_____________________________________________________________________________________________Page 1 Minutes of the Federal Open Market Committee September 12–13, 2012 A meeting of the Federal Open Market Committee was Nellie Liang, Director, Office of Financial Stability Pol- held in the offices of the Board of Governors of the icy and Research, Board of Governors Federal Reserve System in Washington, D.C., on Wednesday, September 12, 2012, at 10:30 a.m. and Jon W. Faust, Special Adviser to the Board, Office of continued on Thursday, September 13, 2012, at Board Members, Board of Governors 8:30 a.m. James A. Clouse, Deputy Director, Division of Mone- PRESENT: tary Affairs, Board of Governors; Maryann F. Ben Bernanke, Chairman Hunter, Deputy Director, Division of Banking Su- William C. Dudley, Vice Chairman pervision and Regulation, Board of Governors Elizabeth Duke Jeffrey M. Lacker Andreas Lehnert,¹ Deputy Director, Office of Financial Dennis P. Lockhart Stability Policy and Research, Board of Governors Sandra Pianalto Jerome H. Powell Linda Robertson, Assistant to the Board, Office of Sarah Bloom Raskin Board Members, Board of Governors Jeremy C. Stein Daniel K. Tarullo Seth B. Carpenter, Senior Associate Director, Division John C. Williams of Monetary Affairs, Board of Governors Janet L. Yellen Thomas Laubach, Senior Adviser, Division of Research James Bullard, Christine Cumming, Charles L. Evans, and Statistics, Board of Governors; Ellen E. Meade Esther L. George, and Eric Rosengren, Alternate and Joyce K. Zickler, Senior Advisers, Division of Members of the Federal Open Market Committee Monetary Affairs, Board of Governors Richard W. Fisher, Narayana Kocherlakota, and Brian J. Gross,² Special Assistant to the Board, Office Charles I. Plosser, Presidents of the Federal Re- of Board Members, Board of Governors serve Banks of Dallas, Minneapolis, and Philadel- phia, respectively Eric M. Engen, Michael G. Palumbo, and Wayne Passmore, Associate Directors, Division of Re- William B. English, Secretary and Economist search and Statistics, Board of Governors Deborah J. Danker, Deputy Secretary Matthew M. Luecke, Assistant Secretary Fabio M. Natalucci, Deputy Associate Director, Divi- David W. Skidmore, Assistant Secretary sion of Monetary Affairs, Board of Governors Michelle A. Smith, Assistant Secretary Scott G. Alvarez, General Counsel Edward Nelson, Section Chief, Division of Monetary Thomas C. Baxter, Deputy General Counsel Affairs, Board of Governors Steven B. Kamin, Economist David W. Wilcox, Economist Jeremy B. Rudd, Senior Economist, Division of Re- search and Statistics, Board of Governors David Altig, Thomas A. Connors, Michael P. Leahy, William Nelson, David Reifschneider, Glenn D. Kelly J. Dubbert, First Vice President, Federal Reserve Rudebusch, William Wascher, and John A. Wein- Bank of Kansas City berg, Associate Economists _______________________ Simon Potter, Manager, System Open Market Account ¹ Attended Wednesday’s session only. ² Attended Thursday’s session only. _____________________________________________________________________________________________Page 2 Federal Open Market Committee Loretta J. Mester, Harvey Rosenblum, and Daniel G. tional work regarding the implications of such purchas- Sullivan, Executive Vice Presidents, Federal Re- es for the normalization of policy. serve Banks of Philadelphia, Dallas, and Chicago, Developments in Financial Markets and the Fed- respectively eral Reserve’s Balance Sheet The Manager of the System Open Market Account Cletus C. Coughlin, Troy Davig, Mark E. Schweitzer, (SOMA) reported on developments in domestic and and Kei-Mu Yi, Senior Vice Presidents, Federal foreign financial markets during the period since the Reserve Banks of St. Louis, Kansas City, Cleve- Federal Open Market Committee (FOMC) met on land, and Minneapolis, respectively July 31–August 1, 2012. He also reported on System open market operations, including the ongoing rein- Lorie K. Logan, Jonathan P. McCarthy, Giovanni Oli- vestment into agency-guaranteed mortgage-backed se- vei, and Nathaniel Wuerffel,³ Vice Presidents, Fed- curities (MBS) of principal payments received on eral Reserve Banks of New York, New York, Bos- SOMA holdings of agency debt and agency-guaranteed ton, and New York, respectively MBS as well as the operations related to the maturity extension program authorized at the June 19–20, 2012, Michelle Ezer,4 Markets Officer, Federal Reserve Bank FOMC meeting. By unanimous vote, the Committee of New York ratified the Desk’s domestic transactions over the in- termeeting period. There were no intervention opera- _______________________ ³ Attended after the discussion on potential effects of a large- tions in foreign currencies for the System’s account scale asset purchase program. over the intermeeting period. 4 Attended the discussion on potential effects of a large-scale Staff Review of the Economic Situation asset purchase program. The information reviewed at the September 12–13 meeting suggested that economic activity continued to increase at a moderate pace in recent months. Em- Potential Effects of a Large-Scale Asset Purchase ployment rose slowly, and the unemployment rate was Program still high. Consumer price inflation stayed subdued, The staff presented an analysis of various aspects of while measures of long-run inflation expectations re- possible large-scale asset purchase programs, including mained stable. a comparison of flow-based purchase programs to pro- grams of fixed size. The presentation reviewed the Private nonfarm employment increased in July and Au- modeling approach used by the staff in estimating the gust at only a slightly faster pace than in the second financial and macroeconomic effects of such purchases. quarter, and the rate of decline in government em- While significant uncertainty surrounds such estimates, ployment eased somewhat. The unemployment rate the presentation indicated that asset purchases could be was 8.1 percent in August, just a bit lower than its aver- effective in fostering more rapid progress toward the age during the first half of the year, and the labor force Committee’s objectives. The staff noted that, for a participation rate edged down further. The share of flow-based program, the public’s understanding of the workers employed part time for economic reasons re- conditions under which the Committee would end pur- mained large, and the rate of long-duration unemploy- chases would shape expectations of the magnitude of ment continued to be high. Indicators of job openings the Federal Reserve’s holdings of longer-term securi- and firms’ hiring plans were little changed, on balance, ties, and thus also influence the financial and economic and initial claims for unemployment insurance were effects of such a program. The staff also discussed the essentially flat over the intermeeting period. potential implications of additional asset purchases for Manufacturing production increased at a faster pace in the evolution of the Federal Reserve’s balance sheet July than in the second quarter, and the rate of manu- and income. The presentation noted that significant facturing capacity utilization rose slightly. However, additional asset purchases should not adversely affect automakers’ schedules indicated that the pace of motor the ability of the Committee to tighten the stance of vehicle assemblies would be somewhat lower in the policy when doing so becomes appropriate. In their coming months than it was in July, and broader indica- discussion of the staff presentation, a few participants tors of manufacturing activity, such as the diffusion noted the uncertainty surrounding estimates of the ef- indexes of new orders from the national and regional fects of large-scale asset purchases or the need for addi- manufacturing surveys, generally remained quite muted _____________________________________________________________________________________________Minutes of the Meeting of September 12–13, 2012 Page 3 in recent months at levels consistent with only meager The U.S. international trade deficit was about un- gains in factory output in the near term. changed in July after narrowing significantly in June. Exports declined in July, as decreases in the exports of Following a couple of months when real personal con- industrial supplies, automotive products, and consumer sumption expenditures (PCE) were roughly flat, spend- goods were only partially offset by greater exports of ing increased in July, and the gains were fairly wide- agricultural products. Imports also declined in July, spread across categories of consumer goods and servic- reflecting lower imports of capital goods and petroleum es. Incoming data on factors that tend to support products and somewhat higher imports of automotive household spending were somewhat mixed. Real dis- products. The trade data for July pointed toward real posable incomes increased solidly in July, boosted in net exports having a roughly neutral effect on the part by lower energy prices. The continued rise in growth of U.S. real gross domestic product (GDP) in house values through July, and the increase in equity the third quarter after they made a positive contribu- prices during the intermeeting period, suggested that tion to the increase in real GDP in the second quarter. households’ net worth may have improved a little in recent months. However, consumer sentiment re- Overall U.S. consumer prices, as measured by the PCE mained more downbeat in August than earlier in the price index, were flat in July. Consumer