Market Account Manager and the Sec-retary will keep the Committee informed ofongoing developments regarding the Sys-tems balance sheet that could affect the at-

tainment over time of the Committees ob-jectives of maximum employment and pricestability.

The vote encompassed approval of the statement be-low to be released at 2:00 p.m.:

Information received since the FederalOpen Market Committee met in Decemberindicates that growth in economic activitypicked up in recent quarters. Labor market

indicators were mixed but on balanceshowed further improvement. The unem-ployment rate declined but remains elevated.Household spending and business fixed in-vestment advanced more quickly in recentmonths, while the recovery in the housing

sector slowed somewhat. Fiscal policy is re-straining economic growth, although the ex-tent of restraint is diminishing. Inflation hasbeen running below the Committees longer-run objective, but longer-term inflation ex-pectations have remained stable.

Consistent with its statutory mandate, theCommittee seeks to foster maximum em-ployment and price stability. The Committeeexpects that, with appropriate policy ac-commodation, economic activity will expandat a moderate pace and the unemployment

rate will gradually decline toward levels theCommittee judges consistent with its dualmandate. The Committee sees the risks tothe outlook for the economy and the labormarket as having become more nearly bal-anced. The Committee recognizes that infla-tion persistently below its 2 percent objectivecould pose risks to economic performance,and it is monitoring inflation developmentscarefully for evidence that inflation will moveback toward its objective over the mediumterm.

Taking into account the extent of federal fis-cal retrenchment since the inception of itscurrent asset purchase program, the Com-mittee continues to see the improvement ineconomic activity and labor market condi-tions over that period as consistent withgrowing underlying strength in the broadereconomy. In light of the cumulative pro-gress toward maximum employment and theimprovement in the outlook for labor marketconditions, the Committee decided to make afurther measured reduction in the pace of its

asset purchases. Beginning in February, theCommittee will add to its holdings of agencymortgage-backed securities at a pace of$30 billion per month rather than $35 billionper month, and will add to its holdings oflonger-term Treasury securities at a pace of$35 billion per month rather than $40 billionper month. The Committee is maintainingits existing policy of reinvesting principalpayments from its holdings of agency debt



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and agency mortgage-backed securities inagency mortgage-backed securities and ofrolling over maturing Treasury securities atauction. The Committees sizable and still-increasing holdings of longer-term securitiesshould maintain downward pressure on

longer-term interest rates, support mortgagemarkets, and help to make broader financialconditions more accommodative, which inturn should promote a stronger economicrecovery and help to ensure that inflation,over time, is at the rate most consistent withthe Committees dual mandate.

The Committee will closely monitor incom-ing information on economic and financialdevelopments in coming months and willcontinue its purchases of Treasury and agen-cy mortgage-backed securities, and employ

its other policy tools as appropriate, until theoutlook for the labor market has improvedsubstantially in a context of price stability. Ifincoming information broadly supports theCommittees expectation of ongoing im-provement in labor market conditions andinflation moving back toward its longer-runobjective, the Committee will likely reducethe pace of asset purchases in further meas-ured steps at future meetings. However, as-set purchases are not on a preset course, andthe Committees decisions about their pace

will remain contingent on the Committeesoutlook for the labor market and inflation aswell as its assessment of the likely efficacyand costs of such purchases.

To support continued progress toward max-imum employment and price stability, theCommittee today reaffirmed its view that ahighly accommodative stance of monetarypolicy will remain appropriate for a consider-able time after the asset purchase programends and the economic recovery strengthens.The Committee also reaffirmed its expecta-

tion that the current exceptionally low targetrange for the federal funds rate of 0 to percent will be appropriate at least as longas the unemployment rate remains above

6 percent, inflation between one and twoyears ahead is projected to be no more than ahalf percentage point above the Committees2 percent longer-run goal, and longer-terminflation expectations continue to be well an-chored. In determining how long to main-

tain a highly accommodative stance of mone-tary policy, the Committee will also considerother information, including additionalmeasures of labor market conditions, indica-tors of inflation pressures and inflation ex-pectations, and readings on financial devel-opments. The Committee continues to an-ticipate, based on its assessment of these fac-tors, that it likely will be appropriate to main-tain the current target range for the federalfunds rate well past the time that the unem-ployment rate declines below 6 percent,

especially if projected inflation continues torun below the Committees 2 percent longer-run goal. When the Committee decides tobegin to remove policy accommodation, itwill take a balanced approach consistent withits longer-run goals of maximum employ-ment and inflation of 2 percent.

Voting for this action: Ben Bernanke, William C.Dudley, Richard W. Fisher, Narayana Kocherlakota,Sandra Pianalto, Charles I. Plosser, Jerome H. Powell,Jeremy C. Stein, Daniel K. Tarullo, and Janet L. Yellen.

Voting against this action: None.

It was agreed that the next meeting of the Committeewould be held on TuesdayWednesday, March 1819,2014. The meeting adjourned at 10:55 a.m. onJanuary 29, 2014.

Notation VoteBy notation vote completed on January 7, 2014, theCommittee unanimously approved the minutes of theCommittee meeting held on December 1718, 2013.

_____________________________William B. English

Secretary


FOMC Minutes 2.19

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Transcript of FOMC Minutes 2.19