US Federal Reserve: records

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Records



Record of Policy Actionsof the Board of Governors

Regulation DReserve Requirementsof Depository Institutions

[Docket No. R-1268]

On October 18, 2006 , the Board ap-proved amendments to reflect the annualindexing of the low reserve tranche andof the reserve requirement exemptionfor use in 2007 reserve requirement cal-culations. The amendments decrease the3 percent low reserve tranche for nettransaction accounts to $45.8 million(from $48.3 million in 2006) andincrease the reserve requirement exemp-

tion to $8.5 million (from $7.8 millionin 2006).

Votes for this action: Chairman Bernanke,Vice Chairman Kohn, and GovernorsWarsh, Kroszner, and Mishkin. Absentand not voting: Governor Bies.

Regulation EElectronic Fund Transfers

[Docket No. R-1247]

On August 24, 2006 , the Board ap-proved amendments to Regulation E andits official staff commentary to apply theregulation to payroll card accountsestablished to distribute employeesalaries, wages, or other compensation

on a recurring basis. The amendmentsalso provide financial institutions withan alternative to sending periodic state-ments for payroll card accounts if theymake account information available toaccount holders by certain specifiedmeans. The amendments are effectiveJuly 1, 2007.

Votes for this action: Chairman Bernanke,Vice Chairman Kohn, and GovernorsBies, Warsh, and Kroszner.

[Docket No. R-1265]

On November 27, 2006 , the Board ap-proved amendments to Regulation E andits official staff commentary to clarifythat the requirement to obtain consumerauthorization applies to any person whointends to collect electronically a fee fora check or other item that is returnedunpaid. The amendments also provideguidance on the regulation’s require-ments concerning consumer notice whena returned-item fee is collected elec-tronically or a transaction involves anelectronic check conversion. Theamendments, which are based substan-tially on an interim final rule approvedon August 24, 2006, are effective Janu-ary 1, 2007; compliance with certaindisclosure requirements for returned-item fees collected in connection withpoint-of-sale transactions is delayed un-til January 1, 2008.

Votes for this action: Chairman Bernanke,Vice Chairman Kohn, and GovernorsBies, Warsh, and Kroszner. Absent andnot voting: Governor Mishkin.

Note: Full texts of the policy actions are avail-able via the online version of the Annual Report,from the “Reading Rooms” on the Board’s FOIAweb page, and on request from the Board’s Free-dom of Information Office.

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Regulation HMembership of State Banking Institutionsin the Federal Reserve System

Regulation YBank Holding Companiesand Change in Bank Control

[Docket No. R-1087]

On February 2, 2006 , the Board, actingwith the other federal bank regulatoryagencies, approved amendments to theagencies ’ market risk rules to reducethe capital requirement for certainsecurities-borrowing transactions collat-eralized with cash. The interagency rule,which makes permanent and expands aninterim final rule approved in 2000, iseffective February 22, 2006.

Votes for this action: Chairman Bernanke,Vice Chairman Ferguson, and GovernorsBies, Olson, and Kohn.

Regulation KInternational Banking Operations

[Docket No. R-1147]

On March 15, 2006 , the Board approvedamendments requiring Edge Act andagreement corporations and the U.S.branches, agencies, and representativeoffices of foreign banks supervised bythe Board to establish and maintain pro-cedures that ensure and monitor compli-ance with the Bank Secrecy Act andrelated regulations. The amendments areeffective April 19, 2006.

Votes for this action: Chairman Bernankeand Governors Bies, Olson, Kohn, Warsh,and Kroszner. Absent and not voting: ViceChairman Ferguson.

Regulation OLoans to Executive Officers,Directors, and PrincipalShareholders of Member Banks

[Docket No. R-1271]

On December 6, 2006 , the Board ap-proved an interim final rule, with re-quest for comment, to implement sec-tion 601 of the Financial ServicesRegulatory Relief Act of 2006 by elimi-nating certain reporting requirements

that have not contributed significantly toeffective monitoring or prevention of insider lending abuse. The interim finalrule is effective December 11, 2006.

Votes for this action: Chairman Bernanke,Vice Chairman Kohn, and GovernorsBies, Warsh, Kroszner, and Mishkin.

Regulation YBank Holding Companiesand Change in Bank Control

[Docket No. R-1235]

On February 22, 2006 , the Board ap-proved amendments to expand the appli-cability of its Small Bank Holding Com-pany Policy Statement and relatedexemptions from its consolidated capitaladequacy guidelines on risk-based andleverage measures by increasing theasset-size limitation specified in the pol-icy statement from $150 million to $500million. The amended policy statementdoes not apply, however, to bank hold-ing companies with less than $500 mil-lion in assets that engage in significantnonbanking or off-balance-sheet activi-

ties or have a material amount of debt orequity securities registered with the Se-curities and Exchange Commission. Theamendments also clarify that subordi-nated debt related to the issuance of trust preferred securities generally

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would be treated as debt under the pol-icy statement, subject to a five-year tran-sition period. The amendments are ef-

fective March 30, 2006.Votes for this action: Chairman Bernanke,Vice Chairman Ferguson, and GovernorsBies, Olson, and Kohn.

Regulation BBCommunity Reinvestment

[Docket No. OP-1240]On March 1, 2006 , the Board, actingwith the other federal bank regulatoryagencies, approved guidance intended toaid implementation of recent changes tothe agencies ’ regulations under theCommunity Reinvestment Act (CRA).The guidance discusses, among otherregulatory topics, (1) the criteria for de-termining if an area is distressed, isunderserved, or has suffered a disaster;(2) the period of time that bank activi-ties in those areas are eligible for consid-eration in a CRA evaluation; and (3) thestandards used by CRA examiners todecide if such activities qualify as “com-munity development. ” The guidancealso explains how the new communitydevelopment test for intermediate smallbanks (banks with assets between$250 million and $1 billion) will beapplied. The interagency guidance is ef-fective March 10, 2006.

Votes for this action: Chairman Bernanke,Vice Chairman Ferguson, and GovernorsBies, Olson, Kohn, and Warsh.

Rules RegardingEqual Opportunity

[Docket No. OP-1264]

On August 1, 2006 , the Board approvedan interim rule, with request for com-

ment, to extend eligibility for access toconfidential supervisory information tocertain noncitizen employees. The in-

terim rule is effective August 7, 2006,and also applies to all grants of accessmade as of that date.

Votes for this action: Chairman Bernanke,Vice Chairman Kohn, and GovernorsBies, Warsh, and Kroszner.

Policy Statementsand Other Actions

Interagency Advisory on theUnsafe and Unsound Use of Limitation of Liability Provisionsin External AuditEngagement Letters

On January 30, 2006 , the Board, actingwith the other federal financial regula-tory agencies, approved an advisory toaddress safety and soundness concernsassociated with agreements by financialinstitutions that limit the liability of theirexternal auditors. The advisory appliesto provisions that (1) indemnify an ex-ternal auditor against claims made bythird parties (including punitive dam-ages); (2) hold harmless or release an

external auditor from liability for claimsor potential claims that might be as-serted by the client financial institution;or (3) limit the remedies available to theclient financial institution. Provisionsthat waive the right of financial institu-tions to seek punitive damages againsttheir external auditors are not consid-ered unsafe and unsound under the advi-sory. The interagency advisory is effec-

tive for engagement letters executed onor after February 9, 2006.

Votes for this action: Chairman Green-span, Vice Chairman Ferguson, and Gov-ernors Bies, Olson, and Kohn.

Record of Policy Actions of the Board of Governors 153













Federal ReserveCurrency Recirculation Policy


On March 17, 2006 , the Board revisedthe Federal Reserve System ’s cash ser-vices policy, with the intention of increasing the recirculation of fit cur-rency by (1) initiating a custodial inven-tory program to encourage depositoryinstitutions to hold $10 and $20 notes intheir vaults to meet customer demandand (2) charging a fee to depositoryinstitutions that deposit fit $10 or$20 notes at a Reserve Bank and orderthe same denominations, above ade minimis amount, during the samebusiness week. The custodial inventoryprogram will begin in July 2006, andfee assessments are expected to begin inJuly 2007.

Votes for this action: Chairman Bernankeand Governors Olson, Kohn, Warsh, andKroszner. Absent and not voting: ViceChairman Ferguson and Governor Bies.

Nontraditional MortgageProduct Risks

[Docket No. OP-1246 ]

On September 27, 2006 , the Board, act-ing with the other federal financial regu-latory agencies, approved interagencyguidance on underwriting and managingnontraditional mortgage products (loansthat allow borrowers to defer paymentof principal and in some cases interest)in a safe and sound manner and onclearly disclosing the potential risks of those products.


Guidance on Concentrations inCommercial Real Estate Lending,Sound Risk-Management Practices


On December 6, 2006 , the Board, actingwith the other federal bank regulatoryagencies, approved guidance intended toreinforce sound risk-management prac-tices for institutions that have high andincreasing concentrations of commercialreal estate loans on their balance sheets.The guidance includes supervisory crite-ria to assist in identifying institutionsthat have potentially significant concen-trations. The interagency guidance is ef-fective December 12, 2006.


Interagency Statement onSound Practices concerningElevated Risk Complex StructuredFinance Activities


On December 20, 2006 , the Board, act-ing with the Securities and Exchange

Commission and the other federal bank and thrift regulatory agencies, approveda statement that describes internal con-trols and risk-management proceduresto assist financial institutions in identi-fying, managing, and addressing theheightened legal and reputational risksassociated with certain complexstructured finance transactions. Theinteragency statement is effective Jan-

uary 11, 2007.Votes for this action: Chairman Bernanke,Vice Chairman Kohn, and GovernorsBies, Kroszner, and Mishkin. Absent andnot voting: Governor Warsh.












Discount Rates in 2006

Under the Federal Reserve Act, boards

of directors of the Federal ReserveBanks must establish rates on loans todepository institutions at least everyfourteen days, subject to review and de-termination by the Board of Governors.

Primary Credit

Primary credit is the Federal Reserve ’smain lending program. Primary credit ismade available with minimal adminis-tration for very short terms as a backupsource of liquidity to depository institu-tions that, in the judgment of the lendingFederal Reserve Bank, are in generallysound financial condition. Primarycredit is extended at a rate above thefederal funds rate target set by the Fed-eral Open Market Committee (FOMC).

During 2006, the Board approvedfour increases in the primary credit rate,bringing the rate from 5 1 ⁄ 4 percent to61 ⁄ 4 percent. The Board reached its de-terminations on the primary credit raterecommendations of the Reserve Bank boards of directors in conjunction withthe FOMC’s decisions to raise the targetfederal funds rate from 4 1 ⁄ 4 percent to51 ⁄ 4 percent and related economic andfinancial developments. Rising energyprices coupled with high levels of resource utilization contributed toheightened inflation pressures over thefirst half of the year. Those pressuresreceded over the second half of the yearas energy prices dropped and weaknessin the housing sector weighed on eco-nomic activity. In light of these condi-tions, the Federal Reserve raised the

structure of policy rates at a measuredpace in the first half of the year and keptthose rates unchanged for the remainderof the year. Monetary policy develop-ments are reviewed more fully in otherparts of this report (see the section

“Monetary Policy and Economic Devel-opments” and the minutes of FOMCmeetings held in 2006).

Secondary and Seasonal Credit

Secondary credit is available in appro-priate circumstances to depository insti-tutions that do not qualify for primarycredit. The secondary credit rate is set ata spread above the primary credit rate.In 2006, the spread was set at 50 basispoints.

Seasonal credit is available to smallerdepository institutions to meet liquidityneeds that arise from regular swings intheir loans and deposits. The rate onseasonal credit is calculated every twoweeks as an average of selected money-market yields, typically resulting in arate close to the federal funds rate target.

At year-end, the secondary and sea-sonal credit rates were 6 3 ⁄ 4 percent and5.30 percent, respectively.

Votes on Discount Rate Changes

About every two weeks during 2006, theBoard approved proposals by the twelveReserve Banks to maintain the formulasfor computing the secondary and sea-sonal credit rates. Details on the four

actions by the Board to approve changesin the primary credit rate are providedbelow.

January 31, 2006 . Effective this date,the Board approved actions taken by thedirectors of the Federal Reserve Banksof Boston, New York, Philadelphia,Cleveland, Richmond, Atlanta, Chicago,Kansas City, Dallas, and San Francisco

to raise the rate on discounts andadvances under the primary credit pro-gram by 1 ⁄ 4 percentage point, to 5 1 ⁄ 2 per-cent. The same increase was approvedfor the Federal Reserve Bank of St.Louis, effective February 1, 2006. The

Record of Policy Actions of the Board of Governors 155



Board also approved an identical actionsubsequently taken by the directors of the Federal Reserve Bank of Minneapo-

lis, effective February 2, 2006.Votes for this action: Chairman Green-span, Vice Chairman Ferguson, and Gov-ernors Bies, Olson, and Kohn. Votesagainst this action: None.

March 28, 2006 . Effective this date, theBoard approved actions taken by thedirectors of the Federal Reserve Banksof Boston, New York, Philadelphia,

Cleveland, Richmond, Atlanta, Chicago,Minneapolis, Dallas, and San Franciscoto raise the rate on discounts andadvances under the primary credit pro-gram by 1 ⁄ 4 percentage point, to 5 3 ⁄ 4 per-cent. The same increase was approvedfor the Federal Reserve Bank of St.Louis, effective March 29, 2006. TheBoard also approved an identical actionsubsequently taken by the directors of

the Federal Reserve Bank of KansasCity, effective March 30, 2006.

Votes for this action: Chairman Bernankeand Governors Bies, Olson, Kohn, Warsh,and Kroszner. Votes against this action:None.

May 10, 2006 . Effective this date, theBoard approved actions taken by thedirectors of the Federal Reserve Banks

of Boston, New York, Philadelphia,Cleveland, Richmond, Atlanta, Chicago,Minneapolis, Dallas, and San Francisco

to raise the rate on discounts andadvances under the primary credit pro-gram by 1 ⁄ 4 percentage point, to 6 per-

cent. The same increase was approvedfor the Federal Reserve Bank of St.Louis, effective May 11, 2006. TheBoard also approved an identical actionsubsequently taken by the directors of the Federal Reserve Bank of KansasCity, effective May 11, 2006.

Votes for this action: Chairman Bernanke,Vice Chairman Ferguson, and Governors

Bies, Olson, Kohn, Warsh, and Kroszner.Votes against this action: None.

June 29, 2006 . Effective this date, theBoard approved actions taken by thedirectors of the Federal Reserve Banksof Boston, New York, Philadelphia,Cleveland, Richmond, Atlanta, Chicago,Minneapolis, and Dallas to raise the rateon discounts and advances under theprimary credit program by 1 ⁄ 4 percentagepoint, to 6 1 ⁄ 4 percent. The same increasewas approved for the Federal ReserveBank of St. Louis, effective June 30,2006. The Board also approved identicalactions subsequently taken by the direc-tors of the Federal Reserve Banks of San Francisco, effective June 29, 2006,and Kansas City, effective July 6, 2006.

Votes for this action: Chairman Bernanke,Vice Chairman Kohn, and GovernorsBies, Warsh, and Kroszner. Votes againstthis action: None. Á




Minutes of Federal Open Market Committee Meetings

The policy actions of the Federal OpenMarket Committee, contained in theminutes of its meetings, are presented inthe Annual Report of the Board of Gov-ernors pursuant to the requirements of section 10 of the Federal Reserve Act.That section provides that the Boardshall keep a complete record of theactions taken by the Board and by theFederal Open Market Committee on allquestions of policy relating to open mar-ket operations, that it shall record thereinthe votes taken in connection with thedetermination of open market policiesand the reasons underlying each policyaction, and that it shall include in itsannual report to Congress a full accountof such actions.

The minutes of the meetings containthe votes on the policy decisions madeat those meetings as well as a summaryof the information and discussions thatled to the decisions. The descriptions of economic and financial conditions arebased solely on the information that wasavailable to the Committee at the timeof the meetings.

Members of the Committee voting fora particular action may differ amongthemselves as to the reasons for theirvotes; in such cases, the range of theirviews is noted in the minutes. Whenmembers dissent from a decision, theyare identified in the minutes and a sum-mary of the reasons for their dissent is

provided.Policy directives of the Federal OpenMarket Committee are issued to theFederal Reserve Bank of New York asthe Bank selected by the Committee toexecute transactions for the System

Open Market Account. In the area of domestic open market operations, theFederal Reserve Bank of New York operates under instructions from theFederal Open Market Committee thattake the form of an Authorization for

Domestic Open Market Operations anda Domestic Policy Directive. (A newDomestic Policy Directive is adopted ateach regularly scheduled meeting.) Inthe foreign currency area, the FederalReserve Bank of New York operatesunder an Authorization for Foreign Cur-rency Operations, a Foreign CurrencyDirective, and Procedural Instructionswith Respect to Foreign Currency Op-erations. These policy instruments areshown below in the form in which theywere in effect at the beginning of 2006.Changes in the instruments during theyear are reported in the minutes for theindividual meetings.

Authorization for DomesticOpen Market Operations

In Effect January 1, 20061. The Federal Open Market Committee

authorizes and directs the Federal ReserveBank of New York, to the extent neces-sary to carry out the most recent domesticpolicy directive adopted at a meeting of theCommittee:

(a) To buy or sell U.S. Governmentsecurities, including securities of the FederalFinancing Bank, and securities that are directobligations of, or fully guaranteed as toprincipal and interest by, any agency of theUnited States in the open market, from or tosecurities dealers and foreign and inter-national accounts maintained at the FederalReserve Bank of New York, on a cash, regu-

157



lar, or deferred delivery basis, for the SystemOpen Market Account at market prices, and,for such Account, to exchange maturingU.S. Government and Federal agency securi-ties with the Treasury or the individual agen-cies or to allow them to mature withoutreplacement.

(b) To buy U.S. Government securities,obligations that are direct obligations of,or fully guaranteed as to principal and inter-est by, any agency of the United States, fromdealers for the account of the FederalReserve Bank of New York under agree-ments for repurchase of such securities orobligations in 65 business days or less, atrates that, unless otherwise expressly autho-rized by the Committee, shall be determinedby competitive bidding, after applying rea-sonable limitations on the volume of agree-ments with individual dealers; provided thatin the event Government securities or agencyissues covered by any such agreement arenot repurchased by the dealer pursuant to theagreement or a renewal thereof, they shall besold in the market or transferred to the Sys-tem Open Market Account.

(c) To sell U.S. Government securitiesand obligations that are direct obligations of,or fully guaranteed as to principal and inter-est by, any agency of the United States todealers for System Open Market Accountunder agreements for the resale by dealersof such securities or obligations in 65 busi-ness days or less, at rates that, unlessotherwise expressly authorized by the Com-mittee, shall be determined by competitivebidding, after applying reasonable limita-tions on the volume of agreements withindividual dealers.

2. In order to ensure the effective conductof open market operations, the Federal OpenMarket Committee authorizes the FederalReserve Bank of New York to lend on anovernight basis U.S. Government securitiesheld in the System Open Market Account todealers at rates that shall be determined bycompetitive bidding. The Federal ReserveBank of New York shall set a minimumlending fee consistent with the objectives of the program and apply reasonable limitationson the total amount of a specific issue thatmay be auctioned and on the amount of securities that each dealer may borrow. TheFederal Reserve Bank of New York mayreject bids which could facilitate a dealer’s

ability to control a single issue as deter-mined solely by the Federal Reserve Bank of New York.

3. In order to ensure the effective conductof open market operations, while assisting inthe provision of short-term investments forforeign and international accounts main-tained at the Federal Reserve Bank of NewYork and accounts maintained at the FederalReserve Bank of New York as fiscal agentof the United States pursuant to Section 15of the Federal Reserve Act, the Federal OpenMarket Committee authorizes and directs theFederal Reserve Bank of New York (a) forSystem Open Market Account, to sell U.S.Government securities to such accounts onthe bases set forth in paragraph 1(a) underagreements providing for the resale by suchaccounts of those securities in 65 businessdays or less on terms comparable to thoseavailable on such transactions in the market;and (b) for New York Bank account, whenappropriate, to undertake with dealers, subject to the conditions imposed on purchasesand sales of securities in paragraph 1(b),repurchase agreements in U.S. Governmentand agency securities, and to arrange corre-sponding sale and repurchase agreementsbetween its own account and such foreign,international, and fiscal agency accountsmaintained at the Bank. Transactions under-taken with such accounts under the provi-sions of this paragraph may provide for aservice fee when appropriate.

4. In the execution of the Committee’sdecision regarding policy during any inter-meeting period, the Committee authorizesand directs the Federal Reserve Bank of New York, upon the instruction of the Chair-man of the Committee, to adjust somewhatin exceptional circumstances the degree of pressure on reserve positions and hence theintended federal funds rate. Any such adjust-ment shall be made in the context of theCommittee’s discussion and decision at itsmost recent meeting and the Committee’slong-run objectives for price stability andsustainable economic growth, and shall bebased on economic, financial, and mone-tary developments during the intermeetingperiod. Consistent with Committee prac-tice, the Chairman, if feasible, will consultwith the Committee before making anyadjustment.




Domestic Policy Directive

In Effect January 1, 2006 1

The Federal Open Market Committeeseeks monetary and financial conditions thatwill foster price stability and promote sus-tainable growth in output. To further its long-run objectives, the Committee in the imme-diate future seeks conditions in reservemarkets consistent with increasing thefederal funds rate to an average of around41 ⁄ 4 percent.

Authorization forForeign Currency Operations

In Effect January 1, 20061. The Federal Open Market Committee

authorizes and directs the Federal ReserveBank of New York, for System Open MarketAccount, to the extent necessary to carry outthe Committee’s foreign currency directiveand express authorizations by the Commit-tee pursuant thereto, and in conformity withsuch procedural instructions as the Commit-tee may issue from time to time:

A. To purchase and sell the followingforeign currencies in the form of cable trans-fers through spot or forward transactions onthe open market at home and abroad, includ-ing transactions with the U.S. Treasury, withthe U.S. Exchange Stabilization Fund estab-lished by Section 10 of the Gold ReserveAct of 1934, with foreign monetary authori-ties, with the Bank for International Settle-

ments, and with other international financialinstitutions:Canadian dollarsDanish kronerEuroPounds sterlingJapanese yen

Mexican pesosNorwegian kronerSwedish kronorSwiss francs

B. To hold balances of, and to haveoutstanding forward contracts to receive orto deliver, the foreign currencies listed inparagraph A above.

C. To draw foreign currencies and to

permit foreign banks to draw dollars underthe reciprocal currency arrangements listedin paragraph 2 below, provided that draw-ings by either party to any such arrangement

shall be fully liquidated within 12 monthsafter any amount outstanding at that timewas first drawn, unless the Committee,because of exceptional circumstances, spe-cifically authorizes a delay.

D. To maintain an overall open posi-tion in all foreign currencies not exceeding$25.0 billion. For this purpose, the overallopen position in all foreign currencies isdefined as the sum (disregarding signs) of net positions in individual currencies. Thenet position in a single foreign currency isdefined as holdings of balances in that cur-rency, plus outstanding contracts for futurereceipt, minus outstanding contracts for

future delivery of that currency, i.e., as thesum of these elements with due regard tosign.

2. The Federal Open Market Commit-tee directs the Federal Reserve Bank of New York to maintain reciprocal currencyarrangements (‘‘swap’’ arrangements) for theSystem Open Market Account for periods upto a maximum of 12 months with the follow-ing foreign banks, which are among thosedesignated by the Board of Governors of the

Federal Reserve System under Section 214.5of Regulation N, Relations with ForeignBanks and Bankers, and with the approval of the Committee to renew such arrangementson maturity:

Amountof arrangement

Foreign bank (millions of dollars equivalent)

Bank of Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 ,000Bank of Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000

Any changes in the terms of existing swaparrangements, and the proposed terms of anynew arrangements that may be authorized,shall be referred for review and approval tothe Committee.

3. All transactions in foreign currenciesundertaken under paragraph 1.A. aboveshall, unless otherwise expressly authorizedby the Committee, be at prevailing marketrates. For the purpose of providing an invest-ment return on System holdings of foreigncurrencies or for the purpose of adjustinginterest rates paid or received in connectionwith swap drawings, transactions with for-eign central banks may be undertaken atnon-market exchange rates.

1. Adopted by the Committee at its meetingon December 13, 2005.

Minutes of FOMC Meetings 159



4. It shall be the normal practice toarrange with foreign central banks for thecoordination of foreign currency transac-tions. In making operating arrangementswith foreign central banks on System hold-ings of foreign currencies, the FederalReserve Bank of New York shall not commititself to maintain any specific balance, un-less authorized by the Federal Open MarketCommittee. Any agreements or understand-ings concerning the administration of theaccounts maintained by the Federal ReserveBank of New York with the foreign banksdesignated by the Board of Governors underSection 214.5 of Regulation N shall bereferred for review and approval to theCommittee.

5. Foreign currency holdings shall be in-vested to ensure that adequate liquidity ismaintained to meet anticipated needs and sothat each currency portfolio shall generallyhave an average duration of no more than18 months (calculated as Macaulay dura-tion). When appropriate in connection witharrangements to provide investment facilitiesfor foreign currency holdings, U.S. Govern-ment securities may be purchased from for-eign central banks under agreements forrepurchase of such securities within 30 cal-endar days.

6. All operations undertaken pursuant tothe preceding paragraphs shall be reportedpromptly to the Foreign Currency Sub-committee and the Committee. The ForeignCurrency Subcommittee consists of theChairman and Vice Chairman of the Com-mittee, the Vice Chairman of the Board of Governors, and such other member of theBoard as the Chairman may designate (or inthe absence of members of the Board servingon the Subcommittee, other Board membersdesignated by the Chairman as alternates,and in the absence of the Vice Chairman of the Committee, his alternate). Meetings of the Subcommittee shall be called at therequest of any member, or at the request of the Manager, System Open Market Account(“Manager ”), for the purposes of reviewingrecent or contemplated operations and of consulting with the Manager on other mat-ters relating to his responsibilities. At therequest of any member of the Subcommittee,questions arising from such reviews and con-sultations shall be referred for determinationto the Federal Open Market Committee.

7. The Chairman is authorized:A. With the approval of the Commit-

tee, to enter into any needed agreement orunderstanding with the Secretary of the Trea-sury about the division of responsibility forforeign currency operations between the Sys-tem and the Treasury;

B. To keep the Secretary of the Trea-sury fully advised concerning System for-eign currency operations, and to consult withthe Secretary on policy matters relating toforeign currency operations;

C. From time to time, to transmitappropriate reports and information to theNational Advisory Council on International

Monetary and Financial Policies.8. Staff officers of the Committee are au-

thorized to transmit pertinent information onSystem foreign currency operations to appro-priate officials of the Treasury Department.

9. All Federal Reserve Banks shall par-ticipate in the foreign currency operationsfor System Account in accordance with para-graph 3G(1) of the Board of Governors ’Statement of Procedure with Respect to For-eign Relationships of Federal Reserve Banksdated January 1, 1944.

Foreign Currency Directive

In Effect January 1, 20061. System operations in foreign curren-

cies shall generally be directed at counteringdisorderly market conditions, provided that

market exchange rates for the U.S. dollarreflect actions and behavior consistent withIMF Article IV, Section 1.

2. To achieve this end the System shall:A. Undertake spot and forward pur-

chases and sales of foreign exchange.B. Maintain reciprocal currency

(“swap”) arrangements with selected foreigncentral banks.

C. Cooperate in other respects withcentral banks of other countries and with

international monetary institutions.3. Transactions may also be undertaken:

A. To adjust System balances in lightof probable future needs for currencies.

B. To provide means for meeting Sys-tem and Treasury commitments in particular




currencies, and to facilitate operations of theExchange Stabilization Fund.

C. For such other purposes as may beexpressly authorized by the Committee.

4. System foreign currency operationsshall be conducted:

A. In close and continuous consulta-tion and cooperation with the United StatesTreasury;

B. In cooperation, as appropriate, withforeign monetary authorities; and

C. In a manner consistent with the ob-ligations of the United States in the Interna-tional Monetary Fund regarding exchangearrangements under IMF Article IV.

Procedural Instructionswith Respect toForeign Currency Operations

In Effect January 1, 2006In conducting operations pursuant to theauthorization and direction of the FederalOpen Market Committee as set forth in theAuthorization for Foreign Currency Opera-tions and the Foreign Currency Directive,the Federal Reserve Bank of New York,through the Manager, System Open MarketAccount ( “Manager ”), shall be guided by thefollowing procedural understandings with re-spect to consultations and clearances withthe Committee, the Foreign Currency Sub-committee, and the Chairman of the Com-mittee. All operations undertaken pur-suant to such clearances shall be reportedpromptly to the Committee.

1. The Manager shall clear with the Sub-committee (or with the Chairman, if theChairman believes that consultation with theSubcommittee is not feasible in the timeavailable):

A. Any operation that would result in achange in the System ’s overall open positionin foreign currencies exceeding $300 millionon any day or $600 million since the mostrecent regular meeting of the Committee.

B. Any operation that would result in achange on any day in the System ’s net posi-tion in a single foreign currency exceeding$150 million, or $300 million when theoperation is associated with repayment of swap drawings.

C. Any operation that might generate asubstantial volume of trading in a particular

currency by the System, even though thechange in the System ’s net position in thatcurrency might be less than the limits speci-fied in 1.B.

D. Any swap drawing proposed by aforeign bank not exceeding the larger of (i) $200 million or (ii) 15 percent of the sizeof the swap arrangement.

2. The Manager shall clear with the Com-mittee (or with the Subcommittee, if theSubcommittee believes that consultationwith the full Committee is not feasible in thetime available, or with the Chairman, if theChairman believes that consultation withthe Subcommittee is not feasible in the timeavailable):

A. Any operation that would result in achange in the System ’s overall open positionin foreign currencies exceeding $1.5 billionsince the most recent regular meeting of theCommittee.

B. Any swap drawing proposed bya foreign bank exceeding the larger of (i) $200 million or (ii) 15 percent of thesize of the swap arrangement.

3. The Manager shall also consult withthe Subcommittee or the Chairman aboutproposed swap drawings by the System andabout any operations that are not of a routinecharacter.

Meeting Held onJanuary 31, 2006

A meeting of the Federal Open Market

Committee was held in the offices of theBoard of Governors of the FederalReserve System in Washington, D.C.,on Tuesday, January 31, 2006 at 9:00a.m.

Present:Mr. Greenspan, ChairmanMr. Geithner, Vice ChairmanMs. BiesMr. FergusonMr. GuynnMr. KohnMr. LackerMr. OlsonMs. PianaltoMs. Yellen

Minutes of FOMC Meetings, January 161



Mses. Cumming and Minehan, Messrs.Moskow, Poole, and Hoenig, Al-ternate Members of the FederalOpen Market Committee

Messrs. Fisher, Stern, and Santomero,Presidents of the Federal ReserveBanks of Dallas, Minneapolis, andPhiladelphia, respectively

Mr. Reinhart, Secretary and EconomistMs. Danker, Deputy SecretaryMs. Smith, Assistant SecretaryMr. Skidmore, Assistant SecretaryMr. Alvarez, General CounselMr. Baxter, Deputy General Counsel

Ms. Johnson, EconomistMr. Stockton, Economist

Messrs. Connors, Eisenbeis, Judd, Ka-min, Madigan, Sniderman, Struck-meyer, and Wilcox, AssociateEconomists

Mr. Kos, Manager, System Open Mar-ket Account

Messrs. Oliner and Slifman, AssociateDirectors, Division of Research

and Statistics, Board of GovernorsMr. Whitesell, Deputy Associate Direc-

tor, Division of Monetary Affairs,Board of Governors

Messrs. English and Sheets, AssistantDirectors, Division of MonetaryAffairs and International Finance,respectively, Board of Governors

Mr. Simpson, Senior Adviser, Divisionof Research and Statistics, Boardof Governors

Mr. Small, Project Manager, Divisionof Monetary Affairs, Board of Governors

Mr. Chaboud and Mses. Kusko andWeinbach, Senior Economists, Di-visions of International Finance,Research and Statistics, and Mone-tary Affairs, respectively, Board of Governors

Ms. Roush, Economist, Division of Monetary Affairs, Board of Governors

Mr. Luecke, Senior Financial Analyst,Division of Monetary Affairs,Board of Governors

Ms. Low, Open Market Secretariat Spe-cialist, Division of MonetaryAffairs, Board of Governors

Mr. Stone, First Vice President, FederalReserve Bank of Philadelphia

Messrs. Fuhrer and Rosenblum, Execu-tive Vice Presidents, FederalReserve Banks of Boston and Dal-las, respectively

Messrs. Evans and Hakkio, Mses.Mester and Perelmuter, andMessrs. Rasche, Rolnick, andSteindel, Senior Vice Presidents,

Federal Reserve Banks of Chicago,Kansas City, Philadelphia, NewYork, St. Louis, Minneapolis, andNew York, respectively

Mr. Hetzel, Senior Economist, FederalReserve Bank of Richmond

In the agenda for this meeting, it wasreported that advices of the election of the following members and alternatemembers of the Federal Open MarketCommittee for a term beginning January31, 2006 had been received and thatthese individuals had executed theiroaths of office.

The elected members and alternatemembers were as follows:

Timothy F. Geithner, President of the Fed-eral Reserve Bank of New York, with

Christine M. Cumming, First VicePresident, Federal Reserve Bank of New York as alternate.

Jeffrey M. Lacker, President of the FederalReserve Bank of Richmond, with CathyE. Minehan, President of the FederalReserve Bank of Boston as alternate.

Sandra Pianalto, President of the FederalReserve Bank of Cleveland, withMichael H. Moskow, President of the

Federal Reserve Bank of Chicago asalternate.

Jack Guynn, President of the FederalReserve Bank of Atlanta, with WilliamPoole, President of the Federal ReserveBank of St. Louis as alternate.




Janet L. Yellen, President of the FederalReserve Bank of San Francisco, withThomas M. Hoenig, President of theFederal Reserve Bank of Kansas City asalternate.

By unanimous vote, the followingofficers of the Federal Open MarketCommittee were selected to serve untilthe selection of their successors at thefirst regularly scheduled meeting of theCommittee in 2007, with the under-standing that in the event of the discon-tinuance of their official connection with

the Board of Governors or with a Fed-eral Reserve Bank, they would cease tohave any official connection with theFederal Open Market Committee:

Alan Greenspan Chairman 2

Timothy F. Geithner Vice ChairmanVincent R. Reinhart Secretary and

EconomistDeborah J. Danker Deputy SecretaryDavid W. Skidmore Assistant SecretaryMichelle A. Smith Assistant SecretaryScott G. Alvarez General CounselThomas C. Baxter, Jr. Deputy General

CounselKaren H. Johnson EconomistDavid J. Stockton EconomistThomas A. Connors, Robert A. Eisenbeis,

John P. Judd, Steven B. Kamin, Brian F.Madigan, Mark S. Sniderman, CharlesS. Struckmeyer, Joseph S. Tracy, JohnA. Weinberg, and David W. Wilcox,Associate Economists

In addition, it was agreed that theCommittee would conduct a notationvote upon the swearing in of a newChairman of the Board of Governors toelect Alan Greenspan ’s successor asChairman of the Committee. 3

By unanimous vote, Deborah J.Danker, or her successor as Deputy Sec-retary, was elected to serve as Chief

Freedom of Information Act Officer tocomply with an Executive Order issuedon December 14, 2005 that requires fed-

eral agencies to take certain actions re-lating to FOIA activities.By unanimous vote, the Committee

amended its Program for Security of FOMC Information, primarily to reflectincorporation of the Board ’s new ruleson access to confidential information bynon-citizens.

By unanimous vote, the FederalReserve Bank of New York was selectedto execute transactions for the SystemOpen Market.

By unanimous vote, Dino Kos wasselected to serve at the pleasure of theCommittee as Manager, System OpenMarket Account, on the understandingthat his selection was subject to beingsatisfactory to the Federal Reserve Bank of New York. 4

By unanimous vote, the Authoriza-tion for Domestic Open Market Opera-tions was reaffirmed in the form shownbelow.

Authorization for Domestic OpenMarket Operations(Reaffirmed January 31, 2006)

1. The Federal Open Market Committeeauthorizes and directs the Federal ReserveBank of New York, to the extent necessaryto carry out the most recent domestic policydirective adopted at a meeting of theCommittee:

(a) To buy or sell U.S. Governmentsecurities, including securities of the FederalFinancing Bank, and securities that are directobligations of, or fully guaranteed as toprincipal and interest by, any agency of theUnited States in the open market, from or tosecurities dealers and foreign and inter-national accounts maintained at the Federal

Reserve Bank of New York, on a cash,regular, or deferred delivery basis, for the2. Alan Greenspan was elected to serve for theremainder of the day.

3. Secretary ’s note: By notation vote completedon February 1, 2006 the Committee unanimouslyapproved the election of Ben S. Bernanke asChairman of the Federal Open Market Committee.

4. Secretary ’s note: Advice subsequently wasreceived that the selection of Mr. Kos as Managerwas satisfactory to the board of directors of theFederal Reserve Bank of New York.




System Open Market Account at marketprices, and, for such Account, to exchangematuring U.S. Government and Federalagency securities with the Treasury or theindividual agencies or to allow them to ma-ture without replacement;

(b) To buy U.S. Government securities,obligations that are direct obligations of, orfully guaranteed as to principal and interestby, any agency of the United States, fromdealers for the account of the Federal Re-serve Bank of New York under agreementsfor repurchase of such securities or obliga-tions in 65 business days or less, at rates that,unless otherwise expressly authorized by the

Committee, shall be determined by competi-tive bidding, after applying reasonable limi-tations on the volume of agreements withindividual dealers; provided that in the eventGovernment securities or agency issues cov-ered by any such agreement are not repur-chased by the dealer pursuant to the agree-ment or a renewal thereof, they shall be soldin the market or transferred to the SystemOpen Market Account.

(c) To sell U.S. Government securitiesand obligations that are direct obligations of,or fully guaranteed as to principal and inter-est by, any agency of the United States todealers for System Open Market Accountunder agreements for the resale by dealers of such securities or obligations in 65 businessdays or less, at rates that, unless otherwiseexpressly authorized by the Committee, shallbe determined by competitive bidding, afterapplying reasonable limitations on the vol-ume of agreements with individual dealers.

2. In order to ensure the effective conductof open market operations, the Federal OpenMarket Committee authorizes the FederalReserve Bank of New York to lend on anovernight basis U.S. Government securitiesheld in the System Open Market Account todealers at rates that shall be determined bycompetitive bidding. The Federal ReserveBank of New York shall set a minimumlending fee consistent with the objectives of the program and apply reasonable limitationson the total amount of a specific issue thatmay be auctioned and on the amount of securities that each dealer may borrow. TheFederal Reserve Bank of New York mayreject bids which could facilitate a dealer ’sability to control a single issue as determinedsolely by the Federal Reserve Bank of NewYork.

3. In order to ensure the effective conductof open market operations, while assisting inthe provision of short-term investments forforeign and international accounts main-tained at the Federal Reserve Bank of NewYork and accounts maintained at the FederalReserve Bank of New York as fiscal agent of the United States pursuant to Section 15 of the Federal Reserve Act, the Federal OpenMarket Committee authorizes and directs theFederal Reserve Bank of New York (a) forSystem Open Market Account, to sell U.S.Government securities to such accounts onthe bases set forth in paragraph l(a) underagreements providing for the resale by suchaccounts of those securities in 65 businessdays or less on terms comparable to thoseavailable on such transactions in the market;and (b) for New York Bank account, whenappropriate, to undertake with dealers, subject to the conditions imposed on purchasesand sales of securities in paragraph l(b),repurchase agreements in U.S. Governmentand agency securities, and to arrange corre-sponding sale and repurchase agreements be-tween its own account and such foreign,

international, and fiscal agency accountsmaintained at the Bank. Transactions under-taken with such accounts under the provi-sions of this paragraph may provide for aservice fee when appropriate.

4. In the execution of the Committee ’sdecision regarding policy during any inter-meeting period, the Committee authorizesand directs the Federal Reserve Bank of New York, upon the instruction of the Chair-man of the Committee, to adjust somewhat

in exceptional circumstances the degree of pressure on reserve positions and hence theintended federal funds rate. Any such adjust-ment shall be made in the context of theCommittee ’s discussion and decision at itsmost recent meeting and the Committee ’slong-run objectives for price stability andsustainable economic growth, and shall bebased on economic, financial, and monetarydevelopments during the intermeetingperiod. Consistent with Committee practice,the Chairman, if feasible, will consult withthe Committee before making anyadjustment.

With Mr. Lacker dissenting, the Com-mittee approved the Authorization forForeign Currency Operations with an




amendment to paragraph 5 which clari-fies the language about permissibleinvestment activities for the foreign

portfolio and brings that language intoalignment with that present in the autho-rization for the domestic portfolio. Ac-cordingly, the Authorization for ForeignCurrency Operations was adopted, effec-tive January 31, 2006, as shown below.

Authorization forForeign Currency Operations(Amended January 31, 2006)

1. The Federal Open Market Committeeauthorizes and directs the Federal ReserveBank of New York, for System Open MarketAccount, to the extent necessary to carry outthe Committee ’s foreign currency directiveand express authorizations by the Committeepursuant thereto, and in conformity withsuch procedural instructions as the Commit-tee may issue from time to time:

A. To purchase and sell the followingforeign currencies in the form of cable trans-fers through spot or forward transactions onthe open market at home and abroad, includ-ing transactions with the U.S. Treasury, withthe U.S. Exchange Stabilization Fund estab-lished by Section 10 of the Gold Reserve Actof 1934, with foreign monetary authorities, withthe Bank for International Settlements, andwith other international financial institutions:

Canadian dollarsDanish kronerEuro

Pounds sterlingJapanese yen

Mexican pesosNorwegian kronerSwedish kronor

Swiss francs

B. To hold balances of, and to haveoutstanding forward contracts to receive orto deliver, the foreign currencies listed inparagraph A above.

C. To draw foreign currencies and topermit foreign banks to draw dollars underthe reciprocal currency arrangements listedin paragraph 2 below, provided that draw-ings by either party to any such arrangementshall be fully liquidated within 12 monthsafter any amount outstanding at that timewas first drawn, unless the Committee, be-cause of exceptional circumstances, specifi-cally authorizes a delay.

D. To maintain an overall open positionin all foreign currencies not exceeding $25.0

billion. For this purpose, the overall openposition in all foreign currencies is definedas the sum (disregarding signs) of net posi-tions in individual currencies. The net posi-tion in a single foreign currency is defined asholdings of balances in that currency, plusoutstanding contracts for future receipt, mi-nus outstanding contracts for future deliveryof that currency, i.e., as the sum of theseelements with due regard to sign.

2. The Federal Open Market Committeedirects the Federal Reserve Bank of NewYork to maintain reciprocal currency ar-rangements ( “swap” arrangements) for theSystem Open Market Account for periods upto a maximum of 12 months with the follow-ing foreign banks, which are among thosedesignated by the Board of Governors of theFederal Reserve System under Section 214.5of Regulation N, Relations with ForeignBanks and Bankers, and with the approval of the Committee to renew such arrangementson maturity:

Foreign bank Amount of

arrangement(millions of

dollars equivalent)

Bank of Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000Bank of Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ,000

Any changes in the terms of existing swaparrangements, and the proposed terms of anynew arrangements that may be authorized,shall be referred for review and approval tothe Committee.

3. All transactions in foreign currenciesundertaken under paragraph 1.A. above

shall, unless otherwise expressly authorizedby the Committee, be at prevailing marketrates. For the purpose of providing an invest-ment return on System holdings of foreigncurrencies or for the purpose of adjustinginterest rates paid or received in connectionwith swap drawings, transactions with for-eign central banks may be undertaken atnon-market exchange rates.

4. It shall be the normal practice to ar-range with foreign central banks for the co-ordination of foreign currency transactions.In making operating arrangements with for-eign central banks on System holdings of foreign currencies, the Federal Reserve Bank of New York shall not commit itself to main-tain any specific balance, unless authorizedby the Federal Open Market Committee. Any




agreements or understandings concerning theadministration of the accounts maintained bythe Federal Reserve Bank of New York withthe foreign banks designated by the Board of Governors under Section 214.5 of Regula-tion N shall be referred for review and ap-proval to the Committee.

5. Foreign currency holdings shall beinvested to ensure that adequate liquidity ismaintained to meet anticipated needs and sothat each currency portfolio shall generallyhave an average duration of no more than18 months (calculated as Macaulay dura-tion). Such investments may include buyingor selling outright obligations of, or fullyguaranteed as to principal and interest by, aforeign government or agency thereof; buy-ing such securities under agreements forrepurchase of such securities; selling suchsecurities under agreements for the resale of such securities; and holding various timeand other deposit accounts at foreign insti-tutions. In addition, when appropriate inconnection with arrangements to provideinvestment facilities for foreign currencyholdings, U.S. Government securities may

be purchased from foreign central banksunder agreements for repurchase of suchsecurities within 30 calendar days.

6. All operations undertaken pursuant tothe preceding paragraphs shall be reportedpromptly to the Foreign Currency Subcom-mittee and the Committee. The Foreign Cur-rency Subcommittee consists of the Chair-man and Vice Chairman of the Committee,the Vice Chairman of the Board of Gover-nors, and such other member of the Board as

the Chairman may designate (or in the ab-sence of members of the Board serving onthe Subcommittee, other Board membersdesignated by the Chairman as alternates,and in the absence of the Vice Chairman of the Committee, his alternate). Meetings of the Subcommittee shall be called at the re-quest of any member, or at the request of theManager, System Open Market Account(“Manager ”), for the purposes of reviewingrecent or contemplated operations and of consulting with the Manager on other mat-

ters relating to his responsibilities. At therequest of any member of the Subcommittee,questions arising from such reviews and con-sultations shall be referred for determinationto the Federal Open Market Committee.

7. The Chairman is authorized:

A. With the approval of the Committee,to enter into any needed agreement or under-standing with the Secretary of the Treasuryabout the division of responsibility for for-eign currency operations between the Sys-tem and the Treasury;

B. To keep the Secretary of the Trea-sury fully advised concerning System for-eign currency operations, and to consult withthe Secretary on policy matters relating toforeign currency operations;

C. From time to time, to transmit ap-propriate reports and information to the Na-tional Advisory Council on InternationalMonetary and Financial Policies.

8. Staff officers of the Committee are au-thorized to transmit pertinent information onSystem foreign currency operations toappropriate officials of the TreasuryDepartment.

9. All Federal Reserve Banks shall partici-pate in the foreign currency operations forSystem Account in accordance with para-graph 3G(1) of the Board of Governors ’Statement of Procedure with Respect to For-eign Relationships of Federal Reserve Banks

dated January 1, 1944.

With Mr. Lacker dissenting, the For-eign Currency Directive was reaffirmedin the form shown below.

Foreign Currency Directive(Reaffirmed January 31, 2006)

1. System operations in foreign currenciesshall generally be directed at countering dis-orderly market conditions, provided thatmarket exchange rates for the U.S. dollarreflect actions and behavior consistent withIMF Article IV, Section 1.

2. To achieve this end the System shall:A. Undertake spot and forward pur-

chases and sales of foreign exchange.B. Maintain reciprocal currency

(“swap”) arrangements with selected foreigncentral banks.

C. Cooperate in other respects withcentral banks of other countries and withinternational monetary institutions.

3. Transactions may also be undertaken:A. To adjust System balances in light

of probable future needs for currencies.




B. To provide means for meeting Sys-tem and Treasury commitments in particularcurrencies, and to facilitate operations of theExchange Stabilization Fund.

C. For such other purposes as may beexpressly authorized by the Committee.

4. System foreign currency operationsshall be conducted:

A. In close and continuous consultationand cooperation with the United StatesTreasury;

B. In cooperation, as appropriate, withforeign monetary authorities; and

C. In a manner consistent with the obli-gations of the United States in the Interna-tional Monetary Fund regarding exchangearrangements under IMF Article IV.

Mr. Lacker dissented in the votes onthe Foreign Currency Directive andAuthorization for Foreign CurrencyOperations to indicate his opposition toforeign currency intervention by theFederal Reserve. In his view, suchintervention would be ineffective if itdid not also signal a shift in domesticmonetary policy. And if it did signalsuch a shift, it could potentially compro-mise the Federal Reserve ’s monetarypolicy independence.

By unanimous vote, the ProceduralInstructions with Respect to ForeignCurrency Operations were reaffirmed inthe form shown below.

Procedural Instructionswith Respect toForeign Currency Operations(Reaffirmed January 31, 2006)

In conducting operations pursuant to theauthorization and direction of the FederalOpen Market Committee as set forth in theAuthorization for Foreign Currency Opera-tions and the Foreign Currency Directive,the Federal Reserve Bank of New York,through the Manager, System Open MarketAccount ( “Manager ”), shall be guided by thefollowing procedural understandings with re-spect to consultations and clearances withthe Committee, the Foreign Currency Sub-committee, and the Chairman of the Com-

mittee. All operations undertaken pursuantto such clearances shall be reported promptlyto the Committee.

1. The Manager shall clear with the Sub-committee (or with the Chairman, if theChairman believes that consultation with theSubcommittee is not feasible in the timeavailable):

A. Any operation that would result in achange in the System ’s overall open positionin foreign currencies exceeding $300 millionon any day or $600 million since the mostrecent regular meeting of the Committee.

B. Any operation that would result in achange on any day in the System ’s net posi-tion in a single foreign currency exceeding$150 million, or $300 million when the op-eration is associated with repayment of swapdrawings.

C. Any operation that might generate asubstantial volume of trading in a particularcurrency by the System, even though thechange in the System ’s net position in thatcurrency might be less than the limits speci-fied in 1.B.

D. Any swap drawing proposed by a

foreign bank not exceeding the larger of (i) $200 million or (ii) 15 percent of the sizeof the swap arrangement.

2. The Manager shall clear with the Com-mittee (or with the Subcommittee, if theSubcommittee believes that consultationwith the full Committee is not feasible in thetime available, or with the Chairman, if theChairman believes that consultation with theSubcommittee is not feasible in the timeavailable):

A. Any operation that would result in achange in the System ’s overall open positionin foreign currencies exceeding $1.5 billionsince the most recent regular meeting of theCommittee.

B. Any swap drawing proposed by aforeign bank exceeding the larger of (i) $200million or (ii) 15 percent of the size of theswap arrangement.

3. The Manager shall also consult with theSubcommittee or the Chairman about pro-posed swap drawings by the System andabout any operations that are not of a routinecharacter.

Among the organizational mattersraised, the Committee indicated that itintended to take up at a future meeting




the relationship between its formal voteand the policy statement issued aftereach meeting.

The Manager of the System OpenMarket Account reported on recent de-velopments in foreign exchange mar-kets. There were no open market opera-tions in foreign currencies for theSystem ’s account in the period since theprevious meeting. The Manager also re-ported on developments in domesticfinancial markets and on System openmarket transactions in government secu-rities and federal agency obligationsduring the period since the previousmeeting. By unanimous vote, the Com-mittee ratified these transactions.

The information reviewed at thismeeting suggested that underlyinggrowth in aggregate demand remainedsolid, even though the expansion of realGDP was estimated to have slowed inthe fourth quarter. Household spendingrose smartly, outside of autos, and or-ders and shipments of nondefense capi-tal goods in the business sector weregenerally quite strong. Housing marketsshowed some signs of cooling, but startsand sales remained at high levels. Indus-trial production posted moderate gains,even after excluding hurricane-relatedrebounds in some production categories,and private payrolls expanded at a firmrate on average. Headline consumer in-flation had been held down by fallingconsumer energy prices; more recently,however, crude oil prices climbed back up to high levels. Meanwhile, core infla-tion had moved up a bit from low levelsseen last summer.

Labor demand expanded further inthe fourth quarter, as private nonfarm

payrolls showed large gains in Novem-ber followed by more-modest gains inDecember. The average increase overthose two months represented sturdy jobgains, even after accounting for thelikely catch-up in employment follow-

ing Hurricanes Katrina and Rita. Severalsectors, including manufacturing andseveral service groups, added vigorously

to payrolls in December, but the total forthe month was held down by employ-ment declines in a number of sectors,such as retail trade and construction,where seasonal adjustment can be diffi-cult this time of year. Aggregate hoursfell slightly in December owing to adecrease in the workweek, but they roseover the fourth quarter as a whole. Theunemployment rate edged down to 4.9percent in part due to the labor forceparticipation rate ticking down.

Industrial production rose notably inNovember and December, boosted bypartial recovery from the effects of thehurricanes. Production in the miningindustry, which includes oil and gas ex-traction, increased sharply. Utilities out-put also popped up in December as tem-peratures turned unseasonably cold inthe first half of the month. Abstractingfrom the effects of these special factors,underlying activity in the industrial sec-tor advanced moderately. Modest pro-duction increases in most manufacturingcategories in December, including high-tech, consumer goods, and businessequipment, outweighed production de-clines in the motor vehicles and partssector. The capacity utilization rate inmanufacturing stood a bit above its levelof one year ago and near its long-runaverage.

Real personal consumption expendi-tures appeared to have increased onlymodestly in the fourth quarter, as spend-ing on motor vehicles was restrainedfollowing a surge in the summer inresponse to manufacturers ’ price incen-

tives. Outside of motor vehicles, con-sumption was brisk, supported by jobgrowth, increases in personal income,and the decline in energy prices. Con-sumption was also likely supported byfurther gains in home values and equity




prices that raised the ratio of householdwealth to disposable income relative tothat seen earlier in 2005. Consumer sen-

timent measured by surveys moved upin December and, judging by the pre-liminary reading of the Michigan Sur-vey, edged up further in January.

Activity in the housing marketappeared to continue at high levels,although there were some indications of slowing. Single-family housing startsdecreased markedly in December; how-ever, this decline may have been due inpart to unusually cold and wet weatherin some areas of the country. Multifam-ily housing starts increased in Decem-ber. Sales of new and existing homesremained at elevated levels but slowedsomewhat toward the end of the year.Moreover, the stock of homes for saleincreased to the upper end of rangesseen in recent years. Recent data onmortgage applications and survey mea-sures of homebuying attitudes alsopointed to some cooling in the housingmarket.

Real outlays for equipment and soft-ware appeared to have slowed signif-icantly in the fourth quarter, as ex-penditures for transportation andcommunications equipment reversedsome of their earlier sharp increases.With few exceptions, however, new or-ders appeared to be quite strong, andorder backlogs increased for severalgoods in the transportation sector.Underlying fundamentals continued tosupport gains in capital spending asbusiness sector output expanded, firmsremained flush with funds, and relativeprice declines pushed down the usercost of capital equipment. Anecdotal re-

ports and surveys also indicated thatbusinesses were optimistic about near-term capital spending plans. Vacancyrates for nonresidential propertiesdrifted lower as construction expendi-tures on commercial and manufacturing

structures remained well below recentpeaks. However, spending on drillingand mining structures continued to

increase strongly. Business investmentin real nonfarm inventories increasedmoderately in the fourth quarter, boostedby a rapid accumulation of motor vehi-cle inventories. Outside of motor vehi-cles, stocks continued to rise slowly.The restrained growth in inventories inrecent months suggested that firms out-side the motor vehicle sector were inten-tionally keeping stockbuilding low;however, it could also have reflected anunanticipated increase in sales or supplyinterruptions following the hurricaneslast fall. That said, the level of stocksappeared reasonably well aligned withdemand in most industries.

After increasing further in October,the U.S. international trade deficit nar-rowed somewhat in November. The re-duction in the deficit reflected a modestincrease in exports and a similar-sizeddecrease in imports that owed impor-tantly to a decline in imports of oil. Thefirm pace of third-quarter GDP growthin foreign economies generally appearedto continue in the fourth quarter.

Core consumer price inflation re-mained moderate over the second half of last year. Core prices had posted astring of very low increases last sum-mer, held down in part by falling motorvehicle prices. In recent months, in-creases in core prices had rebounded.The overall consumer price index edgeddown further in December in responseto substantial declines in its volatileenergy price components. However, sur-vey data pointed to large increases ingasoline prices in January, which were

due to the backup in crude oil prices.Preliminary survey measures of near-term inflation expectations for Januaryhad nonetheless ticked down, continu-ing the reversal of a sharp increase afterthe hurricanes last fall, and longer-term




inflation expectations had moved loweras well. Input prices increased some-what less in December, as upward pres-

sure from previous energy price in-creases receded somewhat. Indeed, theincrease in core intermediate producerprices over the year was estimated to beconsiderably lower than over the previ-ous year. At its December meeting, theFederal Open Market Committee de-cided to increase the target level of thefederal funds rate 25 basis points, to41 ⁄ 4 percent. In its accompanying state-ment, the Committee indicated that,despite elevated energy prices andhurricane-related disruptions, the expan-sion in economic activity appeared solid.Core inflation had stayed relatively lowin recent months, and longer-term infla-tion expectations had remained con-tained. Nevertheless, the Committeenoted that possible increases in resourceutilization as well as elevated energyprices had the potential to add to infla-tionary pressures. In these circum-stances, the Committee believed thatsome further measured policy firmingwas likely to be needed to keep the risksto the attainment of both sustainableeconomic growth and price stabilityroughly in balance.

Investors had largely anticipated theCommittee ’s interest rate decision at theDecember meeting and a change in theportions of the statement characterizingpolicy as accommodative. Accordingly,the policy announcement elicited onlymodest reactions in financial markets.With mixed readings on economic activ-ity and inflation over the intermeetingperiod, the market ’s expectations for thepath of monetary policy and yields on

Treasury coupon securities ended theperiod little changed, on balance. Yieldson investment- and speculative-gradecorporate debt moved largely in linewith Treasury yields. Major stock priceindexes rose modestly, and the trade-

weighted foreign exchange value of thedollar depreciated slightly over theperiod.

Domestic nonfinancial sector debtappeared to have expanded at a some-what slower pace in the fourth quarter,down from the rapid increase in thethird quarter. Household debt growthlikely moderated amid hints of a down-shift in mortgage borrowing from itsrobust third-quarter pace and an outrightdecline in consumer credit, which owedin part to increased charge-offs fromOctober ’s spike in bankruptcy filings.Business sector debt slowed somewhatin the fourth quarter, mainly reflecting arunoff of commercial paper by multina-tional firms that were reported to haverepatriated foreign earnings to take ad-vantage of a recently enacted tax provi-sion. M2 expanded at a somewhat fasterpace in the fourth quarter than had beenpredicted from historical relationshipswith income and opportunity costs. Inpart, the monetary aggregate was likelyboosted by payments to hurricane vic-tims by the federal government and in-surance companies.

The staff forecast prepared for thismeeting suggested that, after slowgrowth in the fourth quarter of 2005,real GDP would expand at a fairly ro-bust pace over the first half of this year,boosted in part by spending on recoveryactivities associated with the hurricanes.Thereafter, real GDP growth wasexpected to moderate, importantly re-flecting a reduced impetus to consump-tion from house price appreciation andsome slowing in residential housing ex-penditures. Core PCE inflation wasexpected to be a touch higher this year

than in 2005, largely because of thepass-through of higher energy and non-fuel import prices, but, with energyprices leveling out, core inflation wasprojected to drop back modestly in2007.




In their discussion of the economicsituation and outlook, meeting partici-pants noted the slowing in GDP growth

in the fourth quarter of 2005, but be-lieved that it probably owed in large partto transitory factors and that economicgrowth would bounce back in the cur-rent quarter. In that regard, several highfrequency indicators of production,labor markets, and private demand sug-gested greater underlying strength of late than had been reflected in the mostrecent GDP data. Over the next coupleof years, the economy seemed poised toexpand at a moderate rate in the neigh-borhood of its sustainable pace. Mostparticipants expected core inflation tomove up slightly in the near term, re-flecting some pass-through of increasedenergy and other commodity prices.Although heightened inflation pressurescould also arise from possible increasesin resource utilization, the outlook foreconomic growth and the stability of inflation expectations suggested thatcore inflation should remain containedover time.

In preparation for the Federal Re-serve’s semiannual report to the Con-gress on the economy and monetary pol-icy, the members of the Board of Governors and the presidents of the Fed-eral Reserve Banks submitted individualprojections of the growth of GDP, therate of unemployment, and core con-sumer price inflation for the years 2006and 2007. The forecasts of the rate of expansion in real GDP for 2006 were ina range of 3 1 ⁄ 4 to 4 percent, centered at31 ⁄ 2 percent, while those for 2007 werein a range of 3 to 4 percent, with acentral tendency of 3 to 3 1 ⁄ 2 percent.

These rates of growth were associatedwith projections of the civilian unem-ployment rate in a range of 4 1 ⁄ 2 to5 percent, with a central tendency of 43 ⁄ 4 to 5 percent, in both the fourthquarter of 2006 and the fourth quarter of

2007. Expectations for the rate of infla-tion, as measured by the core PCE priceindex, were in a range of 1 3 ⁄ 4 to

21

⁄ 2 percent this year, centered at about2 percent, and in a range of 1 3 ⁄ 4 to2 percent in 2007.

In their discussion of major sectors of the economy, meeting participants notedthat consumer spending in the lattermonths of 2005 had been buffeted bythe effects of hurricanes, increasedenergy prices, and reduced auto salesincentives. However, anecdotal reportscontributed to a view that consumerspending had been solid over the holi-day season and in recent weeks, whilemeasures of consumer confidenceremained high. Nevertheless, signs of slowing in the housing sector hadbecome more evident, and the boost toconstruction from hurricane-related re-building now seemed likely to be spreadover the next couple of years rather thanbeing more concentrated in the nearterm. In some areas, home price appre-ciation reportedly had slowed notice-ably, highlighting the risks to aggregatedemand of a pullback in the housingsector. For instance, the effects of aleveling out of housing wealth on thesaving rate were difficult to predict, but,in the view of some, potentially sizable.Rising debt service costs, owing in partto the repricing of variable-rate mort-gages, were also mentioned as possiblyrestraining the discretionary spending of consumers. The most likely outlook,however, was for a gradual moderationin house price appreciation and in thegrowth of consumption, which wouldcontinue to be supported by increases in jobs and incomes.

Participants generally anticipatedfairly strong growth of capital expendi-tures. Though firms had been cautiousabout expanding their plant and equip-ment, business confidence was high, ca-pacity utilization was tightening, and




companies were continuing to look forinvestment opportunities that increasedproductivity. As a result, the outlook

was for reasonably robust spending oncapital equipment even if economicgrowth slowed a bit. Anecdotal reportssuggested that nonresidential real estatemarkets were improving in some areas.

The slowdown in government spend-ing in the fourth quarter was generallyseen as reflecting shifts in the timing of outlays, rather than a change in theunderlying trend. However, fiscal stimu-lus was expected to diminish somewhatby next year. By contrast, global de-mand had picked up of late and wouldprovide ongoing support for U.S. ex-ports; indeed, the sharp increases incommodity prices and rallies in worldequity markets suggested the possibilityof an even stronger path for demandabroad.

Financial market conditions in theUnited States, as well as those abroad,suggested that investors were optimisticabout the economic outlook. The recentstrength in equity markets and the lowprevailing term premiums and bondspreads perhaps reflected market assess-ments that economic risks were lowerthan usual, as well as strong demandsfor longer-term assets and an amplesupply of liquidity. The possibility thatterm premiums and credit spreads couldreturn to more typical settings rep-resented a downside risk for interest-sensitive components of aggregatedemand.

A variety of indicators, along withanecdotal reports, suggested that em-ployment was expanding at a fairly goodpace and labor compensation was rising

moderately. Some participants remarkedon the uncertainties regarding the extentof remaining capacity in labor marketsand the outlook for labor costs. In par-ticular, developments affecting the par-ticipation rate in the labor force and the

pace of growth in productivity wouldimportantly condition prospects for em-ployment and business cost pressures.

Participants noted that, while thepass-through of higher energy and othercommodity prices to prices of coregoods and services had remained sub-dued, there were continuing upside risksto inflation from these sources. What-ever the size of such pass-througheffects, however, it was thought that theywould probably be temporary in natureand likely diminish as energy prices flat-tened out, as long as inflation expecta-tions did not move higher. In that re-gard, participants were encouraged that,despite recent energy price increases,survey measures of inflation expecta-tions had notched down and longer-terminflation compensation in financial mar-kets was little changed. Although highprofit margins could imply some exist-ing pricing power, they might also pro-vide a cushion to absorb some futurecost increases. Indeed, anecdotal reportssuggested that the ability of firms topass through higher input costs gener-ally remained limited. Nevertheless, theincreased prices of energy and othercommodities and the possibility of afurther rise in resource utilization, whichsome members viewed as nearly fullat present, represented continuingrisks, potentially adding to inflationpressures.

In the Committee ’s discussion of monetary policy for the intermeetingperiod, all members favored raising thetarget federal funds rate 25 basis pointsto 41 ⁄ 2 percent at this meeting. Althoughrecent economic data had been uneven,the economy seemed to be expanding at

a solid pace. Members were concernedthat, even after their action today, pos-sible increases in resource utilizationand elevated energy prices had the po-tential to add to inflation pressures.Although the stance of policy seemed




close to where it needed to be given thecurrent outlook, some further policyfirming might be needed to keep infla-

tion pressures contained and the risks toprice stability and sustainable economicgrowth roughly in balance. In the viewof some members, the possibility of additional policy moves was reinforcedby readings on core inflation and infla-tion expectations that were somewhathigher than was desirable over the longrun. However, all members agreed thatthe future path for the funds rate woulddepend increasingly on economic devel-opments and could no longer be pre- judged with the previous degree of confidence.

As this meeting marked AlanGreenspan ’s last as a member of theCommittee, meeting participants took the opportunity individually and collec-tively to pay tribute to his many years of

outstanding service to the FederalReserve and to the nation. They ex-pressed their appreciation for his colle-gial and successful leadership of theCommittee and of the Federal ReserveSystem and emphasized the privilegeand honor they felt in having servedwith him.

At the conclusion of the discussion,the Committee voted to authorize and

direct the Federal Reserve Bank of NewYork, until it was instructed otherwise,to execute transactions in the SystemAccount in accordance with the follow-ing domestic policy directive:

The Federal Open Market Committeeseeks monetary and financial conditions thatwill foster price stability and promote sus-tainable growth in output. To further its long-run objectives, the Committee in the imme-

diate future seeks conditions in reservemarkets consistent with increasing the fed-eral funds rate to an average of around41 ⁄ 2 percent.

The vote encompassed approval of the paragraph below for inclusion in the

statement to be released shortly after themeeting:

The Committee judges that some furtherpolicy firming may be needed to keep therisks to the attainment of both sustainableeconomic growth and price stability roughlyin balance. In any event, the Committee willrespond to changes in economic prospects asneeded to foster these objectives.

Votes for this action: Messrs.Greenspan and Geithner, Ms. Bies,Messrs. Ferguson, Guynn, Kohn,Lacker, and Olson, Mses. Pianalto andYellen. Votes against this action: None.

The confirmation of the date of thenext meeting of the Committee waspostponed, pending the election of asuccessor Chairman.

The meeting adjourned at 12:25 p.m.

Notation VoteBy notation vote completed on Decem-

ber 30, 2005, the Committee unani-mously approved the minutes of theFederal Open Market Committee meet-ing held on December 13, 2005.

Vincent R. ReinhartSecretary

Meeting Held onMarch 27–28, 2006

A meeting of the Federal Open MarketCommittee was held in the offices of theBoard of Governors of the FederalReserve System in Washington, D.C.,on Monday, March 27, 2006 at 3:00p.m. and continued on Tuesday, March28, 2006 at 9:00 a.m.

Present:Mr. Bernanke, ChairmanMr. Geithner, Vice ChairmanMs. BiesMr. GuynnMr. KohnMr. KrosznerMr. Lacker

Minutes of FOMC Meetings, March 173



Mr. OlsonMs. PianaltoMr. WarshMs. Yellen

Mses. Cumming and Minehan, Messrs.Moskow, Poole, and Hoenig, Al-ternate Members of the FederalOpen Market Committee

Messrs. Fisher and Stern, Presidents of the Federal Reserve Banks of Dal-las and Minneapolis, respectively


Mr. Reinhart, Secretary and EconomistMs. Danker, Deputy SecretaryMs. Smith, Assistant SecretaryMr. Skidmore, Assistant SecretaryMr. Alvarez, General CounselMr. Baxter, Deputy General CounselMs. Johnson, EconomistMr. Stockton, Economist

Messrs. Connors, Eisenbeis, Kamin,Madigan, Sniderman, Struck-meyer, Tracy, Weinberg, and Wil-cox, Associate Economists


Mr. Hambley, 5 Assistant to the Board,Office of Board Members, Boardof Governors

Messrs. Oliner and Slifman, AssociateDirectors, Division of Researchand Statistics, Board of Governors

Mr. Whitesell, Deputy Associate Direc-tor, Division of Monetary Affairs,Board of Governors

Mr. English, Assistant Director, Divi-sion of Monetary Affairs, Board of Governors


Mr. Orphanides, Adviser, Divisionof Monetary Affairs, Board of Governors

Mr. Small, Project Manager, Divisionof Monetary Affairs, Board of Governors.

Mr. Wright, Section Chief, Divisionof Monetary Affairs, Board of Governors

Mr. Perli, Senior Economist, Divisionof Monetary Affairs, Board of Governors



Mr. Connolly, First Vice President, Fed-eral Reserve Bank of Boston


Messrs. Evans and Hakkio, Ms. Mester,and Messrs. Rasche, Rolnick, andRudebusch, Senior Vice Presi-dents, Federal Reserve Banks of Chicago, Kansas City, Philadel-phia, St. Louis, Minneapolis, andSan Francisco, respectively

Ms. Mosser, Vice President, FederalReserve Bank of New York

The Manager of the System OpenMarket Account reported on recent de-velopments in foreign exchange mar-kets. There were no open market opera-tions in foreign currencies for theSystem ’s account in the period since theprevious meeting. The Manager also re-ported on developments in domesticfinancial markets and on System openmarket transactions in government secu-rities and federal agency obligationsduring the period since the previousmeeting. By unanimous vote, the Com-

mittee ratified these transactions.The information reviewed at thismeeting suggested that economic activ-ity was expanding strongly in the firstquarter. Consumer spending was ontrack to rise at a robust pace, and busi-5. Attended Monday ’s session only.




ness purchases of equipment and soft-ware picked up appreciably. Warmweather boosted housing construction in

January and February, although sales of new homes dropped back and houseprices decelerated slightly. Private pay-rolls advanced solidly in the first twomonths of the year. Headline consumerprice inflation jumped in January butmoderated in February as energy pricesmoved down. Core inflation remainedcontained.

Labor demand continued to increasein the first two months of 2006, as pri-vate nonfarm payroll employmentshowed large gains in both January andFebruary. With favorable weather condi-tions, employment growth was espe-cially brisk in the construction sector.Financial activities, business services,and nonbusiness services also postedsolid payroll gains. Although the aver-age workweek edged down in February,the level of aggregate hours for produc-tion and nonsupervisory workers wasabove its average for the fourth quarterof 2005. The unemployment rate contin-ued to decline and averaged 4 3 ⁄ 4 percentover the first two months of the year.Several other labor market indicatorsalso signaled a further tightening of labor market conditions.

Industrial production picked up inFebruary after a modest decline in Janu-ary. That pattern was attributable toswings in utilities output, as tempera-tures were historically warm early in theyear before reverting to near seasonalnorms in February. Excluding utilities,industrial production posted a sizablegain in January before flattening out inFebruary, pointing to a solid rise in the

first quarter. Mining output —whichincludes oil and natural gas extraction —slipped in February after registering ro-bust gains in each of the previous threemonths. Manufacturing output was un-changed in February after a significant

increase in January. The rate of capacityutilization in the manufacturing sectorstood a bit above its long-run average.

Consumer spending appeared to haverebounded strongly in the first quarter.Motor vehicle purchases bounced back in late 2005 and early 2006 from thesluggish pace that followed the end of the past summer ’s “employee pricing ”programs. Excluding motor vehicles,consumption spending was robust, sup-ported by continuing improvement inthe labor market and advances in wageand salary income. The annual raise inthe pay of federal employees, cost-of-living adjustments to Social Securitybenefits and other transfer programs,and the initiation of the Medicare Pre-scription Drug Plan boosted the level of personal disposable income in January.Consumption was likely supported alsoby ongoing increases in home prices andgains in the stock market. Consumerconfidence as measured by surveysremained consistent with moderateincreases in consumer spending.

Housing activity had moderatedsomewhat from the robust pace of thepast summer. Although the level of single-family housing starts was unusu-ally high in January and February, muchof this strength was likely the result of mild winter weather; new permit issu-ance extended the downward trajectorythat began in October. After an unusualspike in January, multifamily housingstarts dropped back in February to a ratewell within their historical range. Salesof new homes fell in the first twomonths of the year, while sales of exist-ing homes turned up in February for thefirst time since last August; both mea-

sures were well below their peaks of mid-2005. The stock of homes for salewas elevated compared with its range of the last several years. Mortgage applica-tions continued to decline in February,and survey measures of homebuying at-




titudes also maintained their recentdownward trend. Housing demand waslikely damped by rising mortgage rates,

which moved up further in late 2005 andearly 2006. House price appreciationappeared to have slowed from the rapidpace of the summer, but price increasesfor both new and existing homesremained well within the elevated rangethat has prevailed in recent years.

Real outlays for equipment and soft-ware decelerated in the fourth quarter of 2005 but appeared to have gainedstrength in early 2006. This pattern re-flected sizable swings in outlays fortransportation equipment. The funda-mentals underlying capital spendingcontinued to be supportive, as businesssector output expanded briskly, firmsremained flush with funds, and relativeprice declines for high-tech equipmentcontinued to push down its user cost.Although vacancy rates for nonresiden-tial properties were well below the peaksreached in the first quarter of 2004, realspending on new construction had yet togain traction. In contrast, outlays fordrilling and mining structures continuedto rise rapidly and appeared poised toincrease further in the near term.

The book value of manufacturing andtrade inventories excluding motor vehi-cles rose at a moderate pace in the fourthquarter of 2005, and inventoriesappeared to have continued to build inJanuary. Much of the increase reflectedrising prices of goods held, and realinventory accumulation was subdued.The inventory-sales ratio declinedslightly in January, extending its long-run downward trend. Inventory stocksappeared to be well aligned with de-

mand in most industries.The U.S. international trade deficitrose in the fourth quarter and widenedfurther in January, as gains in exports of goods and services were outweighed bya substantially larger rise in imports.

Exports of industrial supplies, capitalgoods, and agricultural products pickedup robustly in January, while the

increase in imports was widespreadacross most product categories. RealGDP growth in foreign industrial econo-mies was mixed in the fourth quarter, aseconomic activity slowed in the euroarea and in Canada while the Japaneseeconomy expanded briskly and growthin the United Kingdom firmed. Recentindicators of economic activity in devel-oping economies were generally quitepositive.

Readings on core consumer price in-flation were favorable in recent months.Nonetheless, the overall consumer priceindex edged up in February after regis-tering a large increase in January thatwas driven mostly by a spike in energyprices. While prices of food and coreitems recorded only modest increases in

February, energy prices fell back amidincreases in oil inventories and unsea-sonably mild temperatures since the lat-ter part of December. Weekly data forMarch, however, indicated that gasolineprices rose sharply. Prices of capitalequipment inched up in February after amore substantial gain in January. Never-theless, prices of capital equipment de-celerated over the past twelve months.Higher energy prices still seemed to bepassing through to the prices of a num-ber of core intermediate materials,although such increases were more mod-erate than those observed in the immedi-ate aftermath of the hurricanes last au-tumn. The increase in the employmentcost index in the fourth quarter of 2005was relatively modest. Compensationper hour in the nonfarm business sector,after having increased substantially inthe third quarter, was estimated to haverisen somewhat less in the fourth quar-ter. Preliminary survey measures of short-term inflation expectations in




March edged up, but longer-term mea-sures remained steady.

At its January meeting, the Federal

Open Market Committee decided toraise the target level of the federal fundsrate 25 basis points, to 4 1 ⁄ 2 percent. In itsaccompanying statement, the Commit-tee indicated that, although recent eco-nomic data had been uneven, the expan-sion in economic activity appeared solid.Core inflation had stayed relatively lowin recent months, and longer-term infla-tion expectations had remained con-tained. Nevertheless, the Committeenoted that possible increases in resourceutilization as well as elevated energyprices had the potential to add to infla-tion pressures. In these circumstances,the Committee judged that some furtherpolicy firming may be needed to keepthe risks to the attainment of both sus-tainable economic growth and price sta-bility roughly in balance but reiteratedthat it would respond to changes in eco-nomic prospects as needed to foster itsobjectives.

Investors had largely anticipated boththe Committee ’s interest rate decision atthe January meeting and the text of theaccompanying statement. Consequently,the policy announcement elicited littlemarket reaction. Policy expectations andyields on Treasury coupon securitiessubsequently firmed, on net, over theintermeeting period, as incoming dataindicated robust economic growth in theUnited States and strengthening expan-sion abroad. Yields on investment-gradecorporate debt rose roughly in line withthose on comparable-maturity Treasurysecurities, while yields on speculative-grade corporate debt were little changed.

Broad stock market indexes were mod-estly higher amid favorable economicnews and lower oil prices, and the trade-weighted foreign exchange value of thedollar appreciated slightly over theperiod.

Growth of domestic nonfinancial sec-tor debt appeared to have moderatedonly a bit in the first quarter from its

robust pace in the fourth quarter of 2005. Net issuance of corporate bondsand expansion of business loans at com-mercial banks had abated in Februaryand early March after robust growth inJanuary; commercial paper outstandingwas about flat in the first quarter. House-hold mortgage borrowing was thoughtto have slowed somewhat in the firstquarter in response to increased mort-gage interest rates. Consumer credit re-bounded some in January after contract-ing in the fourth quarter because of elevated charge-offs related to the spikein bankruptcy filings. Based on monthlyTreasury statements, federal debtseemed likely to have accelerated in thefirst quarter. On average, M2 grewbriskly in January and February. Whileliquid deposits expanded moderately,small time deposits and retail moneyfunds advanced strongly, supported byfurther increases in offering rates.

The staff forecast prepared for thismeeting showed real GDP expandingbriskly in the current quarter. Economicgrowth was expected to moderate laterthis year. The level of output in thecurrent quarter was estimated to be closeto the economy ’s potential and was an-ticipated to remain so over the projec-tion period. Core PCE inflation wasexpected to move slightly higher in 2006because of cost pressures induced byhigh energy and import prices and tostep back down in 2007 as these costpressures were anticipated to abate.

In their discussion of the economicsituation and outlook, meeting partici-

pants saw the economy as having re-bounded strongly from the slowdown inthe fourth quarter of last year, withaggregate spending and employmentexpanding briskly in the current quarter.Growth was expected to moderate to a




more sustainable pace later this year.The ongoing cooling in the housing mar-ket would act to restrain residential con-

struction and growth in consumption,but business and household confidenceand supportive financial conditionswould help to foster growth in employ-ment and incomes, keeping consump-tion and investment on a solid upwardtrack. Several meeting participants ob-served that, although the economy ’s sus-tainable potential output could not beobserved directly or estimated with pre-cision, historical patterns and recent datasuggested that current levels of laborand product market resource utilizationwere in a zone consistent with little orno remaining economic slack. Therecent behavior of core consumer pricesseemed to indicate that any pass-throughof higher energy and other commodityprices had been limited. In addition, pro-ductivity growth, moderate increases incompensation, contained inflation ex-pectations, and international competi-tion were helping to restrain unit laborcosts and price pressures. Nonetheless,meeting participants generally remainedconcerned about the risk that possibleincreases in resource utilization, in com-bination with the elevated prices of energy and other commodities, couldadd to inflation pressures.

Regarding the major sectors of theeconomy, meeting participants notedthat consumer spending appeared to begrowing at a solid pace, notwithstandingearlier rises in energy prices. Contacts inthe retail sector reported strong demand,and lending to households seemed to berobust. However, some automobile deal-ers reported subdued demand for domes-

tic name-plate products. In coming quar-ters, consumer outlays were expected tobe supported by continued employmentgains, household income growth, andrelatively low long-term interest rates,even if gains in housing wealth abated.

Meeting participants discussed atsome length signs of cooling in the resi-dential real estate market. Published data

on housing starts showed little evidenceof a significant weakening in construc-tion activity. However, anecdotal reportsfrom several markets, surveys of home-buyer attitudes, and data on inventories,home sales, and new home cancellationrates all pointed to a moderation in hous-ing activity. It was noted that the rela-tively robust data on construction activ-ity could owe in part to unseasonablywarm weather. Going forward, partici-pants expected a deceleration in houseprices to contribute to an increase in thehousehold saving rate and to weigh onconsumption growth. Aggregate demandwas also expected to be restrained di-rectly by a softening in the pace of homebuilding. Moreover, rebuilding follow-ing last year ’s major hurricanesappeared to be proceeding at a slowpace, and so would provide only limitedoffset to the implications of more funda-mental developments in this market.

Generally, however, the economicexpansion appeared to be broad-based.Contacts indicated that certain sectors,such as energy and semiconductor pro-duction, were particularly strong.Against this backdrop, robust growth inbusiness spending was seen as likely,even as household spending growthmoderated somewhat. Business capitalexpenditures, especially on equipmentand software, appeared to have consid-erable momentum, supported by strongcorporate profits, exceptionally liquidbalance sheets, and greater business op-timism. Some participants indicated thatnonresidential construction was in the

process of picking up and commercialvacancy rates were declining in someregions.

Financial market conditions remainedsupportive of growth, with long-termrates relatively low, risk spreads in cor-




porate debt markets narrow, and banksseeking lending opportunities. Mergerand acquisition activity was strong and

infusions of private equity continued ata rapid pace, but the domestic marketfor initial public offerings was reportedto be quite weak. Although rates onfixed-rate mortgages remained histori-cally low, some ratcheting up of rates onadjustable-rate mortgages was seen as afactor weighing to some degree on thehousing market. More generally, theeffects on spending of the substantialincrease in short- and intermediate-termrates since June 2004 had probably notyet been fully felt.

There were reports of increased con-struction by state and local govern-ments, which were benefiting fromstrong tax collections. Federal defenseexpenditures had leveled out. Foreigneconomic growth appeared to have

strengthened of late, prompting somefirming of monetary policy by severalforeign central banks. Nonetheless,increases in imports were expected tocontinue to outpace increases in exportsin coming quarters, trimming the rate of expansion of domestic output.

Meeting participants saw both upsideand downside risks to their outlook forexpansion around the rate of growth of the economy ’s potential. In the housingmarket, for instance, some downshiftfrom the rapid price increases and strongactivity of recent years seemed to beunderway, but the magnitude of theadjustment and its effects on householdspending were hard to predict. Someparticipants cited stronger growthabroad and robust nonresidential invest-ment spending as potentially contribut-ing more to activity than expected. Itwas also noted that an abrupt rise inlong-term interest rates, reflecting, forexample, a reversion of currently lowterm premiums to more typical levels,

could weigh on both household andbusiness spending.

Several participants noted that the

labor market had continued tostrengthen, with payrolls increasing at asolid pace. The labor market was nowshowing some signs of tightness, consis-tent with a relatively low jobless rate.There were anecdotal reports of short-ages of skilled labor in a few sectors,such as health care, technology, andfinance. Still, participants expressed un-certainty about how much slack remained. Pressures on unit labor costsappeared contained, despite risinghealth-care costs, amid continued robustproductivity growth and still-moderateincreases in several comprehensive mea-sures of compensation growth.

In their discussion of prices, partici-pants indicated that data over the inter-meeting period, including measures of inflation expectations, suggested thatunderlying inflation was not in the pro-cess of moving higher. Crude oil prices,though volatile, had not risen apprecia-bly in recent months on balance, and aflattening in energy prices was begin-ning to damp headline inflation. In addi-tion, core consumer inflation was flat oreven a bit lower by some measures.Some meeting participants expressedsurprise at how little of the previous risein energy prices appeared to have passedthrough into core inflation measures.However, with energy prices remaininghigh, and prices of some other com-modities continuing to rise, the risk of atleast a temporary impact on core infla-tion remained a concern.

Participants noted that there were asyet few signs that any tightness in prod-

uct and labor markets was adding toinflation pressures. To date, unit laborcosts were not placing pressure on infla-tion, and high profit margins left firms aconsiderable buffer to absorb cost in-creases. Moreover, actual and potential




competition from abroad could be re-straining cost and price pressures,though participants exchanged views on

the extent to which conditions in foreignmarkets might be constraining prices do-mestically. However, participants ob-served that there was a risk that continu-ing increases in resource utilizationcould add to inflationary pressures.Some participants held that core infla-tion and inflation expectations were al-ready toward the upper end of the rangethat they viewed as consistent with pricestability, making them particularly vigi-lant about upside risks to inflation, espe-cially given how costly it might be tobring inflation expectations back downif they were to rise.

In the Committee ’s discussion of monetary policy for the intermeetingperiod, all members favored raising thetarget federal funds rate 25 basis pointsto 4 3 ⁄ 4 percent at this meeting. The econ-omy seemed to be on track to grow neara sustainable pace with core inflationremaining close to recent readingsagainst a backdrop of financial condi-tions embodying an expectation of sometightening. Since the available indica-tors showed that the economy could wellbe producing in the neighborhood of itssustainable potential and that aggregatedemand remained strong, keeping ratesunchanged would run an unacceptablerisk of rising inflation. Most membersthought that the end of the tighteningprocess was likely to be near, and someexpressed concerns about the dangers of tightening too much, given the lags inthe effects of policy. However, membersalso recognized that in current circum-stances, checking upside risks to infla-

tion was important to sustaining goodeconomic performance. The need forfurther policy firming would be deter-mined by the implications of incominginformation for future activity andinflation.

With regard to the Committee ’sannouncement to be released after themeeting, members expressed some dif-

ference in views about the appropriatelevel of detail to include in the state-ment. In the end, they concurred thatthe statement should note that economicgrowth had rebounded in the currentquarter but that it appeared likely tomoderate to a more sustainable pace incoming quarters. Policymakers agreedthat the announcement should alsohighlight the favorable outlook for infla-tion and summarize their reasons forthat assessment, but that it should reiter-ate that possible increases in resourceutilization, along with elevated levels of commodity and energy prices, had thepotential to add to inflation pressures.Changes in the sentence on the balanceof risks to the Committee ’s objectiveswere discussed. Several members wereconcerned that market participantsmight not fully appreciate the extent towhich future policy action will dependon incoming economic data, especiallywhen an end to the tightening processseems likely to be near. Some membersexpressed concern that retention of thephrase “some further policy firmingmay be needed to keep the risks...roughly in balance ” could be mis-construed as suggesting that the Com-mittee thought that several furthertightening steps were likely to be neces-sary. Nonetheless, all concurred that thecurrent risk assessment could beretained at this meeting.

The Committee also discussed its ex-perience with the two-day meeting. Par-ticipants agreed that the additional timehad facilitated their discussion of the

economy, policy, and the wording of theannouncement. It was agreed that, be-cause of scheduling conflicts, the nextmeeting of the Committee would be heldon one day, Wednesday, May 10, 2006.After experience with that and perhaps




the subsequent meeting that is alreadyscheduled for two days, a decisionwould be taken about the general format

of future meetings.At the conclusion of the discussion,the Committee voted to authorize anddirect the Federal Reserve Bank of NewYork, until it was instructed otherwise,to execute transactions in the SystemAccount in accordance with the follow-ing domestic policy directive:

The Federal Open Market Committee

seeks monetary and financial conditions thatwill foster price stability and promote sus-tainable growth in output. To further its long-run objectives, the Committee in the imme-diate future seeks conditions in reservemarkets consistent with increasing the fed-eral funds rate to an average of around43 ⁄ 4 percent.

The vote encompassed approval of the paragraph below for inclusion in thestatement to be released shortly after themeeting:

The Committee judges that some furtherpolicy firming may be needed to keep therisks to the attainment of both sustainableeconomic growth and price stability roughlyin balance. In any event, the Committee willrespond to changes in economic prospects asneeded to foster these objectives.

Votes for this action: Messrs. Bernanke

and Geithner, Ms. Bies, Messrs. Guynn,Kohn, Kroszner, Lacker, and Olson,Ms. Pianalto, Mr. Warsh, and Ms. Yel-len. Vote against this action: None.


Notation Vote

By notation vote completed on February

1, 2006, the Committee unanimouslyapproved the election of Ben S. Ber-nanke as Chairman of the Federal OpenMarket Committee.

By notation vote completed on Febru-ary 17, 2006, the Committee unani-

mously approved the minutes of theFederal Open Market Committee meet-ing held on January 31, 2006.


Meeting Held onMay 10, 2006

A meeting of the Federal Open MarketCommittee was held in the offices of theBoard of Governors of the FederalReserve System in Washington, D.C.,on Wednesday, May 10, 2006 at 8:30a.m.

Present:Mr. Bernanke, ChairmanMr. Geithner, Vice ChairmanMs. BiesMr. GuynnMr. KohnMr. KrosznerMr. Lacker

Mr. OlsonMs. PianaltoMr. WarshMs. Yellen

Mr. Hoenig, Ms. Minehan, and Messrs.Moskow and Poole, AlternateMembers of the Federal OpenMarket Committee

Messrs. Fisher and Stern, Presidents of the Federal Reserve Banks of Dal-

las and Minneapolis, respectivelyMr. Stone, First Vice President, Federal

Reserve Bank of Philadelphia

Mr. Reinhart, Secretary and EconomistMs. Danker, Deputy SecretaryMs. Smith, Assistant SecretaryMr. Skidmore, Assistant SecretaryMr. Alvarez, General CounselMs. Johnson, EconomistMr. Stockton, Economist



Minutes of FOMC Meetings, May 181





Mr. Orphanides, Adviser, Divisionof Monetary Affairs, Board of Governors


Mr. Wright, Section Chief, Divisionof Monetary Affairs, Board of Governors



Mr. Werkema, First Vice President,Federal Reserve Bank of Chicago


Messrs. Evans and Hakkio, Ms. Mester,and Mr. Rasche, Senior Vice Presi-dents, Federal Reserve Banks of Chicago, Kansas City, Philadel-phia, and St. Louis, respectively

Mr. Hilton, Vice President, FederalReserve Bank of New York

Mr. Potter, Assistant Vice President,Federal Reserve Bank of NewYork

Mr. Weber, Senior Research Officer,Federal Reserve Bank of Minne-apolis


The Manager of the System OpenMarket Account reported on recent de-velopments in foreign exchange mar-kets. There were no open market opera-tions in foreign currencies for the

System ’s account in the period since theprevious meeting. The Manager also re-ported on developments in domestic

financial markets and on System openmarket transactions in government secu-rities and federal agency obligationsduring the period since the previousmeeting. By unanimous vote, the Com-mittee ratified these transactions.

With Mr. Lacker dissenting, the Com-mittee voted to extend for one yearbeginning in mid-December 2006 thereciprocal currency ( “swap ”) arrange-ments with the Bank of Canada and theBanco de Mexico. The arrangementwith the Bank of Canada is in theamount of $2 billion equivalent, andthat with the Banco de Mexico is in theamount of $3 billion equivalent. Botharrangements are associated with theFederal Reserve ’s participation in theNorth American Framework Agreementof 1994. The vote to renew the System ’sparticipation in the swap arrangementsmaturing in December was taken at thismeeting because of the provision thateach party must provide six monthsprior notice of an intention to terminateits participation. Mr. Lacker dissentedbecause of his opposition, as indicatedat the January meeting, to foreignexchange market intervention by theFederal Reserve, which such swaparrangements facilitate, and because of his opposition to direct lending to for-eign central banks.

By unanimous vote, the Committeedelegated the authority to review anddetermine appeals of a denial of accessto Committee records under FOIA andother rules to the Board members desig-nated as the primary and alternate Ad-

ministrative Governors for Freedom of Information and Privacy Act Matters.Also by unanimous vote, the Committeeestablished a FOIA Requester ServiceCenter and designated Carol R. Low tofulfill the associated responsibilities.




The information reviewed at thismeeting suggested that economic activ-ity expanded strongly in the first quarter

and that gains were widespread acrossmost categories of final sales. Consumerspending posted a sizable increase,driven by January ’s bounceback inmotor vehicle purchases and an accel-eration in spending on other goods at theturn of the year. In addition, favorableweather boosted housing constructionearly in the quarter. Later in the quarter,however, the pace of consumer spendingmoderated, and housing starts retracedtheir earlier run-up. Business investmentspending strengthened in the first quar-ter, in part because of a surge in thepurchases of transportation and high-tech equipment and a step-up in nonresi-dential construction. Manufacturing pro-duction also posted solid gains in thefirst quarter and payroll growth moder-

ated a bit in April after robust gains inemployment in the first quarter. Overallconsumer prices jumped in March be-cause of higher energy prices, whilecore prices rose a bit more rapidly thanin earlier months.

Nonfarm payrolls increased by138,000 jobs in April following robustgrowth in March. The gains in Aprilwere widespread: Manufacturing and re-lated industries registered significantincreases, mining activity and employ-ment were boosted by rising energyprices, construction hiring posted a mod-erate gain, and a range of services-producing industries strengthened, withthe important exception of retail trade,which more than reversed its Marchgains. Average hours of production ornonsupervisory workers on private non-farm payrolls edged up in April. Theincreases in the workweek and employ-ment in April led to notable growth inaggregate hours of production or nonsu-pervisory workers. The unemployment

rate edged down to 4.7 percent in Marchand remained at that level in April.

Industrial production in March ex-

panded at about the same strong pace asit did in February, with gains postedacross all major components of the in-dex. Manufacturing activity picked upin March after a lull in February. Whilemanufacturing growth for the first quar-ter as a whole slowed from the rapidpace of the fourth quarter, it exceededthat of the previous year. Manufacturingcapacity utilization during the quarterwas a bit above its long-run average.Mining output —which includes oil andnatural gas extraction —strengthened inthe first quarter as a whole. Within thequarter, however, the boost fromhurricane-related recovery seemed toebb. While utility output surged in Feb-ruary and moved up a bit more inMarch, these increases only partlyreversed the weather-related plunge inJanuary.

Growth of consumer spendingappeared to moderate after posting siz-able gains around the turn of the year.Excluding motor vehicles, real outlaysrose temperately in March, boosted bythe continued rise in spending on ser-vices. Spending on goods excludingmotor vehicles posted a second-straightmonthly decline after robust gains overthe previous four months. Sales of lightvehicles held steady in March andpicked up a bit in April, bringing theaverage pace for the year well abovethat of the fourth quarter but about evenwith the rate of last year. Although con-tinued improvements in the labor mar-ket had been generating considerablegains in nominal wage and salary

income, rising gasoline prices helddown the increase in real disposablepersonal income in March and wereexpected to damp it in April as well.Ongoing increases in home prices andadditional gains in the stock market,




however, further boosted householdwealth during the first quarter. Measuresof consumer confidence remained

consistent with moderate increases inconsumer spending.The underlying pace of residential ac-

tivity seemed to moderate in the firstquarter. After unseasonably warmweather allowed a high level of single-family housing starts in January andFebruary, starts fell in March to theirlowest level in a year. New permit issu-ance for single-family homes also fell inMarch, continuing its downward trend.Multifamily starts recovered a bit inMarch from their low rate in Februarybut remained well within their historicalrange. Home sales also declined, on net,in recent months. Although sales of ex-isting single-family homes edged up inFebruary and March, the level of salesfor the first quarter as a whole wasnotably below the record high in thesecond quarter of last year. Sales of newhomes also moved up in March, buttheir average in the first quarter wasdown substantially from the peak in thethird quarter of last year. House priceappreciation appeared to have slowedfrom the elevated rates seen over thepast summer. Growth in the averagesales price of existing homes in March,versus a year earlier, deceleratedsharply, and the average price for newhomes in March fell compared to a yearearlier. In addition, other indicators,such as months ’ supply of both new andexisting homes for sale and the index of pending home sales, supported the viewthat housing markets had cooled inrecent months.

Real outlays for equipment and soft-

ware surged in the first quarter after arelatively subdued performance in thefourth quarter of last year. Much of thegrowth reflected a sharp jump in busi-ness purchases of transportation equip-ment, such as airplanes and motor vehi-

cles. Spending on high-tech equipmentand software also improved as excep-tionally strong growth in expenditures

for communications equipment morethan compensated for fairly soft spend-ing on computers and peripherals and onsoftware. Conditions in the nonresiden-tial construction sector improved notice-ably. Although spending on nonresiden-tial building construction remained wellshort of the robust levels seen in late2000, growth of expenditures in thissector was at its fastest pace in the firstquarter in nearly six years. Outlays ondrilling and mining structures continuedto climb in the first quarter, and avail-able data pointed to ongoing growth.

Real nonfarm inventories steppeddown in the first quarter, largely reflect-ing a decline in investment in motorvehicle inventories. Excluding motorvehicles, inventories increased at a pacewell above that in the fourth quarter.Over the past twelve months, inven-tories relative to shipments and saleshad moved down moderately on bal-ance, extending the long-run downwardtrend.

The U.S. international trade deficitnarrowed in February as a sharpdecrease in imports more than offset amodest fall in exports. The declines inboth categories were generally wide-spread across sectors with the exceptionof oil imports, which were flat, andimported services, which rose. Incom-ing data for foreign industrial econo-mies were generally favorable andpointed to continued expansion. Avail-able data showed continued growth inGDP in the United Kingdom in the firstquarter, continuing strong domestic de-

mand in Canada through February, on-going recovery in Japan, and a first-quarter rebound in euro-area economicperformance.

Headline inflation turned up inMarch. Although the price of natural gas




had fallen because of continued plenti-ful inventories, retail gasoline pricessurged, leading to a jump in overall

energy prices for the month. Prices of core goods and services also rose morequickly in March, largely because of aspike in the apparel component that un-wound a decline in February and a one-time step-up in medical prices related tochanges in Medicare reimbursementrules. During the twelve months endingin March, overall inflation rose at aslightly faster pace than that in the pre-ceding twelve-month period, while coreprices for the same period increased abit more slowly than in the previousyear. Producer price inflation alsomoved up in March, driven largely byhigher food and energy prices. Readingson the growth in the cost of labor weremixed. Over the three months ending inMarch, the employment cost index forhourly compensation of private industryworkers rose at its slowest pace in sev-eral years. Data on compensation perhour in the nonfarm business sector,however, pointed toward notably fastergrowth in the first quarter. Somefinancial-market and survey indicatorssuggested that inflation expectations,both for the upcoming year and for thelonger term, had moved up since theMarch meeting.

At its March meeting, the FederalOpen Market Committee decided toraise its target for the federal funds rate25 basis points, to 4 3 ⁄ 4 percent. In itsaccompanying statement, the Commit-tee indicated that the slowing of thegrowth of real GDP in the fourth quarterof 2005 seemed largely to have reflectedtemporary or special factors. Economic

growth had rebounded strongly in thefirst quarter but seemed likely to moder-ate to a more sustainable pace. As yet,the run-up in the prices of energy andother commodities appeared to have hadonly a modest effect on core inflation,

ongoing productivity gains had helpedto hold the growth of unit labor costs incheck, and inflation expectations had

remained contained. Still, the Commit-tee noted that possible increases inresource utilization, in combination withthe elevated prices of energy and othercommodities, had the potential to add toinflation pressures. In these circum-stances, the Committee judged thatsome further policy firming may beneeded to keep the risks to the attain-ment of both sustainable economicgrowth and price stability roughly inbalance, but reiterated that in any eventthe Committee would respond tochanges in economic prospects asneeded to foster these objectives.

Investors anticipated the FOMC ’s de-cision at its March meeting to raise thetarget federal funds rate 25 basis points,but the Committee ’s post-meeting state-

ment evidently led them to mark upsomewhat their expected path for thefederal funds rate. Subsequently, thepath was pushed up further by data re-leases that were, on balance, strongerthan market participants had expected.Speeches by Federal Reserve officials,the minutes of the March meeting, andCongressional testimony by the Chair-man combined to restrain policy expec-tations some. On net, the anticipatedpath of the federal funds rate over thenext two years nonetheless rotatedupward. Yields on inflation-indexedTreasury securities moved up over theintermeeting period, but yields on nomi-nal Treasury issues rose more. Spreadsof yields on investment-grade bondsover those on comparable-maturityTreasury securities were about un-changed, while those on speculative-grade bonds declined. Major stock priceindexes were up a bit over the intermeet-ing period, as positive first-quarter earn-ings reports more than offset the nega-




tive effects of higher energy prices andrising interest rates.

The trade-weighted exchange value

of the dollar against major foreign cur-rencies fell since the March meeting.Increased focus in public debate on therisks posed by the large U.S. externalimbalance appeared to erode investorsupport for the dollar.

Domestic nonfinancial sector debtwas estimated to have grown at a robustpace in the first quarter, down onlyslightly from the brisk pace of 2005.Business sector debt appeared to haveexpanded strongly, supported by signifi-cant net issuance of U.S. corporatebonds and double-digit growth of busi-ness loans at commercial banks. In thehousehold sector, consumer credit con-tinued to rise slowly, and the growth of household mortgage debt was thought,based on limited data, to have moder-ated somewhat in the first quarteragainst a backdrop of higher mortgageinterest rates and some signs of a decel-eration in house prices. M2 advanced ata pace somewhat below that of nominalGDP in the first quarter and was esti-mated to have expanded moderately inApril.

The staff forecast prepared for thismeeting showed real GDP growth mod-erating somewhat from the average paceof the previous several quarters. Theprojected deceleration of real GDP re-flected the lagged effects of the tighten-ing of monetary policy, the waning im-petus from increases in householdwealth, and reduced stimulus from fiscalpolicy. While higher energy prices wereexpected to boost inflation in the nearterm, structural productivity was strong,

and the influence of higher energy andmaterial costs was thought likely tomoderate. Thus, consumer prices, afterincreasing at a faster rate in the first half of the year, were expected to deceleratelater this year and next year.

In their discussion of the economicsituation and outlook, meeting partici-pants saw the economy as having re-

bounded strongly so far this year afterthe slowing of growth in the fourth quar-ter. The advance in output had beenvigorous in the first quarter of this year,with real GDP increasing at around a5 percent annual rate. Although theexpansion appeared likely to moderate,it evidently remained solid. Inflationpressures appeared to be somewhatgreater than the Committee had antici-pated at the time of its March meeting.Consumer prices recently had risen at apace noticeably above the average riseover the previous twelve months. Also,prices of energy and many other com-modities had climbed sharply of late,and inflation expectations appeared tohave risen slightly. If economic growthcontinued to moderate over comingquarters, as anticipated, pressures onproductive resources would most likelycontinue to be limited. Most participantsexpected that, after allowing for somepossible near-term volatility related tothe recent jump in energy and othercommodity prices, core inflation wouldprobably remain around the levels expe-rienced on average over the past year.However, recent developments sug-gested that upside risks to inflation hadrisen somewhat since the time of theMarch meeting.

In their discussion of major sectors of the economy, some participants notedthat growth of household spending waslikely to slow over the remainder of theyear. Anecdotal information pointed tosome cooling of housing markets. Thatcooling was especially noticeable for

high-end homes and for houses in mar-kets that previously had experienced thesteepest appreciation. Data on homesales, permits, and starts on the wholelikewise suggested that activity wasgradually diminishing. Some reports




indicated that speculative building of homes had dropped off considerably, butinventories of unsold homes still seemed

to be expanding. Although fresh com-prehensive data were not available,home prices on average appeared still tobe rising, but at a slower pace than overthe past few years. Going forward,growth in consumption spending waslikely to be supported by gains in em-ployment and personal income. Butslower appreciation of home prices andthe effects of the increases in energyprices and interest rates that had alreadyoccurred would likely act to restrainconsumption spending somewhat. Cer-tain features of recently popular nontra-ditional mortgage products had the po-tential to cause financial difficulties forsome households and erode mortgageloan performance for some lenders.Nonetheless, the household sectorseemed likely to remain in sound finan-cial condition overall. On balance, con-sumption spending was viewed as mostlikely to expand at a moderate pace incoming quarters.

Several participants remarked thatbusiness investment spending was ro-bust. Nonresidential construction wasaccelerating notably, in the process ab-sorbing some of the resources that werebeing diverted from housing. Office va-cancy rates were declining, spurringconstruction of new office buildings.Drilling and mining activity was said tobe particularly strong, propelled by thehigh levels of energy prices. Investmentin equipment and software appeared tobe expanding at a solid rate. Capitalformation was likely to continue to besupported by rising output, strong bal-

ance sheets in the business sector, andready availability of financing on attrac-tive terms.

Some participants commented on therecent surge in federal tax revenues, adevelopment that was being mirrored at

the state level. While the precise reasonsfor the increase in federal receipts werenot entirely clear, robust income growth

was probably an important factor. In anycase, the effect was to trim the currentfederal budget deficit noticeably. None-theless, the longer-run federal fiscal im-balance remained a serious concern.

Data on economic growth outside theUnited States indicated that the globalexpansion was firming, a sense ampli-fied by reports from international con-tacts. The apparent strengthening of glo-bal growth was likely to support U.S.exports and economic activity andwould also tend to maintain upwardpressures on energy and commodityprices.

Meeting participants expressed someconcern about recent price develop-ments and their implications for infla-tion prospects. Core consumer inflationlately had been a little higher thanexpected. Moreover, energy prices hadrisen steeply in the period since theMarch meeting, and, although pass-through apparently had been limited todate, the most recent increases might bereflected to a greater degree in coreinflation in coming months. Participantsnoted that prices of non-energy com-modities, such as industrial metals andbuilding supplies, also had been climb-ing. The recent decline in the dollar wasanother factor that could add to inflationpressures, although the effect of priorchanges in the foreign exchange valueof the dollar on core consumer priceshad apparently been limited. Businesscontacts had reported continued short-ages of certain types of skilled labor andrelated wage pressures in some occupa-

tions, which would tend to boost costs.However, participants also cited somefactors that could be expected to restraininflation. Although alternative measuresof labor compensation provided diver-gent readings, growth of total compen-




sation on balance appeared to remainmoderate. And, even if nominal wagesshould accelerate somewhat, relatively

wide profit margins could buffer theeffect on prices of final goods and ser-vices. While firms would seek to main-tain those margins, recent experiencesuggested that this might be accom-plished in part through further produc-tivity gains, which had remained fairlystrong on balance in recent quarters,rather than through more rapid pricehikes.

Participants discussed in some detailinflation expectations —a potentially im-portant factor influencing future infla-tion trends. Some surveys suggested thatinflation expectations had risen in recentweeks, but others implied that expecta-tions were little changed. Measures of inflation compensation based on the dif-ference between yields on nominal Trea-sury securities and inflation-indexedissues had edged higher. It was possible,though, that investors ’ uncertainty re-garding inflation prospects, not just in-flation expectations themselves, hadrisen. On balance, participants judgedthat inflation expectations had risensomewhat —a development that wouldhave to be taken into account in policy-making and warranted close mon-itoring —but remained contained.

Although the Committee discussedpolicy approaches ranging from leavingthe stance of policy unchanged at thismeeting to increasing the federal fundsrate 50 basis points, all members be-lieved that an additional 25 basis pointfirming of policy was appropriate todayto keep inflation from rising and pro-mote sustainable economic expansion.

Recent price developments argued foranother firming step at today ’s meeting.Core inflation recently had been a bithigher than had been expected, and sev-eral members remarked that core infla-tion was now around the upper end of

what they viewed as an acceptablerange. Moreover, a number of factorswere augmenting the upside risks to in-

flation: the surge in energy and com-modity prices, some recent weakness inthe foreign exchange value of the dollar,and the possibility that the apparentincrease in inflation expectations could,if it persisted, impart momentum to in-flation. In addition, the economyappeared to be operating at a relativelyhigh level of resource utilization andhad been growing quite strongly, andwhether economic growth would moder-ate to a sustainable pace was not yetclear. At the same time, members alsosaw downside risks to economic activ-ity. For example, the cumulative effectof past monetary policy actions and therecent rise in longer-term interest rateson housing activity and prices couldturn out to be larger than expected. Still,it seemed most likely that, with modestfurther policy action, including a25 basis point firming today, growth inactivity would moderate gradually overcoming quarters, pressures on resourceswould remain limited, and core inflationwould stay close to levels experiencedover the past year.

Given the risks to growth and infla-tion, Committee members were uncer-tain about how much, if any, furthertightening would be needed after to-day’s action. In view of the risk that theoutlook for inflation could worsen, theCommittee decided to repeat the indica-tion in the policy statement releasedafter the March meeting that some fur-ther policy firming could be required.However, the Committee agreed to em-phasize that “the extent and timing of

any such firming will depend impor-tantly on the evolution of the economicoutlook as implied by incoming infor-mation. ” Members debated the appropri-ate characterization of inflation expecta-tions in the statement. Low and stable




inflation expectations were key to theattainment of the Committee ’s dual objectives of price stability and maximum

sustainable economic growth. However,the apparent pickup in longer-term ex-pectations, while worrisome, was rela-tively small. They remained within therange seen over the past couple of years,and the increase could well reverse be-fore long. Accordingly, it appeared ap-propriate to characterize inflation expec-tations again as “contained. ”

At the conclusion of the discussion,the Committee voted to authorize anddirect the Federal Reserve Bank of NewYork, until it was instructed otherwise,to execute transactions in the SystemAccount in accordance with the follow-ing domestic policy directive:

The Federal Open Market Committeeseeks monetary and financial conditions thatwill foster price stability and promote sus-tainable growth in output. To further its long-run objectives, the Committee in the imme-diate future seeks conditions in reservemarkets consistent with increasing the fed-eral funds rate to an average of around5 percent.


The Committee judges that some furtherpolicy firming may yet be needed to addressinflation risks but emphasizes that the extentand timing of any such firming will dependimportantly on the evolution of the eco-nomic outlook as implied by incoming infor-mation. In any event, the Committee willrespond to changes in economic prospects asneeded to support the attainment of itsobjectives.

Votes for this action: Messrs. Bernanke

and Geithner, Ms. Bies, Messrs. Guynn,Kohn, Kroszner, Lacker, and Olson,Ms. Pianalto, Mr. Warsh, and Ms. Yel-len. Votes against this action: None.

During the interval between theMarch and May meetings, Chairman

Bernanke had appointed a subcommit-tee on communications issues to bechaired by Governor Kohn and includ-

ing Presidents Stern and Yellen. Attoday ’s meeting, Governor Kohn indi-cated that the objective of the subcom-mittee was to help the Committee frameand organize discussion of a broad rangeof such issues over coming meetings.


Notation Vote

By notation vote completed on April 17,2006, the Committee unanimously ap-proved the minutes of the Federal OpenMarket Committee meeting held onMarch 27 –28, 2006.


Meeting Held on

June 28 –29, 2006A meeting of the Federal Open MarketCommittee was held in the offices of theBoard of Governors of the FederalReserve System in Washington, D.C.,on Wednesday, June 28, 2006 at 2:00p.m. and continued on Thursday, June29, 2006 at 9:00 a.m.

Present:

Mr. Bernanke, ChairmanMr. Geithner, Vice ChairmanMs. BiesMr. GuynnMr. KohnMr. KrosznerMr. LackerMs. PianaltoMr. WarshMs. Yellen

Ms. Minehan, Messrs. Moskow, Poole,

and Hoenig, Alternate Members of the Federal Open Market Commit-tee

Messrs. Fisher and Stern, Presidents of the Federal Reserve Banks of Dal-las and Minneapolis, respectively

Minutes of FOMC Meetings, June 189




Mr. Reinhart, Secretary and EconomistMs. Danker, Deputy SecretaryMs. Smith, Assistant SecretaryMr. Skidmore, Assistant SecretaryMr. Baxter, Deputy General CounselMs. Johnson, EconomistMr. Stockton, Economist

Messrs. Connors, Eisenbeis, Judd, Ka-min, Madigan, Sniderman, Struck-meyer, Tracy, Weinberg, and Wil-cox, Associate Economists



Ms. Zickler, Deputy Associate Director,Division of Research and Statis-tics, Board of Governors

Mr. English, Assistant Director, Divi-sion of Monetary Affairs, Board of

GovernorsMessrs. Dale 6 and Simpson, Senior Ad-

visers, Divisions of MonetaryAffairs and Research andStatistics, respectively, Board of Governors

Mr. Gross, Special Assistant to theBoard, Office of Board Members,Board of Governors


Mr. Nelson, Section Chief, Divisionof Monetary Affairs, Board of Governors

Mr. Perli, Senior Economist, Divisionof Monetary Affairs, Board of Governor

Mr. Doyle and Ms. Judson, Economists,Divisions of International Financeand Monetary Affairs, respectively,Board of Governors

Mr. Luecke, Senior Financial Analyst,

Division of Monetary Affairs,Board of Governors


Mr. Moore, First Vice President, Fed-eral Reserve Bank of Cleveland


Mr. Evans, Ms. Mester, and Messrs.Rasche, Rolnick, and Sellon,Senior Vice Presidents, FederalReserve Banks of Chicago, Phila-delphia, St. Louis, Minneapolis,and Kansas City, respectively

Ms. Mucciolo, Vice President, FederalReserve Bank of New York

By unanimous vote, the Committeeapproved a “Report and Plan of theFederal Open Market Committee to

Improve FOIA Operations ” and ap-proved a delegation of authority to theChairman (or his designee) to takeactions required under the Freedom of Information Act.

The Manager of the System OpenMarket Account reported on recent de-velopments in foreign exchange mar-kets. There were no open market opera-tions in foreign currencies for theSystem ’s account in the period since theprevious meeting. The Manager also re-ported on developments in domesticfinancial markets and on System openmarket transactions in government secu-rities and federal agency obligationsduring the period since the previousmeeting. By unanimous vote, the Com-mittee ratified these transactions.

The information reviewed at the Junemeeting suggested that the growth of economic activity in the second quarterslowed substantially from its rapid first-quarter pace. The expansion of con-sumer spending softened, and activity in6. Attended Thursday ’s session only.




the housing market continued to cool. Incontrast, the underlying rate of businessspending remained strong and was well

supported by fundamentals. The demandfor labor appeared to moderate as hiringstepped down in recent months. Con-sumer price inflation remained elevatedin April and May, reflecting sharp risesin energy prices and more rapid in-creases in core prices.

Gains in nonfarm private payrollsaveraged 112,000 over the three monthsending in May, a pace considerably be-low the average of about 170,000 jobsper month for the prior three-monthperiod. The slowing in hiring was mostpronounced in retail trade but was alsoevident in construction and informationservices. Establishments in professionaland business services, nonbusiness ser-vices, and wholesale trade continued toadd jobs at roughly the same pace as

earlier in the year. Average hours of production or nonsupervisory workerson private nonfarm payrolls edged up inApril but reversed these gains in May.The unemployment rate was 4.6 percentin May, near its average for the year sofar.

Industrial production edged down inMay after strong growth in April,largely reflecting the patterns of manu-facturing output. For the year to date,manufacturing production advanced at arate significantly below its rapid fourth-quarter growth rate but only a bit belowits average pace of expansion since mid-2003. The mining sector, which includesoil and natural gas extraction, expandedsolidly in April before falling back inMay. Utilities output also grew stronglyin April but retreated in May as tempera-tures returned to normal after havingbeen unseasonably warm in April. Ca-pacity utilization in manufacturingremained somewhat above its long-runaverage in both April and May.

Real consumer spending appeared tobe on track to decelerate noticeably inthe current quarter after posting robust

growth in the first quarter. The slowingreflected both a marked reduction in thegrowth in real outlays for motor vehi-cles from an elevated first-quarter paceand a moderation in the advance of realexpenditures for other goods in recentmonths. Underlying this slowing in theexpansion of consumer expenditureswas a moderation in the fundamentaldeterminants of spending. The level of nominal wages and salaries beginning inthe fourth quarter of 2005 was reviseddown considerably, and rising consumerprices held down the gains in real dis-posable income. Higher interest ratesalso likely restrained spending. None-theless, despite recent declines in equityprices, the wealth-to-income ratioremained well above its historical aver-age, and consumer sentiment, whichdipped in May, rebounded some in earlyJune.

Residential construction activity mod-erated over the past few months butremained at a historically high level.Single-family starts posted a sizabledrop in May for the third consecutivemonth. Although a substantial portion of May’s decline seemed to be a partialpayback for the elevated level of startsearly in the year, when weather condi-tions had been favorable, the underlyingpace of single-family housing construc-tion appeared to have slowed. In themultifamily sector, starts in May werewell within the typical range seen since1995. Sales of both new and existingsingle-family homes in April and Maywere significantly below their peaks of

the summer of 2005, though new homesales continued to regain some groundafter having fallen in February. Themost reliable measures of house pricesindicated modest growth following therapid increases seen last year.




After a first-quarter surge, real spend-ing on equipment and software appearedon track for a much smaller gain in the

second quarter. Incoming data for thecurrent quarter suggested that spendingon transportation equipment reversedthe run-up that occurred in the first quar-ter. Spending on high-tech equipmentand software advanced at a slower pacein the second quarter as a flattening outof spending on communications equip-ment after a huge increase in the firstquarter offset some pickup in business-sector demand for computers and soft-ware. The construction of nonresidentialbuildings picked up noticeably so farthis year, although activity remainedwell short of its previous peak in mid-2000. Outlays on drilling and miningstructures continued to climb in re-sponse to high projected energy prices.

The book value of manufacturing andtrade inventories excluding motor vehi-cles stepped up in April. The ratio of book-value inventories to sales heldsteady for the year so far after havingfallen considerably last year. In general,inventories appeared to be well alignedwith demand, and business surveys sug-gested that firms were comfortable withthe level of inventories.

The U.S. international trade deficitwidened in April, reflecting a largeincrease in imports coupled with a slightdecline in exports. Import growth wasled by sharp rises in the value of im-ported oil and natural gas and increasedimports of automotive products andcapital goods. Exports were restrainedin part by a decline in aircraft exports.Expansion of economic activity in theforeign industrial countries was solid in

the first quarter, but indications for thesecond quarter were more mixed. In-coming data pointed to a possible slow-ing in Canada, but signs of furtherexpansion in the euro area and of contin-ued growth in Japan were evident, not-

withstanding sharp declines in equityindexes in these countries.

Headline inflation picked up in April

and May, driven partly by sharpincreases in the prices of petroleum-based products. In contrast, natural gasprices continued to decline in responseto excess supply, fully reversing lastautumn ’s rises. Higher oil prices showedthrough to producer prices for a varietyof energy-intensive intermediate goods.Consumer food prices decelerated mark-edly since January, reflecting slowerprice increases for food away fromhome and declines, on balance, in theprices of fruits and vegetables. Coreprice inflation rose less than headlineinflation in April and May but above itspace earlier in the year. Core priceswere boosted in part by an accelerationin shelter costs, especially those im-puted for owner-occupied residences.Readings on the growth of labor costswere revised down for the fourth quarterof 2005 and first quarter of 2006, butrecent data suggested a pickup in thesecond quarter. A number of indicatorsof inflation expectations largely re-versed increases recorded in the spring.

At its May meeting, the Federal OpenMarket Committee (FOMC) decided toraise its target for the federal funds rate25 basis points, to 5 percent. The Com-mittee ’s accompanying statement indi-cated that economic growth had beenquite strong so far this year. The Com-mittee saw growth as likely to moderateto a more sustainable pace, partly re-flecting a gradual cooling of the housingmarket and the lagged effects of increases in interest rates and energyprices. At that time, the run-up in the

prices of energy and other commoditiesappeared to have had only a modesteffect on core inflation. Ongoing pro-ductivity gains had helped to hold thegrowth of unit labor costs in check, andinflation expectations remained con-




tained. Still, possible increases inresource utilization and the elevatedprices of energy and other commodities

had the potential to add to inflation pres-sures. In these circumstances, the Com-mittee foresaw the possibility of a needfor some further policy firming to ad-dress inflation risks but emphasized thatthe extent and timing of any such firm-ing would depend importantly on theevolution of the economic outlook asimplied by incoming information.

Investors anticipated the FOMC ’s de-cision at its May meeting to raise thefederal funds rate target 25 basis points,but near-term policy expectations edgedup, apparently in response to the accom-panying statement. Subsequent data re-leases reporting higher-than-expectedinflation, the release of the FOMC min-utes, and speeches by Federal Reservepolicymakers all led investors to pushup their expectations for the future pathof the federal funds rate. Yields on near-term nominal Treasury securities rose inline with policy expectations over theintermeeting period, but those on longer-dated securities moved up by smalleramounts. Yields on inflation-indexedTreasury securities increased by morethan those on nominal securities, and theresulting decline in inflation compensa-tion retraced a substantial share of therise that had occurred over the preced-ing intermeeting period. Major stock price indexes fell sharply over theperiod. Spreads of yields on corporatebonds over those on comparable-maturity Treasury securities widenedsomewhat, while those on speculative-grade issues rose by more.

After changing little on balance dur-

ing much of May, the dollar ’s foreignexchange value against other major cur-rencies moved up in June and showed amodest increase, on net, over the inter-meeting period. The dollar appreciatedafter comments by FOMC policymakers

that were interpreted by market partici-pants as suggesting a higher likelihoodof policy tightening at the June FOMC

meeting. Prices of precious and indus-trial metals, which had risen sharplysince early March, particularly in May,reversed those gains later in the inter-meeting period.

Debt of the domestic nonfinancialsectors was estimated to have deceler-ated in the second quarter after a robustfirst-quarter increase. Business sectordebt advanced more slowly in the sec-ond quarter, although the expansion of business loans remained brisk and netissuance of corporate bonds was solid.In the household sector, mortgage bor-rowing slowed in response to more sub-dued housing activity and moderatinghouse-price appreciation. M2 growth inthe second quarter was tepid, as thegrowth of nominal income had appar-ently softened and rising opportunitycost continued to dampen demand formoney.

The staff forecast prepared for thismeeting indicated that, after the signifi-cant deceleration of real GDP in thecurrent quarter from the first quarter of 2006, growth would proceed throughthe end of 2007 at a pace a bit below therate of growth of the economy ’s poten-tial. The outlook for modest growth of real GDP reflected a slowdown in thehousing market, the effects of past pol-icy tightening, and a diminished boost toconsumer spending from increases inhousehold wealth. Core consumer priceinflation was projected to have steppedup in the second quarter from its aver-age pace over the preceding severalquarters but to then drop back some-

what, albeit to a level higher than previ-ously forecasted, as energy and importprices flatten out and some slack emerges in labor and product markets.

In their discussion of the economicsituation and outlook, meeting partici-




pants saw economic growth as havingmoderated in the second quarter from itsrobust pace in the first quarter, reflecting

a cooling of the housing market and thelagged effects of increases in interestrates and energy prices. Most partici-pants expected output to advance overthe next year and a half at a pace closeto that which the economy can sustainover time. All participants found theelevated readings on core inflation of recent months to be of concern and, if sustained, inconsistent with the mainte-nance of price stability. However, con-tained inflation expectations, the abate-ment of upward pressure from pastincreases in energy and other commod-ity prices, and the slowing in the growthof economic activity that was under waywere expected to contribute to a modera-tion in core inflation in coming quarters.Nonetheless, participants noted a risk that the drop-back in inflation could beslower or more limited than the Com-mittee would find desirable sinceresource utilization was currently tightand the pickup in price increases hadbeen broadly based rather than beinglimited to a few specific sectors thatcould be linked to energy costs.

In preparation for the Federal Re-serve’s semiannual report to the Con-gress on monetary policy, the membersof the Board of Governors and the presi-dents of the Reserve Banks submittedindividual projections of the growth of GDP, the rate of unemployment, andcore consumer price inflation for 2006and 2007, conditioned on the partici-pants ’ views of the appropriate path formonetary policy. The forecasts of therate of fourth-quarter to fourth-quarter

expansion in real GDP for 2006 were ina range of 3 to 3 3 ⁄ 4 percent, with acentral tendency of 3 1 ⁄ 4 to 31 ⁄ 2 percent,and those for 2007 were in a range of 21 ⁄ 2 to 31 ⁄ 4 percent, with a central ten-dency of 3 to 3 1 ⁄ 4 percent. These rates of

growth were associated with a civilianunemployment rate in a range of 4 1 ⁄ 2 to5 percent in the fourth quarter of this

year and 41

⁄ 4 to 51

⁄ 4 percent in the fourthquarter of 2007, with a central tendencyat both horizons of 4 3 ⁄ 4 to 5 percent.Forecasts of the rate of inflation, asmeasured by the change in the averagefourth-quarter core PCE price indexfrom a year earlier, ranged from 2 1 ⁄ 4 to3 percent for this year, with a centraltendency of 2 1 ⁄ 4 to 21 ⁄ 2 percent, and therange and central tendency were 2 to21 ⁄ 4 percent for next year.

In their discussion of the major sec-tors of the economy, participants ob-served that housing construction activityhad declined notably in recent monthsas indicated by lower housing starts andpermits; moreover, higher inventories of unsold homes, a sharp rise in cancella-tions of new home sales, and reportsfrom construction companies suggestedthat the weakness was likely to beextended. Several participants pointedout that the decline was broadly in linewith expectations in light of the tighten-ing in monetary policy and the rapidrun-up in home prices and residentialconstruction in recent years. Participantsalso observed that the evidence to dateindicated that the slowdown was orderlybut were mindful of the possibility of asharper downturn in the sector.

The growth of consumer spendinghad dropped off significantly in the sec-ond quarter from a robust pace earlier inthe year. The slowdown was attributedin part to higher energy prices and alsoto a likely downshift in home priceappreciation and higher interest rates. Areduction in the attractiveness of home

equity borrowing was mentioned as pos-sibly contributing to the slowdown.Some retailers, especially those cateringto lower- and middle-income customers,reported weaker growth in sales. Con-sumer spending was expected to ad-




vance modestly in coming quarters asthe effects of more moderate gains inhome prices and a gradual rebound in

the household saving rate from recenthistorically low levels were offset byfurther gains in employment and growthin labor income. A few participantsnoted that the surge in federal taxreceipts this year and a similar advancein revenue at the state level could be asign of vigorous gains in income,indicating that household spending mayexpand more rapidly than many wereanticipating.

Participants interpreted the incomingdata on orders and shipments of durablegoods, positive readings on businesssentiment, and continued high levels of corporate profitability as suggesting thatbusiness investment would remain asource of strength going forward. In ashift from the pattern observed in thepast few years, some contacts suggestedthat businesses were now directing theircapital expenditures toward expandingcapacity rather than increasing effi-ciency, a signal of the anticipation of continued solid growth in demand. Busi-ness expenditures on nonresidentialstructures also were seen to be advanc-ing robustly in a number of markets,possibly providing some offset to re-duced residential construction activity.Several participants observed that thecontinued ready availability of creditwould support business expenditures.Others, however, noted that the pullback from risk-taking that had been observedin some financial markets over the pre-ceding few months could intensify, rais-ing the cost of funds.

Participants observed that many for-

eign central banks had tightened mone-tary policy over the intermeeting periodin response to strengthening activity andindications of inflation pressures.Greater uncertainty about inflation pres-sures and the needed policy response

had perhaps contributed to a reassess-ment of risks by investors globally. De-spite the tighter policy, however, eco-

nomic growth in the United States ’major trading partners appeared likelyto remain solid, supporting U.S. exports.Participants also discussed the role of global capacity utilization in the infla-tion process.

All meeting participants expressedconcern about recent elevated readingson core inflation. A key issue was theextent to which this spring ’s increase ininflation reflected transitory or persis-tent influences. Many noted that a num-ber of factors were temporarily boostinginflation. The pass-through of the sub-stantial rise in energy prices couldaccount for a considerable part of thestep-up in core inflation in recent quar-ters. In addition, rising rents had beenboosting the cost of shelter and so con-tributing to the increase in core infla-tion. However, energy prices wereexpected to level out, and rents, whiledifficult to forecast, were viewed bysome participants as likely to deceleratein coming quarters. The moderation inthe economic expansion was expectedto prevent pressures on resource utiliza-tion from intensifying. In sum, with in-flation expectations contained and unitlabor costs held down by ongoing gainsin productivity and modest advances incompensation, inflation was seen bymost participants as likely to edge down.

Nevertheless, several factors werecited as potentially sustaining upwardpressure on inflation, and the range of participants ’ forecasts for core inflationin 2007 rose by 1 ⁄ 4 percentage pointrelative to the range of forecasts made in

February. Some participants noted thatbusinesses in their Districts were experi-encing difficulty hiring certain types of skilled workers, suggesting that in-creased wage pressures might emerge.In addition, some business contacts indi-




cated a greater ability to pass highercosts on to customers, although otherbusinesses continued to report that their

pricing power remained limited. Therelatively taut resource markets and thelagged effects of the increase in energyprices raised the possibility that infla-tion could continue at somewhat el-evated levels for some time. Higher lev-els of inflation, should they persist,could become embedded in inflation ex-pectations. In that vein, several partici-pants noted that inflation expectationshad been sensitive to incoming data andto communications regarding monetarypolicy over the intermeeting period.

All Committee members agreed thatraising the target for the federal fundsrate 25 basis points, to 5 1 ⁄ 4 percent, atthis meeting was appropriate given therecent readings on inflation and the as-sociated deterioration in the inflationoutlook. Such an action would also helppreserve the decline in inflation expecta-tions that had occurred over the inter-meeting period and which appeared tobe conditioned on an outlook for a pol-icy firming. Characterizing the resultingstance of policy was quite difficult in theview of most members; those who didventure a judgment saw the stance asranging from modestly restrictive tosomewhat accommodative. Many mem-bers noted that significant uncertaintyaccompanied the appropriate setting of policy going forward, and one indicatedthat the decision to raise the target fed-eral funds rate at this meeting was aclose call.

In their discussion of the wording of the statement to be released after themeeting, members expressed a wide

range of views. Some members favoreda shorter statement that focused on theCommittee ’s desire to see core inflationdecline from its recent elevated levels,while others were inclined to providemore information about the forces that

would likely influence the future path of policy. In light of the possibility that thelessening of inflation pressures could be

more limited than consistent with sus-tained good performance of the econ-omy, members agreed to indicate that“[a]lthough the moderation in thegrowth of aggregate demand should helpto limit inflation pressures over time . . .some inflation risks remain. ” Neverthe-less, with the economy slowing andsome of the effects of past tighteningstill in the pipeline, members recognizedthe value of accumulating more infor-mation for determining what, if any,additional policy action would beneeded following the tightening adoptedat the current meeting. To indicate thatpolicy action at future meetings was notforeordained and would depend on theforecasts for inflation and activity in themedium term, the Committee agreed tostate that “[t]he extent and timing of anyadditional firming that may be needed toaddress these risks will depend on theevolution of the outlook for both infla-tion and economic growth, as impliedby incoming information. ”

After consulting with the participants,the communications subcommittee rec-ommended that the Committee begin itsdiscussions of communications issues atthe FOMC meeting in August and thatthe FOMC meetings scheduled for laterthis year be lengthened to allow a fullerinitial discussion of some of theseissues. The Committee also discussedbriefly the schedule for FOMC meetingsnext year and tentatively agreed toincrease the number of two-day meet-ings to four.

At the conclusion of the discussion,

the Committee voted to authorize anddirect the Federal Reserve Bank of NewYork, until it was instructed otherwise,to execute transactions in the SystemAccount in accordance with the follow-ing domestic policy directive:




The Federal Open Market Committeeseeks monetary and financial conditions thatwill foster price stability and promote sus-tainable growth in output. To further its long-run objectives, the Committee in the imme-diate future seeks conditions in reservemarkets consistent with increasing the fed-eral funds rate to an average of around51 ⁄ 4 percent.


Although the moderation in the growth of aggregate demand should help to limit infla-tion pressures over time, the Committee judges that some inflation risks remain. Theextent and timing of any additional firmingthat may be needed to address these riskswill depend on the evolution of the outlook for both inflation and economic growth, asimplied by incoming information. In anyevent, the Committee will respond tochanges in economic prospects as needed tosupport the attainment of its objectives.

Votes for this action: Messrs. Bernankeand Geithner, Ms. Bies, Messrs. Guynn,Kohn, Kroszner, and Lacker, Ms. Pian-alto, Mr. Warsh, and Ms.Yellen. Votesagainst this action: None.

The meeting adjourned at 11:10 a.m.

Notation Vote

By notation vote completed on May 30,2006, the Committee unanimously ap-proved the minutes of the Federal OpenMarket Committee meeting held on May10, 2006.


Meeting Held onAugust 8, 2006

A meeting of the Federal Open MarketCommittee was held in the offices of theBoard of Governors of the Federal

Reserve System in Washington, D.C.,on Tuesday, August 8, 2006 at 8:30 a.m.

Present:Mr. Bernanke, ChairmanMr. Geithner, Vice ChairmanMs. BiesMr. GuynnMr. KohnMr. KrosznerMr. LackerMs. PianaltoMr. WarshMs. Yellen

Mr. Hoenig, Ms. Minehan, Messrs.Moskow and Poole, AlternateMembers of the Federal OpenMarket Committee

Messrs. Fisher, Plosser, and Stern,Presidents of the Federal ReserveBanks of Dallas, Philadelphia, andMinneapolis, respectively

Mr. Reinhart, Secretary and EconomistMs. Smith, Assistant SecretaryMr. Skidmore, Assistant SecretaryMr. Alvarez, General CounselMs. Johnson, EconomistMr. Stockton, Economist

Messrs. Connors, Eisenbeis, Kamin,Madigan, Sniderman, Struck-meyer, and Wilcox, AssociateEconomists


Mr. English and Ms. Liang, AssociateDirectors, Divisions of MonetaryAffairs and Research andStatistics, respectively, Board of Governors

Mr. Reifschneider, Deputy AssociateDirector, Division of Research andStatistics, Board of Governors

Messrs. Dale and Orphanides, SeniorAdvisers, Division of MonetaryAffairs, Board of Governors



Minutes of FOMC Meetings, August 197




Ms. Beechey, Economist, Divisionof Monetary Affairs, Board of Governors

Ms. Low, Open Market Secretariat Spe-cialist, Division of Monetary Af-fairs, Board of Governors

Mr. Barron, First Vice President, Fed-eral Reserve Bank of Atlanta

Messrs. Fuhrer and Rosenblum, Exec-utive Vice Presidents, Federal Re-serve Banks of Boston and Dallas,respectively

Mr. Hakkio, Ms. Mester, Messrs. Ra-sche and Williams, Senior VicePresidents, Federal Reserve Banksof Kansas City, Philadelphia,St. Louis, and San Francisco,respectively

Messrs. Peach and Krane, and Ms.Weir, Vice Presidents, Federal Re-serve Banks of New York, Chi-cago, and New York, respectively

Mr. Weber, Senior Research Officer,Federal Reserve Bank of Minneapolis


The Manager of the System OpenMarket Account reported on recent de-velopments in foreign exchange mar-kets. There were no open market opera-tions in foreign currencies for theSystem ’s account in the period since theprevious meeting. The Manager also re-ported on developments in domestic fi-nancial markets and on System openmarket transactions in government secu-rities and federal agency obligations

during the period since the previousmeeting. By unanimous vote, the Com-mittee ratified these transactions.

The information reviewed at themeeting suggested that the growth of economic activity in the second quarter

slowed from its rapid pace in the firstquarter. Residential investment con-tracted as activity in the housing market

continued to cool. Consumer spendingand business investment deceleratedafter posting substantial increases in thefirst quarter. The demand for labor mod-erated, with hiring in recent months be-low the pace of earlier this year. Con-sumer price inflation remained elevatedin July, reflecting further increases inenergy prices and shelter costs.

Nonfarm payrolls increased in Juneand July, but more slowly than in thefirst quarter. The moderation in hiringwas most pronounced in retail trade butwas also evident in construction andnon-business services. Establishments inprofessional and business services con-tinued to add jobs at roughly the samepace as that of earlier in the year. Aver-age hours of production or nonsupervi-sory workers on private nonfarm pay-rolls edged up. The unemployment raterose to 4.8 percent in July, above itsaverage over the first half of the year.

Industrial production picked up inJune. For the second quarter as a whole,it grew at a robust rate that was fasterthan its first-quarter pace. Gains inmanufacturing production were wide-spread across industries. The miningsector, which includes oil and naturalgas extraction, expanded solidly in June,although average growth in the secondquarter was below that of the first quar-ter, in part because the recovery fromthe disruptions caused by last year ’shurricanes neared completion. Utilitiesoutput grew strongly in the secondquarter. The rate of capacity utilizationin the manufacturing sector stepped up

in June and remained above its long-runaverage.The growth of consumer spending

slowed considerably in the second quar-ter after the surge in purchases aroundthe turn of the year. Spending on goods




excluding motor vehicles posted a mod-est increase in June after remaining flat,on average, over the previous four

months. Although nominal wages andsalaries rose briskly in the first half of the year, gains in real disposable incomewere held down by rising consumerprices. While past gains in householdwealth, particularly from home prices,supported consumer spending, higherinterest rates and energy prices werelikely a restraining influence. Indicatorsof consumer sentiment for July weremixed.

Residential construction activity con-tracted in the second quarter. Single-family starts declined in June to a levelwell below the average of the previoustwelve months. Construction in the mul-tifamily sector remained steady, withstarts in June well within the typicalrange seen since 1995. Sales of bothnew and existing single-family homesslowed in June and were significantlybelow their peaks of the summer of 2005. Available measures of houseprices indicated that price increases hadmoderated over the past four quarters.

After surging in the first quarter, realspending on equipment and softwareedged down in the second quarter. Thedecline was accounted for primarily bya drop in expenditures on communica-tions and transportation equipment.Spending on high-tech equipment andsoftware declined as well. The construc-tion of nonresidential buildings movedup at a solid pace over the first half of the year, although activity remained wellshort of its previous peak in mid-2000.Outlays on drilling and mining struc-tures continued to climb in response to

high energy prices, and spending on of-fice construction edged up as vacancyrates continued to trend down. Overall,economic fundamentals and businesssentiment continued to support in-creased investment.

The book value of manufacturing andtrade inventories excluding motor vehi-cles rose in May, and real nonfarm

inventories excluding motor vehiclesappeared to be slightly higher in thesecond quarter than earlier in the year.The ratio of book-value inventories tosales edged down in May in both thetrade and manufacturing sectors afterhaving remained relatively steady overthe previous three months. In the manu-facturing sector, however, inventoriesticked up again in June. In general,inventories appeared to be well alignedwith demand, and business surveys sug-gested that firms were comfortable withthe level of inventories.

The U.S. international trade deficitwidened in May, reflecting a sharpincrease in imports that more than offseta sizable gain in exports. Import growthwas heavily concentrated in oil, reflect-ing both higher prices and quantities;other categories of imports fell on bal-ance. Exports rose across almost all major product categories; the largest gainswere in consumer goods and capitalgoods, especially aircraft. Expansion of economic activity in the advanced for-eign economies appeared to continue inthe second quarter at a pace roughlycomparable to that of the first quarter,on net. Incoming data for the secondquarter pointed to a pickup in economicgrowth in the euro area and Japan butindicated that growth slowed somewhatin Canada. Recent economic indicatorsfrom the developing economies weremixed but, in general, suggested somemoderation in growth from the rapidfirst-quarter pace.

Headline inflation continued to move

up, on balance, in recent months, andconsumer prices increased at a fasterpace in the second quarter than over theprevious twelve months. Consumerenergy prices, while declining slightlyin June, surged during the second quar-




ter, on net. Core consumer prices alsocontinued to rise, boosted by an accel-eration in shelter costs, particularly

those for owner-occupied residences,and some pass-through of energy costincreases. Higher oil prices showedthrough in producer prices for a varietyof energy-intensive intermediate goods.Rising import prices, higher domesticrates of capacity utilization, and strongglobal demand for materials were fac-tors underlying an acceleration in coreprices for intermediate materials. Theprice of crude oil increased further overthe intermeeting period, and strongweather-related demand caused the priceof natural gas to rise considerably. Theemployment cost index rose somewhatfaster in the second quarter than over thepreceding three months, but the twelve-month change was less than that of ayear ago. Survey measures of house-holds ’ inflation expectations in June andJuly reversed their increases in Apriland May.

At its June meeting, the Federal OpenMarket Committee (FOMC) decided toraise its target for the federal funds rate25 basis points, to 5 1 ⁄ 4 percent. TheCommittee ’s accompanying statementindicated that economic growth hadbeen moderating from its quite strongpace earlier in the year, partly reflectinga gradual cooling of the housing marketand the lagged effects of increases ininterest rates and energy prices. Read-ings on core inflation had been elevatedin recent months, but ongoing produc-tivity gains had held down the rise inunit labor costs, and inflation expecta-tions remained contained. However,high levels of resource utilization and

the high prices for energy and othercommodities had the potential to sustaininflation pressures. Although the mod-eration in the growth of aggregate de-mand would help limit inflation pres-sures over time, the Committee judged

that some inflation risks remained. Theextent and timing of any additional firm-ing would depend on the evolution of

the economic outlook as implied by in-coming information.Investors anticipated the FOMC ’s de-

cision at its June meeting to raise thefederal funds rate 25 basis points, butnear-term policy expectations edgedlower, apparently in response to the ac-companying statement. Subsequently,data releases on real activity that wereweaker than expected, the Chairman ’stestimony on the semiannual MonetaryPolicy Report, and the release of theJune FOMC minutes all led investors torevise down their expectations for thefuture path of the federal funds rate.Yields on nominal Treasury securitiesfell in line with policy expectations overthe intermeeting period. Yields oninflation-indexed Treasury securitiesdeclined a bit more than those on com-parable nominal Treasury securities,leaving inflation compensation upslightly, albeit within recent ranges.Spreads of yields on corporate bondsover those on comparable-maturityTreasury securities were about un-changed, while those on speculative-grade bonds widened. Major stock priceindexes rose modestly. The foreignexchange value of the dollar againstother major currencies fell, on net, overthe intermeeting period.

Debt of the domestic nonfinancialsectors was estimated to have deceler-ated in the second quarter after a robustfirst-quarter increase. Business-sectordebt increased briskly, as the expansionof business loans remained robust. Inthe household sector, mortgage debt de-

celerated from the first quarter ’s rapidpace in response to higher mortgagerates and slower house-price apprecia-tion. M2 growth dropped in the secondquarter and remained modest in July,consistent with moderating growth of




nominal income and rising opportunitycost.

The staff forecast prepared for this

meeting indicated that real GDP growthwould slow in the second half of 2006and 2007, and to a lower rate than hadbeen anticipated in the prior forecast.The marking down of the outlook waslargely attributable to the annual revi-sion of the national income and productaccounts, which involved downward re-visions to actual GDP growth in prioryears and prompted reductions in thestaff ’s estimate of potential output. Theslowdown in the housing market, theeffects of higher energy prices on house-hold purchasing power, the waning im-petus of household wealth effects onconsumer spending, and the effects of past policy tightening were expected tohold economic growth below potentialover the next six quarters. Core con-sumer price inflation was projected todrop back somewhat later this year andnext, mainly as the effects of higherenergy and import prices abated.

In their discussion of the economicsituation and outlook, meeting partici-pants noted that the slowing of GDPgrowth in the second quarter was gener-ally in line with expectations, reflectingthe continued cooling of the housingmarket, the restraining influence on de-mand of higher energy prices, and thelagged effects of past increases in inter-est rates. Going forward, output wasexpected to advance at a pace at orslightly below the economy ’s potentialrate of growth, but several participantsnoted that the annual revision to thenational income and product accountssuggested this growth rate likely was

lower than previously believed. Incom-ing information with regard to inflationhad not been encouraging. Still, mostparticipants thought that, with energyprices possibly leveling out, aggregatedemand moderating, and long-term in-

flation expectations contained, core PCEinflation likely would decline graduallyfrom its recent elevated level, though

the upside risks to inflation weresignificant.In their discussion of the major sec-

tors of the economy, participants notedthat residential construction activity hadcontinued to recede over the past fewmonths and cited the housing sector as adownside risk to the outlook for growth.The rate of new home sale cancellations,which was identified as an importantleading indicator by some contacts inthe construction industry, had spikedhigher. Single-family housing starts andpermits continued to fall, and inven-tories of unsold housing appeared tohave risen significantly, pointing to con-tinued slowing in this sector. Some par-ticipants observed that the slowingseemed to be orderly thus far, but it wasalso noted that in some areas of thecountry housing construction had expe-rienced a relatively sharp fall. In gen-eral, participants expressed considerableuncertainty regarding prospects for thehousing sector.

Meeting participants noted that thecontinued increases in energy prices andborrowing costs appeared to have re-strained consumer spending growth inrecent months. Contacts in the retail sec-tor generally reported a continued slow-ing of growth in sales, although thesituation differed somewhat by regionand type of good or service. Reliable,comprehensive data were not yet avail-able on recent house price movements,but the rate of appreciation appeared tobe moderating and was likely to slowfurther in coming months. The slower

pace of increase in housing wealthwould restrain consumption growth,though by how much was uncertain.However, the financial condition of households, as judged by indicators suchas bankruptcy filings and loan delin-




quencies, appeared to remain solid.Overall, consumption spending seemedlikely to expand at a moderate pace in

coming quarters.Although business fixed investmentin the second quarter was a little lowerthan had been expected, participantsnoted that this development appearedmainly to reflect the timing of pur-chases, particularly of transportationequipment, and not weakness in theunderlying trend. Some participantsnoted that nonresidential constructionhad continued to strengthen, offsettingsome of the contraction in residentialconstruction. Looking forward, strongbusiness balance sheets and high profit-ability were seen as supporting contin-ued growth in expenditures on softwareand equipment. However, it was notedthat if the reported slowing of increasesin retail sales continued, businessesmight trim capital spending plans.

With regard to the federal sector,spending related to last year ’s hurri-canes appeared likely to abate, and fed-eral expenditures overall would prob-ably be providing less impetus toaggregate demand going forward. Fed-eral receipts had been increasing rap-idly, a development that reflectedcontinued strong growth in labor andnon-labor income.

Some participants noted that globaldemand remained strong, potentiallyadding to worldwide pressures onresources. Increased geopolitical risks,particularly related to developments inthe Middle East, continued to put pres-sure on energy prices, and the prices of many other commodities also hadfirmed over the intermeeting period.

Central banks had been raising interestrates globally, however, and this wasviewed as a factor that should help torestrain global inflation pressures. But itwas also noted that the recent decline inthe foreign exchange value of the dollar

could lead to a weakening of importcompetition in the form of increases inthe prices of tradable goods in the

United States.As at the June meeting, all partici-

pants expressed concern about contin-ued elevated readings on core inflationand inflation risks going forward. Sev-eral participants took note of the revi-sions to historical data that painted amore worrisome picture of cost trends;measures of unit labor costs had beenmarked up, reflecting upward revisionsto labor compensation and downwardrevisions to labor productivity. CorePCE inflation now appeared to havebeen running at or above a 2 percentannual rate for more than two years,with prices accelerating over the firsthalf of 2006. Many participants notedthat the extent to which the increase incore inflation so far this year reflected

transitory or persistent influences re-mained unclear. The recent pickup inprice increases appeared to be broad-based, and a number of business con-tacts reported greater ability to passthrough higher costs. However, sometypes of price pressures were not likelyto continue to increase. The recent ac-celeration in shelter costs, which con-tributed substantially to the increase incore inflation this year, could proveshort-lived. Moreover, while energyprices had risen further in the intermeet-ing period, energy prices could welllevel out in coming quarters. Also, theanticipated moderation in aggregate de-mand implied that pressures on resourceutilization likely would not increase andcould abate to a degree going forward.Finally, inflation expectations appearedto have remained contained despite ad-verse news about prices. In light of thesefactors, most participants expressed theview that core inflation was likely todecline gradually over the next several




quarters, although appreciable upsiderisks remained.

In the Committee ’s discussion of

monetary policy for the intermeetingperiod, nearly all members favoredkeeping the target federal funds rate at51 ⁄ 4 percent at this meeting. In view of the elevated readings on costs andprices, many members thought that thedecision to keep policy unchanged atthis meeting was a close call and notedthat additional firming could well beneeded. But with economic growth hav-ing moderated some, most members an-ticipated that inflation pressures quitepossibly would ease gradually overcoming quarters and the current stanceof policy could well prove to be consis-tent with satisfactory economic perfor-mance. Under these circumstances,keeping policy unchanged at this meet-ing would allow the Committee to accu-mulate more information before judgingwhether additional firming would benecessary to foster the attainment of price stability over time. The full effectof previous increases in interest rates onactivity and prices probably had not yetbeen felt, and a pause was viewed asappropriate to limit the risks of tighten-ing too much. Following seventeen con-secutive policy firming actions, mem-bers generally saw limited risk indeferring further policy tightening thatmight prove necessary, as long as infla-tion expectations remained contained.

All members agreed that the state-ment to be released after the meetingshould convey that inflation risksremained dominant and that conse-quently keeping policy unchanged atthis meeting did not necessarily mark

the end of the tightening cycle. Theyconcurred that an indication that eco-nomic growth had moderated was ap-propriate, and a consensus favored cit-ing the same reasons for that moderationas in the June statement. Members also

agreed that the statement should bothmention factors contributing to thelikely moderation of inflation pressures

over time and reiterate the forces thatwere seen as having the potential tosustain inflation pressures.


The Federal Open Market Committeeseeks monetary and financial conditions thatwill foster price stability and promote sus-tainable growth in output. To further its long-run objectives, the Committee in the imme-diate future seeks conditions in reservemarkets consistent with maintaining the fed-eral funds rate at an average of around51 ⁄ 4 percent.

The vote encompassed approval of

the text below for inclusion in the state-ment to be released at 2:15 p.m.:The Committee judges that some inflation

risks remain. The extent and timing of anyadditional firming that may be needed toaddress these risks will depend on the evolu-tion of the outlook for both inflation andeconomic growth, as implied by incominginformation.

Votes for this action: Messrs. Bernankeand Geithner, Ms. Bies, Messrs. Guynn,Kohn, Kroszner, Ms. Pianalto, Mr.Warsh, and Ms. Yellen. Votes againstthis action: Mr. Lacker.

Mr. Lacker dissented because he be-lieved that further tightening was neededto bring inflation down more rapidlythan would be the case if the policy ratewere kept unchanged. The inflation out-look had deteriorated in the intermeet-

ing period; the recent surge in core infla-tion had persisted and appeared to bebroad-based, while the revision of thenational income and product accountsindicated a recent upswing in compensa-tion and unit labor costs. Although real




growth was likely to be somewhat lowerin coming quarters, in his view it wasunlikely to moderate by enough to bring

core inflation down. He noted, more-over, that real short-term interest rateshad fallen in the intermeeting period andwere still low relative to rates typicallyassociated with sustained expansions.

The Committee then turned to a dis-cussion of the goals and principles thatshould guide the review of its ap-proaches to policy communications thatit had recently undertaken. Participantsagreed that communication was impor-tant for democratic accountability andcould promote the effectiveness of pol-icy. Although considerable strides hadbeen made in FOMC communicationsover the past ten years or so, partici-pants generally thought that furtheradvances were possible. In that regard,consideration of how the Committee ex-pressed both its economic objectives andits assessments of expected progress to-ward those objectives was likely to beparticularly important. Conveying thedegree of uncertainty and conditionalityabout Committee expectations of futuredevelopments was seen as a major chal-lenge. It was recognized that communi-cations should support appropriate deci-sionmaking, including respect for thediversity of views that contributed togood decisions. Participants agreed tocontinue the Committee ’s review of communications issues at the FOMCmeeting in October.


Notation Vote

By notation vote completed on July 19,

2006, the Committee unanimously ap-proved the minutes of the FOMC meet-ing held on June 28 –29, 2006.


Meeting Held onSeptember 20, 2006

A meeting of the Federal Open MarketCommittee was held in the offices of theBoard of Governors of the FederalReserve System in Washington, D.C.,on Tuesday, September 20, 2006 at8:30 a.m.

Present:Mr. Bernanke, ChairmanMr. Geithner, Vice ChairmanMs. Bies

Mr. GuynnMr. KohnMr. KrosznerMr. LackerMr. MishkinMs. PianaltoMr. WarshMs. Yellen

Ms. Cumming, Mr. Hoenig, Ms. Mine-han, and Messrs. Moskow andPoole, Alternate Members of the

Federal Open Market CommitteeMessrs. Fisher, Plosser, and Stern,

Presidents of the Federal ReserveBanks of Dallas, Philadelphia, andMinneapolis, respectively

Mr. Reinhart, Secretary and EconomistMs. Danker, Deputy SecretaryMs. Smith, Assistant SecretaryMr. Skidmore, Assistant SecretaryMr. Alvarez, General CounselMr. Baxter, Deputy General CounselMs. Johnson, EconomistMr. Stockton, Economist

Messrs. Connors, Eisenbeis, Kamin,Madigan, Sniderman, Struck-meyer, Tracy, Weinberg, and Wil-cox, Associate Economists Mr.Kos, Manager, System Open Mar-ket Account

Messrs. English and Slifman, AssociateDirectors, Divisions of Monetary

Affairs and Research and Sta-tistics, respectively, Board of Governors

Mr. Reifschneider, Deputy AssociateDirector, Division of Research andStatistics, Board of Governors




Mr. Oliner, Senior Adviser, Division of Research and Statistics, Board of Governors



Mr. Durham, Section Chief, Divisionof Monetary Affairs, Board of Governors



Mr. Lyon, First Vice President, FederalReserve Bank of Minneapolis


Mr. Evans, Ms. Mester, Messrs. Rasche,Rolnick, Rudebusch, and Sellon,Senior Vice Presidents, FederalReserve Banks of Chicago, Phila-delphia, St. Louis, Minneapolis,San Francisco, and Kansas City,respectively

Ms. Mosser, Vice President, Federal

Reserve Bank of New York The Manager of the System Open

Market Account reported on recent de-velopments in foreign exchange mar-kets. There were no open market opera-tions in foreign currencies for theSystem ’s account in the period since theprevious meeting. The Manager also re-ported on developments in domestic

financial markets and on System openmarket transactions in government secu-rities and federal agency obligationsduring the period since the previousmeeting. By unanimous vote, the Com-mittee ratified these transactions.

The information reviewed at themeeting suggested that economic activ-ity continued to decelerate in recent

months. Consumer and business spend-ing held up well, and payroll employ-ment continued to rise moderately inJuly and August. However, a contrac-tion in homebuilding was damping theeconomic expansion. Core consumerprice inflation eased somewhat butnonetheless remained higher than it wasin 2005. Total consumer price inflationmoderated in August, reflecting a sub-stantial slowing of the increase in energyprices.

Nonfarm payrolls rose in August at apace similar to that recorded over theprevious four months. Employmentgains were widespread in the servicesector, and the construction industry alsoadded jobs, particularly in nonresiden-tial building. However, employment inretail trade and manufacturing fell againin August. Average hours of productionor nonsupervisory workers edged lower.The unemployment rate ticked back down to 4.7 percent in August, but itremained within the narrow band thatprevailed since the beginning of theyear.

Industrial production rose in July butedged down in August. Manufacturingoutput was unchanged in August, as asmall increase in the production of motor vehicles and parts was offset by aslight net decline in other sectors. Out-put of construction supplies, for exam-ple, dropped a little. In the high-technology sector, the production of computers rose tepidly through the sum-mer, while output of communicationsequipment turned down in August after

increasing markedly during the first half of the year. Semiconductor productionremained sluggish through August.

Consumer spending appeared to berising at a moderate pace in recentmonths. Spending on cars and light

Minutes of FOMC Meetings, September 205



trucks increased somewhat in July aftera lackluster pace in the second quarterbut apparently weakened in August.

Consumer spending on goods excludingmotor vehicles increased modestly dur-ing the four months ending in July. De-spite the sharp net increase in energyprices, real disposable income rose fur-ther, with solid gains in June and July.Increases in household wealth earlier inthe year continued to boost consumerspending. However, consumer borrow-ing costs had risen since the beginningof the year with the increase in short-term interest rates. Recent readings onconsumer sentiment were mixed. Thepersonal saving rate fell further in July.

Residential construction activity con-tinued to contract in recent months.Single-family starts fell further in Julyand August to a level well below thepeak in the third quarter of 2005. Con-struction in the multifamily sector alsofell back. Sales of both new and existingsingle-family homes fell in July andwere significantly below the peaks of last summer. A range of indicators sug-gested that housing market activity waslikely to slow further in the near term.Pending home sales dropped noticeablyin July, and mortgage rates hadincreased since the beginning of theyear. Available measures suggested thatprices of existing homes increasedthrough the second quarter at a muchlower rate than the one observed duringthe same period last year.

After strong increases in the first half of 2006, real spending on equipmentand software remained robust into thesummer against a backdrop of risingbusiness output, plentiful corporate cash

reserves, positive sentiment among ex-ecutives, and falling relative prices forhigh-tech equipment. Orders and ship-ments of communications equipmentleveled off in recent months after climb-ing earlier this year. Real computer

spending remained sluggish in July.Business purchases of light vehiclespicked up in August after a weak perfor-

mance in July, and sales of medium andheavy trucks remained brisk. Availabledata indicated that aircraft purchasesremained flat. Real spending on equip-ment outside the high-tech and transpor-tation sectors appeared to be increasingmoderately in the current quarter.

Book-value data for the manufactur-ing and trade sectors suggested thatinventory accumulation slowed onlymodestly in July from a brisk pace in thesecond quarter. Outside the motor vehi-cle sector, inventories appeared to bewell aligned with demand, and surveysindicated that firms continued to be gen-erally comfortable with their level of inventories.

Both imports and exports increased inthe second quarter, but imports increasedand exports decreased in July, wideningthe U.S. trade deficit. The growth of imports was heavily concentrated in oil,reflecting higher petroleum prices, andin non-oil industrial supplies and capitalgoods. Imports of services fell slightly.Exports of capital goods and industrialsupplies declined after considerablegains in June, but exports of telecommu-nications equipment and automotiveproducts were strong. Exports of ser-vices were unchanged in July.

Economic activity in the advancedforeign economies decelerated in thesecond quarter but remained strong. Afall in net exports held back expansionin Japan and Canada, while strongdomestic demand boosted growth in theUnited Kingdom and the euro area. In-coming data suggested that overall GDP

growth in these countries for the currentquarter was dropping a bit from thesecond-quarter pace. Recent economicindicators from the emerging-marketeconomies generally pointed to robust,but moderating, growth.




The overall price index for personalconsumption expenditures rose rela-tively steeply in July and was estimated

to have increased further in August,bringing the advance over the twelve-month period above the year-earlier rise.After July, though, crude oil and gaso-line prices dropped back significantly,and with inventories of natural gasremaining near seasonal highs, naturalgas prices fell from their spike earlierthis summer. Core consumer pricesincreased at a somewhat more subduedpace over July and August, but despitethe recent moderation, the twelve-monthchange in core prices remained abovethe increase over the comparable periodtwelve months earlier. The producerprice index for core intermediate materi-als rose significantly in July and August.Substantial upward revisions to wagesand salaries boosted compensation perhour in the first quarter. The increaselikely owed in part to the exercise of stock options and cash bonuses; otherdata that did not include such forms of compensation pointed to more moderateincreases. Hourly compensation rosefurther in the second quarter and re-corded an increase of about 7 3 ⁄ 4 percentfrom four quarters earlier. After morefavorable readings in June and July, sur-vey measures of households ’ inflationexpectations turned back up in August,but preliminary September readings sug-gested a decline.

At its August meeting, the FederalOpen Market Committee (FOMC)decided to maintain its target for thefederal funds rate at 5 1 ⁄ 4 percent. TheCommittee ’s accompanying statementindicated that economic growth had

moderated from its quite strong paceearlier in the year, partly reflecting agradual cooling of the housing marketand the lagged effects of increases ininterest rates and energy prices. Read-ings on core inflation had been elevated

in recent months, and the high levels of resource utilization and of the prices of energy and other commodities had the

potential to sustain inflation pressures.However, inflation pressures seemedlikely to moderate over time, reflectingcontained inflation expectations and thecumulative effects of monetary policyactions, as well as reduced impetus fromhigher energy and materials costs. None-theless, the Committee judged that someinflation risks remained. The extent andtiming of any additional firming thatmay be needed to address these riskswould depend on the evolution of theoutlook for both inflation and economicgrowth, as implied by incominginformation.

Investors had largely anticipated theFOMC ’s decision at its August meetingto maintain the federal funds rate at itscurrent level, and short-term ratesdropped only a bit in response. Subse-quently, data on inflation that wereweaker than expected, substantialdeclines in oil prices, and the release of the minutes of the August FOMC meet-ing led investors to revise down theirexpectations for the future path of thefederal funds rate. Over the intermeetingperiod, yields on short- and inter-mediate-term nominal Treasury securi-ties fell, while yields on inflation-indexed Treasury securities of comparable maturity increased some-what, pushing inflation compensationconsiderably lower at those horizons.Nominal forward rates further out theyield curve fell about the same amountas real forward rates, implying littlechange in far-forward inflation compen-sation. Spreads of yields on investment-

and speculative-grade corporate bondsover those on Treasury securities wereabout unchanged. Major stock price in-dexes posted solid gains. The foreignexchange value of the dollar againstother major currencies was little




changed, on net, over the intermeetingperiod.

Debt of the domestic nonfinancial

sectors in the third quarter was esti-mated to be rising at about the samepace as in second quarter. Business-sector debt was increasing briskly, as theexpansion of business loans remainedrobust. In the household sector, debtexpanded in the second quarter at a rateslightly below that in the first quarter, asmortgage debt decelerated somewhat.M2 growth remained modest in August,consistent with moderating growth of nominal income and lagged increases inopportunity cost.

The staff forecast prepared for thismeeting indicated that real GDP growthwould continue to slow into the secondhalf of 2006 before strengthening gradu-ally thereafter. By 2008, output was projected to be expanding at a pace aboutequal to the staff ’s forecast of potentialoutput growth. The staff, however, hadagain reduced its projection for potentialGDP growth, and the projected slowpace of growth over the next severalquarters was thus consistent with anopening of only a small gap in resourceutilization. In the near term, the coolingof the housing market and lower motorvehicle production were expected tohold growth back. At the same time,though, significantly lower energyprices, sustained increases in laborincome, and favorable labor market con-ditions were anticipated to supportexpansion through the end of the year.Further ahead, the lagged effects of theprevious tightening of monetary policyand waning stimulus from householdwealth and fiscal policy were antici-

pated to restrain growth, but the dragfrom the downturn in residential con-struction was expected to abate. Coreconsumer price inflation was projectedto drop back somewhat later this yearand next, reflecting the emergence of

slack in the economy and lower energycosts.

In their discussion of the economic

situation and outlook, meeting partici-pants noted that the pace of the expan-sion appeared to be continuing to mod-erate in the third quarter. In particular,activity in the housing market seemed tobe cooling considerably, which wouldcontribute to relatively subdued growthover the balance of the year. Growthwas likely to strengthen next year as thehousing correction abated, with activityalso encouraged by the recent decline inenergy prices and still-supportive finan-cial conditions. In the view of manyparticipants, economic expansion wouldprobably track close to the rate of growth of the economy ’s potential nextyear and in 2008. Many participants alsonoted that core inflation had been run-ning at an undesirably high rate.

Although most participants expectedcore inflation to decline gradually, sub-stantial uncertainty attended this out-look.

In their discussion of major sectors of the economy, meeting participants fo-cused especially on developments in thehousing market. Although the situationvaried somewhat across the nation,housing activity was continuing to con-tract in most regions. Home sales hadslowed considerably, and anecdotal re-ports suggested that more buyers werecanceling contracts for purchases. Par-ticipants noted that inventories of un-sold homes had climbed sharply in manyareas and that builders were taking anumber of measures to reduce inven-tories. Both permits for new construc-tion and housing starts had declined sig-nificantly. Available measures of homeprices suggested that appreciation hadslowed considerably but prices in mostareas were not falling, although somesellers were reported to be providing




various inducements to potential pur-chasers that reduced effective prices.

Thus far, the drop in housing market

activity appeared not to have spilledover significantly to other sectors of theeconomy. Indeed, consumer expendi-tures appeared to have been expandingmoderately over the previous fewmonths, buoyed by increases in employ-ment, personal income, and householdwealth. Contacts in some Districts re-ported that retail sales had picked up alittle most recently. Meeting participantsnoted that consumer spending going for-ward would be supported by the higherlevels of personal income indicated byrecent revisions to the national incomeand product accounts, by further gainsin employment, and by the decline inconsumer energy prices over recentmonths. However, considerable uncer-tainty was expressed regarding the ulti-mate extent of the downturn in the hous-ing sector and the degree to which theslowing in housing activity and the de-celeration in home prices would affectconsumption and other expenditures go-ing forward.

Business investment spending gener-ally was seen as expanding at a reason-ably good pace. Meeting participantsnoted broad strength in manufacturingof capital goods. Nonresidentialconstruction activity continued tostrengthen, and in the process was ab-sorbing some of the resources that wereno longer employed in homebuilding.Although some survey evidence sug-gested that some firms were trimmingcapital spending plans, participants re-ported that their business contacts gen-erally were quite positive about the eco-

nomic outlook and the strength of demand for their products. In this envi-ronment, investment spending wouldlikely continue to be supported byexpansion of overall output, strong bal-ance sheets and profits, and the ready

availability of funding from financialmarkets and institutions.

Participants noted that the financial

condition of federal and state govern-ments continued to improve. Inflows of tax revenues remained strong, consistentwith expanding personal incomes, sales,and business profits.

Economic activity abroad appeared tobe slowing a little from the unusuallyrapid rate of the first half of the year, butstill expanding at a reasonably goodpace overall. Foreign economic growthwas expected to continue, albeit perhapsat a somewhat slower pace than ex-pected by some outside forecasters, con-tributing to increases in U.S. exports.

Participants took note of the jump inlabor compensation in the first half of the year, but commented that theincrease likely reflected in part the exer-cise of stock options. Nonetheless, someparticipants viewed the recent increasein overall compensation as pointing toupside risks to inflation. Participants re-ported steady gains in employment invarious regions, roughly in line withexpansion of the labor force. Many busi-ness contacts continued to experienceshortages of labor and acceleratingwages, particularly for certain types of professionals and skilled workers and,in some areas, unskilled workers.

One participant highlighted that, inthe staff forecast, labor force growthwould begin to slow over the next fewyears as more members of the baby-boom generation retired. Even if resource utilization rates were un-changed, slower growth of the laborforce would mean that increases in em-ployment would be significantly lower,

on average, than those registered inrecent years. In that case, the slowergrowth of the labor force and employ-ment implied that the expansion of po-tential GDP could be somewhat lowerthan it had been earlier this decade.




Some participants commented, however,that they viewed potential outputgrowth, as well as expansion of actual

output, as likely to remain solid over thenext several years.

Many meeting participants empha-sized that they continued to be quiteconcerned about the outlook for infla-tion. Recent rates of core inflation, if they persisted, were seen as higher thanconsistent with price stability, and par-ticipants underscored the importance of ensuring a moderation in inflation. Tobe sure, very recent data on inflationsuggested some improvement from thesituation in the late spring, partly reflect-ing slower increases in owners ’ equiva-lent rent. Also, the considerably lowerlevel of energy prices of recent weeks, if sustained, would help reduce overall in-flation and damp increases in coreprices. Moreover, businesses would

meet more resistance to attempts to passthrough cost increases in the less robusteconomic circumstances that were likelyto prevail at least for a time. However,energy prices remained quite sensitiveto a wide range of forces, includinggeopolitical developments, and mightwell rebound. To date, the available evi-dence indicated that inflation expecta-tions remained contained —indeed, ex-pectations of price increases for the nextfew years had fallen some as energyprices declined. Nonetheless, severalparticipants worried that inflation expec-tations could rise and the Federal Re-serve’s willingness to carry through onits intention to seek price stability couldbe called into question if cost and pricepressures mounted or even if there wasno moderation in core inflation. Look-ing forward, most participants thoughtthat the most likely outcome was a re-duction in inflation pressures, but theanticipated decline was only gradual andthe uncertainties around that forecast

were skewed toward higher rather thanlower inflation rates.

In the Committee ’s discussion of

monetary policy for the intermeetingperiod, nearly all members favoredkeeping the target federal funds rate at51 ⁄ 4 percent at this meeting. Membersgenerally expected economic activity toexpand at a pace below the rate of growth of potential output in the nearterm before strengthening some overtime. Moreover, given the uncertaintiesin forecasting, significantly more slug-gish performance than anticipated couldnot be entirely ruled out. Although theuncertainties were substantial, core in-flation seemed most likely to ebb gradu-ally from its elevated level, in part ow-ing to the waning effects of pastincreases in energy prices. The antici-pated expansion of economic activity ata pace slightly below the rate of growthof the economy ’s potential would likelyalso play a role by easing pressures onresources. Members noted that certaindevelopments of late —appreciable de-clines in energy prices, some softer indi-cators of economic activity, and slightlylower readings on core inflation —pointed to a modestly better inflationoutlook and hence made the policy deci-sion today somewhat less difficult thanit was in August, when it was seen as aparticularly close call.

In view of the most recent informa-tion on the economy, members agreedthat it was appropriate for the post-meeting statement to characterize eco-nomic growth as apparently continuingto moderate. However, in view of still-high energy and other commodity pricesand elevated rates of resource utilization

as well as recent indications of a pos-sible acceleration in labor costs, mem-bers continued to see a substantial risk that inflation would not decline as an-ticipated by the Committee. Conse-quently, the Committee agreed that the




statement should again cite such risks toinflation and explicitly reference thepossibility of additional policy firming.



The vote encompassed approval of the text below for inclusion in the state-ment to be released at 2:15 p.m.:

Nonetheless, the Committee judges thatsome inflation risks remain. The extent andtiming of any additional firming that may beneeded to address these risks will depend onthe evolution of the outlook for both infla-tion and economic growth, as implied byincoming information.

Votes for this action: Messrs. Bernankeand Geithner, Ms. Bies, Messrs. Guynn,Kohn, Kroszner, and Mishkin, Ms. Pi-analto, Mr. Warsh, and Ms. Yellen.Votes against this action: Mr. Lacker.

Mr. Lacker dissented because he be-lieved that further tightening was neededto bring inflation down more rapidlythan would be the case if the policy ratewere kept unchanged. Recent data indi-cated that inflation remained above lev-els consistent with price stability. More-over, the upswing in compensation andunit labor costs in the first half of the

year indicated that inflation risks weretilted to the upside. Although realgrowth was likely to be moderate incoming quarters, in his view it was un-likely to be slow enough to bring coreinflation down.


Notation VoteBy notation vote completed on August28, 2006, the Committee unanimouslyapproved the minutes of the FOMCmeeting held on August 8, 2006.


Meeting Held onOctober 24 –25, 2006A meeting of the Federal Open MarketCommittee was held in the offices of theBoard of Governors of the FederalReserve System in Washington, D.C.,on Tuesday, October 24, 2006 at 2:00p.m. and continued on Wednesday,October 25, 2006 at 9:00 a.m.

Present:Mr. Bernanke, ChairmanMr. Geithner, Vice ChairmanMs. BiesMr. KohnMr. KrosznerMr. LackerMr. MishkinMs. PianaltoMr. WarshMs. Yellen

Mr. Hoenig, Ms. Minehan, and Messrs.Moskow and Poole, AlternateMembers of the Federal OpenMarket Committee

Messrs. Fisher, Plosser, and Stern,Presidents of the Federal ReserveBanks of Dallas, Philadelphia, andMinneapolis, respectively


Mr. Reinhart, Secretary and EconomistMs. Danker, Deputy SecretaryMs. Smith, Assistant SecretaryMr. Skidmore, Assistant SecretaryMr. Alvarez, General CounselMs. Johnson, EconomistMr. Stockton, Economist

Minutes of FOMC Meetings, October 211





Messrs. English and Slifman, AssociateDirectors, Divisions of MonetaryAffairs and Research and Statis-tics, respectively, Board of Gover-nors

Messrs. Gagnon and Wascher, DeputyAssociate Directors, Divisions of

International Finance and Re-search and Statistics, respectively,Board of Governors

Messrs. Dale and Oliner, Senior Advis-ers, Divisions of Monetary Affairsand Research and Statistics, re-spectively, Board of Governors


Mr. Small, Project Manager, Divisionof Monetary Affairs, Board of Governors.

Ms. Weinbach, Senior Economist, Divi-sion of Monetary Affairs, Board of Governors

Messrs. Kumasaka 7 and Luecke, 8

Senior Financial Analysts, Divi-sion of Monetary Affairs, Board of Governors



Mr. Evans, Ms. Mester, and Messrs.Rasche and Sellon, Senior VicePresidents, Federal Reserve Banksof Chicago, Philadelphia, St.Louis, and Kansas City, respec-tively

Ms. Mucciolo and Mr. Todd, VicePresidents, Federal Reserve Banksof New York and Minneapolis, re-spectively

Ms. McConnell, Assistant Vice Presi-dent, Federal Reserve Bank of New York


The manager of the System OpenMarket Account (SOMA) reported onrecent developments in foreign ex-

change markets. There were no openmarket operations in foreign currenciesfor the System ’s account in the periodsince the previous meeting. The Man-ager also reported on developments indomestic financial markets and onSystem open market transactions ingovernment securities and federalagency obligations during the periodsince the previous meeting. By

unanimous vote, the Committee ratifiedthese transactions.

The Manager also discussed with theCommittee the results of a recent reviewof the management of the domestic se-curity holdings of the SOMA. The Man-ager noted that in 2000, in response toreduced issuance of Treasury securities,limits were adopted on the SOMA ’sholdings of individual Treasury bonds,notes, and bills that ranged between15 percent and 35 percent of amountsoutstanding. In recent years, those limitshad created occasional operationalcomplications for the Trading Desk.Meanwhile, circumstances in the Trea-sury securities market had changed con-siderably, and the Manager noted that heintended to revert to the previous prac-

tice of applying a single 35 percent limitacross all issues.The Chairman noted that the Presi-

dent had recently signed the FinancialServices Regulatory Relief Act of 2006,which among its provisions gave the

7. Attended Tuesday ’s session only.8. Attended Wednesday ’s session only.




Federal Reserve discretion, beginningOctober 2011, both to pay interest onreserve balances and to reduce further or

eliminate reserve requirements. The Actpotentially has important implicationsfor many aspects of the Federal Re-serve ’s operations and the Chairmanasked Vincent Reinhart, Director of theDivision of Monetary Affairs, to form acommittee of Federal Reserve Systemstaff to consider these issues.

The information reviewed at theOctober meeting suggested that eco-nomic activity increased at a slow pacein the third quarter. The contraction inhome construction remained a signifi-cant drag on economic activity, andsteep reductions in motor vehicle assem-blies further weighed on growth in thethird quarter. Nonetheless, consumerspending and business investment con-tinued to hold up well. Payroll employ-

ment extended its moderate expansion,on average, through September. Sharpdeclines in energy prices reduced totalconsumer price inflation in September,but the twelve-month change in coreprices remained elevated relative toyear-earlier readings.

Nonfarm payrolls rose modestly inSeptember after a larger increase inAugust, with some of the variation ap-parently a result of seasonal factors. InSeptember, job increases in the service-producing sectors were fairly wide-spread and were again led by the health-care industry. The construction sectoralso added jobs; the lift came from gainsassociated with nonresidential buildingthat more than offset further losses inthe residential sector. Job cutbacks inthe retail trade and manufacturing sec-tors continued. Aggregate hours of pri-vate production or nonsupervisoryworkers again edged lower. The unem-ployment rate ticked down to 4.6 per-cent in August.

After having been flat in August,industrial production declined in Sep-tember, reflecting a sizable weather-

related decrease in the output of utilitiesand a fairly broad-based reduction inmanufacturing output. These declineswere partially offset by a rise in outputin the mining sector that was led bygains in crude oil extraction and inmined construction supplies, such asstone, sand, and gravel. The output of motor vehicles and parts fell in Septem-ber, as automakers continued to trimproduction of light trucks in response tobloated inventories. Output growth inthe high-technology sector softened abit in September relative to the summermonths, reflecting a smaller rise in theproduction of semiconductors. Com-puter production continued to increaseat a tepid rate, while output of commu-nications equipment turned up notice-ably after a decline in August. For thethird quarter as a whole, growth inindustrial production moderated a bitrelative to the first half of the year;stronger output in the high-technologysector and a pickup in the production of business equipment partially offset asteep contraction in the output of motorvehicles and parts and a slowdown inmining output.

Real consumer spending appeared toregain some steam in September after alackluster August. Although nominal re-tail sales fell noticeably in September,the steep drop in gasoline prices morethan accounted for the decline. Exclud-ing sales at gasoline stations, the step-upin consumer spending was the result of faster sales of motor vehicles and broad-based strength in outlays for other cate-

gories of goods, particularly apparel.Real disposable income rose moderatelyin both July and August; the pace wassomewhat above its second-quarteraverage. Consumer spending continuedto draw support from the lagged effects




of the increases in household wealthover the past two years. But interestrates on some types of household loans,

both short- and long-term, had risen thisyear, on balance. The latest readings onconsumer sentiment had been positive,perhaps reflecting the recent declines inoil prices. The personal saving rateedged up in August after a dip in July.

Residential construction activityremained weak. Single-family startsticked up in September, but new permitissuance slid further to its lowest levelin nearly five years. Construction in themultifamily sector continued to fluctu-ate within the range that has prevailedfor several years. Sales of new single-family homes edged up in August, whilesales of existing homes held steady.Pending home sales, which rose some-what in August after a noticeable dropin July, and the decline in mortgagerates since July likely indicated somesupport for housing demand in the nearterm. Still, the overhang of unsoldhomes remained historically high, andprice appreciation of existing homescontinued to slow through the secondquarter.

Real spending on equipment and soft-ware increased at a solid pace during thesummer as the fundamental influenceson such spending remained favorablefor the most part. In particular, althoughbusiness output had recently been risingat a slower rate, corporate financialreserves remained plentiful and the costof high-tech capital goods continued tofall. In the high-tech sector, real outlayson communications equipment likelystabilized in August after having surgedearlier this year, and the available data

suggested that real computer spendingpicked up in the third quarter. In thetransportation sector, business purchasesof motor vehicles were brisk of late; theEnvironmental Protection Agency ’sregulations on truck emissions that are

scheduled to take effect in 2007 likelypulled forward some spending on me-dium and heavy trucks. Outlays on air-

craft appeared to have risen somewhatin the third quarter from their extremelylow second-quarter level. Real spendingon equipment other than high-tech andtransportation items seemed to have re-tained considerable momentum in thethird quarter. Activity in the nonresiden-tial construction sector continued tostrengthen in August.

Book-value data on manufacturingand trade inventories, which were avail-able through August, suggested that therate of stockbuilding remained substan-tial in the third quarter. A major excep-tion was the motor vehicle sector, wherethe cutbacks in assemblies probablybegan to reduce the inventory overhangin that sector. Outside of the motor vehi-cle sector, inventories generallyappeared to be well aligned with de-mand. Although survey data in Septem-ber showed a noticeable rise in the shareof firms that viewed their inventories asbeing too high, a large majority re-mained comfortable with their level.

The U.S. international trade deficitwidened to another record in August,reflecting a surge in imports that morethan offset a sizable jump in exports.The sharp increase in imports wasdriven importantly by oil and naturalgas, but imports of capital goods andnon-oil industrial supplies, particularlymetals, also exhibited large gains. Im-ports of services fell back slightly. Theincrease in exports was led by capitalgoods, with aircraft, computers, semi-conductors, and other machinery allclimbing briskly. Exports of industrial

supplies and consumer goods also rosestrongly, while exports of servicesexpanded modestly.

Economic activity in the foreignindustrial economies continued to ex-pand at a relatively solid pace in the




third quarter. Investment spendingboosted the expansion in Japan. In theeuro area, data on industrial production

and retail sales were consistent with ro-bust growth in real activity. Mixed indi-cators in Canada and the United King-dom suggested that output growth inthose countries remained around recentrates. Incoming data across theemerging-market economies continuedto point to moderating, but solid, growthin economic activity in the third quarter.

Core prices for personal consumptionexpenditures were expected to haverisen in September at the same pace asin July and August, leaving the changeover the twelve months ending in Sep-tember a bit higher than the year-earlierperiod. Increases in shelter costs, whichaccounted for a significant proportion of the pickup in core inflation over the pastyear, had slowed considerably in recentmonths but remained well above therates that prevailed from 2003 to 2005.The price index for total personal con-sumption expenditures was estimated tohave fallen markedly in September be-cause of the steep decline in gasolineprices, bringing its twelve-month in-crease to a two-and-one-half-year low.Retail gasoline prices fell especially rap-idly in September as crude oil pricesdeclined and as the historically highlevel of gasoline inventories likely ledto a sharp narrowing of margins betweenretail gasoline prices and crude oilprices. The producer price index for coreintermediate materials rose only slightlyin September; the increase was well be-low its average monthly advance overthe preceding twelve months, reflectinga drop in prices of some chemicals that

have a high energy content. Averagehourly earnings increased moderately inboth August and September after alarger gain in July. Survey measures of households ’ year-ahead inflation expec-tations eased substantially in early Octo-

ber with the sharp drop in energy prices.Respondents ’ longer-term inflation ex-pectations changed little, remaining well

within the narrow range reported overthe past year.At its September meeting, the Federal

Open Market Committee (FOMC)decided to maintain its target for thefederal funds rate at 5 1 ⁄ 4 percent. TheCommittee ’s accompanying statementindicated that the moderation in eco-nomic growth had appeared to be con-tinuing, partly reflecting a cooling of thehousing market. Readings on core infla-tion had been elevated, and the highlevels of resource utilization and of theprices of energy and other commoditieshad the potential to sustain inflationpressures. However, inflation pressuresseemed likely to moderate over time,reflecting reduced impetus from energyprices, contained inflation expectations,and the cumulative effects of monetarypolicy actions and other factors restrain-ing aggregate demand. Nonetheless, theCommittee judged that some inflationrisks remained. The extent and timing of any additional firming that may beneeded to address these risks would de-pend on the evolution of the outlook forboth inflation and economic growth, asimplied by incoming information.

The FOMC ’s decision at its Septem-ber meeting to leave the target federalfunds rate unchanged had been largelyanticipated by investors, and policy ex-pectations for mid-2007 and beyondrose only slightly. Investors subse-quently revised down their expectationsfor the future path of the federal fundsrate in light of some data releases thatindicated weaker-than-expected eco-

nomic activity. However, those declineswere then rolled back in the wake of speeches by FOMC members, the re-lease of the minutes of the SeptemberFOMC meeting, and stronger-than-expected economic data. Over the inter-




meeting period, yields on nominal andinflation-indexed Treasury coupon secu-rities rose somewhat, on net. Inflation

compensation for 2007 declined mod-estly, perhaps reflecting the further dropin spot energy prices, but was largelyunchanged at longer maturities. Spreadsof investment-grade corporate bondyields over those on comparable-maturity Treasury securities held steady,while those on speculative-grade corpo-rate bonds narrowed a little. Broadequity indexes rose noticeably. Thetrade-weighted index of the foreignexchange value of the dollar versus major currencies rose somewhat on bal-ance, and the gains were spread evenlyagainst most currencies.

Debt of the domestic nonfinancialsectors in the third quarter was esti-mated to be expanding at around itssecond-quarter pace. Business debt rosemore moderately as bank lending tobusinesses slowed. In particular, bank lending to finance commercial real es-tate activity waned in August and Sep-tember, while commercial and industrialloans, which had been expanding brisklyfor many months, slowed sharply inSeptember. In the household sector, thefurther slowing of the rate of increase of house prices appeared to have continuedto weigh on the expansion of mortgagedebt in the third quarter. M2 grewslowly in the third quarter, exhibitingthe lagged effects of earlier increases inopportunity costs and the slow rise innominal spending.

The staff forecast prepared for thismeeting indicated that growth of realGDP had slowed further in the thirdquarter, reflecting both a significant drag

from the continuing contraction in resi-dential construction and a steep declinein motor vehicle assemblies. Lookingahead, a gradual reduction in the re-straining effects of the contraction inresidential investment and further solid

gains in consumer and business spend-ing were expected to lead to a pickup inGDP growth through 2007 and into

2008. These gains in spending werelikely to be supported by past declinesin energy prices and continued gains inpayroll employment and labor income.Real GDP was expected to rise at asomewhat slower rate over the next twoyears than in 2006 in part as a result of less impetus from household wealth,interest rates, and fiscal policy. Theprojected increase in real output overthe next year or so was a little below thestaff ’s estimate of potential outputgrowth, leading to a lessening in pres-sures on resource utilization. Core infla-tion was anticipated to edge down in2007 and 2008 relative to the secondhalf of this year because of thediminishing impetus from the prices of energy and other commodities andbecause of the modest easing inresource utilization.

In their discussion of the economicsituation and outlook, meeting partici-pants noted that incoming data over therelatively brief intermeeting period hadcome in broadly as anticipated. Themost recent indicators suggested thateconomic growth had probably slowedmore sharply in the third quarter thanhad been expected at the time of theSeptember meeting, but that appeared tolargely reflect the impact of temporaryinfluences. Participants continued toexpect the economy to expand at a rateclose to or a little below the economy ’slong-run sustainable pace over comingquarters. The ongoing adjustment in thehousing market was likely to depressreal activity in the near term, but this

effect was expected to wane gradually;private final domestic purchases hadheld up well in recent months andlooked set to expand at a reasonablygood pace. Although recent monthly in-flation readings indicated some slowing




of core inflation from the very rapidrates of spring and early summer, manyparticipants noted that current rates of

core inflation remained undesirablyhigh. Most participants expected coreinflation to moderate gradually, but theywere quite uncertain as to the likelypace and extent of that moderation.

In their discussion of the major sec-tors of the economy, participants notedthat housing activity was likely toremain a substantial drag on economicgrowth over the next few quarters. Manyparticipants drew some comfort fromthe most recent data, which suggestedthat the correction in the housing marketwas likely to be no more severe thanthey had previously expected and thatthe risk of an even larger contraction inthis sector had ebbed. But further adjust-ment in the housing market appearedlikely. Single-family housing permitscontinued to fall and inventories of un-sold homes remained at historically highlevels. Contacts in the building sectorsuggested that construction firms wereattempting to reduce their backlogs of unsold homes, both by cutting back sharply on new construction and by of-fering substantial price incentives. Sev-eral meeting participants noted the con-siderable strain on some small- andmedium-sized residential constructionfirms.

To date, weakness in the housing mar-ket and the associated downshift inhouse price appreciation did not seem tobe spilling over into consumer spending,which appeared to have grown at asteady pace in recent months. Retail ac-tivity in most Districts had been rela-tively robust and contacts in the retail

sector were generally upbeat about theoutlook. Several participants noted,however, that contacts within the trans-portation sector had reported that activ-ity in anticipation of the holiday shop-ping season appeared to be softer than in

previous years. Meeting participants judged that consumer expenditures go-ing forward were likely to expand at a

steady pace a little below the growth indisposable income, supported by favor-able financial conditions, continuedincreases in employment and income,and the recent decline in energy prices.Nonetheless, many participants ex-pressed concern that ongoing develop-ments in the housing market could havea more pronounced impact on consumerand other spending, especially if houseprices declined significantly.

Investment spending also appeared tobe holding up well. Meeting participantsreported that their business contactswere generally optimistic and perceivedthe economic outlook as relativelyfavorable. Several participants notedthat growth in nonresidential construc-tion remained robust and was absorbingsome of the resources displaced fromthe residential sector. The strength of corporate balance sheets and profits wasseen as likely to help maintain a solidprofile for investment spending over thenext year or so, despite some restraintfrom the slower growth in final sales.However, one participant observed thatthe uncertainty concerning the possibleseverity of the current slowing in eco-nomic growth could lead some busi-nesses to delay investment plans.

In contrast to the steady expansion of consumer and business investmentspending in recent months, several othercomponents of output and demandappeared to have been somewhat weakerthan expected. In particular, apparentlyuncomfortably high levels of inventorieswithin the auto sector had prompted a

sharp reduction in light vehicle produc-tion in the third quarter. Federal expen-ditures had been held down by surpris-ingly weak defense outlays. And stronggrowth in imports in July and August,driven in part by a surge in oil imports,




suggested that net exports probablyposed an arithmetic drag on economicgrowth in the third quarter. However,

participants judged that the recent weak-ness in these components largely re-flected temporary influences and wasnot likely to depress the pace of eco-nomic expansion going forward. Thatsaid, one participant did note the possi-bility that the recent decline in oil pricesmay in part stem from weakness in glo-bal demand.

Both data and reports from businessesindicated that the labor market remainedtight. Employment had continued to riseat a steady pace, and participants re-ported that many of their contacts wereincreasingly concerned about the diffi-culty of recruiting suitably qualifiedworkers. Shortages were most pro-nounced for certain types of profes-sional and skilled workers. These re-ports of shortages and the associatedwage pressures had not unambiguouslyshown through in the aggregate compen-sation data, which were giving contra-dictory signals about whether compen-sation increases were picking up.However, the possibility that the tight-ness of the labor market could lead to asustained increase in wage pressure wasviewed by participants as an upside risk to costs and their expectations of agradual decline in inflation. It wasnoted, though, that continuing highprofit margins provided some scope forincreased labor costs to be absorbedwithout necessarily leading to elevatedprice pressures.

All meeting participants expressedconcern about the outlook for inflation.Most participants expected core infla-

tion to edge lower, in part as the effectsof the run-up in energy prices in recentyears waned. And shelter costs were notexpected to add materially to inflationgoing forward. Moreover, moderategrowth in aggregate demand and the

associated modest easing of pressureson resource utilization should also con-tribute slightly to the slowing in core

inflation. Recent changes in core priceshad declined slightly from earlier in theyear. Nonetheless, nearly all participantsviewed the current rates of core inflationas uncomfortably high and stressed theimportance of further moderation. Theavailable measures suggested thatmedium- and long-term inflation expec-tations remained around the levels seenfor the past several years, although inthe view of some participants these ex-pectations were probably higher thanwould be consistent with their assess-ment of long-run price stability. Partici-pants were concerned that inflation ex-pectations could begin to drift upwardsif core inflation remained elevated for aprotracted period. Any such rise in infla-tion expectations and associated upwardpressure on inflation itself would likelyprove costly to reverse. Although someparticipants noted that the recent slow-ing in core inflation had helped to allaytheir fears of a further sustained increasein inflation, all participants emphasizedthat the risks around the desired down-ward path to inflation remained to theupside.

In the Committee ’s discussion of monetary policy for the intermeetingperiod, nearly all members favoredkeeping the target federal funds rate at51 ⁄ 4 percent at this meeting. The Com-mittee ’s view of the outlook for eco-nomic growth and inflation had changedlittle since the previous meeting. Nearlyall members expected that the economywould expand close to or a little belowits potential growth rate and that infla-

tion would ebb gradually from its el-evated levels. Although substantial un-certainty continued to attend thatoutlook, most members judged that thedownside risks to economic activity haddiminished a little, and likewise, some




members felt that the upside risks toinflation had declined, albeit onlyslightly. All members agreed that the

risks to achieving the anticipated reduc-tion in inflation remained of greatestconcern. Members noted that a signifi-cant amount of data would be publishedbefore the next Committee meeting inDecember, giving the Committee amplescope to refine its assessment of theeconomic outlook before judgingwhether any additional firming wasneeded to address those risks.

Members agreed that the statement tobe released after the meeting shouldcontinue to convey that inflation risksremained the dominant concern and thatadditional policy firming was possible.The Committee concurred that the state-ment should mention both that economicgrowth had slowed over the course of the year and that, going forward, theeconomy seemed likely to expand at amoderate pace. With energy prices welloff the highs reached earlier in the year,members felt that it was no longer ap-propriate to note that the high level of energy prices had the potential to sus-tain inflation pressures.





Votes for this action: Messrs. Bernankeand Geithner, Ms. Bies, Messrs. Kohn,Kroszner, and Mishkin, Ms. Pianalto,Messrs. Poole and Warsh, andMs. Yellen. Votes against this action:Mr. Lacker

Mr. Lacker dissented because he be-lieved that further tightening was neededto help ensure that core inflationdeclines to an acceptable rate in comingquarters.

The Committee then continued its dis-cussion of communication issues andconsidered the advantages and disadvan-tages of quantifying an inflation objec-tive. Participants stressed that any suchstep had to be consistent with the statu-tory objectives for monetary policy. Inthat regard, it was noted that over timeprice stability is a prerequisite for maxi-mum employment and moderate long-term interest rates. However, the pos-sible specification of a numerical priceobjective raised a number of complexand interrelated issues that required con-siderable further discussion. The Com-

mittee reached no decisions on theseissues at this meeting, and participantsagreed to continue the Committee ’sreview of communication issues at itsmeeting in January 2007.


Notation VoteBy notation vote completed on Octo-ber 10, 2006, the Committee unani-mously approved the minutes of theFOMC meeting held on September 20,2006.





Meeting Held onDecember 12, 2006

A meeting of the Federal Open MarketCommittee was held in the offices of theBoard of Governors of the FederalReserve System in Washington, D.C.,on Tuesday, December 12, 2006 at8:30 a.m.

Present:Mr. Bernanke, ChairmanMr. Geithner, Vice Chairman

Ms. BiesMr. KohnMr. KrosznerMr. LackerMr. MishkinMs. PianaltoMr. WarshMs. Yellen

Ms. Cumming, Mr. Hoenig, Ms. Mine-han, and Messrs. Moskow andPoole, Alternate Members of the

Federal Open Market CommitteeMessrs. Fisher, Plosser, and Stern,

Presidents of the Federal ReserveBanks of Dallas, Philadelphia, andMinneapolis, respectively


Mr. Reinhart, Secretary and Economist

Ms. Danker, Deputy Secretary

Ms. Smith, Assistant Secretary

Mr. Skidmore, Assistant Secretary

Mr. Alvarez, General Counsel

Mr. Baxter, Deputy General Counsel

Ms. Johnson, Economist

Mr. Stockton, Economist

Messrs. Connors, Eisenbeis, Kamin,Madigan, Sniderman, Struck-meyer, Weinberg, and Wilcox,Associate Economists


Messrs. Clouse and English, AssociateDirectors, Division of MonetaryAffairs, Board of Governors

Ms. Liang and Mr. Slifman, AssociateDirectors, Division of Researchand Statistics, Board of Governors

Messrs. Gagnon and Wascher, DeputyAssociate Directors, Divisions of International Finance and Re-search and Statistics, respectively,Board of Governors

Mr. Dale, Senior Adviser, Divisionof Monetary Affairs, Board of

GovernorsMr. Gross, Special Assistant to the

Board, Office of Board Members,Board of Governors


Mr. Driscoll, Economist, Division of Monetary Affairs, Board of Governors


Mr. Rasdall, First Vice President, Fed-eral Reserve Bank of Kansas City

Mr. Rosenblum, Executive Vice Presi-dent, Federal Reserve Bank of Dallas

Mr. Hakkio, Mses. Mester and Perel-

muter, and Messrs. Rasche,Rolnick, and Williams, SeniorVice Presidents, Federal ReserveBanks of Kansas City, Philadel-phia, New York, St. Louis, Minne-apolis, and San Francisco, respec-tively

Messrs. Kahn and Sullivan, Vice Presi-dents, Federal Reserve Banks of New York and Chicago, respec-tively

Mr. Olivei, Senior Economist, FederalReserve Bank of Boston

The Manager of the System OpenMarket Account (SOMA) reported onrecent developments in foreign ex-




change markets. There were no openmarket operations in foreign currenciesfor the System ’s account in the period

since the previous meeting. The Man-ager also reported on developments indomestic financial markets and onSystem open market transactions ingovernment securities and federalagency obligations during the periodsince the previous meeting. By unani-mous vote, the Committee ratified thesetransactions.

The information reviewed at theDecember meeting suggested that eco-nomic activity was increasing at a sub-dued rate during the second half of theyear. The contraction in homebuildingwas continuing to restrain overall activ-ity, and a step-down in motor vehicleoutput held down industrial production.In contrast, consumer spending andbusiness investment were increasing at a

moderate rate, and payroll employmentexpanded solidly through November.Additional sharp declines in energyprices reduced total consumer price in-flation in October, but the twelve-monthchange in core prices remained above itsyear-earlier level.

Indicators from the labor market weregenerally strong through November.Nonfarm payrolls increased at a solidpace, while revisions to previous esti-mates showed a larger gain, on balance,over the preceding two months. Em-ployment in manufacturing and con-struction industries fell in November,but hiring continued to be brisk in theprofessional and nonbusiness serviceindustries. Aggregate weekly hours of private production or nonsupervisoryworkers edged up. The unemploymentrate had fallen to 4.4 percent in Octoberbut ticked back up to 4.5 percent inNovember, remaining below the averageof 4.7 percent during the first three quar-ters of the year.

Industrial production (IP) declined inSeptember but rose slightly in October.In October, total industrial production

was boosted by a weather-related re-bound in electricity generation, whileoutput in the mining sector posted asizable gain as crude oil extraction inAlaska returned to full production fol-lowing pipeline repairs. Manufacturingoutput fell in both months, partly be-cause of cutbacks in motor vehicle pro-duction as vehicle makers pared el-evated inventories in light trucks.Although less pronounced than in themotor vehicle sector, the recent softnessin factory output was also apparent in anumber of other sectors. A notable ex-ception was production in high-techindustries, which posted another solidincrease in October, reflecting a pickupin computer output and a rise in semi-conductor production attributable to therollout of a new generation of micro-processors.

The National Income and ProductAccounts for the third quarter incorpo-rated an estimate by the Bureau of Eco-nomic Analysis (BEA) that gross outputof new motor vehicles increased at arapid pace in the third quarter, a sharpcontrast to a drop in the IP index formotor vehicles (including parts produc-tion) for that same period. Much of thatdifference could be attributed to theBEA’s method of inferring motor vehi-cle output from separate data on sales,net international trade, and changes ininventories rather than measuring outputdirectly using data on production. Inaddition, a large drop in the producerprice index for light trucks in the thirdquarter resulted in a jump in the BEA ’s

implied unit values of light trucks ininventory. In the staff ’s view, these mea-surement issues likely caused an over-statement of the rate of increase in realGDP in the third quarter, and the gradualunwinding of those effects would prob-

Minutes of FOMC Meetings, December 221



ably lead to an understatement of realGDP growth over the next severalquarters.

Real consumer spending increasedstrongly in October after a more modestgain in September. Although purchasesof motor vehicles weakened in October,outlays on a broad range of other cate-gories of goods, including gasoline,food, and apparel, rose briskly. Spurredby sharp declines in consumer energyprices, real disposable income alsoincreased rapidly in September andOctober. Despite the further decelera-tion in house prices, the ratio of house-hold wealth to disposable incomeremained well above its historical aver-age, buoyed by robust gains in the stock market. Readings on consumer senti-ment edged down in November andearly December but stayed above levelsseen in the summer.

Residential construction activity con-tinued to be very weak. Single-familyhousing starts dropped substantially inOctober after a slight increase in Sep-tember, while new permit issuance fellto nearly its lowest level in the past tenyears. Construction in the much-smallermultifamily sector continued to fluctu-ate within a range that had prevailed forthe past several years. Inventories of unsold homes remained high in Octoberbut were a bit lower than those in pre-ceding months. Sales of new and exist-ing homes showed tentative signs of stabilizing, although at levels well be-low their mid-2005 peaks. Price appre-ciation of existing homes continued toslow in the third quarter, and some pricemeasures showed outright declines.

Real spending on equipment and soft-

ware continued to increase at a solidpace in the third quarter, supported bystrong corporate cash positions and alow cost of capital. Early indicators forthe fourth quarter, including surveymeasures of business conditions, sug-

gested a slowdown in spending, in partreflecting the deceleration in businessoutput. Business purchases of motor

vehicles were likely to continue to beboosted by an increase in spending inadvance of the upcoming change inregulations on truck engines from theEnvironmental Protection Agency.Although spending on high-tech capitalgoods and software expanded at a robustpace in the third quarter, data on neworders and shipments in October pointedto more moderate growth in the fourthquarter. Growth of nonresidential con-struction spending appeared to haveslowed from a rapid rate earlier in theyear, responding in part to still-high va-cancy rates in the office and industrialcategories. The number of natural gasand petroleum drilling rigs in operationhad moved down, on balance, since Sep-tember in response to the moderation inenergy prices.

Unit stocks of light motor vehiclesdropped in the third quarter. Outside themotor vehicle sector, real nonfarminventories edged up, and the ratio of book-value inventories to sales for boththe manufacturing and trade sectors rosein September to levels last seen in mid-2005. Inventory imbalances appearedmore widespread than a few monthsearlier, although business surveysthrough November indicated that a largemajority of firms perceived that theircustomers ’ inventories remained at com-fortable levels.

The U.S. international trade deficitdeclined in September from a recordlevel in August. The narrowing prima-rily reflected a sharp falloff in the valueof imported oil, although non-oil im-

ports, including industrial supplies, capi-tal goods, and automotive products, alsodeclined. Export growth in Septemberwas led by aircraft and industrial sup-plies, while exports of automotive prod-ucts, consumer goods, and semiconduc-




tors fell. The trade deficit shrank a bitfurther in October.

Economic activity in the advanced

foreign economies rose at a moderaterate in the third quarter. The expansionin real activity in the euro area, althoughslower than the staff had expected, wassupported by strong domestic demand.Canada ’s real GDP growth was draggeddown by weakness in inventories andgovernment spending, while slumpingprivate consumption weighed on growthin Japan. The U.K. economy, buoyed bystrong investment, continued to expandsolidly. Recent economic indicators forthe developing economies were some-what mixed but suggested generallybrisk growth in the third quarter.

The overall price index for personalconsumption expenditures fell in Sep-tember and October, reflecting sharpdeclines in energy prices in bothmonths; the declines left the change inthat index over the twelve months end-ing in October substantially lower thanover the preceding twelve-month period.In contrast, the change in the core priceindex for personal consumption expen-ditures over the twelve months endingin October was still somewhat higherthan it was a year earlier, largely reflect-ing an acceleration in shelter costs overthat period. The producer price index forcore intermediate materials was flat inOctober. Increases in average hourlyearnings had been moderate in recentmonths, and compensation per hour inthe nonfarm business sector appeared tohave risen at a subdued rate in the thirdquarter. The estimated increase in hourlycompensation for the second quarter hadbeen revised down substantially; hourly

compensation was now estimated tohave declined in the second quarter fol-lowing the sharp gain recorded in thefirst quarter. This uneven pattern sug-gested that the surge in hourly compen-sation in the first quarter had largely

been driven by transitory factors. Hourlycompensation of private industry work-ers, as measured by the employment

cost index, increased at a somewhatfaster rate in the three months ending inSeptember than it had in precedingquarters.

At its October meeting, the FederalOpen Market Committee (FOMC) de-cided to maintain its target for the fed-eral funds rate at 5 1 ⁄ 4 percent. The Com-mittee ’s accompanying statementindicated that economic growth hadslowed over the course of the year,partly reflecting a cooling of the hous-ing market. Going forward, the econ-omy seemed likely to expand at a mod-erate pace. Readings on core inflationhad been elevated, and the high level of resource utilization had the potential tosustain inflation pressures. However, in-flation pressures seemed likely to mod-erate over time, reflecting reduced impe-tus from energy prices, containedinflation expectations, and the cumula-tive effects of monetary policy actionsand other factors restraining aggregatedemand. Nonetheless, the Committee judged that some inflation risksremained. The extent and timing of anyadditional firming that might be neededto address these risks would depend onthe evolution of the outlook for bothinflation and economic growth, as im-plied by incoming information.

Investors had largely anticipated theFOMC ’s decision at its October meetingto leave the target federal funds rateunchanged and to make only modestchanges in the accompanying policystatement. As a result, the announce-ment of the decision elicited little mar-

ket reaction, as did the subsequent pub-lication of the minutes of the meeting.However, somewhat weaker-than-antic-ipated economic data over the intermeet-ing period apparently led to some soft-ening of investors ’ perception of the




economic outlook. As a result, the likelypace and extent of policy easingexpected by investors increased, and

yields on nominal and inflation-indexedTreasury coupon securities fell. Infla-tion compensation measures were littlechanged. Spreads of investment-gradecorporate bond yields over those of comparable-maturity Treasury securitiesremained about unchanged, while thoseon speculative-grade corporate bondsrose a bit. Broad equity indexes showedsolid gains. The foreign exchange valueof the dollar against other major curren-cies fell, on net, over the intermeetingperiod, with pronounced declinesagainst the euro and sterling.

Debt of the domestic nonfinancialsectors in the third quarter expanded ataround its second-quarter pace. Busi-ness debt rose slightly more slowly thanin the second quarter, in part reflecting

reduced borrowing in the bond and com-mercial paper markets. In the householdsector, mortgage debt increased at itslowest pace since the late 1990s, reflect-ing the continued deceleration in houseprices. M2 rose more strongly in Octo-ber and November than it had in preced-ing months.

The staff forecast prepared for thismeeting indicated that growth in eco-nomic activity had slowed to a pacebelow that of the economy ’s long-runpotential in the second half of 2006,partly as a result of the ongoing adjust-ment of the housing sector. The rate of increase in real GDP was expected topick up gradually as the drag from thecontraction in residential constructiondiminished, returning towards the endof 2007 to a rate close to the staff ’sestimate of potential output growth.Core inflation was anticipated to edgedown in 2007 and 2008 in response to awaning of the effects of higher energyand import prices, a step-down in rent

increases, and the emergence of a smallamount of slack in the economy.

In their discussion of the economic

situation and outlook, meeting partici-pants noted that their assessments of themedium-term prospects for economicgrowth and inflation were little changedfrom the previous meeting. Incomingindicators of near-term activity had beenmixed, with some spending and produc-tion data pointing to a more subduedpicture than that suggested by the still-solid labor market data. Many partici-pants judged that economic activity inthe second half of this year was prob-ably a touch softer than had beenexpected at the time of the Octobermeeting. But looking over the next yearor so, participants continued to expectthe economy to expand at a rate close toor a little below the economy ’s long-runsustainable pace. The ongoing adjust-ment of the housing market was likelyto damp economic growth in the nearterm, but this effect was expected todissipate, and spending in other catego-ries looked set to expand at a reasonablygood pace. Although readings on coreinflation had improved modestly sincethe spring, price pressures were not yetviewed as convincingly on a downwardtrend. Most participants expected coreinflation to moderate slowly over time,but stressed that the risks to the inflationoutlook remained to the upside.

In their discussion of the major sec-tors of the economy, participants notedthat developments in the housing marketcontinued to weigh heavily on economicactivity. Housing starts and permits fornew construction had dropped sharplyin October, and contacts in the building

sector reported that construction firmswere continuing to cancel options onland purchases. However, there weresome indications that home sales mightbe starting to stabilize, aided by amarked slowing in the rate of increase




of house prices and a decline in mort-gage rates in recent months. Several par-ticipants also noted that a range of non-

price incentives and concessions werebeing offered by construction firms tobolster sales. But even if home pur-chases had begun to level off, residentialinvestment was likely to fall further incoming quarters as homebuilders soughtto reduce their backlogs of unsoldhomes.

Thus far, the adjustment of activityand prices in the housing market did notappear to have spilled over significantlyto consumer spending, which hadexpanded at a steady pace in recentmonths, buoyed by continued gains inemployment and by a decline in energyprices. Retailers in most Districtsexpected good sales over the holidayseason, although some contacts at pack-age delivery and trucking firms reportedthat activity was less busy than usual forthis time of year. Participants noted thedownward revision to the BEA ’s esti-mate of personal income in the secondquarter of this year, but nonetheless con-tinued to anticipate consumer expendi-tures to expand at a steady pace goingforward. Growth in consumer spendingwas expected to be supported by favor-able financial conditions and solid gainsin income from employment, outweigh-ing any damping effect of sluggishincreases in housing wealth. Still, con-siderable uncertainty regarding the ulti-mate extent of the housing market cor-rection meant that spillovers toconsumption could become more evi-dent, especially if house prices were todecline significantly.

Business investment appeared to have

decelerated recently, and surveys andorders data pointed to a relatively slowrise in equipment and software spendingover the next few quarters. Incomingdata on construction activity and em-ployment also suggested that, following

very rapid growth earlier in the year,increases in nonresidential constructionspending could be moderating consider-

ably. However, the weaker cast of someof these data contrasted with the senseof optimism among business contacts.Moreover, several participants noted thatcontacts within the construction sectorhad reported that commercial real estateactivity remained robust, encouraged bylower vacancy rates, some firming inrents, and accommodative financial con-ditions. Looking further ahead, meetingparticipants expected investment toexpand at a solid pace, supported bystrong corporate balance sheets andprofits and by the ready availability of funding from financial markets and in-stitutions, factors that were expected tobe offset only partially by restraint fromslower growth in final sales.

Recent data suggested that aggregate

demand in the rest of the world waslikely to continue to expand at a some-what faster rate than in the UnitedStates. Participants noted that thestrength of global demand and the recentdecline in the foreign exchange value of the dollar should help to supportincreases in U.S. exports.

The slowing in the pace of economicexpansion in recent quarters evidencedby the business spending data was alsoapparent in measures of industrial pro-duction. Much of the slowing in produc-tion had been concentrated in the motorvehicle sector —as producers had cut as-semblies in order to reduce high inven-tory levels —and in construction-relatedsectors. But, more recently, inventorieshad increased in a number of other sec-tors, and manufacturing production hadbeen trimmed in response. Further adjustments remained possible, suggestingan additional source of downside risk toeconomic growth in the near term. Incontrast, indicators of activity in the ser-




vices sector implied continued brisk growth.

Participants noted that recent indica-

tors provided mixed signals about thestrength of near-term activity. Solidgains in employment over recent quar-ters stood in contrast to the softer paceof economic expansion suggested by thespending and production data. That dif-ference most likely reflected lagsbetween movements in activity and em-ployment, implying that growth in em-ployment would probably slow over thenext quarter or so. Participants sug-gested that other forces might be at work as well. The growth of structural laborproductivity could be weaker than cur-rently thought, helping to reconcile thesteady growth in employment with moresubdued advances in spending and out-put. Moreover, the recent pace of activ-ity may have been stronger than thatindicated by the spending and produc-tion data. With regard to this possibility,it was noted that gross domestic incomehad grown substantially more quicklythan measured GDP over the past year.

Incoming data and reports from busi-nesses suggested that the labor marketremained tight. The unemployment ratehad moved slightly lower on balanceover recent months, and many businesscontacts reported difficulties in recruit-ing suitably qualified workers, espe-cially for certain types of professionaland skilled positions. The downward re-vision to the estimated increases in laborcompensation and unit labor costs ear-lier in the year had eased some partici-pants ’ concerns about the extent of thepressures on labor resources. Nonethe-less, the possibility that the tightness of

the labor market could lead to sustainedupward pressure on nominal labor costswas viewed as an upside risk to theexpected moderation in inflation.

All meeting participants remainedconcerned about the outlook for infla-

tion. Although readings on core infla-tion had improved modestly since thespring, nearly all participants viewed

core inflation as uncomfortably high andstressed the importance of further mod-eration. Participants expected core infla-tion to edge lower over time, in part asthe pass-through of higher prices forenergy and other commodities ran itscourse and as the moderate growth inaggregate demand likely led to a modesteasing of pressures on resources. Someparticipants also highlighted the impactthat movements in the prices of indi-vidual components of the price index,such as owners ’ equivalent rent andmedical costs, could have on near-termreadings on core inflation. More gener-ally, participants stressed there was con-siderable uncertainty as to the probablepace and extent of the moderation incore inflation and that the risks aroundthis desired downward path remained tothe upside. Moreover, participants ex-pressed concern that a failure of infla-tion to moderate as expected could en-tail significant costs if an upward drift ininflation expectations ensued.

In the Committee ’s discussion of monetary policy for the intermeetingperiod, nearly all members favoredkeeping the target federal funds rate at51 ⁄ 4 percent at this meeting. The outlook for economic growth and inflation wasthought to have changed relatively littlesince the previous meeting. Nearly allmembers felt that maintaining the cur-rent target for now was most likely tofoster moderate economic growth and agradual ebbing of core inflation from itselevated levels. Several members judgedthat the subdued tone of some incoming

indicators meant that the downside risksto economic growth in the near term hadincreased a little and become a bit morebroadly based than previously thought.Nonetheless, all members agreed thatthe risk that inflation would fail to mod-




erate as desired remained the predomi-nant concern.

In light of the data received over the

intermeeting period, members felt thatthe statement should characterize thecooling in the housing market as sub-stantial and should note that recent indi-cators had been mixed. The Committeethought that the statement should reiter-ate that the economy seemed likely toexpand at a moderate pace, while alsorecognizing the possibility that mea-sured GDP growth could be somewhatuneven in coming quarters. Membersagreed that the statement should con-tinue to convey that inflation risksremained of greatest concern and thatadditional policy firming was possible.One member did not favor language thatreferenced only the possibility of addi-tional policy firming and believed that,although the risks to inflation remainedthe predominant concern, the statementshould emphasize that policy could beadjusted in either direction dependingon the evolution of the outlook for infla-tion and economic growth.





Votes for this action: Messrs. Bernankeand Geithner, Ms. Bies, Messrs. Kohn,Kroszner, and Mishkin, Ms. Pianalto,

Messrs. Poole and Warsh, and Ms.Yellen. Votes against this action:Mr. Lacker

Mr. Lacker dissented because he be-lieved that further tightening was neededto help ensure that core inflationdeclines to an acceptable rate in comingquarters.

Meeting participants briefly reviewedsome issues regarding communications

and the next steps in their continuingdiscussion of the topic. At the nextFOMC meeting, confirmed for Janu-ary 30–31, 2007, the Committee in-tended to consider the role that eco-nomic projections and forecasts can playin communicating information.


Notation VoteBy notation vote completed on Novem-ber 14, 2006, the Committee unani-mously approved the minutes of theFOMC meeting held on October 24 –25,2006.





Litigation

During 2006, the Board of Governorswas a party in two lawsuits or appealsfiled that year and was a party in fiveother cases pending from previous years,for a total of seven cases; in 2005, theBoard had been a party in a total of thirteen cases. As of December 31,2006, five cases were pending.

Price v. Bernanke , No. 06-1569(D.D.C., filed September 8, 2006), is anemployment discrimination action.

Texas State Bank v. United States , No.05-1168 (U.S. Supreme Court, filedMarch 10, 2006), was an appeal of adecision of the Court of Appeals for theFederal Circuit dismissing an actionchallenging on constitutional groundsthe failure to pay interest on reserveaccounts held at Federal Reserve Banks.On June 19, 2006, the Supreme Courtdenied certiorari. 126 S. Ct. 2889.

Inner City Press/Community on the Move v. Board of Governors , No. 05-6162 (Second Circuit, filed November21, 2005), is an appeal of the districtcourt’s order (No. 04-CV-8337, 380 F.Supp. 2d 211 (S.D.N.Y. 2005)) granting

in part and denying in part the Board’smotion for summary judgment in a Free-dom of Information Act case. On Sep-

tember 11, 2006, the court of appealsaffirmed in part and reversed in part theruling of the district court, and re-manded the case. 463 F.3d 239.

Price v. Bernanke , No. 05-5361 (D.C.Circuit, filed September 29, 2005), wasan appeal of an order of the district court(No. 04-CV-0973, 374 F. Supp. 2d 177)dismissing an employment discrimina-tion action. On December 15, 2006, thecourt of appeals affirmed the districtcourt’s dismissal. 470 F.3d 384.

Barnes v. Greenspan , No. 04-CV-1989 (CKK) (D.D.C., filed November15, 2004), is a case under the Age Dis-crimination in Employment Act.

Jones v. Greenspan , No. 04-CV-1696(RMU) (D.D.C., filed October 4, 2004),is an employment discrimination action.On December 13, 2005, the district courtgranted in part and denied in part theBoard’s motion to dismiss and for sum-mary judgment. 402 F. Supp. 2d 294.

Artis v. Greenspan , No. 01-0400(D.D.C., filed February 22, 2001), is anemployment discrimination action. Anidentical action, No. 99-2073 (EGS)

(D.D.C., filed August 3, 1999), was con-solidated with this action on August 15,2001. Á

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