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FOMC Mins December

FOMC Mins December

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FOMC Mins December
FOMC Mins December

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Minutes of the Federal Open Market CommitteeDecember 11–12, 2012
 A meeting of the Federal Open Market Committee washeld in the offices of the Board of Governors of theFederal Reserve System in Washington, D.C., on Tues-day, December 11, 2012, at 11:00 a.m. and continuedon Wednesday, December 12, 2012, at 8:30 a.m.PRESENT:Ben Bernanke, Chairman William C. Dudley, Vice ChairmanElizabeth Duke Jeffrey M. LackerDennis P. LockhartSandra Pianalto Jerome H. PowellSarah Bloom Raskin Jeremy C. SteinDaniel K. Tarullo John C. Williams Janet L. Yellen James Bullard, Christine Cumming, Charles L. Evans,Esther L. George, and Eric Rosengren, AlternateMembers of the Federal Open Market CommitteeRichard W. Fisher, Narayana Kocherlakota, andCharles I. Plosser, Presidents of the Federal Re-serve Banks of Dallas, Minneapolis, and Philadel-phia, respectively  William B. English, Secretary and EconomistDeborah J. Danker, Deputy Secretary Matthew M. Luecke, Assistant Secretary Michelle A. Smith, Assistant Secretary Scott G. Alvarez, General CounselSteven B. Kamin, EconomistDavid W. Wilcox, EconomistDavid Altig, Thomas A. Connors, Michael P. Leahy, William Nelson, David Reifschneider, and William Wascher, Associate EconomistsSimon Potter, Manager, System Open Market AccountNellie Liang, Director, Office of Financial Stability Pol-icy and Research, Board of Governors Jon W. Faust, Special Advisor to the Board, Office of Board Members, Board of Governors James A. Clouse and Stephen A. Meyer, Deputy Direc-tors, Division of Monetary Affairs, Board of Gov-ernors; Maryann F. Hunter, Deputy Director, Divi-sion of Banking Supervision and Regulation, Boardof GovernorsLinda Robertson, Assistant to the Board, Office of Board Members, Board of GovernorsEllen E. Meade and Joyce K. Zickler, Senior Advisers,Division of Monetary Affairs, Board of GovernorsEric M. Engen, Thomas Laubach, and David E. Le-bow, Associate Directors, Division of Researchand Statistics, Board of Governors; Michael T. Ki-ley,¹ Associate Director, Office of Financial Stabil-ity Policy and Research, Board of Governors Joshua Gallin, Deputy Associate Director, Division of Research and Statistics, Board of Governors; JaneE. Ihrig, Deputy Associate Director, Division of Monetary Affairs, Board of Governors; Beth Anne Wilson, Deputy Associate Director, Division of In-ternational Finance, Board of GovernorsDavid H. Small, Project Manager, Division of Mone-tary Affairs, Board of Governors Jennifer E. Roush, Senior Economist, Division of Monetary Affairs, Board of GovernorsMarie Gooding, First Vice President, Federal ReserveBank of AtlantaLoretta J. Mester and Daniel G. Sullivan, Executive Vice Presidents, Federal Reserve Banks of Phila-delphia and Chicago, respectively  Troy Davig, Mark E. Schweitzer, Geoffrey Tootell,Christopher J. Waller, and Kei-Mu Yi, Senior VicePresidents, Federal Reserve Banks of Kansas City,Cleveland, Boston, St. Louis, and Minneapolis, re-spectively Mary Daly, Group Vice President, Federal ReserveBank of San Francisco _______________________ 
¹ Attended Tuesday’s session only.
Page 1 _____________________________________________________________________________________________ 
 Evan F. Koenig, Lorie K. Logan, Julie Ann Remache, Alexander L. Wolman, and Nathaniel Wuerffel, Vice Presidents, Federal Reserve Banks of Dallas,New York, New York, Richmond, and New York,respectively  Argia M. Sbordone, Assistant Vice President, FederalReserve Bank of New York 
Developments in Financial Markets and the Fed-eral Reserve’s Balance Sheet
  The Manager of the System Open Market Account(SOMA) reported on developments in domestic andforeign financial markets during the period since theFederal Open Market Committee (FOMC) met on Oc-tober 23–24, 2012. He also reported on System openmarket operations over the intermeeting period, includ-ing the ongoing reinvestment into agency-guaranteedmortgage-backed securities (MBS) of principal pay-ments received on SOMA holdings of agency debt andagency-guaranteed MBS; the operations related to thematurity extension program authorized at the June 19– 20, 2012, FOMC meeting; and the purchases of MBSauthorized at the September 12–13, 2012, FOMCmeeting. By unanimous vote, the Committee ratifiedthe Open Market Desk’s domestic transactions overthe intermeeting period. There were no interventionoperations in foreign currencies for the System’s ac-count over the intermeeting period. The Committee considered a proposal to extend itsliquidity swap arrangements with foreign central bankspast February 1, 2013. All but one member approvedthe following resolution:“The Federal Open Market Committee di-rects the Federal Reserve Bank of New York to extend the existing temporary dollar li-quidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of  Japan, the European Central Bank, and theSwiss National Bank through February 1,2014. In addition, the Federal Open MarketCommittee directs the Federal Reserve Bank of New York to extend the existing tempo-rary foreign currency liquidity swap arrange-ments with the Bank of Canada, the Bank of England, the Bank of Japan, the EuropeanCentral Bank, and the Swiss National Bank through February 1, 2014.”Mr. Lacker dissented because of his opposition to ar-rangements that support Federal Reserve lending inforeign currencies, which he viewed as amounting tofiscal policy.
Options for the Continuation of Asset Purchases
 The staff reviewed several options for purchasing long-er-term securities after the planned completion at theend of the month of the maturity extension program. The presentation focused on the potential effects forthe U.S. economy, based in part on simulations of astaff macroeconomic model, and for the Federal Re-serve’s balance sheet and income of continuing to buy MBS and longer-term Treasury securities over varioustime frames. In their discussion of the staff presenta-tion, some participants asked about the possible conse-quences of the alternative purchase programs for theexpected path of Federal Reserve remittances to the Treasury Department, and a few indicated the need foradditional consideration of the implications of suchpurchases for the eventual normalization of the stanceof monetary policy and the size and composition of theFederal Reserve’s balance sheet.
Staff Review of the Economic Situation
 The information reviewed at the December 11–12meeting indicated that economic activity continued toincrease at a moderate pace in recent months. Em-ployment expanded further, and the unemploymentrate declined slightly, on balance, from September toNovember but was still elevated. Consumer price infla-tion slowed as consumer energy costs fell, whilemeasures of longer-run inflation expectations remainedstable.Private nonfarm employment increased at a slightly faster rate in October and November than in the thirdquarter, but government employment decreased some- what. The unemployment rate declined to 7.7 percentin November, and the labor force participation rate inthat month was at the same level as in the third quarter. The relatively large share of workers employed parttime for economic reasons trended up a bit, on net, while the share of long-duration unemployment in totalunemployment was essentially flat and remained elevat-ed. Indicators of firms’ job openings and hiring plans were little changed on balance. Initial claims for un-employment insurance were boosted in early Novem-ber by the effects of Hurricane Sandy but returned within weeks to a level that was about the same as be-fore the hurricane.Manufacturing production declined in October, as out-put was held down at the end of the month by the dis-
Page 2 Federal Open Market Committee _____________________________________________________________________________________________ 
ruptions and damage caused by Hurricane Sandy; therate of manufacturing capacity utilization also declined. Automakers’ schedules indicated that the pace of mo-tor vehicle assemblies would rise somewhat in the com-ing months. Broader indicators of factory output, suchas the diffusion indexes of new orders from the nation-al and regional manufacturing surveys, continued to besubdued at levels consistent with only small gains inproduction in the near term.Real personal consumption expenditures rose at amodest pace in the third quarter, but spending declinedin October, likely in response in part to some disrup-tions caused by the hurricane. Probably reflecting those disruptions, sales of light motor vehicles fell inOctober but then increased notably in November.Some factors that tend to influence household spend-ing became less supportive: Real disposable personalincome moved up only slightly in the third quarter anddeclined in October. Moreover, consumer sentimentfell back in early December to about its level during thesummer. In contrast, household net worth increased inthe third quarter, partially a result of higher equity andhome values.Conditions in the housing market continued to im-prove gradually, but construction activity was still at alow level, restrained by the considerable inventory of foreclosed and distressed homes and the tight creditstandards for mortgages. Starts and permits of new single-family homes were essentially flat in Octoberafter rising significantly in the preceding month. Startsof new multifamily units rose in October, althoughpermits declined somewhat following their brisk in-crease in the previous month. Meanwhile, home pricesadvanced further and sales of existing homes continuedto expand, but new home sales were little changed.Real business expenditures on equipment and softwaredecreased in the third quarter. In October, nominalnew orders for nondefense capital goods excluding aircraft moved up a little, but shipments of these capitalgoods edged down and the level of orders remainedbelow that of shipments. In addition, other forward-looking indicators of equipment investment by firms,such as surveys of business conditions and capitalspending plans, were still subdued. Real business ex-penditures for nonresidential structures also decreasedin the third quarter, although nominal constructionspending by firms increased in October. Inventories inmost industries appeared to be roughly aligned withsales in recent months.Real federal government purchases increased markedly in the third quarter, led by a sharp rise in defensespending. However, data for nominal federal spending in October pointed toward a decline in real defenseexpenditures in the fourth quarter. Real state and localgovernment purchases were little changed in the thirdquarter. State and local government payrolls decreasedon net over October and November, and nominal con-struction spending by these governments edged lowerin October. The U.S. international trade deficit widened in October,and both exports and imports fell sharply from theprevious month. The decrease in exports was wide-spread across categories, while the reduction in importsimportantly reflected lower purchases of consumergoods and non-oil industrial supplies, although petrole-um imports increased.Consumer prices moved up more slowly in Octoberthan in the preceding few months, primarily because of a small decline in energy prices after several months of large gains. Moreover, survey data indicated that retailgasoline prices decreased further in November. Con-sumer food prices rose a little faster in October, as theeffects of last summer’s drought started to show through at the retail level. Increases in consumer pricesexcluding food and energy remained subdued. Near-term inflation expectations from the Thomson Reu-ters/University of Michigan Surveys of Consumersedged up, on balance, in November and early Decem-ber, while longer-term inflation expectations in the sur- vey were little changed and continued to run within therelatively narrow range that has prevailed for sometime.Measures of labor compensation indicated that gains innominal wages remained slow. Compensation per hourin the nonfarm business sector increased slightly overthe year ending in the third quarter, and with a moder-ate rise in productivity, unit labor costs were essentially unchanged. The employment cost index rose only a bitfaster than the measure of compensation per hour overthe same period. In October and November, increasesin average hourly earnings for all employees were small.Economic activity abroad remained subdued, especially in the advanced foreign economies. The euro-areaeconomy contracted further in the third quarter, andconsumer and business confidence remained low.Economic activity in Japan also declined in the thirdquarter, and a sharp drop in exports restrained eco-nomic growth in Canada. In emerging market econo-mies, by contrast, recent data on exports and manufac-
Minutes of the Meeting of December 1112, 2012 Page 3 _____________________________________________________________________________________________ 

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