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Minutes of the Federal Open Market Committee
September 22-23, 2009

A joint meeting of the Federal Open Market Commit- Mr. Struckmeyer, Deputy Staff Director, Office of
tee and the Board of Governors of the Federal Reserve the Staff Director for Management, Board of
System was held in the offices of the Board of Gover- Governors
nors in Washington, D.C., on Tuesday, September 22,
2009, at 2:00 p.m. and continued on Wednesday, Sep- Ms. Barger and Mr. English, Deputy Directors, Di-
tember 23, 2009, at 9:00 a.m. visions of Banking Supervision and Regulation
and Monetary Affairs, respectively, Board of
PRESENT: Governors
Mr. Bernanke, Chairman
Mr. Dudley, Vice Chairman Ms. Robertson, Assistant to the Board, Office of
Ms. Duke Board Members, Board of Governors
Mr. Evans
Mr. Kohn Ms. Edwards, Messrs. Reifschneider and Wascher,
Mr. Lacker Senior Associate Directors, Divisions of Mon-
Mr. Lockhart etary Affairs, Research and Statistics, and Re-
Mr. Tarullo search and Statistics, respectively, Board of
Mr. Warsh Governors
Ms. Yellen
Mr. Oliner, Senior Adviser, Division of Research
Mr. Bullard, Ms. Cumming, Mr. Hoenig, Ms. Pia- and Statistics, Board of Governors
nalto, and Mr. Rosengren, Alternate Members
of the Federal Open Market Committee Mr. Small, Project Manager, Division of Monetary
Affairs, Board of Governors
Messrs. Fisher and Plosser, Presidents of the Fed-
eral Reserve Banks of Dallas and Philadelphia, Ms. Low, Open Market Secretariat Specialist, Divi-
respectively sion of Monetary Affairs, Board of Governors

Mr. Lyon, First Vice President, Federal Reserve Mr. Williams, Records Management Analyst, Divi-
Bank of Minneapolis sion of Monetary Affairs, Board of Governors

Mr. Madigan, Secretary and Economist Mr. Connolly,¹ First Vice President, Federal Re-
Mr. Luecke, Assistant Secretary serve Bank of Boston
Mr. Skidmore, Assistant Secretary
Ms. Smith, Assistant Secretary Messrs. Fuhrer and Rosenblum, Executive Vice
Mr. Alvarez, General Counsel Presidents, Federal Reserve Banks of Boston
Mr. Ashton, Assistant General Counsel and Dallas, respectively
Mr. Sheets, Economist
Mr. Stockton, Economist Mr. Hakkio, Ms. Mester, Messrs. Rasche, Rude-
busch, and Schweitzer, Senior Vice Presidents,
Messrs. Altig, Clouse, Connors, Kamin, Slifman, Federal Reserve Banks of Kansas City, Phila-
Sullivan, Tracy, Weinberg, and Wilcox, Asso- delphia, St. Louis, San Francisco, and Cleve-
ciate Economists land, respectively

Mr. Sack, Manager, System Open Market Account Mr. Weber, Senior Research Officer, Federal Re-
serve Bank of Minneapolis
Ms. Johnson, Secretary of the Board, Office of the
Secretary, Board of Governors
¹ Attended Tuesday’s session only.
Page 2 Federal Open Market Committee _

Mr. McCarthy and Ms. O’Connor, Assistant Vice first quarter of 2010.
Presidents, Federal Reserve Bank of New York
The staff also briefed the Committee on the likely im-
plications of very high reserve balances for bank bal-
Mr. Chatterjee, Senior Economic Advisor, Federal
ance sheet management and for the economy. The
Reserve Bank of Philadelphia
staff’s assessment, based in part on consultations with
market participants, was that many banks were current-
ly comfortable holding high levels of reserves as a
means of managing liquidity risks, and these balances
Developments in Financial Markets and the Fed-
or further increases along the lines implied by the an-
eral Reserve’s Balance Sheet
nounced programs were not likely to crowd out other
The Manager of the System Open Market Account
lending through pressures on capital positions. As the
reported on recent developments in domestic and for-
economy improves, however, banks could seek to low-
eign financial markets. The Manager also reported on
er their levels of reserve balances by purchasing securi-
System open market operations in Treasury securities,
ties, thereby putting downward pressure on market
agency debt, and agency mortgage-backed securities
interest rates, or by easing their credit standards and
(MBS) since the Committee’s August 11-12 meeting.
terms in order to expand lending. Such effects, if sig-
By unanimous vote, the Committee ratified those
nificant, would provide further impetus to economic
transactions. There were no open market operations in
growth. The staff analysis indicated that these effects
foreign currencies for the System’s account during the
would likely emerge only gradually and that their mag-
intermeeting period. Since the Committee met in Au-
nitude could be quite limited. However, some partici-
gust, the Federal Reserve’s total assets had risen about
pants thought that declining demand for reserves might
$125 billion, on balance, to approximately $2.1 trillion,
already be putting downward pressure on yields. Par-
as the System’s purchases of securities exceeded a fur-
ticipants expressed a range of views about the likely
ther decline in usage of the System’s credit and liquidity
stimulative effect of a further expansion of reserve bal-
ances on economic activity, as well as the potential im-
The staff briefed the Committee on the current status pact of elevated reserves on inflation expectations.
of the asset purchase programs. Participants noted that Some meeting participants noted that the announced
the primary influence of the programs is likely through decrease in the balance in the Treasury’s Supplementary
the cumulative effect that they generate on the publicly Financing Account (SFA) would increase reserves in
available stocks of securities. However, they also ob- the banking system unless it were offset by Federal Re-
served that the rate of new purchases could have an serve actions or by a further reduction in borrowing
effect on asset prices, especially of MBS. Given this from the Federal Reserve’s various credit and liquidity
possibility, participants remarked that a gradual reduc- facilities, and that these increases could be expansion-
tion in the pace at which the Federal Reserve buys ary. Others noted that the decrease in the SFA could
agency debt and agency MBS could help promote a well be temporary and, in any event, that the macro-
smooth transition in markets as the announced asset economic effects of the increase in reserves would
purchases are completed. Participants observed that probably be limited in the current environment.
such a strategy would be similar to the approach
The staff presented an update on the continuing devel-
adopted in August for the purchases of Treasury se-
opment of several tools that could help support a
curities and generally viewed it as a useful step to miti-
smooth withdrawal of policy accommodation at the
gate the risk of a sharp change in yields as purchases
appropriate time. These measures included executing
end. Participants expressed a range of views about the
reverse repurchase agreements on a large scale, poten-
rate at which asset purchases should be slowed. Some
tially with counterparties other than the primary deal-
suggested tapering quickly and completing the purchas-
ers; implementing a term deposit facility, available to
es by year-end, while a few preferred slowing the rate
depository institutions, to reduce the supply of reserve
of purchases over a longer period in order to maintain
balances; and taking steps to tighten the link between
flexibility regarding the pace and the cumulative
the interest rate paid on reserve balances held at the
amount purchased and thus potentially better calibrate
Federal Reserve Banks and the federal funds rate. Par-
the programs to evolving economic and financial mar-
ticipants expressed confidence that these tools, along
ket conditions. Most participants supported extending
with the payment of interest on reserves and possible
purchases of agency debt and agency MBS through the
sales of assets from the System’s portfolio, would allow
Minutes of the Meeting of September 22-23, 2009 Page 3

them to remove policy accommodation at the appro- 2008. Although employment losses continued to be
priate time and pace. Completing development of widespread, the rate of decline diminished in most in-
these tools would remain a top priority of the Federal dustries. The length of the average workweek for pro-
Reserve. duction and nonsupervisory workers remained steady,
albeit at a low level, and the rate of decline in aggregate
The staff presented proposed schedules for operations
hours for this group over July and August was the
under the Term Auction Facility (TAF) and Term Se-
smallest of the past year. In the household survey, al-
curities Lending Facility (TSLF) through January 2010.
though the unemployment rate rose in August to
As conditions in short-term funding markets had con-
9.7 percent, the rise in the unemployment rate slowed,
tinued to improve, usage of these facilities had dimin-
on net, in recent months from its pace earlier in the
ished. The proposed schedules were consistent with
year. The labor force participation rate in August re-
not only the Federal Reserve’s previously announced
mained at the low level that had prevailed through
intention to gradually scale back these facilities in re-
much of the year. Continuing claims for unemploy-
sponse to continued improvements in financial market
ment insurance through regular state programs fell
conditions, but also with a desire to assure market par-
slightly, on balance, from its earlier peak, but the total
ticipants that the Federal Reserve will provide sufficient
including extended and emergency benefits stayed near
liquidity over year-end. There was general agreement
its recent high level. Initial claims for unemployment
that the Federal Reserve should assess over the next
insurance fluctuated within a narrow range that was
several months whether to maintain a TAF on a per-
consistent with further declines in employment. With
manent basis.
labor markets still weak, the year-over-year increase in
Secretary’s note: On September 24, 2009, average hourly earnings of production and nonsupervi-
the Federal Reserve announced schedules for sory workers slowed further in August, even with the
operations under the TAF and the TSLF higher federal minimum wage that went into effect at
through January 2010 and indicated that it the end of July.
would seek public comment on a proposal
Industrial production rose in July and August, led by a
for a permanent TAF.
rebound in motor vehicle production from the extraor-
Staff Review of the Economic Situation dinarily low assembly rates in the first half of the year.
The information reviewed at the September 22-23 Manufacturing production outside of motor vehicles
meeting suggested that overall economic activity was increased solidly, likely reflecting stronger demand for
beginning to pick up. Factory output, particularly mo- materials from the motor vehicle sector and a slower
tor vehicle production, rose in July and August. Con- pace of inventory liquidation elsewhere. Business sur-
sumer spending on motor vehicles during that period vey indicators suggested further gains in factory output
was boosted by government rebates and greater dealer over the near term. Nevertheless, the factory utiliza-
incentives, and household spending outside of motor tion rate in August was only modestly above its recent
vehicles appeared to rise in August after having been historical low.
roughly flat from May through July. Although em-
Real personal consumption expenditures increased
ployment continued to contract in August, the pace of
modestly in July, led by a strong advance in motor ve-
job losses slowed noticeably from that of earlier in the
hicle purchases, which were boosted appreciably by the
year. Investment in equipment and software (E&S)
government’s “cash-for-clunkers” program. This pro-
also seemed to be stabilizing. Sales and construction of
gram contributed to a further surge in motor vehicle
single-family homes during July and August, while still
sales in August to their highest level since the first half
at low levels, were significantly above the readings at
of 2008. After declining in July, sales at retailers, ex-
the beginning of the year. The sharp cuts in produc-
cluding those at motor vehicle dealers, building mate-
tion this year reduced inventory stocks significantly,
rials stores, and gasoline stations, rose significantly in
though they remained elevated relative to the recent
August, suggesting an increase in real consumer ex-
level of sales. Core consumer price inflation continued
penditures on non-motor-vehicle goods for the month.
to be subdued in July and August, but higher gasoline
Even so, many determinants of spending continued to
prices raised overall consumer price inflation in August.
be tepid. In particular, the weak labor market contin-
Firms continued to reduce payrolls, but job losses ued to restrain growth in household income, and the
abated further in August, with the decline in private prior declines in household net worth probably contin-
payroll employment the smallest since that of August ued to weigh on spending. However, an increase in
Page 4 Federal Open Market Committee _

household net worth since March, a rise in nominal forward-looking indicators of investment in E&S im-
labor compensation in July, and increases in various proved, suggesting that conditions had become less
measures of consumer sentiment indicated some im- adverse than earlier in the year. Monthly surveys of
provement in the outlook for consumer spending. business conditions and sentiment recently recovered
to levels consistent with a modest rise in business
Data from the housing sector indicated that a gradual
spending, and corporate bond spreads over Treasury
recovery in activity was under way. Although single-
securities narrowed further. In contrast, conditions in
family housing starts fell modestly in August, this de-
the nonresidential construction sector generally re-
crease followed five consecutive monthly increases, and
mained quite poor, and measures of construction
the number of starts in August was well above the
spending excluding energy-related projects stayed on a
record low reached in the first quarter of the year. In
downward trajectory through July. Vacancy rates con-
contrast, in the much smaller multifamily sector, where
tinued to rise, property prices fell further, and financing
credit conditions were still particularly tight and vacan-
for nonresidential construction projects remained very
cy rates remained high, starts continued to be down, on
tight. The nominal book value of businesses invento-
net, in 2009 after a significant fall in the second half of
ries continued to fall in July, which contributed to fur-
2008. The sales data for July indicated further increases
ther declines in inventory-to-sales ratios; however,
in the demand for both new and existing single-family
those ratios stayed elevated.
homes. Even though new home sales remained mod-
est, they had been sufficient, given the slow pace of After narrowing to a 10-year low in May, the U.S. inter-
construction, to pare the overhang of unsold new sin- national trade deficit widened in June and July, as
gle-family houses: In July, the level of inventories of strong increases in exports were more than offset by
such homes was about one-half of its peak in the sum- sizable rises in imports. The July trade data provided
mer of 2006, and the months’ supply had fallen consid- additional evidence that the levels of both exports and
erably from its record high in January. Sales of existing imports probably reached their trough in the second
homes in July were at their fastest pace since mid-2007, quarter. About one-half of the increase in exports of
and pending home sales agreements suggested that re- goods and services in July was in exports of automotive
sale activity would rise further in following months. products; the other gains were widespread across other
Although sales of distressed properties remained ele- major categories of exports. As with exports, the larg-
vated, the rise in total sales of existing homes over the est increase in imports of goods and services in July
summer appeared to have been driven by an increase in was in automotive products, reflecting some recovery
transactions involving nondistressed properties. The in North American motor vehicle production. Imports
apparent modest strengthening of housing demand was of consumer goods, capital goods, and industrial sup-
likely due, in part, to improvements in housing affor- plies also rose markedly. Imports of oil increased more
dability stemming from low interest rates for conform- moderately, with the rise wholly reflecting higher pric-
ing mortgages, a lower level of house prices, and possi- es.
bly the first-time homebuyer tax credit. In addition,
Real gross domestic product (GDP) in the advanced
demand may have been buoyed by a sense that house
foreign economies contracted more moderately in the
prices were beginning to stabilize. Through the end of
second quarter than in the first quarter, with growth
the second quarter, many house price indexes had
resuming in several countries. In Japan, a trade-related
smaller year-over-year declines than they had shown
rebound in industrial production led to an increase in
earlier this year, and some indexes recorded positive
overall output. Government incentives for motor ve-
changes for the second quarter.
hicle purchases contributed to a modest expansion of
Real spending on E&S appeared to be stabilizing after the German and French economies, but the euro-area
falling sharply for more than a year. Business purchas- economy as a whole contracted slightly as inventory
es of transportation equipment seemed to be expanding drawdowns weighed on activity. Output also fell in
solidly in the third quarter. Nominal shipments and Canada and the United Kingdom. Purchasing manag-
orders for high-tech equipment in July were significant- ers indexes (PMIs) rose further in the major economies
ly above their second-quarter averages; moreover, a few during the intermeeting period, and reached levels con-
major producers of high-tech equipment reported sistent with stabilization or moderate expansion of out-
some signs of improvement in demand. Business in- put in the third quarter. Indicators of consumer senti-
vestment in equipment other than high tech and trans- ment continued to increase, but remained well below
portation showed tentative signs of stabilization. Some pre-recession levels, in part because of concerns about
Minutes of the Meeting of September 22-23, 2009 Page 5

rising unemployment. In most emerging market econ- labor market conditions and generally quiescent infla-
omies, particularly in Asia, economic activity re- tion as consistent with an outlook that would lead the
bounded in the second quarter; however, output de- FOMC to maintain low policy rates over the medium
clined again in Mexico. Indicators of activity in the term. In addition, investors’ uncertainty about the fu-
third quarter pointed to a continued expansion of out- ture policy rate path appeared to diminish, which may
put in most emerging market countries, and PMIs have also contributed to the lowering of the path im-
moved into the expansionary range in many of them. plied by futures prices by reducing term premiums.
International trade in emerging market economies Yields on nominal Treasury securities also decreased
picked up, supported by Chinese demand, while de- since the Committee met in August. A decline in im-
mand from advanced economies still appeared weak. plied volatility on longer-term Treasury yields suggested
that some of the drop in yields was due to reduced risk
In the United States, core consumer price inflation re-
premiums. Inflation compensation based on five-year
mained subdued in July and August, as price increases
Treasury inflation-protected securities (TIPS) increased
in housing services moderated and durable goods pric-
a little, on balance, over the intermeeting period, while
es declined. Overall consumer price inflation increased
five-year inflation compensation five years ahead de-
in August, boosted by a sharp upturn in energy prices,
clined modestly; the decrease in forward inflation com-
particularly those of gasoline. The latest available sur-
pensation partially reversed increases in prior inter-
vey data indicated that gasoline prices edged up further
meeting periods. Liquidity in the TIPS market report-
in the first half of September. Consumer food prices
edly continued to be poor, complicating inferences
were little changed in August. According to the prelim-
about investors’ expectations of future inflation.
inary September release of the Reuters/University of
Michigan Surveys of Consumers, median year-ahead Conditions in short-term funding markets showed
inflation expectations decreased modestly in the first modest further improvement over the intermeeting
half of September, but remained somewhat above the period. Spreads between London interbank offered
low levels posted at the beginning of the year. Longer- rates (Libor) and overnight index swaps (OIS) at the
term inflation expectations from this survey stayed in one- and three-month maturities returned to near the
the narrow range that has prevailed over recent years. levels that prevailed before the onset of the financial
The producer price index for core intermediate mate- crisis in August 2007. Longer-term Libor-OIS spreads
rials rose in August, its third consecutive monthly in- also narrowed, but they remained high by historical
crease; over those three months, the index retraced standards. Reports continued to suggest that lending
about one-third of the decline of the previous eight institutions were unusually selective about their coun-
months. All measures of nominal hourly compensation terparties in funding markets. Spreads on A2/P2-rated
and wages suggested that labor costs had decelerated commercial paper and AA-rated asset-backed commer-
markedly this year amid the considerable weakness in cial paper were little changed, on net, remaining at the
labor markets. low end of their ranges over the past two years. Indica-
tors of Treasury market functioning showed no materi-
Staff Review of the Financial Situation
al change, and functioning continued to be somewhat
The decisions by the Federal Open Market Committee
impaired. Bid-asked spreads held roughly steady, and
(FOMC) at the August meeting to leave the target
trading volumes remained low. The on-the-run liquidi-
range for the federal funds rate unchanged and to
ty premium for the 10-year Treasury note was little
maintain the maximum sizes of its large-scale asset pur-
changed at an elevated level, although it was well below
chase programs, along with the accompanying state-
its peak last fall; the premiums on two- and five-year
ment, were broadly in line with market expectations.
Treasury securities stayed low.
The announcement in the statement of the decision to
slow the pace of Treasury securities purchases so that Amid lower interest rates as well as further indications
the full amount of $300 billion would be completed by that the contraction in economic activity may have
the end of October reduced uncertainty about the tim- ended, broad stock price indexes rose, on net, over the
ing of the end of this program and the ultimate amount intermeeting period. The spread between an estimate
of purchases. After the release of the statement, the of the expected real equity return over the next 10 years
expected path for the federal funds rate implied by for S&P 500 firms and an estimate of the real 10-year
money market futures prices declined modestly. Sub- Treasury yield—a rough gauge of the equity risk pre-
sequently, the expected policy path shifted down fur- mium—remained high by historical standards. After
ther, on net, as investors apparently interpreted weak having dropped significantly in prior months, option-
Page 6 Federal Open Market Committee _

implied volatility on the S&P 500 index declined mod- recent months. The contraction of commercial real
estly, on balance, over the intermeeting period, but was estate loans held by banks also intensified in August.
still at a level comparable with that of previous reces- Even though originations of residential mortgages ap-
sions. Yields on corporate bonds fell a bit more than parently increased during August, banks sold an un-
those on Treasury securities of similar duration. Indi- usually large volume of loans to the government-
cators suggested that liquidity in the secondary market sponsored enterprises; consequently, banks’ balance
for corporate bonds increased a bit further. Conditions sheet holdings of residential mortgages decreased mar-
in the secondary market for leveraged syndicated loans kedly.
continued to improve slowly, as secondary-market
After declining in July, M2 contracted more quickly in
prices rose slightly and bid-asked spreads narrowed.
August. The reduced demand for M2 assets likely re-
Changes in investor sentiment toward claims on finan- flected low interest rates on retail deposits and money
cial firms were mixed over the intermeeting period. market mutual fund shares, as well as a continued real-
Equity prices for larger banks increased, but stock pric- location of wealth toward riskier assets. Small time
es for regional and smaller banks were little changed. deposits and retail money market mutual funds fell
Market participants reportedly took note of the in- more sharply in August than earlier in the year. Liquid
creased number of failures at regional and smaller deposits increased in August, but at a slower rate than
banks and remained concerned about the credit quality in July. Currency expanded less rapidly in July and Au-
of such banks’ loan portfolios and their ability to raise gust than in the first half of the year, as demand from
capital. Credit default swap spreads for banking institu- abroad evidently was restrained.
tions changed little, on net, over the intermeeting pe-
Global financial markets showed some further signs of
riod. A number of financial institutions issued debt
stabilization over the intermeeting period. Stock in-
that was not guaranteed by the Federal Deposit Insur-
dexes in Europe rose solidly, apparently reflecting an
ance Corporation.
improved economic outlook, but the Japanese stock
The level of debt of the private domestic nonfinancial market declined modestly. In emerging markets, credit
sector declined again in the second quarter, as both default swap spreads on sovereign debt declined
household and nonfinancial business debt fell. Con- slightly, and equity prices in most countries rose mod-
sumer credit posted its sixth consecutive monthly de- erately; however, stock prices fell notably in China,
cline in July; both revolving and nonrevolving credit partly driven by reports that authorities were taking
showed sizable drops. While issuance of consumer actions to moderate loan growth. Despite fairly posi-
credit asset-backed securities decreased in August, a tive economic indicators, sovereign yields fell in major
large volume of securities eligible for the Term Asset- industrial economies, reportedly in part because of the
Backed Securities Loan Facility was issued in early Sep- reiteration by major central banks of their intention to
tember. Gross bond issuance by nonfinancial corpora- keep policy interest rates low. On a trade-weighted
tions rose in August following a lull in July; the re- basis, the dollar depreciated against major foreign cur-
bound was particularly robust for speculative-grade rencies, notably against the euro and Japanese yen; it
firms. However, commercial paper outstanding was was little changed, on average, against the currencies of
unchanged and bank loans fell again; as a result, bor- the other major trading partners of the United States.
rowing by the nonfinancial business sector declined, on
The European Central Bank, the Bank of England, the
net, again in August. In contrast, the federal govern-
Bank of Canada, and the Bank of Japan kept their re-
ment continued to issue debt at a rapid pace, and gross
spective policy rates constant over the intermeeting
issuance of state and local government debt was robust,
period. On the first day of the FOMC meeting, the
supported in part by issuance of Build America Bonds
Bank of Canada announced the expiration of two tem-
authorized under the fiscal stimulus program.
porary liquidity facilities at the end of October 2009.
Commercial bank credit contracted further in August;
Staff Economic Outlook
all major loan categories declined. Commercial and
In the forecast prepared for the September FOMC
industrial (C&I) lending again decreased steeply amid
meeting, the staff raised its projection for real GDP
reported broad-based paydowns of outstanding loans.
growth over the second half of 2009 and over 2010.
At the same time, the latest Survey of Terms of Busi-
The information received during the intermeeting pe-
ness Lending showed that C&I loan spreads over com-
riod appeared to indicate a more noticeable upturn than
parable-maturity market instruments rose noticeably in
anticipated at the time of the August meeting: Sales
Minutes of the Meeting of September 22-23, 2009 Page 7

and starts of single-family homes provided evidence of Participants’ Views on Current Conditions and the
some firming in housing activity, capital spending indi- Economic Outlook
cators pointed to an earlier-than-anticipated trough for In their discussion of the economic situation and out-
investment in E&S, and some data suggested a modest look, meeting participants agreed that the incoming
recovery in consumer spending. These tentative signs data and information received from business contacts
of a recovery of economic activity were supported by suggested that economic activity had picked up follow-
other factors, including recent rises in house and equity ing its severe downturn; most thought an economic
prices that would support household net worth, de- recovery was under way. Many participants noted that
clines in interest rates on corporate bonds and fixed- since August, they had revised up their projections for
rate mortgages, and a stronger outlook for activity in the second half of 2009 and for subsequent years. A
foreign economies. The staff expected that these posi- number of factors were expected to support growth
tive factors would lead to a modest increase in final over the next few quarters: Activity in the housing sec-
sales in the second half of 2009, despite continued tor was evidently rising, and house prices had apparent-
weakness in commercial construction and some further ly stabilized or even increased; consumer spending
deterioration in labor markets. As a result of the ex- seemed to be in the process of leveling out; reports
pected increase in final sales and an anticipated reduc- from business contacts and regional surveys were con-
tion in inventory liquidation, the staff projected that sistent with firms making progress in bringing invento-
real GDP would increase in the second half of 2009 at ries into better alignment with sales and with produc-
a rate somewhat above the growth rate of potential tion stabilizing or beginning to rise in many sectors; the
output. For 2010, the staff forecast that output growth outlook for growth abroad had also improved, auguring
would continue to strengthen, supported by an ongoing well for U.S. exports; and financial market conditions
improvement in financial conditions, a fading of the had continued to improve over the past several
drag from earlier declines in income and wealth, ac- months. Despite these positive factors, many partici-
commodative monetary and fiscal policy, and recovery pants noted that the economic recovery was likely to be
in the housing sector. These factors also contributed quite restrained. Credit from banks remained difficult
to an expected further increase in real GDP growth in to obtain and costly for many borrowers; these condi-
2011, despite an anticipated decline in the impetus tions were expected to improve only gradually. In light
from fiscal policy. Even though the upward revision to of recent experience, consumers were likely to be cau-
the projection for output was expected to generate tious in spending, and business contacts indicated that
larger gains in employment than previously forecast, their firms would also be cautious in hiring and invest-
the staff still projected only a slow improvement in la- ing even as demand for their products picked up.
bor markets, with the unemployment rate moving Some of the recent gains in activity probably reflected
down to about 9¼ percent by the end of 2010 and then government policy support, and participants expressed
falling to about 8 percent by the end of 2011. considerable uncertainty about the likely strength of the
upturn once those supports were withdrawn or their
The staff forecast for inflation was little changed from
effects waned. Overall, the economy was projected to
that at the August meeting. The recent data on con-
expand over the remainder of 2009 and during 2010,
sumer price inflation were a little above staff expecta-
but at a pace that was unlikely to reduce the unem-
tions, but still indicated a slower increase in core prices
ployment rate appreciably. Subsequently, as the hous-
compared with those of earlier in the year. Survey
ing market picked up further and financial conditions
measures of inflation expectations displayed no signifi-
improved, economic growth was expected to streng-
cant change. Nonetheless, with the significant under-
then, leading to more-substantial increases in resource
utilization of resources expected to persist through
utilization over time.
2011, the staff forecast core inflation to slow somewhat
further over the next two years from the pace of the Nonetheless, most participants anticipated that slack in
first half of 2009. Because of recent increases in energy both labor and product markets would be substantial
prices, overall consumer price inflation was projected over the next few years, leading to subdued and poten-
to be somewhat above core inflation in the second half tially declining wage and price inflation. Some partici-
of 2009 and 2010, but it was expected to be near the pants were skeptical of the usefulness of measures of
core rate in 2011. resource utilization in gauging inflation pressures, partly
because of the difficulty of measuring slack, especially
in real time. Also, those participants noted that the
Page 8 Federal Open Market Committee _

degree to which slack reduces inflation depends on the cause the improvement in financial markets was due, in
stability of longer-term inflation expectations, which in part, to support from various government programs,
turn depends on expectations for monetary policy. In market functioning might deteriorate as those programs
any case, all participants recognized that inflation ex- wind down. Moreover, credit remained quite tight for
pectations are a key determinant of inflation, and that many businesses and households dependent on banks,
various measures of inflation expectations, although and many regional and small banks were vulnerable to
imperfect, needed to be carefully monitored in the cur- the deteriorating performance of commercial real estate
rent environment. Participants discussed the extent to loans. Participants noted that all categories of bank
which the size of the Federal Reserve’s balance sheet lending continued to decline.
would affect inflation expectations going forward. To
Participants emphasized that labor market conditions
keep inflation expectations well anchored, all agreed on
remained weak. Although recent data indicated that
the importance of the Federal Reserve continuing to
the pace at which employment was declining had
communicate that it has the tools and willingness to
slowed, job losses remained sizable and the unemploy-
begin withdrawing monetary policy accommodation at
ment rate was high. The unusually large fraction of
the appropriate time and pace to prevent any persistent
those who were working part time for economic rea-
increase in inflation. Overall, many participants viewed
sons, the unusually low level of the average workweek,
the risks to their inflation outlook over the next few
and indications from business contacts that firms
quarters as being roughly balanced. A few continued to
would be slow to hire additional staff as sales and pro-
see some risk of substantial further disinflation, but
duction turn up all pointed to a period of modest job
that risk had eased somewhat further over the inter-
gains, and thus only a slow decline in the unemploy-
meeting period. Over a longer horizon, a few felt the
ment rate as the economic recovery proceeds. Signifi-
risks were tilted to the upside.
cant cost cutting by firms was thought to have led to a
Developments in financial markets were again regarded sizable increase in productivity growth in the first half
as broadly positive; participants saw the cumulative of the year; sustained outsized gains in productivity
improvement in market functioning and pricing since could further damp hiring. Finally, high levels of long-
the spring as substantial. Over the intermeeting period, term unemployment and permanent separations could
the strengthening in the economic outlook led to an lead to losses of skills and greater needs for labor real-
increase in investors’ appetite for riskier assets. Mar- location that could slow employment growth.
kets for corporate debt continued to improve, private
Consumer spending had picked up more than expected
credit spreads narrowed further, and equity prices rose.
over the intermeeting period, but participants saw that
Given the improved economic prospects, the decline in
increase as partly reflecting special factors like the cash-
longer-term Treasury yields and the apparent marking
for-clunkers program. Recent increases in house prices
down of the implied path for the policy interest rate
and equity prices were positives, but participants gener-
were seen as somewhat puzzling but supportive of re-
ally expected no more than moderate growth in con-
covery. Some participants saw the decline in yields on
sumer spending over the near term. Households still
Treasury securities and other instruments as an indica-
faced considerable headwinds, including tight credit,
tion that the expansion of excess reserve balances was
high levels of debt, uncertain job prospects, and wealth
putting downward pressure on market rates; some oth-
levels that remained relatively low despite the recent
ers viewed the configuration of rate movements as
rise in equity prices and stabilization in house prices.
consistent with reduced concerns about inflation and
In that environment, households’ saving behavior re-
with lower term premiums in a more settled economic
mained an important source of uncertainty in the out-
environment. In any event, the ongoing improvement
look. The household saving rate had risen considerably
in broader financial and economic conditions seemed
in recent quarters, and the most likely outcome was for
to some participants to reflect the onset of a positive
the saving rate to remain near its higher level; however,
feedback loop in which better financial conditions con-
some participants noted that there was some chance
tribute to stronger growth in output and employment,
that the sharp drop in household net worth over the
which in turn bolsters expected returns and strengthens
past few years, reduced access to credit, and high
financial firms, leading to a further easing in financial
household debt burdens could lead households to save
conditions. Others noted, however, that many financial
a substantially larger fraction of their incomes going
markets and institutions were still strained and that
downside financial risks remained. In particular, be-
Minutes of the Meeting of September 22-23, 2009 Page 9

Firms appeared to be reducing inventories and fixed Committee Policy Action
investment at a slower pace than earlier in the year and In their discussion of monetary policy for the period
had made substantial progress in reducing stocks to- ahead, Committee members agreed that no significant
ward desired levels. With inventories low, firms were changes to its policy target rate or large-scale asset pur-
beginning to raise production to meet at least a portion chase programs were warranted at this meeting. Al-
of new demand; this adjustment was likely to make an though the economic outlook had improved further in
important contribution to economic recovery in the recent weeks and the risks to the forecast had become
second half of this year. Recent data on new orders more balanced, the level of economic activity was likely
and shipments pointed to an earlier bottoming out in to be quite weak and resource utilization low. With
equipment and investment spending than previously substantial resource slack likely to persist and longer-
anticipated. Some participants reported that while term inflation expectations stable, the Committee antic-
business contacts had expressed relief that the most ipated that inflation would remain subdued for some
severe economic outcomes had been avoided, they re- time. Under these circumstances, the Committee
mained cautious about the recovery. This caution, to- judged that the costs of growth turning out to be weak-
gether with low utilization rates and substantial excess er than anticipated could be relatively high. According-
capacity, could hold back the rate of increase of new ly, the Committee agreed that it was appropriate to
capital spending. maintain its target range for the federal funds rate at
0 to ¼ percent and to reiterate its view that economic
In the residential real estate sector, home sales and con-
conditions were likely to warrant an exceptionally low
struction had increased from very low levels, and house
level of the federal funds rate for an extended period.
prices appeared to be stabilizing. Participants wel-
With respect to the large-scale asset purchase pro-
comed the cumulating evidence that the housing sector
grams, some members thought that an increase in the
was beginning to recover, and many participants had
maximum amount of the Committee’s purchases of
marked up their forecasts for housing activity. Howev-
agency MBS could help to reduce economic slack more
er, some viewed the improvement as quite tentative,
quickly than in the baseline outlook. Another member
pointing to the pending termination of the temporary
believed that the recent improvement in the economic
tax credit for first-time homebuyers and the winding
outlook could warrant a reduction in the Committee’s
down of the Federal Reserve’s agency MBS purchase
maximum purchases. However, all members were able
program as potential risks to the outlook for the sector.
to support an indication by the Committee of its inten-
Also, some participants questioned whether the recent
tion at this time to purchase the full $1.25 trillion of
stabilization in house prices would be sustained as likely
agency MBS that it had previously established as the
further increases in foreclosures would probably put
maximum for this program. With respect to agency
downward pressure on prices. Still, a better outlook
debt, the Committee agreed to reiterate its intention to
for house prices was an important input to the im-
purchase up to $200 billion of these securities. To
proved economic outlook; not only would household
promote a smooth transition in markets as these pro-
wealth benefit from a turnaround in such prices, but
grams are concluded, members decided to gradually
the exposure of lenders to real estate losses would be
slow the pace of both its agency MBS and agency debt
diminished. In contrast to developments in the resi-
purchases and to extend their completion through the
dential sector, commercial real estate activity continued
end of the first quarter of 2010. The Committee
to fall markedly in most districts, reflecting deteriorat-
agreed that it would continue to evaluate the timing and
ing fundamentals, including declining occupancy and
overall amounts of its purchases of securities in light of
rental rates and very tight credit conditions.
the evolving economic outlook and conditions in fi-
Participants marked up their outlook for foreign econ- nancial markets. Members discussed the importance of
omies, mainly reflecting better-than-expected incoming maintaining flexibility to expand the asset purchase
data from a range of countries. The pickup in foreign programs should the economic outlook deteriorate or
economic activity, especially in Asia, had buoyed U.S. to scale back the programs should economic and finan-
export growth, and several participants noted that cial conditions improve more than anticipated.
higher growth abroad would support growth in U.S.
At the conclusion of the discussion, the Committee
exports going forward.
voted to authorize and direct the Federal Reserve Bank
of New York, until it was instructed otherwise, to ex-
Page 10 Federal Open Market Committee _

ecute transactions in the System Account in accordance still cutting back on fixed investment and
with the following domestic policy directive: staffing, though at a slower pace; they con-
tinue to make progress in bringing inventory
“The Federal Open Market Committee seeks
stocks into better alignment with sales. Al-
monetary and financial conditions that will
though economic activity is likely to remain
foster price stability and promote sustainable
weak for a time, the Committee anticipates
growth in output. To further its long-run
that policy actions to stabilize financial mar-
objectives, the Committee seeks conditions
kets and institutions, fiscal and monetary
in reserve markets consistent with federal
stimulus, and market forces will support a
funds trading in a range from 0 to ¼ percent.
strengthening of economic growth and a
The Committee directs the Desk to purchase
gradual return to higher levels of resource
agency debt, agency MBS, and longer-term
utilization in a context of price stability.
Treasury securities during the intermeeting
period with the aim of providing support to With substantial resource slack likely to con-
private credit markets and economic activity. tinue to dampen cost pressures and with
The timing and pace of these purchases longer-term inflation expectations stable, the
should depend on conditions in the markets Committee expects that inflation will remain
for such securities and on a broader assess- subdued for some time.
ment of private credit market conditions.
In these circumstances, the Federal Reserve
The Desk is expected to complete purchases
will continue to employ a wide range of tools
of about $300 billion of longer-term Treas-
to promote economic recovery and to pre-
ury securities by the end of October. It is al-
serve price stability. The Committee will
so expected to execute purchases of up to
maintain the target range for the federal
$200 billion in housing-related agency debt
funds rate at 0 to ¼ percent and continues to
and about $1.25 trillion of agency MBS by
anticipate that economic conditions are likely
the end of the first quarter of 2010. The
to warrant exceptionally low levels of the
Desk is expected to gradually slow the pace
federal funds rate for an extended period.
of these purchases as they near completion.
To provide support to mortgage lending and
The Committee anticipates that outright pur-
housing markets and to improve overall
chases of securities will cause the size of the
conditions in private credit markets, the Fed-
Federal Reserve’s balance sheet to expand
eral Reserve will purchase a total of $1.25
significantly in coming months. The System
trillion of agency mortgage-backed securities
Open Market Account Manager and the Sec-
and up to $200 billion of agency debt. The
retary will keep the Committee informed of
Committee will gradually slow the pace of
ongoing developments regarding the Sys-
these purchases in order to promote a
tem’s balance sheet that could affect the at-
smooth transition in markets and anticipates
tainment over time of the Committee’s ob-
that they will be executed by the end of the
jectives of maximum employment and price
first quarter of 2010. As previously an-
nounced, the Federal Reserve’s purchases of
The vote encompassed approval of the statement be- $300 billion of Treasury securities will be
low to be released at 2:15 p.m.: completed by the end of October 2009. The
Committee will continue to evaluate the tim-
“Information received since the Federal
ing and overall amounts of its purchases of
Open Market Committee met in August sug-
securities in light of the evolving economic
gests that economic activity has picked up
outlook and conditions in financial markets.
following its severe downturn. Conditions in
The Federal Reserve is monitoring the size
financial markets have improved further, and
and composition of its balance sheet and will
activity in the housing sector has increased.
make adjustments to its credit and liquidity
Household spending seems to be stabilizing,
programs as warranted.”
but remains constrained by ongoing job
losses, sluggish income growth, lower hous-
ing wealth, and tight credit. Businesses are
Minutes of the Meeting of September 22-23, 2009 Page 11

Voting for this action: Messrs. Bernanke and Dudley, of Information Act Officer, with authority to subdele-
Ms. Duke, Messrs. Evans, Kohn, Lacker, Lockhart, gate duties as appropriate.
Tarullo, and Warsh, and Ms. Yellen.
By notation vote completed on September 1, 2009, the
Voting against this action: None. Committee unanimously approved the minutes of the
FOMC meeting held on August 11-12, 2009.
It was agreed that the next meeting of the Committee
would be held on Tuesday-Wednesday, November 3-4,
2009. The meeting adjourned at 12:35 p.m. on Sep-
tember 23, 2009.
Notation Votes
By notation vote completed on August 28, 2009, the _____________________________
Committee unanimously approved the designation of Brian F. Madigan
Matthew M. Luecke as the Committee’s Chief Freedom Secretary