Presentation Materials (PDF)

Pages 246 to 314 of the Transcript

Appendix 1: Materials used by Messrs. Duca, Haughwout, and Cooper

Material for
FOMC Briefing on Lending and Leverage

John Duca, Andrew Haughwout, and Daniel Cooper
January 24, 2012

Class II FOMC - Restricted (FR)

Debt, Leverage and the Recovery of Consumption:
Time Series Evidence

John V. Duca and Anthony Murphy
Federal Reserve Bank of Dallas
Exhibits by J.B. Cooke and David Luttrell

Exhibit 1: Real Per Capita Consumption Weak in Current Cycle

The data are plotted as a curve with a range around 5 prior major business cycle peaks. Units are percentage point deviations of real per capita consumption expenditures from its level at a business cycle peak, running from 12 quarters before a business cycle peak to 15 quarters after a business cycle peak. A range of low and high values across all the business cycles is depicted in a gray range. As shown in the figure, in the earlier business cycles, on average consumption rose up until two quarters before the business cycle peak, then barely changed for a year following the peak. Starting about one year after a peak, consumption typically began rising, increasing roughly 10 percentage points from the peak level 15 quarters after the peak. In the most recent cycle, real per capita consumption fell below the average path three quarters after the 2007Q4 peak and continued declining until 6 quarters after the peak. Although it has recovered some, this measure of consumption has stayed well below the average and the range of the earlier recessions, not even fully recovering from the declines seen in the recession.

Exhibit 2: Personal Saving Rate Rose in Recent Cycle, Before Ebbing

The data are plotted as a curve with a range around 5 prior major business cycle peaks. Units are percentage point deviations of the personal saving rate from its level at a business cycle peak, running from 12 quarters before a business cycle peak to 15 quarters after a business cycle peak. A range of low and high values across all the business cycles is depicted in a gray range. As shown in the figure, in the earlier business cycles, the personal saving rate on average changed little before and after business cycle peaks, generally moving within a range between 2 percentage points above and 3 percentage points below its level at the business cycle peak. In the most recent cycle, the personal saving rate jumped nearly 4 percentage points above its 2007Q4 peak level and only in 2011q3 did it fall within the range seen in the prior five major business cycles. Nevertheless, in 2011Q3 it was about 2 percentage points above the average seen in those earlier episodes.

Exhibit 3: Consumer Credit Conditions Weak, But Recently Improving

The data are plotted as a curve with a range around 5 prior major business cycle peaks. Units are percentage point deviations of the credit conditions index from its level at a business cycle peak, running from 12 quarters before a business cycle peak to 15 quarters after a business cycle peak. A range of low and high values across all the business cycles is depicted in a gray range. As shown in the figure, in the earlier business cycles, on average the consumer credit conditions index rose a little from 3 years before until 4 quarters before a business cycle peak. It then typically began rising about five quarters after a business cycle, rising nearly 10 percentage points above its prior peak level about 4 years after a peak. In the most recent cycle, the consumer credit conditions index fell from the peak for about nine quarters, until falling nearly 5 percentage points below it 2007Q4 level. It only started recovering some since 10 quarters following that peak, and has nearly recovered its level at that peak.

Exhibit 4: Trends in Saving Reflect More Than Movements in Household Net Wealth

The data are plotted as two curves ranging from 1970 to 2011. Units are the ratio of net worth to income in whole numbers and the saving rate is measured as a percent of disposable personal income. The plot of the net worth to income ratio shows it fluctuating between 4 and 5 until 1996. It then rises to nearly 6 in the late 1990s, falls back to about 5 in the early 2000s. It then rises to 6.5 in the mid-2000s, before falling back to around 5 during the 2008-09 recession, and stating around that level since then. The personal saving rate fluctuated between 8 and 10 percent in the 1970s and early 1980s, before trending down to about 2 percent between 1982 and 2000. It then fluctuated between 1 and 4 percent until 2007Q4 before rising 4 percentage points and fluctuating in a range between 4 and 6 percent since then. The chart shows that the saving rate and wealth-to-income ratio move synchronously, though in opposite directions as theory would predict. But the saving rate is roughly half its level of the 1970s and early 1980s, even though the wealth-to-income ratio is roughly similar.

Exhibit 5: Components of Household Wealth

The data plotted as three curves ranging from 1970 to 2011. The units are the ratio of three categories of wealth to disposable personal income in whole numbers. One category, measures gross housing assets of households, showing that it fluctuated between 1.2 and 1.7 from 1970 to 2000, before rising to 2.5 by 2005 and then falling back to 1.4 in 2011Q3. Another curve plots illiquid financial assets, the sum of stock, bond, pension, and other illiquid financial assets as a share of disposable income. This ratio generally moves between 2 and 2.6 between 1970 and 1995. It rises to nearly 4 in 1999 and then falls to 3 by 2002. It then rose in the mid-2000s to a peak near 4 before falling during the 2008-9 recession to a level near 3. The third curve plots net liquid assets--the sum of cash-like assets minus household debt--as a share of disposable income. After staying flat at about 0.5 percent of income from 1970 to 1990, it trends down to about -0.1 in the mid-2000s, before edging up to about 0.06 percent in 2011.

Exhibit 6: Sensitivities of Consumption to Wealth

Exhibit 7: Sensitivity of Consumption to Housing Wealth Triples in Late-1990s, Retreats During the Subprime Bust

The data are plotted as a curve ranging from 1973 to 2011. Units are in dollars, showing how much annual consumption will rise in dollars per $100 rise in gross housing assets. The estimated impact was near $0.5 in the early 1970s, and rose to around $1 for most of the late 1970s to early 1990s. It rose sharply in the late 1990s to a height of nearly $3.6 by 2003. As labeled in the chart, most of this rise coincides with the rise of cash-out mortgage refinancing that enabled households to borrow more against their houses when refinancing their mortgages.

Exhibit 8: Consumer Credit Conditions Index Rises Sharply from 1970 to Mid-1990s, and Swings Since the Mid-2000s

The data are plotted as a curve ranging from 1966 to 2011. Units are normalized so that the index has an initial value of zero in 1966 and a maximum value of 1 at its peak in 2007. The index rises from 0 in 1970 to about 0.3 by 1978. As labeled in the chart, this coincides with the rise of installment credit and credit cards in much of the 1970s. It dips some and stays flat until the early 1980s. It rises strongly from about 0.25 to about .75 between 1982 and 1990. As indicated in the chart, this coincided with an era of deposit deregulation and the rise of credit scoring and screening that encouraged consumer lending. The index stopped rising in the 1990s when the new Basel bank capital standards temporarily deterred banks from expanding consumer credit. The index rose moderately between 1992 and 1995, before stabilizing until the mid-2000s, when it rose from about .9 to 1.0 by 2007. It fell back to .9 by late 2009 in the index's largest sized decline before recovering to nearly 1 by the end of 2011.

Exhibit 9: Changes in Ratio of Consumption-to-Income Tracked Well by Combined Credit and Wealth Effects

The data are plotted as three curves. Units are percentage point deviations for the level of 1995Q1. One line plots the percent deviation of the log of the consumption to non-property income ratio, which rises about 4 percentage points in the late 1990s, and then falls back to being about 2 percentage points above in the 2002-04 period. The ratio then rises to about 5.5 percent between 2005 and 2007, before falling to about (-0.5) percent by early 2009, before rising to its 1995Q1 level by the end of 2010. The estimated impact of changes in credit and wealth effects tracks these movements closely. Also shown is a third curve, the personal saving rate. This moves synchronously with the consumption-to-income ratio, but in an opposite direction as can be expected.

Exhibit 10: Impact of Credit Conditions and Wealth on the Consumption-to-Income Ratio

Exhibit 11: Consumer Debt-to-Income Ratio Stabilizes, While Mortgage Ratio Continues Declining, Though Less Rapidly of Late

The data are plotted as two curves. One series, the mortgage-debt-to-disposable income ratio, fluctuated around 40 percent between 1970 and 1985. It shifted up to 60 percent by 1990 and stayed near that level until 1995. It rose to 100 percent by 2005 before falling to nearly 95 percent by 2011. The trends suggest the ratio may fall further, though more slowly in coming quarters. The other plotted series is the consumer-debt-to-income ratio, which oscillated between 1970 and 1980 in a range between 12 and 18 percent. It then rose in the late 1980s peaking around 18 percent, before falling in the early 1990s. It then recovered in the mid-1990s and the rose to nearly 25 percent by 2000, staying near that level until 2008, when it fell to nearly 22 percent by 2011. In recent quarters it has stopped falling and ticked up, suggesting that the consumer credit deleveraging process is nearing an end.

Supplementary Exhibits

Supplementary Exhibit 1: The Consumer Credit Conditions Index Tracks the Rise of Bank Credit Card Ownership Rates

The data are plotted as a mixture of bars and a curve. The bars depict the percent of families owning bank credit cards, which rose from 15 percent in 1970 to about 70 percent by the 1995, rising further to a little over 70 percent in 2001 and staying roughly flat through 2007. The curve is a plot of the consumer credit conditions index for the same selected years, rising from about 0 in 1970 to roughly 1 by 2007. The chart shows that the consumer credit index based on installment loan policies at banks tracks the credit card ownership rate, ostensibly because financial innovations and deregulation have boosted the availability of revolving and installment credit.

Supplementary Exhibit 2: Subpar Recovery in Consumer Durables

The data are plotted as a curve with a range around 5 prior major business cycle peaks. Units are percentage point deviations of real per capita consumer durable expenditures from its level at a business cycle peak, running from 12 quarters before a business cycle peak to 15 quarters after a business cycle peak. A range of low and high values across all the business cycles is depicted in a gray range. As shown in the figure, in the earlier business cycles, on average consumer durable purchases rose up until two quarters before the business cycle peak, then edged lower for about year following the peak. Starting about one year after a peak, this component of consumption typically began rising, increasing roughly 20 percentage points from the peak level 15 quarters after the peak.

In the most recent cycle, real per capita consumer durable purchases fell below the average path three quarters after the 2007Q4 peak and continued declining until 6 quarters after the peak. Although it has recovered to its pre-recession peak, this measure of consumption has stayed well below the average and the range of the earlier recessions.

Supplementary Exhibit 3: Similar Sensitivities of Consumption to Wealth in the U.S., UK and Australia

Recent Developments in Household Debt

Andrew Haughwout
Federal Reserve Bank of New York

With contributions from
Donghoon Lee, Jonathan McCarthy, Joseph Tracy, Wilbert van der Klaauw and David Yun

Exhibit 1

Top panel
Total Household Debt: Flow of Funds Accounts and FRBNY Consumer Credit Panel

Line chart. Unit is trillions of dollars. The graphic compares the long-run trends in aggregate household debt measures from the Flow of Funds and the FRBNY Consumer Credit Panel (CCP). The Flow of Funds series begins in 1952 and shows generally increasing levels of household debt until 2008. In that year it begins a sustained decline that continued through 2011:Q3. FRBNY CCP data begins in 1999 and shows a similar pattern, although it is always lower than the Flow of Funds.

Bottom panel
Total Household Debt and Its Composition

Stacked bar chart. Unit is trillions of dollars. The graph shows the components of household debt since 1999, using the FRBNY CCP. Debts secured by residential real estate -- closed end mortgages and home equity lines of credit -- are the dominant household liability, comprising about ¾ of household debt. Mortgage debt was the driving force behind the 1999-2008 increase in household liabilities, rising by $6.7 trillion to nearly $10 trillion. Other forms of household debt increased as well, albeit by much smaller amounts. Mortgage debt began declining in 2008:Q3.

Exhibit 2

Housing Assets, Mortgage Debt, and Owners' Equity Share

Line chart. Unit is trillions of dollars except as noted. The chart shows the aggregate value of owner-occupied real estate, aggregate household mortgage liabilities and the owner's equity share in household real estate, 1999-2011:Q3. Flow of Funds data indicate that the aggregate value of owner-occupied real estate rose sharply from 1999-2006, then began to decline in 2007. Home mortgage liabilities of households rose at the same time, and started to fall somewhat later, in 2008. Owner's equity as a share of residential real estate was roughly constant at around 60% until 2006, when it began a sustained decline that took it to below 40% in 2009. Owner's equity share has hovered around 40% since 2009.

Exhibit 3

Top panel
Combined Negative and Near-negative Equity Rates in 168 Metro Areas

Heatmap of the US, with metropolitan areas shaded to indicate the share of mortgages in negative or near-negative equity in 2011:Q3. Negative and near-negative equity mortgages are somewhat concentrated in metro areas in Arizona, California, Florida and Nevada as of 2011:Q3. But rates of negative and near-negative equity in excess of 29% are found in many US metropolitan areas, including Atlanta, Denver, Memphis and Tacoma, Washington.

Bottom panel
Negative Equity Debt Overhang

Bar and line chart shows the aggregate negative equity amount in dollars, and the share of mortgages in negative or near-negative equity from 1999:Q3-2011:Q3. CoreLogic aggregate data indicate that as of 2011:Q3, aggregate mortgage balances in negative equity remain around $700 billion, down from about 800 billion in late 2009 and early 2010. Over the same period, the share of mortgage in negative or near-negative equity has fallen from about 28.5% to 27%.

Exhibit 4

Top panel
Sources of Change in Aggregate Mortgage Balances

Line chart breaks down annual changes in mortgage balances into three components, for 2000-2011.

1. Changes associated with housing transactions other than foreclosures rose from $400 billion in 2001 to about $900 billion in 2006, before falling to $200 billion in 2009-2011.
2. First-lien amortization, junior lien balance changes and refinance activity's effect on balances was a net positive contributor to balance change at about $200 billion per year from 2003-2007, then fell sharply to negative $200 billion in 2010 and 2011.
3. Charge-offs resulting from foreclosures were small until 2007, but have reduced mortgage balances by between $300 and $400 billion annually ever since.

Bottom panel
Annual Cash Flows from All Forms of Household Debt

Bar chart combines series 2 above with analogous figures for non-mortgage debt. Total cash flow from household debt averaged over $300 billion from 2002-2007. In 2008 this figure fell to $100 billion and in 2009-2011 households were paying back debts at an average rate of over $150 billion per year.

Exhibit 5

Top panel
Credit Limit and Balance: Credit Cards and HELOC

Stacked bar chart shows aggregate credit limits and balances for credit cards and HELOCs. Aggregate credit limits on revolving accounts -- credit cards and home equity lines of credit -- rose by over $2 trillion from 1999-2008. At the peak, credit card limits were $3.7 trillion; HELOC limits exceeded $1.3 trillion. In late 2008, credit limits -- especially for credit cards -- began a sustained decline and fell by over $1 trillion. In the last year, credit card limits have stabilized at around $2.7 trillion. HELOC limits are stable around $1.2 trillion. Aggregate credit card and HELOC balances have fallen over the same period, albeit more slowly than limits.

Bottom panel
Total Number of New and Closed Accounts and Inquiries

Line chart shows accounts opened and closed in the previous 12 months, as well as credit bureau inquiries in the past six months, for the period 2000:Q1-2011:Q3. Account closings rose sharply during the financial crisis, but have returned to their earlier levels of around 200 million closings per year. At the peak in 2009:Q3, over 375 million credit accounts had been closed in the previous 12 months. Openings and inquiries fell as closings rose, but in the last year have stabilized at between 155 million and 165 million per year.

Exhibit 6

Change in Debt 2010Q3-2011Q3, by Borrower Characteristics

Four panels show percentage changes in three kinds of debt balances (mortgage/HELOC, auto and credit card) and inquiries for the period 2010:Q3-2011:Q3.

Top-left panel
By Credit Score Quintile

Over the last year, borrowers in lowest 20% of the credit score distribution have seen the largest increase in inquiries for new credit, but have reduced their credit card and mortgage/HELOC balances the most as well. Auto loan balances are increasing for all borrowers except those with the lowest credit scores.

Top-right panel
By Selected States

AZ, CA, FL, NV, OH, MI, TX and rest of US are displayed. Borrowers in states hardest hit by housing cycle - AZ, CA, FL and NV - continue to reduce debts of all types. Single exception is auto debt in Florida, which rose slightly over the last year. Excepting Florida, inquiries are growing more slowly in these states than in balance of US.

Bottom-left panel
By Borrower Age

Younger borrowers reduced their debts, especially mortgage/HELOC and credit cards. Older borrowers are increasing their real estate and auto loan indebtedness, but continue to reduce credit card balances. Inquiries are rising across the age distribution

Bottom-right panel
By Presence of Housing Debt in 2010Q3

Borrowers with housing debt on their credit reports as of 2011Q3:

• Have reductions in credit card debt roughly equivalent to those without housing debt.
• Increased auto debt by less than 1%, compared with over 5% for those without housing debt.
• Saw a 5% decline in inquiries, compared with a 10% increase in inquiries among those without housing debt.

Household Deleveraging and Consumption: Evidence using Aggregate and Household-Level Data

Daniel Cooper
Federal Reserve Bank of Boston
Exhibits by Kevin Todd

Exhibit 1

Top panel
Deleveraging Defined

• Household balance sheet debt adjustment that lowers consumption.
• Consumption decline exceeds what would be predicted based on current and past changes in income and asset values.
  • Assumes a previous phase of leveraging where households increased consumption through debt accumulation.
  • Leveraging based on expectations about future returns to housing.
• Heavily indebted households decided that debt burdens were inconsistent with downwardly revised price expectations.

Deleveraging is not:

• Mortgage charge-offs due to foreclosure
• Debt reorganization to take advantage of lower interest rates
• Debt repayment through mortgage amortization
• Mortgage lenders forcing households to repay debt when house prices fall.

Bottom panel
Overview of Presentation

• Analyze deleveraging at the aggregate and household level.
• Household-level data come from the Panel Study of Income Dynamics.
• Find little evidence of deleveraging in the micro or macro data.
• Movements in consumption prior to, during, and following the Great Recession are driven by employment, income, and net worth.

Exhibit 2

Top panel
Growth in Consumption, Income, and Debt

Year-over-year percentage changes in consumption, income, and debt, 2003 through 2006 and the average growth rate for 2003-to-2006. Data are plotted as a bar chart. Units are year-over-year percentage growth rates. The chart displays bars for income growth, consumption growth, and debt growth by year and the average growth rate for these series. Debt growth exceeds 6.0 percent in every year and has an average growth rate of about 8.5 percent. Consumption growth remains roughly constant across all years and averages a little more than 3.0 percent. Income growth fluctuates between 0.6 percent and 4.6 percent, and has an overall average growth rate of just above 3.0 percent--almost exactly matching the average consumption growth rate.

Bottom panel
Debt-to-Income Ratio

Debt to income ratio, first quarter 1995 through the third quarter of 2011. Data are plotted as a line graph. Units are ratio points. Income is disposable personal income. The chart shows a steady upward trend in the debt-to-income ratio starting in the first quarter of 1995, when the ratio was a bit below 0.9, and continuing until just before the recession that began in the fourth quarter of 2007. The debt-to-income ratio peaked at around 1.35 and then dropped noticeably at the very beginning of the recession before rebounding slightly and remaining steady at a little less than 1.3 through late 2009. The ratio has declined steadily since late 2009 to a level of 1.2 as of the third quarter of 2011.

Exhibit 3
Consumption, Income, and Net Worth

Top panel
Current versus Previous Business Cycles

Consumption, disposable income, and net worth, sixteen quarters before and after business cycle peaks. Data are plotted as line graphs. The chart compares the performance of consumption, disposable income, and net worth of U.S. households before, during, and after the 2007 business cycle peak (solid lines) with the average performance of these three measures during the previous 5 major business cycles, which occurred in 1970, 1974, 1981-82, 1990, and 2001 (dashed lines). The short-lived 1980 recession is excluded from the analysis. Consumption, disposable income and net worth in the prior cycles were relatively flat for roughly two quarters after the business cycle peak but then quickly resumed growing at a very similar rate as they were prior to the peak. In the most recent cycle, disposable income, consumption and net worth were higher relative to their averages in the quarters preceding the business cycle peak. After the peak, disposable income grew for two quarters, then fell noticeably before starting to grow again, but a sluggish pace, about eight quarters after the business cycle peak. Consumption in the most recent cycle has followed a path similar to that of income, although it was relatively flat immediately following the business cycle peak, while income rose. Since the peak consumption has remained somewhat below income, although the gap has been closing slightly in recent quarters. Both series are well below their post-peak averages in prior business cycles. Net worth in the most recent cycle peaked prior to the business cycle peak, and fell by more than 20 percent in the five quarters immediately following the peak. Net worth has rebounded a little since then, but remains very weak even when compared with consumption and income in the current cycle.

Bottom panel
Consumption versus Net Worth over Time

Consumption-to-income and net worth-to-income ratios, quarterly, from the first quarter of 1980 to the third quarter of 2011. Data are presented as a scatter plot. The log of net worth divided by income is plotted on the x-axis and the log of consumption divided by income is plotted on the y-axis. Units on both axes are logarithmic points. The plot includes a line showing predicted values based on a regression of log consumption-to-income on log net worth-to-income using data from 1996Q1 to 2007Q4. There was a shift in the relationship between consumption-to-income and net worth-to-income around the beginning of 1996. The more recent points are clustered around a flatter sloped line--relative to the pre-1996 data points--indicating that consumption has perhaps become less sensitive to net worth. The plot further shows that the points depicting the relationship between net worth-to-income and consumption-to-income since the second quarter of 2009 are roughly in line with the relationship between these two series from 1996 to 2007.

Exhibit 4
Panel Study of Income Dynamics

Top panel
Key Characteristics

• Began in 1968.
• Follows households and their offspring annually through 1997; biennially there-after.
• Most recent waves contain between 7,000 and 8,000 households.
• More comprehensive consumption data (in addition to food consumption) starting in 1999.
  • Designed to bring coverage more in line with the Consumer Expenditure Survey.
  • Added in 1999: health care, mortgage or rent payments, housing insurance, transportation, child care, schooling, recurring automobile costs, and utilities.
  • Added in 2005: home furnishings, recreation, clothing, and vacations.
• Most recent data are for 2009.

Bottom panel
Selected Summary Statistics

Exhibit 5

Top panel
Change in Households' Consumption-to-Income and Debt-to-Income Ratios, 2007 to 2009

Bottom panel
Empirical Specification

$$$$ \mathrm{Equation\ 1}: \Delta C_t = \alpha_0 + \alpha_1\Delta Y_t + \alpha_2\Delta{NW}_t + \alpha_3{age}_t + \alpha_4{age}_t^2 + \alpha_5{age}_t^3 + \alpha_6{famsize}_t + \alpha_7{year}_t + \epsilon_t $$$$

Exhibit 6
Impact of Growth in Income and Net Worth on Consumption

Top panel
Baseline Estimates

Middle panel
Results by Homeownership Status

Bottom panel
Results based on Debt Holdings

Exhibit 7

Top panel
Household Net Worth and Liabilities

Total debt-to-income ratio and net worth-to-income ratios from the first quarter of 1975 through the third quarter of 2011. Data are presented as a line graph. Time is on the x-axis. Total debt-to-income is on the left axis and net worth-to-income is on the right axis. Units are ratio points. The chart shows that the debt-to-income ratio fluctuated between 0.6 and 0.7 from 1975-to-1985 and then grew steadily to about 1.0 in the first quarter of 2000. The ratio then surged to a high of about 1.35 in the third quarter of 2007. The series then drops and is subsequently mostly flat at around 1.3 during the recent recession and declines persistently in the recession's aftermath, dropping to about 1.2 in the third quarter of 2011. Net-worth-to-income fluctuates more than debt-to-income over the sample horizon, but overall exhibits a similar upward trend through 2007. In particular, net worth-to-income is about 4.4 or 4.5 from 1975 until the first quarter of 1985, before rising to around 4.7 by 1995. The ratio subsequently skyrockets to about 6.0 by late 1999, and then plummets to about 5.0 by 2002 before rising back to about 6.5 in the second quarter of 2007. Net worth-to-income subsequently sank to 4.7 by the first quarter of 2009, and has recovered only a bit to a level of 5.0 by the third quarter of 2011. As of the third quarter of 2011, debt-to-income remains well above net worth-to-income especially by historical standards--historically the two ratios moved together over time.

Bottom panel
Consumption Growth Estimates
Households with Debt Declines

Exhibit 8
Summary

• Little empirical evidence during and/or following the Great Recession that factors other than ongoing developments in income and net worth had an impact on consumption.
• Even if pent-up demand for deleveraging exists, the risks to consumption growth would be limited.
• The standard relationship linking consumption to income and net worth should continue to be a reasonable predictor of household spending.

Appendix 2: Materials used by Ms. Yellen

Consensus Statement on Longer-Run Goals and Policy Strategy

January 24, 2012

Class I FOMC - Restricted Controlled (FR)

The FOMC's Longer-Run Goals and Policy Strategy

Following careful deliberations at its recent meetings, the Federal Open Market Committee (FOMC) has reached broad agreement on the following principles regarding its longer-run goals and monetary policy strategy. The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January.

1. The FOMC is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decision-making by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.
2. Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee's policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee's goals.
3. The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances.
4. The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants' estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC's Summary of Economic Projections. For example, in the most recent projections, FOMC participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 6.0 percent, roughly unchanged from last January but substantially higher than the corresponding interval several years earlier.
5. In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate.

Appendix 3: Materials used by Mr. Sack

Material for
FOMC Presentation: Financial Market Developments and Desk Operations

Brian Sack
January 24, 2012

Class II FOMC - Restricted FR

Exhibit 1

Top-left panel
(1)

Title: Euro Area Excess Liquidity
Series: Euro area excess reserves plus deposit facility balance at ECB, excluding fine-tuning operation days
Horizon: April 1, 2010 - January 20, 2012
Description: The ECB's recent operations, most notably the 3-year longer-term refinancing operation (LTRO), have provided the euro area with considerable excess euro liquidity.

Top-right panel
(2)

Title: Maturing European Bank Debt
Series: Maturing longer-term unsecured and secured bank debt by month in 2012 for 16 large banks in the euro area, UK, and Switzerland
Horizon: January 2012 - December 2012
Description: The amount of longer-term bank debt coming due for European banks over 2012 is quite sizable and relatively evenly distributed throughout the year. The liquidity provided by the ECB may aid in helping banks replace those funds.

Middle-left panel
(3)

Title: Dollar Funding Spreads to OIS (3-Month Rates)
Series: Euro Libor rate swapped to dollars spread to OIS, 3-month forward dollar Libor spread to OIS, spot 3-month dollar Libor
Horizon: April 1, 2010 - January 20, 2012
Description: Spreads indicating current and future funding stresses have decreased moderately, but remain somewhat elevated.

Middle-right panel
(4)

Title: Euro Area Sovereign Yields (2-Year Rates)
Series: Spain 2-year yield, Italy 2-year yield
Horizon: April 1, 2010 - January 20, 2012
Description: Shorter-term sovereign debt yields have decreased significantly since December, perhaps in part aided by bank buying of sovereign debt to pledge to the ECB for funding via the 3-year LTRO.

Bottom-left panel
(5)

Title: ECB Securities Markets Program Weekly Purchase Amounts
Series: ECB Securities Markets Program weekly purchase amounts
Horizon: August 5, 2011 - January 13, 2012
Description: The ECB has maintained a relatively slow pace of sovereign debt purchases in recent weeks.

Bottom-right panel
(6)

Title: Price of Greek Bond Maturing on 05/20/13
Series: Price of 10-year Greek note issued January 9, 2003 and maturing May 20, 2013, with 4.6% coupon
Horizon: January 1, 2011 - January 20, 2012
Description: Greek debt is currently trading at around 30 cents on the dollar, as negotiations over debt restructuring continue.

Exhibit 2

Top-left panel
(7)

Title: Equity Prices and Volatility
Series: S&P 500 indexed to 4/1/2010, VIX Index
Horizon: April 1, 2010 - January 20, 2012
Description: Domestic equity prices increased substantially in the intermeeting period, while implied volatility has continued to decrease.

Top-right panel
(8)

Title: Correlation of S&P 500 with Euro
Series: 30-day rolling correlation of daily percent changes in S&P 500 index and euro-dollar exchange rate
Horizon: April 1, 2010 - January 20, 2012
Description: The correlation of S&P 500 returns with the euro-dollar exchange rate has decreased off its highs but remains elevated, suggesting that developments in Europe will continue to be an important driver of U.S. asset prices.

Middle-left panel
(9)

Title: Corporate Bond Spreads to Treasury
Series: Bank of America-Merrill Lynch high-yield bond index spread to Treasury and investment grade index spread to Treasury
Horizon: April 1, 2010 - January 20, 2012
Description: Yield spreads on corporate bonds have turned down following their rise in the second half of last year.

Middle-right panel
(10)

Title: Treasury Yields
Series: 2-year, 5-year, and 10-year Treasury yields
Horizon: April 1, 2010 - January 20, 2012
Description: Despite the general shift into risky assets, U.S. Treasury yields remained at very low levels and were roughly unchanged over the intermeeting period.

Bottom-left panel
(11)

Title: Implied Federal Funds Rate Path
Series: Risk neutral implied federal funds rate path derived from federal funds futures and eurodollar futures
Horizon: January 20, 2012 - January 1, 2015
Description: The expected path of the federal funds rate remains roughly flat through 2013 and only begins to turn gradually higher in 2014. This expected path decreased very slightly in the intermeeting period.

Bottom-right panel
(12)

Title: Estimated Effect of SOMA Balance Sheet on Term Premium
Series: Estimated effect of SOMA balance sheet on term premium embedded in 10-year Treasury yield, as estimated by Min Wei and Canlin Li in 2012 model developed at Federal Reserve Board of Governors
Horizon: December 31, 2009 - December 31, 2016
Description: The balance sheet policies of the FOMC appear to be exerting downward pressure on longer-term yields through a term premium effect, as Board staff estimate that the Federal Reserve's asset holdings are keeping the term premium embedded in the 10-year Treasury yield about 65 basis points lower than it would be if the balance sheet were of normal size and composition.

Exhibit 3

Top-left panel
(13)

Title: Probability of Additional Policy Actions
Series: Federal Reserve Bank of New York Survey additional policy action responses by primary dealers
Horizon: Current meeting & 1 year
Description: Participants placed a high probability of additional easing over the next year, particularly in the form of further asset purchases, guidance on the size of the SOMA portfolio, or guidance on the target federal funds rate. For the current meeting, participants placed a roughly 70 percent probability to a change in rate guidance, and less than 50 percent probability to the other easing options listed here.

Top-right panel
(14)

Title: Probability Distribution of First Increase in Federal Funds Target Rate
Series: Average probabilities of first increase in federal funds target rate by half-year, as assessed in Federal Reserve Bank of New York Survey of primary dealers
Horizon: 2012:H1 to 2016 or later
Description: Dealer survey respondents place sizable odds on policy remaining on hold for a long period, with a 95 percent probability that the first increase will take place after mid-2013. This indicates a shift out in their estimates for this lift-off.

Middle-left panel
(15)

Title: SOMA Portfolio Holdings
Series: Actual past SOMA portfolio holdings and median expected future holdings as indicated in the January Federal Reserve Bank of New York Survey and November Survey
Horizon: January 1, 2007 - January 1, 2017
Description: Dealer survey respondents have increased their future estimates for SOMA portfolio holdings, as the median forecast now includes an increase in SOMA size.

Middle-right panel
(16)

Title: MBS Option-Adjusted Spread to Treasury
Series: FNMA 30-year current coupon MBS option-adjusted spread to Treasury securities, spliced with 3.5% coupon option-adjusted spread to Treasury when current coupon rate is below 3.5%
Horizon: March 1, 2011 - January 20, 2012
Description: The option-adjusted MBS spread to Treasury securities decreased in the intermeeting period.

Bottom-left panel
(17)

Title: Annual Treasury Remittances
Series: Actual past annual Federal Reserve remittances to U.S. Treasury and projected future remittances
Horizon: 2002 - 2020
Description: The elevated size of the SOMA portfolio continues to produce a substantial financial return, with a preliminary estimate of a $77 billion remittance to Treasury for 2011. The strong pace of remittance is expected to continue for several years, but this path is dependent on the course of interest rates.

Bottom-right panel
(18) SOMA Operations Since September 2011 FOMC Meeting

Appendix 4: Materials used by Messrs. Engen, Reeve, and Gallin

Material for
Staff Presentation on the Economic Outlook

January 24-25, 2012

Class II FOMC - Restricted (FR)

Exhibit 1
Recent Indicators

Top-left panel
Change in Private Payroll Employment

[Inset:] Unemployment Rate

Top-right panel
Manufacturing IP

[Inset]

Middle-left panel
Real Personal Consumption Expenditures

Quarterly averages

[Inset]

Middle-right panel
Nondefense Capital Goods Ex. Aircraft

[Inset] E&S Spending

Bottom-left panel
Real Federal Government Purchases

Bottom-right panel
Real GDP

Exhibit 2
Medium-term Forecast

Top-left panel
Real GDP

Top-right panel
Unemployment Rate

Middle-left panel
Factors Restraining Recovery

• European situation:
  • Higher value of the dollar.
  • Lower exports.
  • Increased uncertainty.
• Difficult access to credit.
• Depressed housing market.

Middle-right panel
Reserve Bank Inquiries of Their District Business Contacts

Bottom-left panel
Fiscal Impetus: Federal Government

Bottom-right panel
Real State and Local Government Purchases

Exhibit 3
Some Risks Around the Forecast

Top-left panel
Faster Snapback

• Financial recovery may be further along than assumed.
• Recent improvement in labor and production indicators may signal more sustained recovery.
• More pent-up demand for durables and business equipment is released.

Top-right panel
Lost Decade

• Improvements in financial conditions are slower to materialize.
• Consumer and business confidence remains subdued.
• Persistently slow spending has negative supply-side effects.

Middle-left panel
Real GDP

Middle-right panel
Unemployment Rate

Bottom-left panel
Core PCE Prices

Bottom-right panel
Federal Funds Rate

Exhibit 4
Inflation Projection

Top-left panel
PCE Prices

Top-right panel
PCE Energy Prices

Middle-left panel
Core Nonfuel Import Prices

Middle-right panel
Inflation Expectations

Bottom-left panel
Compensation per Hour*

Bottom-right panel
PCE Price Projection

Exhibit 5
European Developments

Top-left panel
Effects of ECB Operations

Top-right panel
Three-month Dollar Funding Rate

Upper-middle-left panel
Two-year Sovereign Bond Spreads*

Upper-middle-right panel
10-year Sovereign Bond Spreads*

Lower-middle panel
Recent Developments

• Little concrete progress on increasing financial backstops.
  • - Permanent facility, ESM, may not add to total funds and will take time to implement.
  • - Leveraged EFSF not operational.
  • - S&P's downgrade of EFSF may limit effectiveness.
• With insufficient firewalls, any number of shocks may cause financial conditions to deteriorate.
  • - Efforts to restructure Greek debt may not prevent disorderly default.

Bottom-left panel
Euro-area Equity Prices

Bottom-right panel
Five-year BBB Nonfinancial Corporate Spreads*

Exhibit 6
Outlook for Growth in the Advanced Foreign Economies

Top panel
Real GDP*

Middle-left panel
Industrial Production

Middle-right panel
Euro Area

Bottom-left panel
Structural Budget Deficits

Bottom-right panel
Industrial Production

Exhibit 7
Outlook for Growth in the Emerging Market Economies

Top panel
Real GDP*

Middle-left panel
China

Middle-center panel
EME Exports

Middle-right panel
EME Manufacturing PMI

Bottom-left panel
Flows to EME Dedicated Funds*

Bottom-right panel
EME Exchange Rates

Exhibit 8
Inflation and Monetary Policy

Top-left panel
Commodity Prices

Top-right panel
Commodity Price Outlook

Middle-left panel
AFE Consumer Prices

Middle-right panel
EME Consumer Prices

Bottom-left panel
Consumer Price Outlook

Bottom-right panel
Monetary Policy

• In AFEs, monetary policy will remain accommodative.
  • - Continued extraordinary liquidity provision by ECB.
  • - Expansion of asset purchases by BoE and BoJ.
• In EMEs, monetary policy will likely be eased somewhat.
  • - Though in some cases, continued concerns about inflation may limit scope for easing.

Exhibit 9
U.S. External Sector

Top-left panel
Total Foreign Real GDP

Top-right panel
Broad Real Dollar

Middle-left panel
Real Exports

Middle-right panel
Real Imports

Bottom-left panel
Net Exports

Bottom-right panel
Current Account Balance

Exhibit 10
Baseline Financial Conditions

Top-left panel
Long-term Interest Rates

Top-right panel
Equity Prices

Middle-left panel
House Price Index

Middle-right panel
Composite Index of Changes in Standards for Bank Loans

Bottom-left panel
Nonfinancial Sector Debt

Bottom-right panel
Financial Market Stress

Exhibit 11
Conditions of Large Banking Institutions

Top-left panel
5-year CDS Spreads

Top-right panel
Stock Prices

Middle panel
Market Equity Ratios

Bottom-left panel
Conditional Value at Risk (CoVar)

CoVaR is an estimate of an extreme loss to the financial system that would be expected to occur if a particular firm suffered from extreme distress.

Bottom-right panel
CoVaR

Exhibit 12
Risks to Financial Institutions

Top-left panel
Alternative Scenario: Severe Euro Stress

• For Europe:
  • - Soaring borrowing costs, plunging confidence, and a precipitous decline in GDP.
• For the U.S.:
  • - A sharp contraction of GDP.
  • - An increase in the unemployment rate to about 11 3/4 percent by the end of 2013.

Top-right panel
Effects on Banks

• Banks would experience substantial losses and weaker revenues.
• Aggregate ratio of Tier 1 common equity to risk weighted assets would fall sharply.
• Investors could doubt the solvency of large financial institutions.

Middle panel
Liabilities Structure of Large Bank Holding Companies

Bottom-left panel
Dealers Reporting Increased Attention to Exposure to Other Dealers

Bottom-right panel
Vulnerabilities

• Multiple legal entities and different regulatory regimes pose significant challenges for policymakers.
• Differences in bankruptcy and resolution regimes add to uncertainty.
• Nonbank financial firms could be harmed.

Exhibit 13 (Last)
Money Market Funds and Policy Initiatives

Top-left panel
Taxable Institutional Money Market Fund Assets

Top-right panel
Prime Money Fund Holdings*

Middle-left panel
Maturity Distribution of Prime MMF European Holdings

Middle-right panel
Exposures of Prime U.S. MMFs to France

Bottom panel
Policy Initiatives

• The SEC will issue a proposed rule aimed at reducing the susceptibility of money funds to runs.
  • - Rules are expected to include a capital buffer and perhaps holdback provisions.
• Task Force on triparty repo reform is expected to issue a final report soon.
  • - The industry has not eliminated the market's reliance on intraday credit from clearing banks.
• The FSOC has issued a proposed rule for the designation of systemically important nonbank financial institutions.
• The Comprehensive Capital Analysis and Review is underway.

Appendix 5: Materials used by Ms. Zickler

Material for Briefing on
FOMC Participants' Economic and Policy Projections

Joyce Zickler
January 24, 2012

Class I FOMC - Restricted Controlled (FR)

Exhibit 1. Central tendencies and ranges of economic projections, 2012-14 and over the longer run

Change in real GDP

Unemployment rate

PCE inflation

Core PCE inflation

Exhibit 2. Overview of FOMC participants' assessments of appropriate monetary policy

Appropriate Timing of Policy Firming

Appropriate Pace of Policy Firming

Exhibit 3. Scatter Plot of Unemployment and PCE Inflation Projections in the Liftoff Year

Exhibit 4. Economic projections for 2012-2014 and over the longer run (percent)

Change in real GDP

Unemployment rate

PCE inflation

Core PCE inflation

Exhibit 5. Uncertainty and risks in economic projections

Histograms, eight panels.

Uncertainty about GDP growth

Uncertainty about the unemployment rate

Uncertainty about PCE inflation

Uncertainty about core PCE inflation

Risks to GDP growth

Risks to the unemployment rate

Risks to PCE inflation

Risks to core PCE inflation

Appendix 6: Materials used by Mr. English

Material for
FOMC Briefing on Monetary Policy Alternatives

Bill English
January 24-25, 2012

Class I FOMC - Restricted (FR)

December FOMC Statement

• 1. Information received since the Federal Open Market Committee met in November suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth. While indicators point to some improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but business fixed investment appears to be increasing less rapidly and the housing sector remains depressed. Inflation has moderated since earlier in the year, and longer-term inflation expectations have remained stable.
• 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
• 3. To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
• 4. The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.
• 5. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability.

[Note: In the January FOMC Statement Alternatives, emphasis (strike-through) indicates strike-through text in the original document, and strong emphasis (bold) indicates bold red underlined text in the original document.]

January FOMC Statement--Alternative A

• 1. Information received since the Federal Open Market Committee met in November December suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth. While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to be increasing less rapidly has slowed, and the housing sector remains depressed. Inflation has moderated since earlier in the year been subdued in recent months, and longer-term inflation expectations have remained stable.
• 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expects a moderate that, absent further policy action, the pace of economic growth would remain modest over coming quarters and consequently anticipates that the unemployment rate will would decline only very gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that over coming quarters, inflation will settle, run at levels [ at or ] below those consistent with the Committee's dual mandate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
• 3. To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to purchase up to an additional $500 billion of agency mortgage-backed securities by the end of January 2013. In addition, the Committee intends to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is also maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. These programs should put downward pressure on longer-term interest rates, provide support to mortgage markets, and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
  OR
  
• 3′. To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to purchase additional agency mortgage-backed securities, initially at a rate of $40 billion per month. The Committee will adjust the pace of purchases and determine the ultimate size of the program in light of the evolving economic outlook and as needed to foster its objectives. In addition, the Committee intends to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is also maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. These programs should put downward pressure on longer-term interest rates, provide support to mortgage markets, and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
• 4. The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently now anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant this exceptionally low levels range for the federal funds rate at least through mid-2013 will be appropriate at least as long as the unemployment rate exceeds [ 6 1/2 ] percent, the inflation rate (as measured by the price index for personal consumption expenditures) at a horizon of one to two years is projected to be either below or close to [ 2 ] percent, and longer-term inflation expectations continue to be well anchored. On the basis of currently available information, the Committee expects these conditions to prevail at least through 2014.
• 5. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as needed to promote a stronger economic recovery in a context of price stability.

January FOMC Statement--Alternative B

• 1. Information received since the Federal Open Market Committee met in November December suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth. While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to be increasing less rapidly has slowed, and the housing sector remains depressed. Inflation has moderated since earlier in the year been subdued in recent months, and longer-term inflation expectations have remained stable.
• 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expects a moderate pace of economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually make only slow progress toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that over coming quarters, inflation will settle, run at levels at or below those consistent with the Committee's dual mandate. [ However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations. ]
• 3. To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee intends to maintain a highly accommodative stance for monetary policy. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant this exceptionally low levels range for the federal funds rate at least through mid-2013 will be appropriate at least as long as the unemployment rate exceeds [ 7 ] percent, the inflation rate (as measured by the price index for personal consumption expenditures) at a horizon of one to two years is projected to be either below or close to [ 2 ] percent, and longer-term inflation expectations continue to be well anchored. On the basis of currently available information, the Committee expects these conditions to prevail at least through late 2014.
  OR
  
• 3′. To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013 late 2014.
• 4. The Committee also decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.
• 5. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability.

January FOMC Statement--Alternative C

• 1. Information received since the Federal Open Market Committee met in November December suggests that the economic has been expanding moderately, notwithstanding some apparent slowing in global growth recovery has strengthened somewhat. While indicators point to some improvement in overall labor market conditions, Although the unemployment rate remains elevated, it has declined recently, and employment continues to increase. Household spending has continued to advanced further, but and business fixed investment appears to be increasing less rapidly and has continued to expand, but the housing sector remains depressed. Inflation has moderated since earlier in the somewhat since the first half of last year, and longer-term inflation expectations have remained stable.
• 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expects a moderate firming in the pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that over coming quarters, inflation will settle, run at levels at or below those consistent with the Committee's dual mandate. However, The Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
• 3. To support a stronger the economic recovery and to help while ensuring that inflation, over time, is at levels that are consistent with the dual mandate, the Committee decided today to continue its reduce by half the size of the program to extend the average maturity of its holdings of securities as announced in September and to complete the program by the end of February. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
• 4. The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently now anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013 for an extended period.
• 5. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of its objectives of maximum employment and price stability.

December 2011 Directive

The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to continue the maturity extension program it began in September to purchase, by the end of June 2012, Treasury securities with remaining maturities of approximately 6 years to 30 years with a total face value of $400 billion, and to sell Treasury securities with remaining maturities of 3 years or less with a total face value of $400 billion. The Committee also directs the Desk to maintain its existing policies of rolling over maturing Treasury securities into new issues and of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability.

[Note: In the January 2012 Directive Alternatives, emphasis (strike-through) indicates strike-through text in the original document, and strong emphasis (bold) indicates bold red underlined text in the original document.]

January 2012 Directive--Alternative A

The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to continue the maturity extension program it began in September to purchase, by the end of June 2012, Treasury securities with remaining maturities of approximately 6 years to 30 years with a total face value of $400 billion, and to sell Treasury securities with remaining maturities of 3 years or less with a total face value of $400 billion. [ The Committee also directs the Desk to execute purchases of agency mortgage-backed securities by the end of January 2013 in order to increase the total face value of domestic securities held in the System Open Market Account to approximately $3.1 trillion. | The Committee also directs the Desk to execute purchases of agency mortgage-backed securities in order to increase the total face value of domestic securities held in the System Open Market Account by approximately $40 billion per month. ] The Committee also directs the Desk to maintain its existing policies of rolling over maturing Treasury securities into new issues and of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion. The Committee directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability.

January 2012 Directive--Alternative B

The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to continue the maturity extension program it began in September to purchase, by the end of June 2012, Treasury securities with remaining maturities of approximately 6 years to 30 years with a total face value of $400 billion, and to sell Treasury securities with remaining maturities of 3 years or less with a total face value of $400 billion. The Committee also directs the Desk to maintain its existing policies of rolling over maturing Treasury securities into new issues and of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability.

January 2012 Directive--Alternative C

The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to continue modify the maturity extension program it began in September so as to purchase, by the end of June February 2012, Treasury securities with remaining maturities of approximately 6 years to 30 years with a total face value of $400 $200 billion, and to sell Treasury securities with remaining maturities of 3 years or less with a total face value of $400 $200 billion. The Committee also directs the Desk to maintain its existing policies of rolling over maturing Treasury securities into new issues and of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability.

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