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September 12–13, 2012 1 of 290 Meeting of the Federal Open Market Committee on September 12–13, 2012 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 Wednesday, September 12, 2012, at 10:30 a.m. and continued on Thursday, September 13, 2012, at 8:30 a.m. Those present were the following: Ben Bernanke, Chairman William C. Dudley, Vice Chairman Elizabeth Duke Jeffrey M. Lacker Dennis P. Lockhart Sandra Pianalto Jerome H. Powell Sarah Bloom Raskin Jeremy C. Stein Daniel K. Tarullo John C. Williams Janet L. Yellen James Bullard, Christine Cumming, Charles L. Evans, Esther L. George, and Eric Rosengren, Alternate Members of the Federal Open Market Committee Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, Presidents of the Federal Reserve Banks of Dallas, Minneapolis, and Philadelphia, 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 David Altig, Thomas A. Connors, Michael P. Leahy, William Nelson, David Reifschneider, Glenn D. Rudebusch, William Wascher, and John A. Weinberg, Associate Economists Simon Potter, Manager, System Open Market Account Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors September 12–13, 2012 2 of 290 Jon W. Faust, Special Adviser to the Board, Office of Board Members, Board of Governors James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors; Maryann F. Hunter, Deputy Director, Division of Banking Supervision and Regulation, Board of Governors Andreas Lehnert,1 Deputy Director, Office of Financial Stability Policy and Research, Board of Governors Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors Seth B. Carpenter, Senior Associate Director, Division of Monetary Affairs, Board of Governors Thomas Laubach, Senior Adviser, Division of Research and Statistics, Board of Governors; Ellen E. Meade and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors Brian J. Gross,2 Special Assistant to the Board, Office of Board Members, Board of Governors Eric M. Engen, Michael G. Palumbo, and Wayne Passmore, Associate Directors, Division of Research and Statistics, Board of Governors Fabio M. Natalucci, Deputy Associate Director, Division of Monetary Affairs, Board of Governors Edward Nelson, Section Chief, Division of Monetary Affairs, Board of Governors Jeremy B. Rudd, Senior Economist, Division of Research and Statistics, Board of Governors Kelly J. Dubbert, First Vice President, Federal Reserve Bank of Kansas City Loretta J. Mester, Harvey Rosenblum, and Daniel G. Sullivan, Executive Vice Presidents, Federal Reserve Banks of Philadelphia, Dallas, and Chicago, respectively Cletus C. Coughlin, Troy Davig, Mark E. Schweitzer, and Kei-Mu Yi, Senior Vice Presidents, Federal Reserve Banks of St. Louis, Kansas City, Cleveland, and Minneapolis, respectively 1 Attended Wednesday’s session only. 2 Attended Thursday’s session only. September 12–13, 2012 3 of 290 Lorie K. Logan, Jonathan P. McCarthy, Giovanni Olivei, and Nathaniel Wuerffel,3 Vice Presidents, Federal Reserve Banks of New York, New York, Boston, and New York, respectively Michelle Ezer,4 Markets Officer, Federal Reserve Bank of New York 3 Attended after the discussion on potential effects of a large-scale asset purchase program. 4 Attended the discussion on potential effects of a large-scale asset purchase program. September 12–13, 2012 4 of 290 Transcript of the Federal Open Market Committee Meeting on September 12–13, 2012 September 12 Session CHAIRMAN BERNANKE. Good morning, everybody. Our first item is a staff report on the potential effects of large-scale asset purchases. Seth Carpenter will lead, but Vice Chairman Dudley would like to introduce the other presenter. VICE CHAIRMAN DUDLEY. I would like to introduce Michelle Ezer from the Markets Group. Michelle and I actually had the interesting experience of writing a paper on the case for TIPS, right in the heart of the financial crisis, along with Jennifer Roush. I am not really sure how I managed to do that during that period, but, obviously, Jennifer and Michelle did most of the work. So she is a coauthor. CHAIRMAN BERNANKE. Okay, thank you. Seth. MR. CARPENTER.1 Thank you, Mr. Chairman. I will be referring to the material that’s labeled “Potential Effects of a Large-Scale Asset Purchase Program.” The Committee received three memos from the staff discussing various aspects of potential new large-scale asset purchase (LSAP) programs. I will discuss some considerations about how LSAP programs might be structured, and Michelle will discuss the balance sheet and income implications, along with the associated exit issues. When considering the financial and economic effects of LSAPs, the staff analysis starts from a term structure model that embeds Treasury and MBS supply factors as determinants of the yield curve. These effects depend on market participants’ beliefs about the entire trajectory of the SOMA portfolio’s holdings of securities and the types of those securities. The FRB/US model assumes that declines in the 10-year Treasury yield pass through roughly one-for-one to other market rates. In addition, the lower Treasury rate reduces the discount factor in pricing equities, boosting stock prices. The foreign exchange value of the dollar falls as well. For LSAPs that include purchases of MBS, there is an additional assumed reduction in MBS and mortgage rates. Finally, the changes in these market variables are used to simulate the macroeconomic effects of these purchases using the FRB/US model. Of course, the results depend critically on the models used and a wide set of assumptions, any of which could be challenged. First, in the staff models, the one- 1 The materials used by Mr. Carpenter and Ms. Ezer are appended to this transcript (appendix 1). September 12–13, 2012 5 of 290 for-one pass-through from the 10-year Treasury yield to other market rates could misstate the connection among these rates. For example, frictions like capacity restrictions for originations may prevent mortgage rates from fully adjusting, at least in the short run. Another source of uncertainty concerns the embedded effects on equity prices and the foreign exchange value of the dollar. Some event studies of previous unconventional balance sheet actions point to smaller effects than incorporated into staff analysis. Finally, the macroeconomic effects of the changes in asset prices are calculated using the FRB/US model, and other models would of course yield results that could be larger or smaller. In short, while the projections represent the staff’s best assessment, the effects are clearly subject to considerable uncertainty. Buying either longer-term Treasury securities or MBS should, in principle, put downward pressure on longer-term interest rates and, so, stimulate the economy. Although staff models suggest that purchases of MBS have a somewhat smaller effect than Treasury purchases on most longer-term interest rates, they have somewhat larger effects on mortgage rates, and when translated into estimated macroeconomic outcomes, the differences are fairly small, especially relative to the substantial uncertainty that surrounds such estimates. As a result, the staff memos did not provide clear guidance regarding the allocation of LSAPs between purchases of longer-term Treasury securities and purchases of MBS. Looking at your first exhibit, to illustrate the macroeconomic effects that are implied by the staff models, we compare a projection in which the MEP, the Maturity Extension Program, is continued as planned—the solid, dark blue line—to a projection that assumes that the Committee instead ends the MEP and purchases $600 billion in Treasury securities and $400 billion in MBS by late next year. That’s labeled option 1 as in the staff memo and it’s the dotted blue line. In addition to lowering term premiums from LSAPs, this option is also assumed to put downward pressure on longer-term rates by pushing off the first increase in the federal funds rate by about six months. This LSAP program is projected to boost real GDP, lower the unemployment rate, and increase the inflation rate somewhat. As a consequence, more rapid progress toward both of the Committee’s goals is made. The staff memorandum provided prior to your last meeting concluded that the purchases under such a program would not likely lead to a deterioration in market functioning. Michelle will later discuss some of the anticipated effects of the program on the Federal Reserve’s balance sheet and income. As I noted before, the estimated interest rate effect of an LSAP depends on the public’s understanding of the FOMC’s intended plans for purchases and exit. This consideration is particularly important for a flow-based or open-ended program that continues until a certain economic outcome is achieved. If the public understands the FOMC’s stopping rule and has the same forecast for the economy as the Committee, and the economy evolves according to those projections, then our models would suggest that the flow-based LSAP is roughly equivalent to a stock-based LSAP of the same ultimate size. Of course, the economy would likely not proceed exactly in line with expectations, so under a flow-based LSAP, the anticipated total amount of asset September 12–13, 2012 6 of 290 purchases would likely be more state dependent and evolve as the economy evolves. Option 4 in the memo entitled “Options for an Additional LSAP Program”— presented here as the dashed red line—was intended to correspond roughly to such a program when the economy faces an adverse shock, and, as a result, purchases end up at a level that is higher than originally assumed.

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