September 17–18, 2013 1 of 241 Meeting of the Federal Open Market Committee on September 17–18, 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, September 17, 2013, at 1:00 p.m. and continued on Wednesday, September 18, 2013, at 8:30 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 Christine Cumming, 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 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 Steven B. Kamin, Economist David W. Wilcox, Economist Thomas A. Connors, Troy Davig, Michael P. Leahy, Stephen A. Meyer, Geoffrey Tootell, 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 Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors James A. Clouse and William Nelson, Deputy Directors, Division of Monetary Affairs, Board of Governors September 17–18, 2013 2 of 241 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 Ellen E. Meade and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors Eric M. Engen, Michael T. Kiley, Thomas Laubach, David E. Lebow, and Michael G. Palumbo, Associate Directors, Division of Research and Statistics, Board of Governors; Fabio M. Natalucci, Associate Director, 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 and Statistics, Board of Governors Christopher J. Gust and Elizabeth Klee, Section Chiefs, Division of Monetary Affairs, Board of Governors Gordon Werkema, First Vice President, Federal Reserve Bank of Chicago David Altig, Loretta J. Mester, and Harvey Rosenblum,1 Executive Vice Presidents, Federal Reserve Banks of Atlanta, Philadelphia, and Dallas, respectively Joyce Hansen, Evan F. Koenig, Spencer Krane, Lorie K. Logan, Mark E. Schweitzer, John A. Weinberg, and Kei-Mu Yi, Senior Vice Presidents, Federal Reserve Banks of New York, Dallas, Chicago, New York, Cleveland, Richmond, and Minneapolis, respectively Chris Burke and Jonathan P. McCarthy, Vice Presidents, Federal Reserve Bank of New York Eric T. Swanson, Senior Research Advisor, Federal Reserve Bank of San Francisco _______________________ 1 Attended introductory remarks at Tuesday’s session only. September 17–18, 2013 3 of 241 Transcript of the Federal Open Market Committee Meeting on September 17–18, 2013 September 17 Session CHAIRMAN BERNANKE. Good afternoon, everybody. Today is Harvey Rosenblum’s last FOMC meeting before he retires from the Dallas Fed. Harvey started his Fed career at the Chicago Federal Reserve Bank in 1970, when I was a senior in high school. [Laughter] He will have attended—get this—189 regular FOMC meetings, including this one, starting with the meeting in November 1985 when he first became the research director at Dallas. Harvey has advised three presidents of the Federal Reserve Bank of Dallas, including Mr. Boykin; Mr. McTeer, “the Lonesome Dove” [laughter]; and President Richard Fisher. MR. FISHER. “The Lonesome Hawk.” [Laughter] CHAIRMAN BERNANKE. Harvey, congratulations on a distinguished career. All of your colleagues and friends here at the Federal Reserve System, I’m sure, wish you the very, very best. Thank you for your service. [Applause] MR. ROSENBLUM. Thank you, Mr. Chairman. If I could just add, it really has been a privilege serving this Committee for 27 years and the Federal Reserve System for 43 years. It has been fun and exciting to watch all the things going on and participate in them. I’m going to miss this place, and I’m going to miss your leadership. Thank you. CHAIRMAN BERNANKE. Thank you. Let’s go to the agenda, item 1, “Financial Developments and Open Market Operations.” Let me turn the floor over to Simon Potter. MR. POTTER.1 Thank you, Mr. Chairman. U.S. interest rates rose moderately over the intermeeting period, extending their increases since early May, while other domestic asset prices were relatively little changed. The increases in interest rates continued to be driven by shifting expectations for Federal Reserve policy and various sources of uncertainty about the policy outlook. Sovereign yields in most other advanced economies also rose, reflecting the pass-through of U.S. monetary 1 The materials used by Mr. Potter are appended to this transcript (appendix 1). September 17–18, 2013 4 of 241 policy expectations and some better-than-expected economic data. Financial stresses in some emerging markets intensified early in the period, but conditions have stabilized. Risks associated with a wider conflict in Syria also contributed to some volatility in asset prices over the period. Your first exhibit begins with a brief review of changes in domestic asset prices over the intermeeting period through last Friday. As shown in the top-left panel, 2- and 10-year nominal Treasury yields increased 12 and 27 basis points, respectively, and interest rates on 30-year fixed-rate mortgages rose roughly 26 basis points. TIPS yields increased more than comparable-maturity nominal Treasury yields, leaving measures of inflation compensation a bit lower. The S&P 500 and the trade-weighted dollar were both little changed. The rise in interest rates extended the sharp increases seen over the two prior intermeeting periods, and longer-term nominal Treasury yields and mortgage rates are now up roughly 120 basis points since the April/May FOMC meeting; real yields have risen by even more. However, market dynamics such as deleveraging and convexity hedging, which likely amplified the interest rate increases in June and July, appear to have moderated. Some of these dynamics will be discussed in Mike Kiley’s briefing and were examined in the staff’s recent Quantitative Surveillance report. Despite domestic economic data releases that were, on balance, viewed by market participants as somewhat weaker than expected, the odds placed on a reduction in the pace of asset purchases at this meeting appeared to increase. In a continuation of developments since mid-May, investors also seemed to revise up their expectations for the path of the target rate over the next several years, and uncertainty about the outlook for monetary policy increased. Many market participants highlighted shifting expectations regarding Federal Reserve leadership as an increasingly important factor driving interest rates over the period. Confirming the role that leadership succession played, financial conditions—as measured by bond yields, equity prices, and the dollar—eased significantly early yesterday, following the announcement that Lawrence Summers, the presumptive favorite, was no longer under consideration to be the chairman of the Federal Reserve. Some of the moves retraced over the day as market attention returned to potential policy actions at this meeting. As shown in the top-right panel, the path of the federal funds rate implied by a straight read of interest rate futures increased over the intermeeting period. Implied rates 2 to 5 years ahead rose the most, and this part of the curve steepened. The higher rates likely reflect a shift up in investors’ expectations for the most likely path of the target rate, as well as the effects of the increased uncertainty about Federal Reserve policy. These changes in uncertainty are illustrated in the middle-left panel, which shows the evolution of interest rate implied volatility. To gain further insight into these dynamics, the Desk’s latest primary dealer survey asked respondents to rate the importance of various factors in explaining the roughly 40 basis point increase in the 10-year Treasury yield between the release of the July FOMC statement and September 5. The responses, shown in the middle- September 17–18, 2013 5 of 241 right panel, indicate that dealers believe that changes in market expectations regarding the path of monetary policy and uncertainty about monetary policy, including uncertainty over leadership succession, were the dominant factors contributing to the yield increase. A change in the economic outlook and technical factors were rated as less important. Notably, we continue to see a divergence between survey respondents’ own policy expectations—which did not shift much over the period—and their assessment that changes in policy beliefs are the key factors driving interest rates. This divergence may indicate that the beliefs of dealer respondents differ from those of traders and investors whose views more directly affect prices in markets. Turning to this meeting, as shown to the right side of the bottom-left panel, averaging across the primary dealers’ beliefs produces a 58 percent probability of a reduction in the pace of purchases, a modest increase since the July survey and broadly consistent with the results of many other surveys. However, beliefs about the odds of this action still range widely. This contrasts with the move to a concentration of beliefs for some previous changes in balance sheet policy. For example, as shown to the left side of the panel, views on the likelihood of a second LSAP program had coalesced at very high levels leading into the November 2010 FOMC meeting. There was, consequently, little market response to the Committee’s announcement of the program.