FOMC Minutes August

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Minutes of the Federal Open Market CommitteeJuly 3031, 2013

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., on Tues-day, July 30, 2013, at 2:00 p.m. and continued onWednesday, July 31, 2013, at 9:00 a.m.

PRESENT:Ben Bernanke, ChairmanWilliam C. Dudley, Vice ChairmanJames BullardElizabeth DukeCharles L. EvansEsther L. GeorgeJerome H. PowellSarah Bloom Raskin

Eric RosengrenJeremy C. SteinDaniel K. TarulloJanet L. Yellen

Christine Cumming, Richard W. Fisher, NarayanaKocherlakota, Sandra Pianalto, and Charles I.Plosser, Alternate Members of the Federal OpenMarket Committee

Jeffrey M. Lacker, Dennis P. Lockhart, and John C.Williams, Presidents of the Federal Reserve Banks

of Richmond, Atlanta, and San Francisco, respec-tively

William B. English, Secretary and EconomistDeborah J. Danker, Deputy SecretaryMatthew M. Luecke, Assistant SecretaryDavid W. Skidmore, Assistant SecretaryMichelle A. Smith, Assistant SecretaryScott G. Alvarez, General CounselThomas C. Baxter, Deputy General CounselSteven B. Kamin, EconomistDavid W. Wilcox, Economist

Thomas A. Connors, Troy Davig, Michael P. Leahy,Stephen A. Meyer, Daniel G. Sullivan, and WilliamWascher, Associate Economists

Simon Potter, Manager, System Open Market Account

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

James A. Clouse and William Nelson, Deputy Direc-tors, Division of Monetary Affairs, Board of Gov-ernors; Maryann F. Hunter, Deputy Director, Divi-sion of Banking Supervision and Regulation, Boardof Governors

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

Linda Robertson, Assistant to the Board, Office ofBoard Members, Board of Governors

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

Michael T. Kiley, Thomas Laubach, and David E.Lebow, Associate Directors, Division of Researchand Statistics, Board of Governors

Joshua Gallin, Deputy Associate Director, Division ofResearch and Statistics, Board of Governors

Edward Nelson, Assistant Director, Division of Mone-tary Affairs, Board of Governors; Stacey Tevlin,

Assistant Director, Division of Research and Statis-tics, Board of Governors

Laura Lipscomb, Section Chief, Division of MonetaryAffairs, Board of Governors

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

Marie Gooding, First Vice President, Federal ReserveBank of Atlanta

David Altig, Jeff Fuhrer, and Loretta J. Mester, Execu-tive Vice Presidents, Federal Reserve Banks of At-lanta, Boston, and Philadelphia, respectively

Lorie K. Logan, Senior Vice President, Federal ReserveBank of New York

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Todd E. Clark, William Gavin, Evan F. Koenig, PaoloA. Pesenti, Julie Ann Remache,1 and Mark Spiegel,Vice Presidents, Federal Reserve Banks of Cleve-land, St. Louis, Dallas, New York, New York, andSan Francisco, respectively

Robert L. Hetzel and Samuel Schulhofer-Wohl, SeniorEconomists, Federal Reserve Banks of Richmondand Minneapolis, respectively

______________________________1Attended Tuesdays session only.

Developments in Financial Markets and the Fed-eral Reserves Balance SheetThe Manager of the System Open Market Accountreported on developments in domestic and foreign fi-nancial markets as well as the System open market op-

erations during the period since the Federal Open Mar-ket Committee (FOMC) met on June 1819, 2013. Byunanimous 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.

In support of the Committees longer-run planning forimprovements in the implementation of monetary poli-cy, the Desk report also included a briefing on the po-tential for establishing a fixed-rate, full-allotment over-night reverse repurchase agreement facility as an addi-

tional tool for managing money market interest rates.The presentation suggested that such a facility wouldallow the Committee to offer an overnight, risk-freeinstrument directly to a relatively wide range of marketparticipants, perhaps complementing the payment ofinterest on excess reserves held by banks and therebyimproving the Committees ability to keep short-termmarket rates at levels that it deems appropriate toachieve its macroeconomic objectives. The staff alsoidentified several key issues that would require consid-eration in the design of such a facility, including thechoice of the appropriate facility interest rate and pos-sible additions to the range of eligible counterparties.In general, meeting participants indicated that theythought such a facility could prove helpful; they askedthe staff to undertake further work to examine how itmight operate and how it might affect short-term fund-ing markets. A number of them emphasized that theirinterest in having the staff conduct additional researchreflected an ongoing effort to improve the technical

execution of policy and did not signal any change in theCommittees views about policy going forward.

Staff Review of the Economic SituationThe information reviewed for the July 3031 meetingindicated that economic activity expanded at a modestpace in the first half of the year. Private-sector em-ployment increased further in June, but the unemploy-ment rate was still elevated. Consumer price inflationslowed markedly in the second quarter, likely restrainedin part by some transitory factors, but measures oflonger-term inflation expectations remained stable.The Bureau of Economic Analysis (BEA) released itsadvance estimate for second-quarter real gross domes-tic product (GDP), along with revised data for earlierperiods, during the second day of the FOMC meeting.The staffs assessment of economic activity and infla-tion in the first half of 2013, based on informationavailable before the meeting began, was broadly con-

sistent with the new information from the BEA.

Private nonfarm employment rose at a solid pace inJune, as in recent months, while total government em-ployment decreased further. The unemployment ratewas 7.6 percent in June, little changed from its level inthe prior few months. The labor force participationrate rose slightly, as did the employment-to-populationratio. The rate of long-duration unemployment de-creased somewhat, but the share of workers employedpart time for economic reasons moved up; both ofthese measures remained relatively high. Forward-looking indicators of labor market activity in the near

term were mixed: Although household expectations forthe labor market situation generally improved andfirms hiring plans moved up, initial claims for unem-ployment insurance were essentially flat over the inter-meeting period, and measures of job openings and therate of gross private-sector hiring were little changed.

Manufacturing production expanded in June, and therate of manufacturing capacity utilization edged up.Auto production and sales were near pre-recession lev-els, and automakers schedules indicated that the rate ofmotor vehicle assemblies would continue at a similarpace in the coming months. Broader indicators ofmanufacturing production, such as the readings on neworders from the national and regional manufacturingsurveys, were generally consistent with further modestgains in factory output in the near term.

Real personal consumption expenditures (PCE) in-creased more slowly in the second quarter than in thefirst. However, some key factors that tend to supporthousehold spending were more positive in recent

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months; in particular, gains in equity values and homeprices boosted household net worth, and consumersentiment in the Thomson Reuters/University of Mich-igan Surveys of Consumers rose in July to its highestlevel since the onset of the recession.

Conditions in the housing sector generally improvedfurther, as real expenditures for residential investmentcontinued to expand briskly in the second quarter.However, construction activity was still at a low level,with demand restrained in part by tight credit standardsfor mortgage loans. Starts of new single-family homeswere essentially flat in June, but the level of permit is-suance was consistent with gains in construction insubsequent months. In the multifamily sector, whereactivity is more variable, starts and permits both de-creased. Home prices continued to rise stronglythrough May, and sales of both new and existinghomes increased, on balance, in May and June. The

recent rise in mortgage rates did not yet appear to havehad an adverse effect on housing activity.

Growth in real private investment in equipment andintellectual property products was greater in the secondquarter than in the first quarter.2 Nominal new ordersfor nondefense capital goods excluding aircraft contin-ued to trend up in May and June and were runningabove the level of shipments. Other recent forward-looking indicators, such as surveys of business condi-tions and capital spending plans, were mixed andpointed to modest gains in business equipment spend-ing in the near term. Real business expenditures for

nonresidential construction increased in the secondquarter after falling in the first quarter. Business inven-tories in most industries appeared to be broadly alignedwith sales in recent months.

Real federal government purchases contracted less inthe second quarter than in the first quarter as reduc-tions in defense spending slowed. Real state and localgovernment purchases were little changed in the se-cond quarter; the payrolls of these governments ex-panded somewhat, but state and local construction ex-penditures continued to decrease.

The U.S. international trade deficit widened in May asexports fell slightly and imports rose. The decline in

2 With the most recent revision to the national accounts, theBEA introduced intellectual property products as a new cat-egory of investment that included software; research anddevelopment; and entertainment, literary, and artistic origi-nals.

exports was led by a sizable drop in consumer goods,while most other categories of exports showed modestgains. Imports increased in a wide range of categories,with particular strength in oil, consumer goods, andautomotive products.

Overall U.S. consumer prices, as measured by the PCEprice index, were unchanged from the first quarter tothe second and were about 1 percent higher than a yearearlier. Consumer energy prices declined significantlyin the second quarter, although retail gasoline prices,measured on a seasonally adjusted basis, moved up inJune and July. The PCE price index for items exclud-ing food and energy rose at a subdued rate in the se-cond quarter and was around 1 percent higher than ayear earlier. Near-term inflation expectations from theMichigan survey were little changed in June and July, aswere longer-term inflation expectations, which re-mained within the narrow range seen in recent years.

Measures of labor compensation indicated that gains innominal wages and employee benefits remained mod-est.

Foreign economic growth appeared to remain subduedin comparison with longer-run trends. Nonetheless,there were some signs of improvement in the advancedforeign economies. Production and business confi-dence turned up in Japan, real GDP growth picked upto a moderate pace in the second quarter in the UnitedKingdom, and recent indicators suggested that theeuro-area recession might be nearing an end. In con-trast, Chinese real GDP growth moderated in the first

half of this year compared with 2012, and indicators forother emerging market economies (EMEs) also pointedto less-robust growth. Foreign inflation generally re-mained well contained. Monetary policy stayed highlyaccommodative in the advanced foreign economies,but some EME central banks tightened policy in reac-tion to capital outflows and to concerns about infla-tionary pressures from currency depreciation.

Staff Review of the Financial SituationFinancial markets were volatile at times during the in-termeeting period as investors reacted to Federal Re-serve communications and to incoming economic dataand as market dynamics appeared to amplify some assetprice moves. Broad equity price indexes ended theperiod higher, and longer-term interest rates rose sig-nificantly. Sizable increases in rates occurred followingthe June FOMC meeting, as investors reportedly sawCommittee communications as suggesting a less ac-commodative stance of monetary policy than had beenexpected going forward; however, a portion of the in-creases was reversed as subsequent policy communica-

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tions lowered these concerns. U.S. economic data, par-ticularly the June employment report, also contributedto the rise in yields over the period.

On balance, yields on intermediate- and longer-termTreasury securities rose about 30 to 45 basis pointssince the June FOMC meeting, with staff models at-tributing most of the increase to a rise in term premi-ums and the remainder to an upward revision in theexpected path of short-term rates. The federal fundsrate path implied by financial market quotes steepenedslightly, on net, but the results from the Desks Julysurvey of primary dealers showed little change in deal-ers views of the most likely timing of the first increasein the federal funds rate target. Market-based measuresof inflation compensation were about unchanged.

Over the period, rates on primary mortgages and yieldson agency mortgage-backed securities (MBS) rose

about in line with the 10-year Treasury yield. Theoption-adjusted spread for production-coupon MBSwidened somewhat, possibly reflecting a downwardrevision in investors expectations for Federal ReserveMBS purchases, an increase in uncertainty aboutlonger-term interest rates, and convexity-related MBSselling.

Spreads between yields on 10-year nonfinancial corpo-rate bonds and yields on Treasury securities narrowedsomewhat on net. Early in the period, yields on corpo-rate bonds increased, and bond mutual funds and bondexchange-traded funds experienced large net redemp-

tions in June; the rate of redemptions then slowed inJuly.

Market sentiment toward large domestic banking or-ganizations appeared to improve somewhat over theintermeeting period, as the largest banks reportedsecond-quarter earnings that were above analysts ex-pectations. Stock prices of large domestic banks out-performed broader equity indexes, and credit defaultswap spreads for the largest bank holding companiesmoved about in line with trends in broad credit index-es.

Municipal bond yields rose sharply over the intermeet-ing period, increasing somewhat more than yields onTreasury securities. In June, gross issuance of long-term municipal bonds remained solid and was splitroughly evenly between refunding and new-capital issu-ance. The City of Detroits bankruptcy filing reported-ly had only a limited effect on the market for municipalsecurities as it had been widely anticipated by marketparticipants.

Credit flows to nonfinancial businesses showed mixedchanges. Reflecting the reduced incentive to refinanceas longer-term interest rates rose, the pace of gross is-suance of investment- and speculative-grade corporatebonds dropped in June and July, compared with theelevated pace earlier this year. In contrast, gross issu-

ance of equity by nonfinancial firms maintained its re-cent strength in June. Leveraged loan issuance alsocontinued to be strong amid demand for floating-rateinstruments by investors. Financing conditions forcommercial real estate continued to recover slowly. Inresponse to the July Senior Loan Officer Opinion Sur-vey on Bank Lending Practices (SLOOS), banks gener-ally indicated that they had eased standards on bothcommercial and industrial (C&I) and commercial realestate loans over the past three months. For C&Iloans, standards were currently reported to be some-what easy compared with longer-term norms, while for

commercial real estate loans, standards remainedsomewhat tighter than longer-term norms. Banks re-ported somewhat stronger demand for most types ofloans.

Financing conditions in the household sector improvedfurther in recent months. Mortgage purchase applica-tions declined modestly through July even as refinanc-ing applications fell off sharply with the rise in mort-gage rates. The outstanding amounts of student andauto loans continued to expand at a robust pace inMay. Credit card debt remained about flat on a year-over-year basis. In the July SLOOS, banks reported

that they had eased standards on most categories ofloans to households in the second quarter, but thatstandards on all types of mortgages, and especially onsubprime mortgage loans and home equity lines ofcredit, remained tight when judged against longer-runnorms.

Increases in total bank credit slowed in the secondquarter, as the book value of securities holdings fellslightly and C&I loan balances at large banks increasedonly modestly in April and May. M2 grew at an annualrate of about 7 percent in June and July, supported byflows into liquid deposits and retail money market

funds. Both of these components of M2 may havebeen boosted recently by the sizable redemptions frombond mutual funds. The monetary base continued toexpand rapidly in June and July, driven mainly by theincrease in reserve balances resulting from the FederalReserves asset purchases.

Ten-year sovereign yields in the United Kingdom andGermany rose with U.S. yields early in the intermeetingperiod but fell back somewhat after statements by the



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European Central Bank and the Bank of England wereboth interpreted by market participants as signaling thattheir policy rates would be kept low for a considerabletime. On net, the U.K. 10-year sovereign yield in-creased, though by less than the comparable yield in theUnited States, while the yield on German bunds was

little changed. Peripheral euro-area sovereign spreadsover German bunds were also little changed on net.Japanese government bond yields were relatively stableover the period, after experiencing substantial volatilityin May. The staffs broad nominal dollar index movedup as the dollar appreciated against the currencies ofthe advanced foreign economies, consistent with thelarger increase in U.S. interest rates. The dollar wasmixed against the EME currencies. Foreign equityprices generally increased, although equity prices inChina declined amid investor concerns regarding fur-ther signs that the economy was slowing and over vola-

tility in Chinese interbank funding markets. Outflowsfrom EME equity and bond funds, which had beenparticularly rapid in June, moderated in July.

Staff Economic OutlookThe data received since the forecast was prepared forthe previous FOMC meeting suggested that real GDPgrowth was weaker, on net, in the first half of the yearthan had been anticipated.3 Nevertheless, the staff stillexpected that real GDP would accelerate in the secondhalf of the year. Part of this projected increase in therate of real GDP growth reflected the staffs expecta-tion that the drag on economic growth from fiscal poli-

cy would be smaller in the second half as the pace ofreductions in federal government purchases slowed andas the restraint on growth in consumer spendingstemming from the higher taxes put in place at the be-ginning of the year diminished. For the year as awhole, the staff anticipated that the rate of growth ofreal GDP would only slightly exceed that of potentialoutput. The staffs projection for real GDP growthover the medium term was essentially unrevised, ashigher equity prices were seen as offsetting the restric-tive effects of the increase in longer-term interest rates.The staff continued to forecast that the rate of realGDP growth would strengthen in 2014 and 2015, sup-ported by a further easing in the effects of fiscal policyrestraint on economic growth, increases in consumerand business confidence, additional improvements in

3The staffs forecast for the July FOMC meeting was pre-

pared before the BEA released its estimate for real GDP inthe second quarter and the revisions for earlier periods.

credit availability, and accommodative monetary policy.The expansion in economic activity was anticipated tolead to a slow reduction in the slack in labor and prod-uct markets over the projection period, and the unem-ployment rate was expected to decline gradually.

The staffs forecast for inflation was little changed fromthe projection prepared for the previous FOMC meet-ing. The staff continued to judge that much of the re-cent softness in consumer price inflation would betransitory and that inflation would pick up somewhat inthe second half of this year. With longer-run inflationexpectations assumed to remain stable, changes incommodity and import prices expected to be modest,and significant resource slack persisting over the fore-cast period, inflation was forecast to be subduedthrough 2015.

The staff continued to see numerous risks around the

forecast. Among the downside risks for economic ac-tivity were the uncertain effects and future course offiscal policy, the possibility of adverse developments inforeign economies, and concerns about the ability ofthe U.S. economy to weather potential future adverseshocks. The most salient risk for the inflation outlookwas that the recent softness in inflation would notabate as anticipated.

Participants Views on Current Conditions and theEconomic OutlookIn their discussion of the economic situation, meetingparticipants noted that incoming information on eco-

nomic activity was mixed. Household spending andbusiness fixed investment continued to advance, andthe housing sector was strengthening. Private domesticfinal demand continued to increase in the face of tight-er federal fiscal policy this year, but several participantspointed to evidence suggesting that fiscal policy hadrestrained spending in the first half of the year morethan they previously thought. Perhaps partly for thatreason, a number of participants indicated that growthin economic activity during the first half of this yearwas somewhat below their earlier expectations. In ad-dition, subpar economic activity abroad was a negativefactor for export growth. Conditions in the labor mar-ket improved further as private payrolls rose at a solidpace in June, but the unemployment rate remained ele-vated. Inflation continued to run below the Commit-tees longer-run objective.

Participants generally continued to anticipate that thegrowth of real GDP would pick up somewhat in thesecond half of 2013 and strengthen further thereafter.Factors cited as likely to support a pickup in economic



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activity included highly accommodative monetary poli-cy, improving credit availability, receding effects of fis-cal restraint, continued strength in housing and autosales, and improvements in household and businessbalance sheets. A number of participants indicated,however, that they were somewhat less confident about

a near-term pickup in economic growth than they hadbeen in June; factors cited in this regard included recentincreases in mortgage rates, higher oil prices, slowgrowth in key U.S. export markets, and the possibilitythat fiscal restraint might not lessen.

Consumer spending continued to advance, but spend-ing on items other than motor vehicles was relativelysoft. Recent high readings on consumer confidenceand boosts to household wealth from increased equityand real estate prices suggested that consumer spendingwould gather momentum in the second half of the year.However, a few participants expressed concern that

higher household wealth might not translate into great-er consumer spending, cautioning that household in-come growth remained slow, that households mightnot treat the additions to wealth arising from recentequity price increases as lasting, or that householdsscope to extract housing equity for the purpose of in-creasing their expenditures was less than in the past.

The housing sector continued to pick up, as indicatedby increases in house prices, low inventories of homesfor sale, and strong demand for construction. Whilerecent mortgage rate increases might serve to restrainhousing activity, several participants expressed confi-

dence that the housing recovery would be resilient inthe face of the higher rates, variously citing pent-uphousing demand, banks increasing willingness to makemortgage loans, strong consumer confidence, still-lowreal interest rates, and expectations of continuing risesin house prices. Nonetheless, refinancing activity wasdown sharply, and the incoming data would need to bewatched carefully for signs of a greater-than-anticipatedeffect of higher mortgage rates on housing activitymore broadly.

In the business sector, the outlook still appeared to bemixed. Manufacturing activity was reported to havepicked up in a number of Districts,and activity in theenergy sector remained at a high level. Although astep-up in business investment was likely to be a neces-sary element of the projected pickup in economicgrowth, reports from businesses ranged from thosecontacts who expressed heightened optimism to thosewho suggested that little acceleration was likely in thesecond half of the year.

Participants reported further signs that the tightening infederal fiscal policy restrained economic activity in thefirst half of the year: Cuts in government purchasesand grants reportedly had been a factor contributing toslower growth in sales and equipment orders in someparts of the country, and consumer spending seemed to

have been held back by tax increases. Moreover, un-certainty about the effects of the federal spending se-questration and related furloughs clouded the outlook.It was noted, however, that fiscal restriction by stateand local governments seemed to be easing.

The June employment report showed continued solidgains in payrolls. Nonetheless, the unemployment rateremained elevated, and the continuing low readings onthe participation rate and the employment-to-population ratio, together with a high incidence ofworkers being employed part time for economic rea-sons, were generally seen as indicating that overall labor

market conditions remained weak. It was noted thatemployment growth had been stronger than wouldhave been expected given the recent pace of outputgrowth, reflecting weak gains in productivity. Someparticipants pointed out that once productivity growthpicked up, faster economic growth would be requiredto support further increases in employment along thelines seen of late. However, one participant thoughtthat sluggish productivity performance was likely topersist, implying that the recent pace of output growthwould be sufficient to maintain employment gains nearcurrent rates.

Recent readings on inflation were below the Commit-tees longer-run objective of 2 percent, in part reflectingtransitory factors, and participants expressed a range ofviews about how soon inflation would return to2 percent. A few participants, who felt that the recentlow inflation rates were unlikely to persist or that thelow PCE inflation readings might be marked up in fu-ture data revisions, suggested that, as transitory factorsreceded and the pace of recovery improved, inflationcould be expected to return to 2 percent reasonablyquickly. A number of others, however, viewed the lowinflation readings as largely reflecting persistently defi-

cient aggregate demand, implying that inflation couldremain below 2 percent for a protracted period andfurther supporting the case for highly accommodativemonetary policy.

Both domestic and foreign asset markets were volatileat times during the intermeeting period, reacting to pol-icy communications and data releases. In discussingthe increases in U.S. longer-term interest rates that oc-curred in the wake of the June FOMC meeting and the



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associated press conference, meeting participantspointed to heightened financial market uncertaintyabout the path of monetary policy and a shift of marketexpectations toward less policy accommodation. A fewparticipants suggested that this shift occurred in partbecause Committee participants economic projections,

released following the June meeting, generally showed asomewhat more favorable outlook than those of pri-vate forecasters, or because the June policy statementand press conference were seen as indicating relativelylittle concern about inflation readings, which had beenlow and declining. Moreover, investors may have per-ceived that Committee communications about the pos-sibility of slowing the pace of asset purchases also im-plied a higher probability of an earlier firming of thefederal funds rate. Subsequent Federal Reserve com-munications, which emphasized that decisions aboutthe two policy tools were distinct and underscored that

a highly accommodative stance of monetary policywould remain appropriate for a considerable periodafter purchases are completed, were seen as havinghelped clarify the Committees policy strategy. A num-ber of participants mentioned that, by the end of theintermeeting period, market expectations of the futurecourse of monetary policy, both with regard to assetpurchases and with regard to the path of the federalfunds rate, appeared well aligned with their own expec-tations. Nonetheless, some participants felt that, as aresult of recent financial market developments, overallfinancial market conditions had tightened significantly,importantly reflecting larger term premiums, and they

expressed concern that the higher level of longer-terminterest rates could be a significant factor holding backspending and economic growth. Several others, how-ever, judged that the rise in rates was likely to exert rel-atively little restraint, or that the increase in equity pric-es and easing in bank lending standards would largelyoffset the effects of the rise in longer-term interestrates. Some participants also stated that financial de-velopments during the intermeeting period might havehelped put the financial system on a more sustainablefooting, insofar as those developments were associatedwith an unwinding of unsustainable speculative posi-

tions or an increase in term premiums from extraordi-narily low levels.

In looking ahead, meeting participants commented onseveral considerations pertaining to the course of mon-etary policy. First, almost all participants confirmedthat they were broadly comfortable with the characteri-zation of the contingent outlook for asset purchasesthat was presented in the June postmeeting press con-

ference and in the July monetary policy testimony.Under that outlook, if economic conditions improvedbroadly as expected, the Committee would moderatethe pace of its securities purchases later this year. Andif economic conditions continued to develop broadly asanticipated, the Committee would reduce the pace of

purchases in measured steps and conclude the purchaseprogram around the middle of 2014. At that point, ifthe economy evolved along the lines anticipated, therecovery would have gained further momentum, un-employment would be in the vicinity of 7 percent, andinflation would be moving toward the Committees 2percent objective. While participants viewed the futurepath of purchases as contingent on economic and fi-nancial developments, one participant indicated dis-comfort with the contingent plan on the grounds thatthe references to specific dates could be misinterpretedby the public as suggesting that the purchase program

would be wound down on a more-or-less preset sched-ule rather than in a manner dependent on the state ofthe economy. Generally, however, participants weresatisfied that investors had come to understand thedata-dependent nature of the Committees thinkingabout asset purchases. A few participants, while com-fortable with the plan, stressed the need to avoid put-ting too much emphasis on the 7 percent value for theunemployment rate, which they saw only as illustrativeof conditions that could obtain at the time when theasset purchases are completed.

Second, participants considered whether it would be

desirable to include in the Committees policy state-ment additional information regarding the Committeescontingent outlook for asset purchases. Most partici-pants saw the provision of such information, whichwould reaffirm the contingent outlook presented fol-lowing the June meeting, as potentially useful; however,many also saw possible difficulties, such as the chal-lenge of conveying the desired information succinctlyand with adequate nuance, and the associated risk ofagain raising uncertainty about the Committees policyintentions. A few participants saw other forms ofcommunication as better suited for this purpose. Sev-eral participants favored including such additional in-formation in the policy statement to be released follow-ing the current meeting; several others indicated thatproviding such information would be most useful whenthe time came for the Committee to begin reducing thepace of its securities purchases, reasoning that earlierinclusion might trigger an unintended tightening offinancial conditions.



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Finally, the potential for clarifying or strengthening theCommittees forward guidance for the federal fundsrate was discussed. In general, there was support formaintaining the current numerical thresholds in theforward guidance. A few participants expressed con-cern that a decision to lower the unemployment

threshold could potentially lead the public to view theunemployment threshold as a policy variable that couldnot only be moved down but also up, thereby callinginto question the credibility of the thresholds and un-dermining their effectiveness. Nonetheless, severalparticipants were willing to contemplate lowering theunemployment threshold if additional accommodationwere to become necessary or if the Committee wantedto adjust the mix of policy tools used to provide theappropriate level of accommodation. A number ofparticipants also remarked on the possible usefulness ofproviding additional information on the Committees

intentions regarding adjustments to the federal fundsrate after the 6 percent unemployment rate thresholdwas reached, in order to strengthen or clarify theCommittees forward guidance. One participant sug-gested that the Committee could announce an addi-tional, lower set of thresholds for inflation and unem-ployment; another indicated that the Committee couldprovide guidance stating that it would not raise its tar-get for the federal funds rate if the inflation rate wasexpected to run below a given level at a specific hori-zon. The latter enhancement to the forward guidancemight be seen as reinforcing the message that theCommittee was willing to defend its longer-term infla-

tion goal from below as well as from above.

Committee Policy ActionCommittee members viewed the information receivedover the intermeeting period as suggesting that eco-nomic activity expanded at a modest pace during thefirst half of the year. Labor market conditions showedfurther improvement in recent months, on balance, butthe unemployment rate remained elevated. Householdspending and business fixed investment advanced, andthe housing sector was strengthening, but mortgagerates had risen somewhat and fiscal policy was restrain-ing economic growth. The Committee expected that,with appropriate policy accommodation, economicgrowth would pick up from its recent pace, resulting ina gradual decline in the unemployment rate toward lev-els consistent with the Committees dual mandate.With economic activity and employment continuing togrow despite tighter fiscal policy, and with global finan-cial conditions less strained overall, members generallycontinued to see the downside risks to the outlook for

the economy and the labor market as having dimin-ished since last fall. Inflation was running below theCommittees longer-run objective, partly reflectingtransitory influences, but longer-run inflation expecta-tions were stable, and the Committee anticipated thatinflation would move back toward its 2 percent objec-

tive over the medium term. Members recognized,however, that inflation persistently below the Commit-tees 2 percent objective could pose risks to economicperformance.

In their discussion of monetary policy for the periodahead, members judged that a highly accommodativestance of monetary policy was warranted in order tofoster a stronger economic recovery and sustained im-provement in labor market conditions in a context ofprice stability. In considering the likely path for theCommittees asset purchases, members discussed thedegree of improvement in the labor market outlook

since the purchase program began last fall. The unem-ployment rate had declined considerably since then,and recent gains in payroll employment had been solid.However, other measures of labor utilizationincluding the labor force participation rate and thenumbers of discouraged workers and those workingpart time for economic reasonssuggested more mod-est improvement, and other indicators of labor de-mand, such as rates of hiring and quits, remained low.While a range of views were expressed regarding thecumulative improvement in the labor market since lastfall, almost all Committee members agreed that a

change in the purchase program was not yet appropri-ate. However, in the view of the one member whodissented from the policy statement, the improvementin the labor market was an important reason for callingfor a more explicit statement from the Committee thatasset purchases would be reduced in the near future. Afew members emphasized the importance of being pa-tient and evaluating additional information on theeconomy before deciding on any changes to the pace ofasset purchases. At the same time, a few others point-ed to the contingent plan that had been articulated onbehalf of the Committee the previous month, and sug-gested that it might soon be time to slow somewhat thepace of purchases as outlined in that plan. At the con-clusion of its discussion, the Committee decided tocontinue adding policy accommodation by purchasingadditional MBS at a pace of $40 billion per month andlonger-term Treasury securities at a pace of $45 billionper month and to maintain its existing reinvestmentpolicies. In addition, the Committee reaffirmed its in-tention to keep the target federal funds rate at



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0 to percent and retained its forward guidance that itanticipates that this exceptionally low range for the fed-eral funds rate will be appropriate at least as long as theunemployment rate remains above 6 percent, infla-tion between one and two years ahead is projected tobe no more than a half percentage point above the

Committees 2 percent longer-run goal, and longer-term inflation expectations continue to be well an-chored.

Members also discussed the wording of the policystatement to be issued following the meeting. In addi-tion to updating its description of the state of theeconomy, the Committee decided to underline its con-cern about recent shortfalls of inflation from its longer-run goal by including in the statement an indicationthat it recognizes that inflation persistently below its2 percent objective could pose risks to economic per-formance, while also noting that it continues to antici-

pate that inflation will move back toward its objectiveover the medium term. The Committee also consid-ered whether to add more information concerning thecontingent outlook for asset purchases to the policystatement, but judged that doing so might prompt anunwarranted shift in market expectations regarding as-set purchases. The Committee decided to indicate inthe statement that it reaffirmed its viewrather thansimply expectsthat a highly accommodative stanceof monetary policy will remain appropriate for a con-siderable time after the asset purchase program endsand the economic recovery strengthens.

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 System Account in accordancewith the following 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 seeksconditions 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. TheDesk is directed to continue purchasinglonger-term Treasury securities at a pace ofabout $45 billion per month and to continuepurchasing agency mortgage-backed securi-ties at a pace of about $40 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 ofthe Federal Reserves agency mortgage-backed securities transactions. The Commit-tee directs the Desk to maintain its policy ofrolling over maturing Treasury securities into

new 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 theSecretary will keep the Committee informedof ongoing 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 June sug-gests that economic activity expanded at amodest pace during the first half of the year.Labor market conditions have shown furtherimprovement in recent months, on balance,but the unemployment rate remains elevated.Household spending and business fixed in-vestment advanced, and the housing sectorhas been strengthening, but mortgage rateshave risen somewhat and fiscal policy is re-

straining economic growth. Partly reflectingtransitory influences, inflation has been run-ning below the Committees longer-run ob-jective, but longer-term inflation expecta-tions 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 growth will pick upfrom its recent pace and the unemploymentrate will gradually decline toward levels theCommittee judges consistent with its dualmandate. The Committee sees the downsiderisks to the outlook for the economy and thelabor market as having diminished since thefall. The Committee recognizes that inflationpersistently below its 2 percent objectivecould pose risks to economic performance,but it anticipates that inflation will move



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back toward its objective over the mediumterm.

To support a stronger economic recoveryand to help ensure that inflation, over time,is at the rate most consistent with its dualmandate, the Committee decided to continuepurchasing additional agency mortgage-backed securities at a pace of $40 billion permonth and longer-term Treasury securities ata pace of $45 billion per month. The Com-mittee is maintaining its existing policy of re-investing principal payments from its hold-ings of agency debt and agency mortgage-backed securities in agency mortgage-backedsecurities and of rolling over maturingTreasury securities at auction. Taken togeth-er, these actions should maintain downwardpressure on longer-term interest rates, sup-

port mortgage markets, and help to makebroader financial conditions more accom-modative.

The Committee will closely monitor incom-ing information on economic and financialdevelopments in coming months. TheCommittee will continue its purchases ofTreasury and agency mortgage-backed secu-rities, and employ its other policy tools asappropriate, until the outlook for the labormarket has improved substantially in a con-text of price stability. The Committee is

prepared to increase or reduce the pace of itspurchases to maintain appropriate policy ac-commodation as the outlook for the labormarket or inflation changes. In determiningthe size, pace, and composition of its assetpurchases, the Committee will continue totake appropriate account of the likely efficacyand costs of such purchases as well as the ex-tent of progress toward its economic objec-tives.

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.In particular, the Committee decided to keepthe target range for the federal funds rate at0 to percent and currently anticipates thatthis exceptionally low range for the federal

funds rate will be appropriate at least as longas the unemployment rate remains above6 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-term

inflation 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. 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, James Bullard, Elizabeth Duke, Charles L. Ev-ans, Jerome H. Powell, Sarah Bloom Raskin, EricRosengren, Jeremy C. Stein, Daniel K. Tarullo, andJanet L. Yellen.

Voting against this action: Esther L. George.

Ms. George dissented because she favored including inthe policy statement a more explicit signal that the paceof the Committees asset purchases would be reducedin the near term. She expressed concerns about the

open-ended approach to asset purchases and viewedproviding such a signal as important at this time, inlight of the ongoing improvement in labor market con-ditions as well as the potential costs and uncertain ben-efits of large-scale asset purchases.

It was agreed that the next meeting of the Committeewould be held on TuesdayWednesday, September 1718, 2013. The meeting adjourned at 12:30 p.m. onJuly 31, 2013.

Notation VoteBy notation vote completed on July 9, 2013, the Com-mittee unanimously approved the minutes of theFOMC meeting held on June 1819, 2013.

_____________________________William B. English

Secretary


FOMC Minutes August

Documents

Transcript of FOMC Minutes August