FOMC Meeting Transcript, October 29-30, 2013

October 29–30, 2013 1 of 239 Meeting of the Federal Open Market Committee on October 29–30, 2013 A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, October 29, 2013, at 1:00 p.m. and continued on Wednesday, October 30, 2013, at 9:00 a.m. Those present were the following: Ben Bernanke, Chairman William C. Dudley, Vice Chairman James Bullard Charles L. Evans Esther L. George Jerome H. Powell Eric Rosengren Jeremy C. Stein Daniel K. Tarullo Janet L. Yellen Richard W. Fisher, Narayana Kocherlakota, Sandra Pianalto, and Charles I. Plosser, Alternate Members of the Federal Open Market Committee Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively William B. English, Secretary and Economist Deborah J. Danker, Deputy Secretary Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Scott G. Alvarez, General Counsel Thomas C. Baxter, Deputy General Counsel Steven B. Kamin, Economist David W. Wilcox, Economist Thomas A. Connors, Michael P. Leahy, Stephen A. Meyer, Daniel G. Sullivan, Christopher J. Waller, and William Wascher, Associate Economists Simon Potter, Manager, System Open Market Account Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors October 29–30, 2013 2 of 239 Jon W. Faust, Special Adviser to the Board, Office of Board Members, Board of Governors Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors Trevor A. Reeve, Senior Associate Director, Division of International Finance, Board of Governors Ellen E. Meade and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors Eric M. Engen, Michael T. Kiley, Thomas Laubach, and David E. Lebow, Associate Directors, Division of Research and Statistics, Board of Governors Marnie Gillis DeBoer, Deputy Associate Director, Division of Monetary Affairs, Board of Governors Rochelle M. Edge, Assistant Director, Office of Financial Stability Policy and Research, Board of Governors Eric Engstrom, Section Chief, Division of Research and Statistics, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Mark A. Carlson, Senior Economist, Division of Monetary Affairs, Board of Governors; Robert J. Tetlow, Senior Economist, Division of Research and Statistics, Board of Governors Blake Prichard, First Vice President, Federal Reserve Bank of Philadelphia David Altig, Glenn D. Rudebusch, and Mark S. Sniderman, Executive Vice Presidents, Federal Reserve Banks of Atlanta, San Francisco, and Cleveland, respectively Craig S. Hakkio, Evan F. Koenig, Lorie K. Logan, and Kei-Mu Yi, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Dallas, New York, and Minneapolis, respectively Anna Nordstrom and Giovanni Olivei, Vice Presidents, Federal Reserve Banks of New York and Boston, respectively Argia M. Sbordone, Assistant Vice President, Federal Reserve Bank of New York Andreas L. Hornstein, Senior Advisor, Federal Reserve Bank of Richmond Satyajit Chatterjee, Senior Economic Advisor, Federal Reserve Bank of Philadelphia October 29–30, 2013 3 of 239 Transcript of the Federal Open Market Committee Meeting on October 29–30, 2013 October 29 Session CHAIRMAN BERNANKE. Good afternoon. I’d like to start by asking President Rosengren and President Bullard what they bet on the outcome of the World Series. [Laughter] MR. ROSENGREN. Traditional beer bet. MR. BULLARD. Local brews. CHAIRMAN BERNANKE. Today is Debbie Danker’s last FOMC meeting. Of a total of 66 meetings, most of them sitting right here to the right of the Chairman, Debbie has done a commendable job of keeping the Chairman and the FOMC mostly on track, although I wish she had a more elastic policy about recording every comment I make in the transcripts. [Laughter] Over her career, Debbie has brought expertise that’s led her on a tour of the major policymaking institutions, including the New York Fed, the Council of Economic Advisers, the World Bank, the Treasury, and, of course, the Board, where she has worked her way up through the ranks to be deputy director and deputy secretary for the FOMC. So, for 66 meetings, we thank you for putting up with this group and wish you the very best in your retirement. [Applause] MS. DANKER. Can I just say, it’s been a great privilege. Thank you very much. CHAIRMAN BERNANKE. Thank you. Before we get started, I want to say a couple words on external communications. The first is that I’m tentatively planning to announce very shortly a press conference at the January meeting, which will be my last meeting. That will give us three consecutive meetings with press conferences and, I hope, will enhance our communication over the next few months. The second thing is that I’d like to ask folks—I know it’s tempting to comment on when the FOMC may or may not take a first step toward reducing asset purchases, but it’s probably not October 29–30, 2013 4 of 239 a wise thing to do. In fact, our policy on communications explicitly precludes making comments about “a prediction . about Committee action in advance of the Committee’s announcement of such decisions.” What I hope you will do rather than speculate on timing is to articulate a set of principles, and I would recommend three. First, data dependence. We’re going to be tying our decisions, as always, to the incoming data—not one particular piece of data, of course, but the whole general outlook. The second principle I would suggest would be noting that our criterion of “substantial improvement in the outlook for the labor market” has a retrospective and a prospective component. Retrospectively, we have seen a good bit of improvement—the term I’ve used is “meaningful” improvement—since September 2012. It’s worth pointing that out. I recollect where we feared we might be at this point, and we’re actually in much better shape in the labor market than we thought a year ago. There’s also a prospective component to our criterion. We’re hoping to see evidence that the recovery and the improvement in the labor market will continue—and I hope that’s not an excessively high burden, but simply that the outlook for the labor market will continue to improve. And the third principle I’d recommend to folks is—it’s a phrase I don’t care much for, but—tapering is not tightening, necessarily. Even as we make the shift from asset purchases to rate policy going forward—and I think this is reflected in our statements—the Committee intends to maintain a highly accommodative policy as needed to achieve recovery and hit our inflation target. Again, I recognize that there’s a lot of temptation, a lot of speculation. I think we’re probably better off if we stick to some principles on this issue. Any comments or questions on that? [No response] If not, why don’t we go now to our agenda? Item 1 is “Financial Developments and Open Market Operations,” and let me call on Simon Potter. October 29–30, 2013 5 of 239 MR. POTTER.1 Thank you, Mr. Chairman. Domestic financial conditions eased over the intermeeting period as market participants revised up their expectations for future monetary policy accommodation. The shift in expectations was driven largely by the outcome of the September FOMC meeting, combined with the implications of the federal government shutdown and the weaker-than-expected September employment report. The debt limit impasse dominated market attention and affected a number of money markets and institutions for a time. The direct effect in other markets appeared to be relatively limited, though market participants highlighted the potential long-term implications for U.S. financial markets of repeated standoffs over the debt limit. Foreign financial conditions were driven primarily by U.S. developments and also eased over the period. As shown in the top-left panel of your first exhibit, domestic financial markets were driven by several key developments that led market participants to revise their outlook for U.S. monetary policy. The Committee’s decision not to reduce the pace of its asset purchases at the September meeting evidently surprised many market participants, and other Federal Reserve communications that day—including the 2016 target rate projections—were also perceived as more accommodative than expected. The shutdown of the federal government delayed the publication of key economic data and increased uncertainty about the economic outlook. These effects, along with a resolution to the shutdown and debt limit that could put both fiscal issues back into play in early 2014, reportedly increased expectations for no reduction in the pace of Federal Reserve asset purchases at the next few meetings. These expectations were reinforced by the weaker-than-expected nonfarm payrolls release last week. Changes in most domestic asset prices over the period are consistent with expectations for a more accommodative future stance of monetary policy. As shown in the top-right panel, the 10-year nominal Treasury yield decreased 34 basis points. Option-adjusted spreads on agency MBS narrowed 17 basis points, and interest rates on 30-year fixed-rate mortgages declined 44 basis points. High-yield corporate credit spreads narrowed 14 basis points, the S&P 500 index increased 3 percent, and the DXY dollar index depreciated 2 percent. Roughly half of these changes came on the day of the September meeting. TIPS yields declined in line with comparable- maturity nominal Treasury yields over the period, leaving measures of inflation compensation little changed and within their recent ranges.

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