Minutes of the Federal Open Market CommitteeSeptember 17–18, 2013
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, September 17, 2013, at 1:00 p.m. and continued on Wednesday, September 18, 2013, at 8:30 a.m.PRESENT:Ben Bernanke, Chairman William C. Dudley, Vice Chairman James BullardCharles L. EvansEsther L. George Jerome H. PowellEric Rosengren Jeremy C. SteinDaniel K. Tarullo Janet L. YellenChristine 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 Banksof Richmond, Atlanta, and San Francisco, respec-tively Deborah J. Danker, Deputy Secretary Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Scott G. Alvarez, General CounselSteven B. Kamin, EconomistDavid W. Wilcox, Economist Thomas A. Connors, Troy Davig, Michael P. Leahy,Stephen A. Meyer, Geoffrey Tootell, Christopher J. Waller, and William Wascher, Associate Econo-mistsSimon Potter, Manager, System Open Market AccountMichael S. Gibson, Director, Division of Banking Su-pervision and Regulation, Board of GovernorsNellie 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 Jon W. Faust, Special Adviser to the Board, Office of Board Members, Board of 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, Michael T. Kiley, Thomas Laubach,David E. Lebow, and Michael G. Palumbo, Asso-ciate Directors, Division of Research and Statistics,Board of Governors; Fabio M. Natalucci, AssociateDirector, Division of Monetary Affairs, Board of Governors Joshua Gallin, Deputy Associate Director, Division of Research and Statistics, Board of Governors Jeremy B. Rudd, Adviser, Division of Research andStatistics, Board of GovernorsChristopher J. Gust and Elizabeth Klee, Section Chiefs,Division of Monetary Affairs, Board of GovernorsGordon Werkema, First Vice President, Federal Re-serve Bank of ChicagoDavid Altig, Loretta J. Mester, and Harvey Rosen-blum,
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Executive Vice Presidents, Federal ReserveBanks of Atlanta, Philadelphia, and Dallas, respec-tively Joyce Hansen, Evan F. Koenig, Spencer Krane, LorieK. Logan, Mark E. Schweitzer, John A. Weinberg,and Kei-Mu Yi, Senior Vice Presidents, FederalReserve Banks of New York, Dallas, Chicago, New York, Cleveland, Richmond, and Minneapolis, re-spectively _______________________
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Attended introductory remarks at Tuesday’s session only.
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Chris Burke and Jonathan P. McCarthy, Vice Presi-dents, Federal Reserve Bank of New York Eric T. Swanson, Senior Research Advisor, FederalReserve Bank of San Francisco
Developments in Financial Markets and the Fed-eral Reserve’s Balance Sheet
The 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 July 30–31, 2013. Thereview included a report that the System’s purchases of longer-term assets did not appear to have had an ad- verse effect on the functioning of the markets for Treasury securities or agency mortgage-backed securi-ties (MBS), and that the Open Market Desk’s opera-tions in both sectors had proceeded smoothly. By unanimous vote, the Committee ratified the Desk’sdomestic transactions over the intermeeting period. There were no intervention operations in foreign cur-rencies for the System’s account over the intermeeting period.In support of the Committee’s longer-run planning forimprovements in the implementation of monetary poli-cy, the staff presented an update on the potential forestablishing a fixed-rate, full-allotment overnight re- verse repurchase agreement (RRP) facility. The presen-tation summarized initial discussions with financialmarket firms about how such a facility might affectmoney market interest rates and intermediation flows, what the relationship might be between the facility rateand other money market rates, and how the differenttypes of firms might view the facility. Overall, the in-quiries suggested that the facility could be an effectiveadditional tool for managing money market interestrates and helping to support a floor on those rates.Meeting participants discussed the potential role for anovernight RRP facility, the possible effects on the func-tioning of the federal funds market or the structure of money markets, and the usefulness of expanding theDesk’s test operations in RRPs. Meeting participantsgenerally supported a proposal to authorize the Desk toconduct a limited exercise in order to provide someinsight into the potential usage of an overnight RRPfacility as well as additional experience with operationalaspects of such a facility. One participant, however,preferred that further analysis be undertaken beforeproceeding with the exercise. A number of meeting participants emphasized that their interest in these op-erations reflected an ongoing effort to improve thetechnical execution of policy and did not signal any change in the Committee’s views about policy going forward. Following the discussion, the Committeeunanimously approved the following resolution:“The Federal Open Market Committee(FOMC) authorizes the Federal ReserveBank of New York to conduct a series of fixed-rate, overnight reverse repurchase op-erations involving U.S. Government securi-ties, and securities that are direct obligationsof, or fully guaranteed as to principal and in-terest by, any agency of the United States, forthe purpose of assessing operational readi-ness. The reverse repurchase operations au-thorized by this resolution shall be (i) offeredat a fixed rate that may vary from zero to fivebasis points, (ii) offered at up to a capped al-lotment per counterparty of $1 billion perday and (iii) for an overnight term, or suchlonger term as is warranted to accommodate weekend, holiday, and similar trading con- ventions. The System Open Market AccountManager will inform the FOMC in advanceof the terms of the planned operations. These operations may be announced whenauthorized by the Chairman, may begin whenauthorized by the Chairman on or after Sep-tember 23, 2013, and shall be authorizedthrough the FOMC meeting that ends on January 29, 2014.”
Staff Review of the Economic Situation
The information reviewed for the September 17–18meeting suggested that economic activity continued toincrease at a moderate rate. Private-sector employmentrose further in July and August, but the unemploymentrate was still elevated. Total consumer price inflationpicked up in recent months but continued to be mod-est, and measures of longer-run inflation expectationsremained stable.Private nonfarm employment continued to expand in July and August, but at a somewhat slower pace than inthe first half of the year, while total government em-ployment edged down on balance. The unemploymentrate declined further to 7.3 percent in August. Thelabor force participation rate also decreased, leaving theemployment-to-population ratio essentially unchangedin recent months. Other indicators of labor marketactivity also were mixed. Measures of firms’ hiring plans moved up, initial claims for unemployment insur-
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ance declined, and the share of workers employed parttime for economic reasons decreased a little. However,household expectations of the labor market situationdeteriorated somewhat, rates of job openings and grossprivate-sector hiring were little changed, on net, and therate of long-duration unemployment rose slightly.Manufacturing production increased in August after adecline in July, and the rate of manufacturing capacity utilization was unchanged, on balance, over those twomonths. Automakers’ schedules indicated that the paceof motor vehicle assemblies would remain roughly flatin the coming months, but broader indicators of manu-facturing production, such as the readings on new or-ders from the national and regional manufacturing sur- veys, pointed to moderate increases in factory output inthe near term.Real personal consumption expenditures (PCE) wereflat in July. In August, nominal retail sales, excluding those at motor vehicle and parts outlets, edged up, while sales of light motor vehicles rose notably. Recentinformation on key factors that influence consumerspending were mixed: Households’ net worth likely expanded further as home prices posted additionalgains through July, but real disposable incomes in-creased only a little in July and consumer sentiment inthe Thomson Reuters/University of Michigan Surveysof Consumers moved lower in August and early Sep-tember.Improvements in housing-sector activity appeared toslow, possibly reflecting the rise in mortgage rates sincethe spring. Starts and permits of new single-family homes moved down in July, but the level of permitissuance was still somewhat above that for starts andpointed to moderate increases in construction in sub-sequent months. In the multifamily sector, both startsand permits rose in July but construction remainedaround the same level as early in the year. Sales of ex-isting homes increased, but new home sales declined.Growth in real private expenditures for businessequipment and intellectual property products appearedto be subdued going into the third quarter. Nominalshipments of nondefense capital goods excluding air-craft declined again in July. However, nominal new orders for these capital goods continued to be abovethe level of shipments, pointing to increases in ship-ments in subsequent months, and other forward-looking indicators, such as surveys of business condi-tions, were consistent with moderate gains in spending for business equipment in the near term. Nominalbusiness expenditures for nonresidential constructionincreased in July but were still at a low level. Recentbook-value data for inventory-sales ratios, along withreadings on inventories from national and regionalmanufacturing surveys, did not point to significant in- ventory imbalances.Reductions in real federal government purchases ap-peared to persist: Defense spending continued to de-crease in July and August, while federal employmentedged down further. Real state and local governmentpurchases looked to be about flat—the payrolls of these governments expanded slightly, on balance, in July and August, and state and local construction ex-penditures seemed to be leveling off. The U.S. international trade deficit narrowed substan-tially in June before widening in July to a level near itssecond-quarter average. Exports expanded in June, with particular strength in industrial supplies and capi-tal goods, before stepping down somewhat in July.Imports fell in June but then largely recovered in July,driven by swings in imports of oil and consumer goods. Total U.S. inflation, as measured by the PCE price in-dex through July and by the consumer price indexthrough August, was about 1½ percent over the pre-ceding 12-month period for each series. Consumerfood prices only edged up in July and August, whileenergy prices were little changed, on net, over thosetwo months, and retail gasoline prices moved down inthe first half of September. Core consumer price infla-tion, which excludes food and energy, was modest in July and August. Both near-term and longer-term infla-tion expectations from the Michigan survey were littlechanged in August and early September.Measures of labor compensation indicated that increas-es in nominal wages were still subdued. Both compen-sation per hour and unit labor costs in the nonfarmbusiness sector rose modestly over the year ending inthe second quarter, as there were only slight gains inproductivity. In July and August, increases in averagehourly earnings for all employees were fairly slow onbalance. Average foreign economic growth remained muted inthe first half of the year, although there were some no-table divergences across countries. Growth in realgross domestic product (GDP) picked up in the secondquarter in the United Kingdom and remained strong in Japan, recent data suggested that the euro-area econo-my was coming out of recession, and economic indica-tors were positive for China and several other emerging market economies (EMEs) in Asia. However, real
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