Records
Record of Policy Actions

of the Board of Governors

Regulation D

Reserve Requirements

of Depository Institutions

[Docket No. R-1268]

On October 18, 2006, the Board approved amendments to reflect the annual

indexing of the low reserve tranche and

of the reserve requirement exemption

for use in 2007 reserve requirement calculations. The amendments decrease the

3 percent low reserve tranche for net

transaction accounts to $45.8 million

(from $48.3 million in 2006) and

increase the reserve requirement exemption to $8.5 million (from $7.8 million

in 2006).

Votes for this action: Chairman Bernanke,

Vice Chairman Kohn, and Governors

Warsh, Kroszner, and Mishkin. Absent

and not voting: Governor Bies.

Regulation E

Electronic Fund Transfers

[Docket No. R-1247]

On August 24, 2006, the Board approved amendments to Regulation E and

its official staff commentary to apply the

regulation to payroll card accounts

established to distribute employee

salaries, wages, or other compensation

on a recurring basis. The am

also provide financial institut

an alternative to sending perio

ments for payroll card accoun

make account information av

account holders by certain 

means. The amendments are 

July 1, 2007.

Votes for this action: Chairman 

Vice Chairman Kohn, and 

Bies, Warsh, and Kroszner.

[Docket No. R-1265]

On November 27, 2006, the 

proved amendments to Regula

its official staff commentary 

that the requirement to obtain 

authorization applies to any pe

intends to collect electronicall

a check or other item that is 

unpaid. The amendments als

guidance on the regulation’

ments concerning consumer no

a returned-item fee is collec

tronically or a transaction in

electronic check conversi

amendments, which are based 

tially on an interim final rule 

on August 24, 2006, are effec

ary 1, 2007; compliance wi

disclosure requirements for 

item fees collected in connec

point-of-sale transactions is de

til January 1, 2008.

Votes for this action: Chairman 

Vice Chairman Kohn, and 

Bies, Warsh, and Kroszner. A

not voting: Governor Mishkin.

Note: Full texts of the policy actions are available via the online version of the Annual Report,

from the “Reading Rooms” on the Board’s FOIA

web page, and on request from the Board’s Freedom of Information Office.
Regulation H

Membership of

State Banking Institutions

in the Federal Reserve System

Regulation Y

Bank Holding Companies

and Change in Bank Control

[Docket No. R-1087]

On February 2, 2006, the Board, acting

with the other federal bank regulatory

agencies, approved amendments to the

agencies’ market risk rules to reduce

the capital requirement for certain

securities-borrowing transactions collateralized with cash. The interagency rule,

which makes permanent and expands an

interim final rule approved in 2000, is

effective February 22, 2006.

Votes for this action: Chairman Bernanke,

Vice Chairman Ferguson, and Governors

Bies, Olson, and Kohn.

Regulation K

International Banking Operations

[Docket No. R-1147]

On March 15, 2006, the Board approved

amendments requiring Edge Act and

agreement corporations and the U.S.

branches, agencies, and representative

offices of foreign banks supervised by

the Board to establish and maintain procedures that ensure and monitor compliance with the Bank Secrecy Act and

related regulations. The amendments are

effective April 19, 2006.

Votes for this action: Chairman Bernanke

and Governors Bies, Olson, Kohn, Warsh,

and Kroszner. Absent and not voting: Vice

Chairman Ferguson.

Regulation O

Loans to Executive Officer

Directors, and Principal

Shareholders of Member B

[Docket No. R-1271]

On December 6, 2006, the B

proved an interim final rule

quest for comment, to imple

tion 601 of the Financial 

Regulatory Relief Act of 2006 

nating certain reporting req

that have not contributed signi

effective monitoring or prev

insider lending abuse. The int

rule is effective December 11, 

Votes for this action: Chairman 

Vice Chairman Kohn, and 

Bies, Warsh, Kroszner, and Mi

Regulation Y

Bank Holding Companies

and Change in Bank Contr

[Docket No. R-1235]

On February 22, 2006, the B

proved amendments to expand 

cability of its Small Bank Hold

pany Policy Statement an

exemptions from its consolida

adequacy guidelines on risk-b

leverage measures by incre

asset-size limitation specified 

icy statement from $150 millio

million. The amended policy 

does not apply, however, to b

ing companies with less than 

lion in assets that engage in s

nonbanking or off-balance-sh

ties or have a material amount 

equity securities registered wi

curities and Exchange Commi

amendments also clarify tha

nated debt related to the is

trust preferred securities 
would be treated as debt under the policy statement, subject to a five-year transition period. The amendments are effective March 30, 2006.

Votes for this action: Chairman Bernanke,

Vice Chairman Ferguson, and Governors

Bies, Olson, and Kohn.

Regulation BB

Community Reinvestment

[Docket No. OP-1240]

On March 1, 2006, the Board, acting

with the other federal bank regulatory

agencies, approved guidance intended to

aid implementation of recent changes to

the agencies’ regulations under the

Community Reinvestment Act (CRA).

The guidance discusses, among other

regulatory topics, (1) the criteria for determining if an area is distressed, is

underserved, or has suffered a disaster;

(2) the period of time that bank activities in those areas are eligible for consideration in a CRA evaluation; and (3) the

standards used by CRA examiners to

decide if such activities qualify as “community development.” The guidance

also explains how the new community

development test for intermediate small

banks (banks with assets between

$250 million and $1 billion) will be

applied. The interagency guidance is effective March 10, 2006.

Votes for this action: Chairman Bernanke,

Vice Chairman Ferguson, and Governors

Bies, Olson, Kohn, and Warsh.

Rules Regarding

Equal Opportunity

[Docket No. OP-1264]

On August 1, 2006, the Board approved

an interim rule, with request for comment, to extend eligibility for 

confidential supervisory infor

certain noncitizen employees

terim rule is effective Augus

and also applies to all grants 

made as of that date.

Votes for this action: Chairman 

Vice Chairman Kohn, and 

Bies, Warsh, and Kroszner.

Policy Statements

and Other Actions

Interagency Advisory on th

Unsafe and Unsound Use o

Limitation of Liability Prov

in External Audit

Engagement Letters

On January 30, 2006, the Boa

with the other federal financi

tory agencies, approved an ad

address safety and soundness 

associated with agreements by 

institutions that limit the liabili

external auditors. The adviso

to provisions that (1) indemn

ternal auditor against claims 

third parties (including puni

ages); (2) hold harmless or r

external auditor from liability 

or potential claims that mig

serted by the client financial i

or (3) limit the remedies availa

client financial institution. P

that waive the right of financi

tions to seek punitive damag

their external auditors are no

ered unsafe and unsound unde

sory. The interagency advisor

tive for engagement letters ex

or after February 9, 2006.

Votes for this action: Chairm

span, Vice Chairman Ferguson

ernors Bies, Olson, and Kohn.
Federal Reserve

Currency Recirculation Policy

[Docket No. OP-1164]

On March 17, 2006, the Board revised

the Federal Reserve System’s cash services policy, with the intention of

increasing the recirculation of fit currency by (1) initiating a custodial inventory program to encourage depository

institutions to hold $10 and $20 notes in

their vaults to meet customer demand

and (2) charging a fee to depository

institutions that deposit fit $10 or

$20 notes at a Reserve Bank and order

the same denominations, above a

de minimis amount, during the same

business week. The custodial inventory

program will begin in July 2006, and

fee assessments are expected to begin in

July 2007.

Votes for this action: Chairman Bernanke

and Governors Olson, Kohn, Warsh, and

Kroszner. Absent and not voting: Vice

Chairman Ferguson and Governor Bies.

Nontraditional Mortgage

Product Risks

[Docket No. OP-1246]

On September 27, 2006, the Board, acting with the other federal financial regulatory agencies, approved interagency

guidance on underwriting and managing

nontraditional mortgage products (loans

that allow borrowers to defer payment

of principal and in some cases interest)

in a safe and sound manner and on

clearly disclosing the potential risks of

those products.

Votes for this action: Chairman Bernanke,

Vice Chairman Kohn, and Governors

Bies, Warsh, Kroszner, and Mishkin.

Guidance on Concentration

Commercial Real Estate Le

Sound Risk-Management P

[Docket No. OP-1248]

On December 6, 2006, the Boa

with the other federal bank 

agencies, approved guidance in

reinforce sound risk-managem

tices for institutions that have 

increasing concentrations of co

real estate loans on their balan

The guidance includes supervi

ria to assist in identifying in

that have potentially significan

trations. The interagency guid

fective December 12, 2006.

Votes for this action: Chairman 

Vice Chairman Kohn, and 

Bies, Warsh, Kroszner, and Mi

Interagency Statement on

Sound Practices concerning

Elevated Risk Complex Str

Finance Activities

[Docket No. OP-1254]

On December 20, 2006, the B

ing with the Securities and 

Commission and the other fed

and thrift regulatory agencies, 

a statement that describes inte

trols and risk-management p

to assist financial institutions 

fying, managing, and addre

heightened legal and reputati

associated with certain 

structured finance transacti

interagency statement is effe

uary 11, 2007.

Votes for this action: Chairman 

Vice Chairman Kohn, and 

Bies, Kroszner, and Mishkin. A

not voting: Governor Warsh.
Discount Rates in 2006

Under the Federal Reserve Act, boards

of directors of the Federal Reserve

Banks must establish rates on loans to

depository institutions at least every

fourteen days, subject to review and determination by the Board of Governors.

Primary Credit

Primary credit is the Federal Reserve’s

main lending program. Primary credit is

made available with minimal administration for very short terms as a backup

source of liquidity to depository institutions that, in the judgment of the lending

Federal Reserve Bank, are in generally

sound financial condition. Primary

credit is extended at a rate above the

federal funds rate target set by the Federal Open Market Committee (FOMC).

During 2006, the Board approved

four increases in the primary credit rate,

bringing the rate from 51⁄4 percent to

61⁄4 percent. The Board reached its determinations on the primary credit rate

recommendations of the Reserve Bank

boards of directors in conjunction with

the FOMC’s decisions to raise the target

federal funds rate from 41⁄4 percent to

51⁄4 percent and related economic and

financial developments. Rising energy

prices coupled with high levels of

resource utilization contributed to

heightened inflation pressures over the

first half of the year. Those pressures

receded over the second half of the year

as energy prices dropped and weakness

in the housing sector weighed on economic activity. In light of these conditions, the Federal Reserve raised the

structure of policy rates at a measured

pace in the first half of the year and kept

those rates unchanged for the remainder

of the year. Monetary policy developments are reviewed more fully in other

parts of this report (see the section

“Monetary Policy and Econom

opments” and the minutes o

meetings held in 2006).

Secondary and Seasonal Cr

Secondary credit is available 

priate circumstances to deposi

tutions that do not qualify fo

credit. The secondary credit ra

a spread above the primary c

In 2006, the spread was set a

points.

Seasonal credit is available 

depository institutions to mee

needs that arise from regular 

their loans and deposits. Th

seasonal credit is calculated 

weeks as an average of selecte

market yields, typically resu

rate close to the federal funds r

At year-end, the secondary 

sonal credit rates were 63⁄4 pe

5.30 percent, respectively.

Votes on Discount Rate Ch

About every two weeks during 

Board approved proposals by t

Reserve Banks to maintain the 

for computing the secondary 

sonal credit rates. Details on 

actions by the Board to approv

in the primary credit rate are 

below.

January 31, 2006. Effective 

the Board approved actions tak

directors of the Federal Reser

of Boston, New York, Phi

Cleveland, Richmond, Atlanta

Kansas City, Dallas, and San 

to raise the rate on disco

advances under the primary c

gram by 1⁄4 percentage point, t

cent. The same increase was 

for the Federal Reserve Ba

Louis, effective February 1, 2
Board also approved an identical action

subsequently taken by the directors of

the Federal Reserve Bank of Minneapolis, effective February 2, 2006.

Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Bies, Olson, and Kohn. Votes

against this action: None.

March 28, 2006. Effective this date, the

Board approved actions taken by the

directors 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 and

advances under the primary credit program by 1⁄4 percentage point, to 53⁄4 percent. The same increase was approved

for the Federal Reserve Bank of St.

Louis, effective March 29, 2006. The

Board also approved an identical action

subsequently taken by the directors of

the Federal Reserve Bank of Kansas

City, effective March 30, 2006.

Votes for this action: Chairman Bernanke

and Governors Bies, Olson, Kohn, Warsh,

and Kroszner. Votes against this action:

None.

May 10, 2006. Effective this date, the

Board approved actions taken by the

directors of the Federal Reserve Banks

of Boston, New York, Philadelphia,

Cleveland, Richmond, Atlanta, Chicago,

Minneapolis, Dallas, and San Francisco

to raise the rate on disco

advances under the primary c

gram by 1⁄4 percentage point, 

cent. The same increase was 

for the Federal Reserve Ba

Louis, effective May 11, 2

Board also approved an identi

subsequently taken by the di

the Federal Reserve Bank o

City, effective May 11, 2006.

Votes for this action: Chairman 

Vice Chairman Ferguson, and 

Bies, Olson, Kohn, Warsh, and 

Votes against this action: None

June 29, 2006. Effective this 

Board approved actions take

directors of the Federal Reser

of Boston, New York, Phi

Cleveland, Richmond, Atlanta

Minneapolis, and Dallas to rai

on discounts and advances 

primary credit program by 1⁄4 p

point, to 61⁄4 percent. The sam

was approved for the Federa

Bank of St. Louis, effective 

2006. The Board also approved 

actions subsequently taken by 

tors of the Federal Reserve 

San Francisco, effective June 

and Kansas City, effective July 

Votes for this action: Chairman 

Vice Chairman Kohn, and 

Bies, Warsh, and Kroszner. Vo

this action: None. 
Minutes of Federal Open Market

Committee Meetings

The policy actions of the Federal Open

Market Committee, contained in the

minutes of its meetings, are presented in

the Annual Report of the Board of Governors pursuant to the requirements of

section 10 of the Federal Reserve Act.

That section provides that the Board

shall keep a complete record of the

actions taken by the Board and by the

Federal Open Market Committee on all

questions of policy relating to open market operations, that it shall record therein

the votes taken in connection with the

determination of open market policies

and the reasons underlying each policy

action, and that it shall include in its

annual report to Congress a full account

of such actions.

The minutes of the meetings contain

the votes on the policy decisions made

at those meetings as well as a summary

of the information and discussions that

led to the decisions. The descriptions of

economic and financial conditions are

based solely on the information that was

available to the Committee at the time

of the meetings.

Members of the Committee voting for

a particular action may differ among

themselves as to the reasons for their

votes; in such cases, the range of their

views is noted in the minutes. When

members dissent from a decision, they

are identified in the minutes and a summary of the reasons for their dissent is

provided.

Policy directives of the Federal Open

Market Committee are issued to the

Federal Reserve Bank of New York as

the Bank selected by the Committee to

execute transactions for the System

Open Market Account. In th

domestic open market opera

Federal Reserve Bank of N

operates under instructions 

Federal Open Market Comm

take the form of an Authori

Domestic Open Market Opera

a Domestic Policy Directive

Domestic Policy Directive is a

each regularly scheduled me

the foreign currency area, th

Reserve Bank of New York 

under an Authorization for For

rency Operations, a Foreign 

Directive, and Procedural In

with Respect to Foreign Curr

erations. These policy instru

shown below in the form in w

were in effect at the beginning 

Changes in the instruments d

year are reported in the minut

individual meetings.

Authorization for Domest

Open Market Operations

In Effect January 1, 2006

1. The Federal Open Market 

authorizes and directs the Feder

Bank of New York, to the ext

sary to carry out the most recen

policy directive adopted at a mee

Committee:

(a) To buy or sell U.S. G

securities, including securities of 

Financing Bank, and securities tha

obligations of, or fully guaran

principal and interest by, any age

United States in the open market, 

securities dealers and foreign 

national accounts maintained at t

Reserve Bank of New York, on a 
lar, or deferred delivery basis, for the System

Open Market Account at market prices, and,

for such Account, to exchange maturing

U.S. Government and Federal agency securities with the Treasury or the individual agencies or to allow them to mature without

replacement.

(b) To buy U.S. Government securities,

obligations that are direct obligations of,

or fully guaranteed as to principal and interest by, any agency of the United States, from

dealers for the account of the Federal

Reserve Bank of New York under agreements for repurchase of such securities or

obligations in 65 business days or less, at

rates that, unless otherwise expressly authorized by the Committee, shall be determined

by competitive bidding, after applying reasonable limitations on the volume of agreements with individual dealers; provided that

in the event Government securities or agency

issues covered by any such agreement are

not repurchased by the dealer pursuant to the

agreement or a renewal thereof, they shall be

sold in the market or transferred to the System Open Market Account.

(c) To sell U.S. Government securities

and obligations that are direct obligations of,

or fully guaranteed as to principal and interest by, any agency of the United States to

dealers for System Open Market Account

under agreements for the resale by dealers

of such securities or obligations in 65 business days or less, at rates that, unless

otherwise expressly authorized by the Committee, shall be determined by competitive

bidding, after applying reasonable limitations on the volume of agreements with

individual dealers.

2. In order to ensure the effective conduct

of open market operations, the Federal Open

Market Committee authorizes the Federal

Reserve Bank of New York to lend on an

overnight basis U.S. Government securities

held in the System Open Market Account to

dealers at rates that shall be determined by

competitive bidding. The Federal Reserve

Bank of New York shall set a minimum

lending fee consistent with the objectives of

the program and apply reasonable limitations

on the total amount of a specific issue that

may be auctioned and on the amount of

securities that each dealer may borrow. The

Federal Reserve Bank of New York may

reject bids which could facilitate a dealer’s

ability to control a single issue 

mined solely by the Federal Reser

New York.

3. In order to ensure the effecti

of open market operations, while 

the provision of short-term inve

foreign and international accou

tained at the Federal Reserve Ba

York and accounts maintained at 

Reserve Bank of New York as f

of the United States pursuant to 

of the Federal Reserve Act, the Fe

Market Committee authorizes and 

Federal Reserve Bank of New Y

System Open Market Account, t

Government securities to such a

the bases set forth in paragraph 

agreements providing for the resa

accounts of those securities in 6

days or less on terms comparab

available on such transactions in 

and (b) for New York Bank acc

appropriate, to undertake with de

ject to the conditions imposed on 

and sales of securities in parag

repurchase agreements in U.S. G

and agency securities, and to arra

sponding sale and repurchase 

between its own account and su

international, and fiscal agency 

maintained at the Bank. Transact

taken with such accounts under 

sions of this paragraph may pro

service fee when appropriate.

4. In the execution of the C

decision regarding policy during 

meeting period, the Committee 

and directs the Federal Reserv

New York, upon the instruction of 

man of the Committee, to adjust 

in exceptional circumstances the 

pressure on reserve positions and 

intended federal funds rate. Any s

ment shall be made in the con

Committee’s discussion and dec

most recent meeting and the C

long-run objectives for price st

sustainable economic growth, an

based on economic, financial, 

tary developments during the in

period. Consistent with Comm

tice, the Chairman, if feasible, w

with the Committee before m

adjustment.
Domestic Policy Directive

In Effect January 1, 20061

The Federal Open Market Committee

seeks monetary and financial conditions that

will foster price stability and promote sustainable growth in output. To further its longrun objectives, the Committee in the immediate future seeks conditions in reserve

markets consistent with increasing the

federal funds rate to an average of around

41⁄4 percent.

Authorization for

Foreign Currency Operations

In Effect January 1, 2006

1. The Federal Open Market Committee

authorizes and directs the Federal Reserve

Bank of New York, for System Open Market

Account, to the extent necessary to carry out

the Committee’s foreign currency directive

and express authorizations by the Committee pursuant thereto, and in conformity with

such procedural instructions as the Committee may issue from time to time:

A. To purchase and sell the following

foreign currencies in the form of cable transfers through spot or forward transactions on

the open market at home and abroad, including transactions with the U.S. Treasury, with

the U.S. Exchange Stabilization Fund established by Section 10 of the Gold Reserve

Act of 1934, with foreign monetary authorities, with the Bank for International Settlements, and with other international financial

institutions:

Canadian dollars

Danish kroner

Euro

Pounds sterling

Japanese yen

Mexican pesos

Norwegian kroner

Swedish kronor

Swiss francs

B. To hold balances of, and to have

outstanding forward contracts to receive or

to deliver, the foreign currencies listed in

paragraph A above.

C. To draw foreign currencies and to

permit foreign banks to draw dollars under

the reciprocal currency arrangements listed

in paragraph 2 below, provided that drawings by either party to any such arrangement

shall be fully liquidated within 

after any amount outstanding a

was first drawn, unless the C

because of exceptional circumst

cifically authorizes a delay.

D. To maintain an overall 

tion in all foreign currencies not 

$25.0 billion. For this purpose, 

open position in all foreign cu

defined as the sum (disregarding 

net positions in individual curre

net position in a single foreign 

defined as holdings of balances i

rency, plus outstanding contracts 

receipt, minus outstanding con

future delivery of that currency, 

sum of these elements with due 

sign.

2. The Federal Open Marke

tee directs the Federal Reserve 

New York to maintain reciproca

arrangements (‘‘swap’’ arrangeme

System Open Market Account for 

to a maximum of 12 months with 

ing foreign banks, which are am

designated by the Board of Gover

Federal Reserve System under Se

of Regulation N, Relations wi

Banks and Bankers, and with the 

the Committee to renew such arr

on maturity:

of 

Foreign bank (m

dolla

Bank of Canada . . . . . . . . . . . . . . . . . . . . . . . . . 

Bank of Mexico . . . . . . . . . . . . . . . . . . . . . . . . 

Any changes in the terms of exi

arrangements, and the proposed te

new arrangements that may be 

shall be referred for review and 

the Committee.

3. All transactions in foreign 

undertaken under paragraph 1

shall, unless otherwise expressly 

by the Committee, be at prevail

rates. For the purpose of providing 

ment return on System holdings 

currencies or for the purpose o

interest rates paid or received in 

with swap drawings, transaction

eign central banks may be und

non-market exchange rates.

1. Adopted by the Committee at its meeting

on December 13, 2005.
4. It shall be the normal practice to

arrange with foreign central banks for the

coordination of foreign currency transactions. In making operating arrangements

with foreign central banks on System holdings of foreign currencies, the Federal

Reserve Bank of New York shall not commit

itself to maintain any specific balance, unless authorized by the Federal Open Market

Committee. Any agreements or understandings concerning the administration of the

accounts maintained by the Federal Reserve

Bank of New York with the foreign banks

designated by the Board of Governors under

Section 214.5 of Regulation N shall be

referred for review and approval to the

Committee.

5. Foreign currency holdings shall be invested to ensure that adequate liquidity is

maintained to meet anticipated needs and so

that each currency portfolio shall generally

have an average duration of no more than

18 months (calculated as Macaulay duration). When appropriate in connection with

arrangements to provide investment facilities

for foreign currency holdings, U.S. Government securities may be purchased from foreign central banks under agreements for

repurchase of such securities within 30 calendar days.

6. All operations undertaken pursuant to

the preceding paragraphs shall be reported

promptly to the Foreign Currency Subcommittee and the Committee. The Foreign

Currency Subcommittee consists of the

Chairman and Vice Chairman of the Committee, the Vice Chairman of the Board of

Governors, and such other member of the

Board as the Chairman may designate (or in

the absence of members of the Board serving

on the Subcommittee, other Board members

designated 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

request of any member, or at the request of

the Manager, System Open Market Account

(“Manager”), for the purposes of reviewing

recent or contemplated operations and of

consulting with the Manager on other matters relating to his responsibilities. At the

request of any member of the Subcommittee,

questions arising from such reviews and consultations shall be referred for determination

to the Federal Open Market Committee.

7. The Chairman is authorized

A. With the approval of th

tee, to enter into any needed ag

understanding with the Secretary o

sury about the division of respon

foreign currency operations betwe

tem and the Treasury;

B. To keep the Secretary o

sury fully advised concerning S

eign currency operations, and to c

the Secretary on policy matters 

foreign currency operations;

C. From time to time, t

appropriate reports and informa

National Advisory Council on In

Monetary and Financial Policies.

8. Staff officers of the Commi

thorized to transmit pertinent info

System foreign currency operation

priate officials of the Treasury De

9. All Federal Reserve Banks 

ticipate in the foreign currency 

for System Account in accordance 

graph 3G(1) of the Board of 

Statement of Procedure with Resp

eign Relationships of Federal Res

dated January 1, 1944.

Foreign Currency Directi

In Effect January 1, 2006

1. System operations in forei

cies shall generally be directed at 

disorderly market conditions, pro

market exchange rates for the 

reflect actions and behavior cons

IMF Article IV, Section 1.

2. To achieve this end the Sys

A. Undertake spot and for

chases and sales of foreign excha

B. Maintain reciprocal 

(“swap”) arrangements with selec

central banks.

C. Cooperate in other res

central banks of other countries 

international monetary institution

3. Transactions may also be un

A. To adjust System balanc

of probable future needs for curre

B. To provide means for m

tem and Treasury commitments in 
currencies, and to facilitate operations of the

Exchange Stabilization Fund.

C. For such other purposes as may be

expressly authorized by the Committee.

4. System foreign currency operations

shall be conducted:

A. In close and continuous consultation and cooperation with the United States

Treasury;

B. In cooperation, as appropriate, with

foreign monetary authorities; and

C. In a manner consistent with the obligations of the United States in the International Monetary Fund regarding exchange

arrangements under IMF Article IV.

Procedural Instructions

with Respect to

Foreign Currency Operations

In Effect January 1, 2006

In conducting operations pursuant to the

authorization and direction of the Federal

Open Market Committee as set forth in the

Authorization for Foreign Currency Operations and the Foreign Currency Directive,

the Federal Reserve Bank of New York,

through the Manager, System Open Market

Account (“Manager”), shall be guided by the

following procedural understandings with respect to consultations and clearances with

the Committee, the Foreign Currency Subcommittee, and the Chairman of the Committee. All operations undertaken pursuant to such clearances shall be reported

promptly to the Committee.

1. The Manager shall clear with the Subcommittee (or with the Chairman, if the

Chairman believes that consultation with the

Subcommittee is not feasible in the time

available):

A. Any operation that would result in a

change in the System’s overall open position

in foreign currencies exceeding $300 million

on any day or $600 million since the most

recent regular meeting of the Committee.

B. Any operation that would result in a

change on any day in the System’s net position in a single foreign currency exceeding

$150 million, or $300 million when the

operation is associated with repayment of

swap drawings.

C. Any operation that might generate a

substantial volume of trading in a particular

currency by the System, even 

change in the System’s net posit

currency might be less than the li

fied in 1.B.

D. Any swap drawing prop

foreign bank not exceeding the 

(i) $200 million or (ii) 15 percent 

of the swap arrangement.

2. The Manager shall clear wit

mittee (or with the Subcommit

Subcommittee believes that c

with the full Committee is not fea

time available, or with the Chair

Chairman believes that consult

the Subcommittee is not feasible 

available):

A. Any operation that would 

change in the System’s overall op

in foreign currencies exceeding $

since the most recent regular mee

Committee.

B. Any swap drawing pr

a foreign bank exceeding the 

(i) $200 million or (ii) 15 perc

size of the swap arrangement.

3. The Manager shall also co

the Subcommittee or the Chair

proposed swap drawings by the S

about any operations that are not o

character.

Meeting Held on

January 31, 2006

A meeting of the Federal Ope

Committee was held in the off

Board of Governors of the 

Reserve System in Washingt

on Tuesday, January 31, 200

a.m.

Present:

Mr. Greenspan, Chairman

Mr. Geithner, Vice Chairman

Ms. Bies

Mr. Ferguson

Mr. Guynn

Mr. Kohn

Mr. Lacker

Mr. Olson

Ms. Pianalto

Ms. Yellen
Mses. Cumming and Minehan, Messrs.

Moskow, Poole, and Hoenig, Alternate Members of the Federal

Open Market Committee

Messrs. Fisher, Stern, and Santomero,

Presidents of the Federal Reserve

Banks of Dallas, Minneapolis, and

Philadelphia, 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, Judd, Kamin, Madigan, Sniderman, Struckmeyer, and Wilcox, Associate

Economists

Mr. Kos, Manager, System Open Market Account

Messrs. Oliner and Slifman, Associate

Directors, Division of Research

and Statistics, Board of Governors

Mr. Whitesell, Deputy Associate Director, Division of Monetary Affairs,

Board of Governors

Messrs. English and Sheets, Assistant

Directors, Division of Monetary

Affairs and International Finance,

respectively, Board of Governors

Mr. Simpson, Senior Adviser, Division

of Research and Statistics, Board

of Governors

Mr. Small, Project Manager, Division

of Monetary Affairs, Board of

Governors

Mr. Chaboud and Mses. Kusko and

Weinbach, Senior Economists, Divisions of International Finance,

Research and Statistics, and Monetary 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 Secr

cialist, Division of 

Affairs, Board of Gover

Mr. Stone, First Vice Preside

Reserve Bank of Philad

Messrs. Fuhrer and Rosenblu

tive Vice Presidents

Reserve Banks of Bosto

las, respectively

Messrs. Evans and Hakk

Mester and Perelm

Messrs. Rasche, Rol

Steindel, Senior Vice 

Federal Reserve Banks o

Kansas City, Philadel

York, St. Louis, Minne

New York, respectively

Mr. Hetzel, Senior Econom

Reserve Bank of Richm

In the agenda for this meeti

reported that advices of the e

the following members and 

members of the Federal Ope

Committee for a term beginnin

31, 2006 had been received 

these individuals had execu

oaths of office.

The elected members and 

members were as follows:

Timothy F. Geithner, President o

eral Reserve Bank of New 

Christine M. Cumming, 

President, Federal Reserve 

New York as alternate.

Jeffrey M. Lacker, President of t

Reserve Bank of Richmond, 

E. Minehan, President of t

Reserve Bank of Boston as a

Sandra Pianalto, President of t

Reserve Bank of Clevel

Michael H. Moskow, Presid

Federal Reserve Bank of C

alternate.

Jack Guynn, President of th

Reserve Bank of Atlanta, wi

Poole, President of the Fede

Bank of St. Louis as alternat
Janet L. Yellen, President of the Federal

Reserve Bank of San Francisco, with

Thomas M. Hoenig, President of the

Federal Reserve Bank of Kansas City as

alternate.

By unanimous vote, the following

officers of the Federal Open Market

Committee were selected to serve until

the selection of their successors at the

first regularly scheduled meeting of the

Committee in 2007, with the understanding that in the event of the discontinuance of their official connection with

the Board of Governors or with a Federal Reserve Bank, they would cease to

have any official connection with the

Federal Open Market Committee:

Alan Greenspan Chairman2

Timothy F. Geithner Vice Chairman

Vincent R. Reinhart Secretary and

Economist

Deborah J. Danker Deputy Secretary

David W. Skidmore Assistant Secretary

Michelle A. Smith Assistant Secretary

Scott G. Alvarez General Counsel

Thomas C. Baxter, Jr. Deputy General

Counsel

Karen H. Johnson Economist

David J. Stockton Economist

Thomas A. Connors, Robert A. Eisenbeis,

John P. Judd, Steven B. Kamin, Brian F.

Madigan, Mark S. Sniderman, Charles

S. Struckmeyer, Joseph S. Tracy, John

A. Weinberg, and David W. Wilcox,

Associate Economists

In addition, it was agreed that the

Committee would conduct a notation

vote upon the swearing in of a new

Chairman of the Board of Governors to

elect Alan Greenspan’s successor as

Chairman of the Committee.3

By unanimous vote, Deborah J.

Danker, or her successor as Deputy Secretary, was elected to serve as Chief

Freedom of Information Act 

comply with an Executive Or

on December 14, 2005 that req

eral agencies to take certain a

lating to FOIA activities.

By unanimous vote, the C

amended its Program for Se

FOMC Information, primarily 

incorporation of the Board’s 

on access to confidential infor

non-citizens.

By unanimous vote, the 

Reserve Bank of New York wa

to execute transactions for th

Open Market.

By unanimous vote, Dino 

selected to serve at the pleas

Committee as Manager, Syst

Market Account, on the unde

that his selection was subject 

satisfactory to the Federal Res

of New York.4

By unanimous vote, the A

tion for Domestic Open Mark

tions was reaffirmed in the fo

below.

Authorization for Domestic 

Market Operations

(Reaffirmed January 31, 20

1. The Federal Open Market 

authorizes and directs the Feder

Bank of New York, to the exten

to carry out the most recent dome

directive adopted at a meetin

Committee:

(a) To buy or sell U.S. G

securities, including securities of 

Financing Bank, and securities tha

obligations of, or fully guaran

principal and interest by, any age

United States in the open market, 

securities dealers and foreign 

national accounts maintained at t

Reserve Bank of New York, o

2. Alan Greenspan was elected to serve for the regular, or deferred delivery bas

remainder of the day.

3. Secretary’s note: By notation vote completed

on February 1, 2006 the Committee unanimously

approved the election of Ben S. Bernanke as

Chairman of the Federal Open Market Committee.

4. Secretary’s note: Advice subse

received that the selection of Mr. Kos 

was satisfactory to the board of dire

Federal Reserve Bank of New York.
System Open Market Account at market

prices, and, for such Account, to exchange

maturing U.S. Government and Federal

agency securities with the Treasury or the

individual agencies or to allow them to mature without replacement;

(b) To buy U.S. Government securities,

obligations that are direct obligations of, or

fully guaranteed as to principal and interest

by, any agency of the United States, from

dealers for the account of the Federal Reserve Bank of New York under agreements

for repurchase of such securities or obligations in 65 business days or less, at rates that,

unless otherwise expressly authorized by the

Committee, shall be determined by competitive bidding, after applying reasonable limitations on the volume of agreements with

individual dealers; provided that in the event

Government securities or agency issues covered by any such agreement are not repurchased by the dealer pursuant to the agreement or a renewal thereof, they shall be sold

in the market or transferred to the System

Open Market Account.

(c) To sell U.S. Government securities

and obligations that are direct obligations of,

or fully guaranteed as to principal and interest by, any agency of the United States to

dealers for System Open Market Account

under agreements for the resale by dealers of

such securities or obligations in 65 business

days or less, at rates that, unless otherwise

expressly authorized by the Committee, shall

be determined by competitive bidding, after

applying reasonable limitations on the volume of agreements with individual dealers.

2. In order to ensure the effective conduct

of open market operations, the Federal Open

Market Committee authorizes the Federal

Reserve Bank of New York to lend on an

overnight basis U.S. Government securities

held in the System Open Market Account to

dealers at rates that shall be determined by

competitive bidding. The Federal Reserve

Bank of New York shall set a minimum

lending fee consistent with the objectives of

the program and apply reasonable limitations

on the total amount of a specific issue that

may be auctioned and on the amount of

securities that each dealer may borrow. The

Federal Reserve Bank of New York may

reject bids which could facilitate a dealer’s

ability to control a single issue as determined

solely by the Federal Reserve Bank of New

York.

3. In order to ensure the effecti

of open market operations, while 

the provision of short-term inve

foreign and international accou

tained at the Federal Reserve Ba

York and accounts maintained at 

Reserve Bank of New York as fisc

the United States pursuant to Se

the Federal Reserve Act, the Fe

Market Committee authorizes and 

Federal Reserve Bank of New Y

System Open Market Account, t

Government securities to such a

the bases set forth in paragraph 

agreements providing for the resa

accounts of those securities in 6

days or less on terms comparab

available on such transactions in 

and (b) for New York Bank acc

appropriate, to undertake with de

ject to the conditions imposed on 

and sales of securities in para

repurchase agreements in U.S. G

and agency securities, and to arra

sponding sale and repurchase agre

tween its own account and suc

international, and fiscal agency 

maintained at the Bank. Transact

taken with such accounts under 

sions of this paragraph may pro

service fee when appropriate.

4. In the execution of the C

decision regarding policy during 

meeting period, the Committee 

and directs the Federal Reserv

New York, upon the instruction of 

man of the Committee, to adjust 

in exceptional circumstances the 

pressure on reserve positions and 

intended federal funds rate. Any s

ment shall be made in the con

Committee’s discussion and dec

most recent meeting and the C

long-run objectives for price st

sustainable economic growth, an

based on economic, financial, an

developments during the in

period. Consistent with Committe

the Chairman, if feasible, will co

the Committee before ma

adjustment.

With Mr. Lacker dissenting, 

mittee approved the Authori

Foreign Currency Operations 
amendment to paragraph 5 which clarifies the language about permissible

investment activities for the foreign

portfolio and brings that language into

alignment with that present in the authorization for the domestic portfolio. Accordingly, the Authorization for Foreign

Currency Operations was adopted, effective January 31, 2006, as shown below.

Authorization for

Foreign Currency Operations

(Amended January 31, 2006)

1. The Federal Open Market Committee

authorizes and directs the Federal Reserve

Bank of New York, for System Open Market

Account, to the extent necessary to carry out

the Committee’s foreign currency directive

and express authorizations by the Committee

pursuant thereto, and in conformity with

such procedural instructions as the Committee may issue from time to time:

A. To purchase and sell the following

foreign currencies in the form of cable transfers through spot or forward transactions on

the open market at home and abroad, including transactions with the U.S. Treasury, with

the U.S. Exchange Stabilization Fund established by Section 10 of the Gold Reserve Act

of 1934, with foreign monetary authorities, with

the Bank for International Settlements, and

with other international financial institutions:

Canadian dollars

Danish kroner

Euro

Pounds sterling

Japanese yen

Mexican pesos

Norwegian kroner

Swedish kronor

Swiss francs

B. To hold balances of, and to have

outstanding forward contracts to receive or

to deliver, the foreign currencies listed in

paragraph A above.

C. To draw foreign currencies and to

permit foreign banks to draw dollars under

the reciprocal currency arrangements listed

in paragraph 2 below, provided that drawings by either party to any such arrangement

shall be fully liquidated within 12 months

after any amount outstanding at that time

was first drawn, unless the Committee, because of exceptional circumstances, specifically authorizes a delay.

D. To maintain an overall open position

in all foreign currencies not exceeding $25.0

billion. For this purpose, the ov

position in all foreign currencies 

as the sum (disregarding signs) o

tions in individual currencies. Th

tion in a single foreign currency is 

holdings of balances in that cur

outstanding contracts for future r

nus outstanding contracts for futu

of that currency, i.e., as the sum 

elements with due regard to sign.

2. The Federal Open Market 

directs the Federal Reserve Ban

York to maintain reciprocal cu

rangements (“swap” arrangemen

System Open Market Account for 

to a maximum of 12 months with 

ing foreign banks, which are am

designated by the Board of Gover

Federal Reserve System under Se

of Regulation N, Relations wi

Banks and Bankers, and with the 

the Committee to renew such arr

on maturity:

Foreign bank

A

ar

(

dolla

Bank of Canada . . . . . . . . . . . . . . . . . . . . . . . . . 

Bank of Mexico . . . . . . . . . . . . . . . . . . . . . . . . 

Any changes in the terms of exi

arrangements, and the proposed te

new arrangements that may be 

shall be referred for review and 

the Committee.

3. All transactions in foreign 

undertaken under paragraph 1

shall, unless otherwise expressly 

by the Committee, be at prevail

rates. For the purpose of providing 

ment return on System holdings 

currencies or for the purpose o

interest rates paid or received in 

with swap drawings, transaction

eign central banks may be und

non-market exchange rates.

4. It shall be the normal prac

range with foreign central banks 

ordination of foreign currency tr

In making operating arrangement

eign central banks on System h

foreign currencies, the Federal Re

of New York shall not commit itse

tain any specific balance, unless 

by the Federal Open Market Comm
agreements or understandings concerning the

administration of the accounts maintained by

the Federal Reserve Bank of New York with

the foreign banks designated by the Board of

Governors under Section 214.5 of Regulation N shall be referred for review and approval to the Committee.

5. Foreign currency holdings shall be

invested to ensure that adequate liquidity is

maintained to meet anticipated needs and so

that each currency portfolio shall generally

have an average duration of no more than

18 months (calculated as Macaulay duration). Such investments may include buying

or selling outright obligations of, or fully

guaranteed as to principal and interest by, a

foreign government or agency thereof; buying such securities under agreements for

repurchase of such securities; selling such

securities under agreements for the resale of

such securities; and holding various time

and other deposit accounts at foreign institutions. In addition, when appropriate in

connection with arrangements to provide

investment facilities for foreign currency

holdings, U.S. Government securities may

be purchased from foreign central banks

under agreements for repurchase of such

securities within 30 calendar days.

6. All operations undertaken pursuant to

the preceding paragraphs shall be reported

promptly to the Foreign Currency Subcommittee and the Committee. The Foreign Currency Subcommittee consists of the Chairman and Vice Chairman of the Committee,

the Vice Chairman of the Board of Governors, and such other member of the Board as

the Chairman may designate (or in the absence of members of the Board serving on

the Subcommittee, other Board members

designated 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 request of any member, or at the request of the

Manager, System Open Market Account

(“Manager”), for the purposes of reviewing

recent or contemplated operations and of

consulting with the Manager on other matters relating to his responsibilities. At the

request of any member of the Subcommittee,

questions arising from such reviews and consultations shall be referred for determination

to the Federal Open Market Committee.

7. The Chairman is authorized:

A. With the approval of the C

to enter into any needed agreemen

standing with the Secretary of th

about the division of responsibil

eign currency operations betwee

tem and the Treasury;

B. To keep the Secretary o

sury fully advised concerning S

eign currency operations, and to c

the Secretary on policy matters 

foreign currency operations;

C. From time to time, to tr

propriate reports and information 

tional Advisory Council on In

Monetary and Financial Policies.

8. Staff officers of the Commit

thorized to transmit pertinent info

System foreign currency ope

appropriate officials of the 

Department.

9. All Federal Reserve Banks sh

pate in the foreign currency ope

System Account in accordance 

graph 3G(1) of the Board of 

Statement of Procedure with Resp

eign Relationships of Federal Res

dated January 1, 1944.

With Mr. Lacker dissenting

eign Currency Directive was r

in the form shown below.

Foreign Currency Directive

(Reaffirmed January 31, 20

1. System operations in foreign 

shall generally be directed at coun

orderly market conditions, pro

market exchange rates for the 

reflect actions and behavior cons

IMF Article IV, Section 1.

2. To achieve this end the Syst

A. Undertake spot and fo

chases and sales of foreign excha

B. Maintain reciprocal 

(“swap”) arrangements with selec

central banks.

C. Cooperate in other res

central banks of other countries 

international monetary institution

3. Transactions may also be un

A. To adjust System balanc

of probable future needs for curre
B. To provide means for meeting System and Treasury commitments in particular

currencies, and to facilitate operations of the

Exchange Stabilization Fund.

C. For such other purposes as may be

expressly authorized by the Committee.

4. System foreign currency operations

shall be conducted:

A. In close and continuous consultation

and cooperation with the United States

Treasury;

B. In cooperation, as appropriate, with

foreign monetary authorities; and

C. In a manner consistent with the obligations of the United States in the International Monetary Fund regarding exchange

arrangements under IMF Article IV.

Mr. Lacker dissented in the votes on

the Foreign Currency Directive and

Authorization for Foreign Currency

Operations to indicate his opposition to

foreign currency intervention by the

Federal Reserve. In his view, such

intervention would be ineffective if it

did not also signal a shift in domestic

monetary policy. And if it did signal

such a shift, it could potentially compromise the Federal Reserve’s monetary

policy independence.

By unanimous vote, the Procedural

Instructions with Respect to Foreign

Currency Operations were reaffirmed in

the form shown below.

Procedural Instructions

with Respect to

Foreign Currency Operations

(Reaffirmed January 31, 2006)

In conducting operations pursuant to the

authorization and direction of the Federal

Open Market Committee as set forth in the

Authorization for Foreign Currency Operations and the Foreign Currency Directive,

the Federal Reserve Bank of New York,

through the Manager, System Open Market

Account (“Manager”), shall be guided by the

following procedural understandings with respect to consultations and clearances with

the Committee, the Foreign Currency Subcommittee, and the Chairman of the Committee. All operations undertake

to such clearances shall be reporte

to the Committee.

1. The Manager shall clear wi

committee (or with the Chairm

Chairman believes that consultati

Subcommittee is not feasible in 

available):

A. Any operation that would 

change in the System’s overall op

in foreign currencies exceeding $3

on any day or $600 million sinc

recent regular meeting of the Com

B. Any operation that would 

change on any day in the System

tion in a single foreign currency 

$150 million, or $300 million wh

eration is associated with repayme

drawings.

C. Any operation that might 

substantial volume of trading in 

currency by the System, even 

change in the System’s net posit

currency might be less than the li

fied in 1.B.

D. Any swap drawing prop

foreign bank not exceeding the 

(i) $200 million or (ii) 15 percent 

of the swap arrangement.

2. The Manager shall clear wit

mittee (or with the Subcommit

Subcommittee believes that c

with the full Committee is not fea

time available, or with the Chair

Chairman believes that consultati

Subcommittee is not feasible in 

available):

A. Any operation that would 

change in the System’s overall op

in foreign currencies exceeding $

since the most recent regular mee

Committee.

B. Any swap drawing prop

foreign bank exceeding the larger 

million or (ii) 15 percent of the 

swap arrangement.

3. The Manager shall also cons

Subcommittee or the Chairman 

posed swap drawings by the S

about any operations that are not o

character.

Among the organizationa

raised, the Committee indicat

intended to take up at a futur
the relationship between its formal vote

and the policy statement issued after

each meeting.

The Manager of the System Open

Market Account reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the

System’s account in the period since the

previous meeting. The Manager also reported on developments in domestic

financial markets and on System open

market transactions in government securities and federal agency obligations

during the period since the previous

meeting. By unanimous vote, the Committee ratified these transactions.

The information reviewed at this

meeting suggested that underlying

growth in aggregate demand remained

solid, even though the expansion of real

GDP was estimated to have slowed in

the fourth quarter. Household spending

rose smartly, outside of autos, and orders and shipments of nondefense capital goods in the business sector were

generally quite strong. Housing markets

showed some signs of cooling, but starts

and sales remained at high levels. Industrial production posted moderate gains,

even after excluding hurricane-related

rebounds in some production categories,

and private payrolls expanded at a firm

rate on average. Headline consumer inflation had been held down by falling

consumer energy prices; more recently,

however, crude oil prices climbed back

up to high levels. Meanwhile, core inflation had moved up a bit from low levels

seen last summer.

Labor demand expanded further in

the fourth quarter, as private nonfarm

payrolls showed large gains in November followed by more-modest gains in

December. The average increase over

those two months represented sturdy job

gains, even after accounting for the

likely catch-up in employment following Hurricanes Katrina and Rit

sectors, including manufactu

several service groups, added v

to payrolls in December, but th

the month was held down by 

ment declines in a number o

such as retail trade and con

where seasonal adjustment ca

cult this time of year. Aggreg

fell slightly in December ow

decrease in the workweek, but 

over the fourth quarter as a w

unemployment rate edged do

percent in part due to the la

participation rate ticking down

Industrial production rose n

November and December, b

partial recovery from the effe

hurricanes. Production in th

industry, which includes oil an

traction, increased sharply. Ut

put also popped up in Decemb

peratures turned unseasonabl

the first half of the month. A

from the effects of these speci

underlying activity in the indu

tor advanced moderately. Mo

duction increases in most man

categories in December, includ

tech, consumer goods, and 

equipment, outweighed produ

clines in the motor vehicles 

sector. The capacity utilizatio

manufacturing stood a bit abov

of one year ago and near its 

average.

Real personal consumption 

tures appeared to have incre

modestly in the fourth quarter, 

ing on motor vehicles was 

following a surge in the su

response to manufacturers’ pr

tives. Outside of motor vehi

sumption was brisk, supporte

growth, increases in persona

and the decline in energy pri

sumption was also likely sup

further gains in home values a
prices that raised the ratio of household

wealth to disposable income relative to

that seen earlier in 2005. Consumer sentiment measured by surveys moved up

in December and, judging by the preliminary reading of the Michigan Survey, edged up further in January.

Activity in the housing market

appeared to continue at high levels,

although there were some indications of

slowing. Single-family housing starts

decreased markedly in December; however, this decline may have been due in

part to unusually cold and wet weather

in some areas of the country. Multifamily housing starts increased in December. Sales of new and existing homes

remained at elevated levels but slowed

somewhat toward the end of the year.

Moreover, the stock of homes for sale

increased to the upper end of ranges

seen in recent years. Recent data on

mortgage applications and survey measures of homebuying attitudes also

pointed to some cooling in the housing

market.

Real outlays for equipment and software appeared to have slowed significantly in the fourth quarter, as expenditures for transportation and

communications equipment reversed

some of their earlier sharp increases.

With few exceptions, however, new orders appeared to be quite strong, and

order backlogs increased for several

goods in the transportation sector.

Underlying fundamentals continued to

support gains in capital spending as

business sector output expanded, firms

remained flush with funds, and relative

price declines pushed down the user

cost of capital equipment. Anecdotal reports and surveys also indicated that

businesses were optimistic about nearterm capital spending plans. Vacancy

rates for nonresidential properties

drifted lower as construction expenditures on commercial and manufacturing

structures remained well belo

peaks. However, spending o

and mining structures con

increase strongly. Business i

in real nonfarm inventories 

moderately in the fourth quarte

by a rapid accumulation of m

cle inventories. Outside of m

cles, stocks continued to ris

The restrained growth in inve

recent months suggested that 

side the motor vehicle sector w

tionally keeping stockbuild

however, it could also have re

unanticipated increase in sales 

interruptions following the h

last fall. That said, the level 

appeared reasonably well alig

demand in most industries.

After increasing further in 

the U.S. international trade d

rowed somewhat in Novembe

duction in the deficit reflected 

increase in exports and a sim

decrease in imports that owe

tantly to a decline in imports o

firm pace of third-quarter GD

in foreign economies generally 

to continue in the fourth quart

Core consumer price inf

mained moderate over the se

of last year. Core prices had 

string of very low increases 

mer, held down in part by fall

vehicle prices. In recent mo

creases in core prices had r

The overall consumer price in

down further in December in 

to substantial declines in it

energy price components. How

vey data pointed to large in

gasoline prices in January, w

due to the backup in crude 

Preliminary survey measures 

term inflation expectations fo

had nonetheless ticked down

ing the reversal of a sharp incr

the hurricanes last fall, and lo
inflation expectations had moved lower

as well. Input prices increased somewhat less in December, as upward pressure from previous energy price increases receded somewhat. Indeed, the

increase in core intermediate producer

prices over the year was estimated to be

considerably lower than over the previous year. At its December meeting, the

Federal Open Market Committee decided to increase the target level of the

federal funds rate 25 basis points, to

41⁄4 percent. In its accompanying statement, the Committee indicated that,

despite elevated energy prices and

hurricane-related disruptions, the expansion in economic activity appeared solid.

Core inflation had stayed relatively low

in recent months, and longer-term inflation expectations had remained contained. Nevertheless, the Committee

noted that possible increases in resource

utilization as well as elevated energy

prices had the potential to add to inflationary pressures. In these circumstances, the Committee believed that

some further measured policy firming

was likely to be needed to keep the risks

to the attainment of both sustainable

economic growth and price stability

roughly in balance.

Investors had largely anticipated the

Committee’s interest rate decision at the

December meeting and a change in the

portions of the statement characterizing

policy as accommodative. Accordingly,

the policy announcement elicited only

modest reactions in financial markets.

With mixed readings on economic activity and inflation over the intermeeting

period, the market’s expectations for the

path of monetary policy and yields on

Treasury coupon securities ended the

period little changed, on balance. Yields

on investment- and speculative-grade

corporate debt moved largely in line

with Treasury yields. Major stock price

indexes rose modestly, and the tradeweighted foreign exchange va

dollar depreciated slightly 

period.

Domestic nonfinancial se

appeared to have expanded a

what slower pace in the fourt

down from the rapid increa

third quarter. Household deb

likely moderated amid hints o

shift in mortgage borrowing 

robust third-quarter pace and a

decline in consumer credit, wh

in part to increased charge-

October’s spike in bankruptc

Business sector debt slowed 

in the fourth quarter, mainly re

runoff of commercial paper by 

tional firms that were reporte

repatriated foreign earnings to 

vantage of a recently enacted 

sion. M2 expanded at a somew

pace in the fourth quarter than 

predicted from historical rel

with income and opportunity 

part, the monetary aggregate w

boosted by payments to hurr

tims by the federal governme

surance companies.

The staff forecast prepared 

meeting suggested that, af

growth in the fourth quarter 

real GDP would expand at a 

bust pace over the first half of 

boosted in part by spending on 

activities associated with the h

Thereafter, real GDP gro

expected to moderate, impor

flecting a reduced impetus to 

tion from house price apprec

some slowing in residential ho

penditures. Core PCE infla

expected to be a touch higher 

than in 2005, largely becau

pass-through of higher energy 

fuel import prices, but, wit

prices leveling out, core infl

projected to drop back mo

2007.
In their discussion of the economic

situation and outlook, meeting participants noted the slowing in GDP growth

in the fourth quarter of 2005, but believed that it probably owed in large part

to transitory factors and that economic

growth would bounce back in the current quarter. In that regard, several high

frequency indicators of production,

labor markets, and private demand suggested greater underlying strength of

late than had been reflected in the most

recent GDP data. Over the next couple

of years, the economy seemed poised to

expand at a moderate rate in the neighborhood of its sustainable pace. Most

participants expected core inflation to

move up slightly in the near term, reflecting some pass-through of increased

energy and other commodity prices.

Although heightened inflation pressures

could also arise from possible increases

in resource utilization, the outlook for

economic growth and the stability of

inflation expectations suggested that

core inflation should remain contained

over time.

In preparation for the Federal Reserve’s semiannual report to the Congress on the economy and monetary policy, the members of the Board of

Governors and the presidents of the Federal Reserve Banks submitted individual

projections of the growth of GDP, the

rate of unemployment, and core consumer price inflation for the years 2006

and 2007. The forecasts of the rate of

expansion in real GDP for 2006 were in

a range of 31⁄4 to 4 percent, centered at

31⁄2 percent, while those for 2007 were

in a range of 3 to 4 percent, with a

central tendency of 3 to 31⁄2 percent.

These rates of growth were associated

with projections of the civilian unemployment rate in a range of 41⁄2 to

5 percent, with a central tendency of

43⁄4 to 5 percent, in both the fourth

quarter of 2006 and the fourth quarter of

2007. Expectations for the rat

tion, as measured by the core 

index, were in a range o

21⁄2 percent this year, centered 

2 percent, and in a range 

2 percent in 2007.

In their discussion of major 

the economy, meeting particip

that consumer spending in 

months of 2005 had been bu

the effects of hurricanes, 

energy prices, and reduced a

incentives. However, anecdot

contributed to a view that 

spending had been solid over 

day season and in recent wee

measures of consumer c

remained high. Nevertheless, 

slowing in the housing se

become more evident, and th

construction from hurricane-r

building now seemed likely to 

over the next couple of years r

being more concentrated in 

term. In some areas, home pr

ciation reportedly had slowe

ably, highlighting the risks to 

demand of a pullback in th

sector. For instance, the eff

leveling out of housing weal

saving rate were difficult to pr

in the view of some, potential

Rising debt service costs, owi

to the repricing of variable-r

gages, were also mentioned a

restraining the discretionary sp

consumers. The most likely 

however, was for a gradual m

in house price appreciation a

growth of consumption, whi

continue to be supported by in

jobs and incomes.

Participants generally a

fairly strong growth of capita

tures. Though firms had been 

about expanding their plant a

ment, business confidence was 

pacity utilization was tighte
companies were continuing to look for

investment opportunities that increased

productivity. As a result, the outlook

was for reasonably robust spending on

capital equipment even if economic

growth slowed a bit. Anecdotal reports

suggested that nonresidential real estate

markets were improving in some areas.

The slowdown in government spending in the fourth quarter was generally

seen as reflecting shifts in the timing of

outlays, rather than a change in the

underlying trend. However, fiscal stimulus was expected to diminish somewhat

by next year. By contrast, global demand had picked up of late and would

provide ongoing support for U.S. exports; indeed, the sharp increases in

commodity prices and rallies in world

equity markets suggested the possibility

of an even stronger path for demand

abroad.

Financial market conditions in the

United States, as well as those abroad,

suggested that investors were optimistic

about the economic outlook. The recent

strength in equity markets and the low

prevailing term premiums and bond

spreads perhaps reflected market assessments that economic risks were lower

than usual, as well as strong demands

for longer-term assets and an ample

supply of liquidity. The possibility that

term premiums and credit spreads could

return to more typical settings represented a downside risk for interestsensitive components of aggregate

demand.

A variety of indicators, along with

anecdotal reports, suggested that employment was expanding at a fairly good

pace and labor compensation was rising

moderately. Some participants remarked

on the uncertainties regarding the extent

of remaining capacity in labor markets

and the outlook for labor costs. In particular, developments affecting the participation rate in the labor force and the

pace of growth in productiv

importantly condition prospec

ployment and business cost pr

Participants noted that, w

pass-through of higher energy 

commodity prices to prices 

goods and services had rema

dued, there were continuing up

to inflation from these sourc

ever the size of such pas

effects, however, it was though

would probably be temporary 

and likely diminish as energy p

tened out, as long as inflation 

tions did not move higher. I

gard, participants were encour

despite recent energy price 

survey measures of inflation 

tions had notched down and lo

inflation compensation in fina

kets was little changed. Altho

profit margins could imply so

ing pricing power, they might 

vide a cushion to absorb so

cost increases. Indeed, anecdo

suggested that the ability of 

pass through higher input co

ally remained limited. Neverth

increased prices of energy 

commodities and the possib

further rise in resource utilizati

some members viewed as n

at present, represented c

risks, potentially adding to 

pressures.

In the Committee’s discu

monetary policy for the int

period, all members favored r

target federal funds rate 25 ba

to 41⁄2 percent at this meeting. 

recent economic data had bee

the economy seemed to be exp

a solid pace. Members were 

that, even after their action to

sible increases in resource 

and elevated energy prices ha

tential to add to inflation 

Although the stance of polic
close to where it needed to be given the

current outlook, some further policy

firming might be needed to keep inflation pressures contained and the risks to

price stability and sustainable economic

growth roughly in balance. In the view

of some members, the possibility of

additional policy moves was reinforced

by readings on core inflation and inflation expectations that were somewhat

higher than was desirable over the long

run. However, all members agreed that

the future path for the funds rate would

depend increasingly on economic developments and could no longer be prejudged with the previous degree of

confidence.

As this meeting marked Alan

Greenspan’s last as a member of the

Committee, meeting participants took

the opportunity individually and collectively to pay tribute to his many years of

outstanding service to the Federal

Reserve and to the nation. They expressed their appreciation for his collegial and successful leadership of the

Committee and of the Federal Reserve

System and emphasized the privilege

and honor they felt in having served

with him.

At the conclusion of the discussion,

the Committee voted to authorize and

direct the Federal Reserve Bank of New

York, until it was instructed otherwise,

to execute transactions in the System

Account in accordance with the following domestic policy 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 longrun objectives, the Committee in the immediate future seeks conditions in reserve

markets consistent with increasing the federal funds rate to an average of around

41⁄2 percent.

The vote encompassed approval of

the paragraph below for inclusion in the

statement to be released shortl

meeting:

The Committee judges that so

policy firming may be needed t

risks to the attainment of both 

economic growth and price stabil

in balance. In any event, the Com

respond to changes in economic p

needed to foster these objectives.

Votes for this action: 

Greenspan and Geithner, 

Messrs. Ferguson, Guyn

Lacker, and Olson, Mses. P

Yellen. Votes against this ac

The confirmation of the d

next meeting of the Comm

postponed, pending the elec

successor Chairman.

The meeting adjourned at 1

Notation Vote

By notation vote completed o

ber 30, 2005, the Committ

mously approved the minut

Federal Open Market Commi

ing held on December 13, 200

Vincent R

Meeting Held on

March 27–28, 2006

A meeting of the Federal Ope

Committee was held in the off

Board of Governors of the 

Reserve System in Washingt

on Monday, March 27, 200

p.m. and continued on Tuesd

28, 2006 at 9:00 a.m.

Present:

Mr. Bernanke, Chairman

Mr. Geithner, Vice Chairman

Ms. Bies

Mr. Guynn

Mr. Kohn

Mr. Kroszner

Mr. Lacker
Mr. Olson

Ms. Pianalto

Mr. Warsh

Ms. Yellen

Mses. Cumming and Minehan, Messrs.

Moskow, Poole, and Hoenig, Alternate Members of the Federal

Open Market Committee

Messrs. Fisher and Stern, Presidents of

the Federal Reserve Banks of Dallas and Minneapolis, respectively

Mr. Stone, First Vice President, Federal

Reserve Bank of Philadelphia

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, Struckmeyer, Tracy, Weinberg, and Wilcox, Associate Economists

Mr. Kos, Manager, System Open Market Account

Mr. Hambley,5 Assistant to the Board,

Office of Board Members, Board

of Governors

Messrs. Oliner and Slifman, Associate

Directors, Division of Research

and Statistics, Board of Governors

Mr. Whitesell, Deputy Associate Director, Division of Monetary Affairs,

Board of Governors

Mr. English, Assistant Director, Division of Monetary Affairs, Board of

Governors

Mr. Simpson, Senior Adviser, Division

of Research and Statistics, Board

of Governors

Mr. Orphanides, Adviser, Division

of Monetary Affairs, Board of

Governors

Mr. Small, Project Manager, Division

of Monetary Affairs, Board of

Governors.

Mr. Wright, Section Chief

of Monetary Affairs, 

Governors

Mr. Perli, Senior Economis

of Monetary Affairs, 

Governors

Mr. Luecke, Senior Financi

Division of Monetar

Board of Governors

Ms. Low, Open Market Secr

cialist, Division of 

Affairs, Board of Gover

Mr. Connolly, First Vice Pres

eral Reserve Bank of B

Messrs. Fuhrer and Rosenblu

tive Vice Presidents

Reserve Banks of Bosto

las, respectively

Messrs. Evans and Hakkio, M

and Messrs. Rasche, R

Rudebusch, Senior V

dents, Federal Reserve 

Chicago, Kansas City

phia, St. Louis, Minne

San Francisco, respectiv

Ms. Mosser, Vice Presiden

Reserve Bank of New Y

The Manager of the Syst

Market Account reported on 

velopments in foreign excha

kets. There were no open mar

tions in foreign currencies 

System’s account in the period 

previous meeting. The Manag

ported on developments in 

financial markets and on Sys

market transactions in governm

rities and federal agency o

during the period since the 

meeting. By unanimous vote, 

mittee ratified these transactio

The information reviewed 

meeting suggested that econo

ity was expanding strongly in 

quarter. Consumer spending 

5. Attended Monday’s session only. track to rise at a robust pace, 
ness purchases of equipment and software picked up appreciably. Warm

weather boosted housing construction in

January and February, although sales of

new homes dropped back and house

prices decelerated slightly. Private payrolls advanced solidly in the first two

months of the year. Headline consumer

price inflation jumped in January but

moderated in February as energy prices

moved down. Core inflation remained

contained.

Labor demand continued to increase

in the first two months of 2006, as private nonfarm payroll employment

showed large gains in both January and

February. With favorable weather conditions, employment growth was especially brisk in the construction sector.

Financial activities, business services,

and nonbusiness services also posted

solid payroll gains. Although the average workweek edged down in February,

the level of aggregate hours for production and nonsupervisory workers was

above its average for the fourth quarter

of 2005. The unemployment rate continued to decline and averaged 43⁄4 percent

over the first two months of the year.

Several other labor market indicators

also signaled a further tightening of

labor market conditions.

Industrial production picked up in

February after a modest decline in January. That pattern was attributable to

swings in utilities output, as temperatures were historically warm early in the

year before reverting to near seasonal

norms in February. Excluding utilities,

industrial production posted a sizable

gain in January before flattening out in

February, pointing to a solid rise in the

first quarter. Mining output—which

includes oil and natural gas extraction—

slipped in February after registering robust gains in each of the previous three

months. Manufacturing output was unchanged in February after a significant

increase in January. The rate o

utilization in the manufacturi

stood a bit above its long-run 

Consumer spending appeare

rebounded strongly in the fir

Motor vehicle purchases boun

in late 2005 and early 2006 

sluggish pace that followed t

the past summer’s “employee 

programs. Excluding motor 

consumption spending was ro

ported by continuing improv

the labor market and advance

and salary income. The annu

the pay of federal employees

living adjustments to Social 

benefits and other transfer 

and the initiation of the Med

scription Drug Plan boosted th

personal disposable income in 

Consumption was likely supp

by ongoing increases in home 

gains in the stock market. 

confidence as measured by 

remained consistent with 

increases in consumer spendin

Housing activity had m

somewhat from the robust pa

past summer. Although the 

single-family housing starts w

ally high in January and Febru

of this strength was likely the 

mild winter weather; new pe

ance extended the downward 

that began in October. After a

spike in January, multifamily 

starts dropped back in Februar

well within their historical ran

of new homes fell in the 

months of the year, while sale

ing homes turned up in Februa

first time since last August; b

sures were well below their 

mid-2005. The stock of home

was elevated compared with it

the last several years. Mortgag

tions continued to decline in 

and survey measures of homeb
titudes also maintained their recent

downward trend. Housing demand was

likely damped by rising mortgage rates,

which moved up further in late 2005 and

early 2006. House price appreciation

appeared to have slowed from the rapid

pace of the summer, but price increases

for both new and existing homes

remained well within the elevated range

that has prevailed in recent years.

Real outlays for equipment and software decelerated in the fourth quarter of

2005 but appeared to have gained

strength in early 2006. This pattern reflected sizable swings in outlays for

transportation equipment. The fundamentals underlying capital spending

continued to be supportive, as business

sector output expanded briskly, firms

remained flush with funds, and relative

price declines for high-tech equipment

continued to push down its user cost.

Although vacancy rates for nonresidential properties were well below the peaks

reached in the first quarter of 2004, real

spending on new construction had yet to

gain traction. In contrast, outlays for

drilling and mining structures continued

to rise rapidly and appeared poised to

increase further in the near term.

The book value of manufacturing and

trade inventories excluding motor vehicles rose at a moderate pace in the fourth

quarter of 2005, and inventories

appeared to have continued to build in

January. Much of the increase reflected

rising prices of goods held, and real

inventory accumulation was subdued.

The inventory-sales ratio declined

slightly in January, extending its longrun downward trend. Inventory stocks

appeared to be well aligned with demand in most industries.

The U.S. international trade deficit

rose in the fourth quarter and widened

further in January, as gains in exports of

goods and services were outweighed by

a substantially larger rise in imports.

Exports of industrial supplie

goods, and agricultural produ

up robustly in January, w

increase in imports was w

across most product categor

GDP growth in foreign industr

mies was mixed in the fourth 

economic activity slowed in 

area and in Canada while the 

economy expanded briskly an

in the United Kingdom firme

indicators of economic activity 

oping economies were gener

positive.

Readings on core consumer 

flation were favorable in recen

Nonetheless, the overall consu

index edged up in February a

tering a large increase in Jan

was driven mostly by a spike 

prices. While prices of food 

items recorded only modest in

February, energy prices fell b

increases in oil inventories a

sonably mild temperatures sin

ter part of December. Weekly 

March, however, indicated tha

prices rose sharply. Prices 

equipment inched up in Febru

more substantial gain in Janua

theless, prices of capital equip

celerated over the past twelv

Higher energy prices still seem

passing through to the prices 

ber of core intermediate 

although such increases were m

erate than those observed in th

ate aftermath of the hurricane

tumn. The increase in the em

cost index in the fourth quarte

was relatively modest. Com

per hour in the nonfarm busin

after having increased substa

the third quarter, was estimate

risen somewhat less in the fo

ter. Preliminary survey me

short-term inflation expect
March edged up, but longer-term measures remained steady.

At its January meeting, the Federal

Open Market Committee decided to

raise the target level of the federal funds

rate 25 basis points, to 41⁄2 percent. In its

accompanying statement, the Committee indicated that, although recent economic data had been uneven, the expansion in economic activity appeared solid.

Core inflation had stayed relatively low

in recent months, and longer-term inflation expectations had remained contained. Nevertheless, the Committee

noted that possible increases in resource

utilization as well as elevated energy

prices had the potential to add to inflation pressures. In these circumstances,

the Committee judged that some further

policy firming may be needed to keep

the risks to the attainment of both sustainable economic growth and price stability roughly in balance but reiterated

that it would respond to changes in economic prospects as needed to foster its

objectives.

Investors had largely anticipated both

the Committee’s interest rate decision at

the January meeting and the text of the

accompanying statement. Consequently,

the policy announcement elicited little

market reaction. Policy expectations and

yields on Treasury coupon securities

subsequently firmed, on net, over the

intermeeting period, as incoming data

indicated robust economic growth in the

United States and strengthening expansion abroad. Yields on investment-grade

corporate debt rose roughly in line with

those on comparable-maturity Treasury

securities, while yields on speculativegrade corporate debt were little changed.

Broad stock market indexes were modestly higher amid favorable economic

news and lower oil prices, and the tradeweighted foreign exchange value of the

dollar appreciated slightly over the

period.

Growth of domestic nonfina

tor debt appeared to have m

only a bit in the first quarte

robust pace in the fourth q

2005. Net issuance of corpor

and expansion of business loan

mercial banks had abated in 

and early March after robust 

January; commercial paper ou

was about flat in the first quart

hold mortgage borrowing wa

to have slowed somewhat in 

quarter in response to increa

gage interest rates. Consumer 

bounded some in January after 

ing in the fourth quarter b

elevated charge-offs related to 

in bankruptcy filings. Based o

Treasury statements, fede

seemed likely to have accelera

first quarter. On average, 

briskly in January and Februa

liquid deposits expanded m

small time deposits and reta

funds advanced strongly, sup

further increases in offering ra

The staff forecast prepared 

meeting showed real GDP e

briskly in the current quarter. 

growth was expected to mod

this year. The level of outp

current quarter was estimated t

to the economy’s potential an

ticipated to remain so over th

tion period. Core PCE infla

expected to move slightly high

because of cost pressures in

high energy and import pric

step back down in 2007 as 

pressures were anticipated to a

In their discussion of the 

situation and outlook, meetin

pants saw the economy as h

bounded strongly from the slo

the fourth quarter of last y

aggregate spending and em

expanding briskly in the curre

Growth was expected to mod
more sustainable pace later this year.

The ongoing cooling in the housing market would act to restrain residential construction and growth in consumption,

but business and household confidence

and supportive financial conditions

would help to foster growth in employment and incomes, keeping consumption and investment on a solid upward

track. Several meeting participants observed that, although the economy’s sustainable potential output could not be

observed directly or estimated with precision, historical patterns and recent data

suggested that current levels of labor

and product market resource utilization

were in a zone consistent with little or

no remaining economic slack. The

recent behavior of core consumer prices

seemed to indicate that any pass-through

of higher energy and other commodity

prices had been limited. In addition, productivity growth, moderate increases in

compensation, contained inflation expectations, and international competition were helping to restrain unit labor

costs and price pressures. Nonetheless,

meeting participants generally remained

concerned about the risk that possible

increases in resource utilization, in combination with the elevated prices of

energy and other commodities, could

add to inflation pressures.

Regarding the major sectors of the

economy, meeting participants noted

that consumer spending appeared to be

growing at a solid pace, notwithstanding

earlier rises in energy prices. Contacts in

the retail sector reported strong demand,

and lending to households seemed to be

robust. However, some automobile dealers reported subdued demand for domestic name-plate products. In coming quarters, consumer outlays were expected to

be supported by continued employment

gains, household income growth, and

relatively low long-term interest rates,

even if gains in housing wealth abated.

Meeting participants disc

some length signs of cooling i

dential real estate market. Publ

on housing starts showed little 

of a significant weakening in 

tion activity. However, anecdo

from several markets, surveys 

buyer attitudes, and data on in

home sales, and new home ca

rates all pointed to a moderatio

ing activity. It was noted tha

tively robust data on construct

ity could owe in part to uns

warm weather. Going forwar

pants expected a deceleration 

prices to contribute to an incre

household saving rate and to 

consumption growth. Aggrega

was also expected to be rest

rectly by a softening in the pac

building. Moreover, rebuildin

ing last year’s major h

appeared to be proceeding a

pace, and so would provide on

offset to the implications of m

mental developments in this m

Generally, however, the 

expansion appeared to be bro

Contacts indicated that certai

such as energy and semicond

duction, were particularly 

Against this backdrop, robust 

business spending was seen 

even as household spendin

moderated somewhat. Busine

expenditures, especially on e

and software, appeared to hav

erable momentum, supported 

corporate profits, exceptiona

balance sheets, and greater bu

timism. Some participants indi

nonresidential construction w

process of picking up and co

vacancy rates were declining 

regions.

Financial market conditions 

supportive of growth, with 

rates relatively low, risk sprea
porate debt markets narrow, and banks

seeking lending opportunities. Merger

and acquisition activity was strong and

infusions of private equity continued at

a rapid pace, but the domestic market

for initial public offerings was reported

to be quite weak. Although rates on

fixed-rate mortgages remained historically low, some ratcheting up of rates on

adjustable-rate mortgages was seen as a

factor weighing to some degree on the

housing market. More generally, the

effects on spending of the substantial

increase in short- and intermediate-term

rates since June 2004 had probably not

yet been fully felt.

There were reports of increased construction by state and local governments, which were benefiting from

strong tax collections. Federal defense

expenditures had leveled out. Foreign

economic growth appeared to have

strengthened of late, prompting some

firming of monetary policy by several

foreign central banks. Nonetheless,

increases in imports were expected to

continue to outpace increases in exports

in coming quarters, trimming the rate of

expansion of domestic output.

Meeting participants saw both upside

and downside risks to their outlook for

expansion around the rate of growth of

the economy’s potential. In the housing

market, for instance, some downshift

from the rapid price increases and strong

activity of recent years seemed to be

underway, but the magnitude of the

adjustment and its effects on household

spending were hard to predict. Some

participants cited stronger growth

abroad and robust nonresidential investment spending as potentially contributing more to activity than expected. It

was also noted that an abrupt rise in

long-term interest rates, reflecting, for

example, a reversion of currently low

term premiums to more typical levels,

could weigh on both house

business spending.

Several participants noted 

labor market had conti

strengthen, with payrolls incre

solid pace. The labor market 

showing some signs of tightne

tent with a relatively low job

There were anecdotal reports 

ages of skilled labor in a few 

such as health care, techno

finance. Still, participants exp

certainty about how mu

remained. Pressures on unit l

appeared contained, despi

health-care costs, amid continu

productivity growth and still

increases in several comprehen

sures of compensation growth

In their discussion of price

pants indicated that data over 

meeting period, including me

inflation expectations, sugge

underlying inflation was not i

cess of moving higher. Crude 

though volatile, had not risen 

bly in recent months on balan

flattening in energy prices w

ning to damp headline inflation

tion, core consumer inflation w

even a bit lower by some 

Some meeting participants 

surprise at how little of the pre

in energy prices appeared to ha

through into core inflation 

However, with energy prices 

high, and prices of some ot

modities continuing to rise, the 

least a temporary impact on c

tion remained a concern.

Participants noted that ther

yet few signs that any tightnes

uct and labor markets was 

inflation pressures. To date, 

costs were not placing pressur

tion, and high profit margins l

considerable buffer to absorb 

creases. Moreover, actual and 
competition from abroad could be restraining cost and price pressures,

though participants exchanged views on

the extent to which conditions in foreign

markets might be constraining prices domestically. However, participants observed that there was a risk that continuing increases in resource utilization

could add to inflationary pressures.

Some participants held that core inflation and inflation expectations were already toward the upper end of the range

that they viewed as consistent with price

stability, making them particularly vigilant about upside risks to inflation, especially given how costly it might be to

bring inflation expectations back down

if they were to rise.

In the Committee’s discussion of

monetary policy for the intermeeting

period, all members favored raising the

target federal funds rate 25 basis points

to 43⁄4 percent at this meeting. The economy seemed to be on track to grow near

a sustainable pace with core inflation

remaining close to recent readings

against a backdrop of financial conditions embodying an expectation of some

tightening. Since the available indicators showed that the economy could well

be producing in the neighborhood of its

sustainable potential and that aggregate

demand remained strong, keeping rates

unchanged would run an unacceptable

risk of rising inflation. Most members

thought that the end of the tightening

process was likely to be near, and some

expressed concerns about the dangers of

tightening too much, given the lags in

the effects of policy. However, members

also recognized that in current circumstances, checking upside risks to inflation was important to sustaining good

economic performance. The need for

further policy firming would be determined by the implications of incoming

information for future activity and

inflation.

With regard to the Com

announcement to be released 

meeting, members expressed 

ference in views about the a

level of detail to include in 

ment. In the end, they conc

the statement should note that 

growth had rebounded in th

quarter but that it appeared 

moderate to a more sustainab

coming quarters. Policymake

that the announcement sho

highlight the favorable outlook 

tion and summarize their re

that assessment, but that it sho

ate that possible increases in 

utilization, along with elevated 

commodity and energy prices

potential to add to inflation 

Changes in the sentence on th

of risks to the Committee’s 

were discussed. Several mem

concerned that market pa

might not fully appreciate the 

which future policy action w

on incoming economic data, 

when an end to the tightenin

seems likely to be near. Some 

expressed concern that retent

phrase “some further policy 

may be needed to keep th

roughly in balance” could 

construed as suggesting that 

mittee thought that severa

tightening steps were likely to 

sary. Nonetheless, all concurre

current risk assessment c

retained at this meeting.

The Committee also discus

perience with the two-day mee

ticipants agreed that the addit

had facilitated their discussi

economy, policy, and the word

announcement. It was agreed 

cause of scheduling conflicts

meeting of the Committee wou

on one day, Wednesday, May 

After experience with that an
the subsequent meeting that is already

scheduled for two days, a decision

would be taken about the general format

of future meetings.

At the conclusion of the discussion,

the Committee voted to authorize and

direct the Federal Reserve Bank of New

York, until it was instructed otherwise,

to execute transactions in the System

Account in accordance with the following domestic policy 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 longrun objectives, the Committee in the immediate future seeks conditions in reserve

markets consistent with increasing the federal funds rate to an average of around

43⁄4 percent.

The vote encompassed approval of

the paragraph below for inclusion in the

statement to be released shortly after the

meeting:

The Committee judges that some further

policy firming may be needed to keep the

risks to the attainment of both sustainable

economic growth and price stability roughly

in balance. In any event, the Committee will

respond to changes in economic prospects as

needed 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. Yellen. Vote against this action: None.

The meeting adjourned at 12:15 p.m.

Notation Vote

By notation vote completed on February

1, 2006, the Committee unanimously

approved the election of Ben S. Bernanke as Chairman of the Federal Open

Market Committee.

By notation vote completed on February 17, 2006, the Committee unanimously approved the minut

Federal Open Market Commi

ing held on January 31, 2006.

Vincent R

Meeting Held on

May 10, 2006

A meeting of the Federal Ope

Committee was held in the off

Board of Governors of the 

Reserve System in Washingt

on Wednesday, May 10, 200

a.m.

Present:

Mr. Bernanke, Chairman

Mr. Geithner, Vice Chairman

Ms. Bies

Mr. Guynn

Mr. Kohn

Mr. Kroszner

Mr. Lacker

Mr. Olson

Ms. Pianalto

Mr. Warsh

Ms. Yellen

Mr. Hoenig, Ms. Minehan, a

Moskow and Poole, 

Members of the Fed

Market Committee

Messrs. Fisher and Stern, Pr

the Federal Reserve Ba

las and Minneapolis, re

Mr. Stone, First Vice Preside

Reserve Bank of Philad

Mr. Reinhart, Secretary and 

Ms. Danker, Deputy Secreta

Ms. Smith, Assistant Secreta

Mr. Skidmore, Assistant Sec

Mr. Alvarez, General Couns

Ms. Johnson, Economist

Mr. Stockton, Economist

Messrs. Connors, Eisenbeis, 

min, Madigan, Sniderm

meyer, and Wilcox, 

Economists

Mr. Kos, Manager, System 

ket Account
Messrs. Oliner and Slifman, Associate

Directors, Division of Research

and Statistics, Board of Governors

Mr. Simpson, Senior Adviser, Division

of Research and Statistics, Board

of Governors

Mr. Orphanides, Adviser, Division

of Monetary Affairs, Board of

Governors

Mr. Small, Project Manager, Division

of Monetary Affairs, Board of

Governors

Mr. Wright, Section Chief, Division

of Monetary Affairs, Board of

Governors

Mr. Luecke, Senior Financial Analyst,

Division of Monetary Affairs,

Board of Governors

Ms. Low, Open Market Secretariat Specialist, Division of Monetary

Affairs, Board of Governors

Mr. Werkema, First Vice President,

Federal Reserve Bank of Chicago

Messrs. Fuhrer and Rosenblum, Executive Vice Presidents, Federal

Reserve Banks of Boston and Dallas, respectively

Messrs. Evans and Hakkio, Ms. Mester,

and Mr. Rasche, Senior Vice Presidents, Federal Reserve Banks of

Chicago, Kansas City, Philadelphia, and St. Louis, respectively

Mr. Hilton, Vice President, Federal

Reserve Bank of New York

Mr. Potter, Assistant Vice President,

Federal Reserve Bank of New

York

Mr. Weber, Senior Research Officer,

Federal Reserve Bank of Minneapolis

Mr. Hetzel, Senior Economist, Federal

Reserve Bank of Richmond

The Manager of the System Open

Market Account reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the

System’s account in the period 

previous meeting. The Manag

ported on developments in 

financial markets and on Sys

market transactions in governm

rities and federal agency o

during the period since the 

meeting. By unanimous vote, 

mittee ratified these transactio

With Mr. Lacker dissenting, 

mittee voted to extend for 

beginning in mid-December 

reciprocal currency (“swap”) 

ments with the Bank of Canad

Banco de Mexico. The arr

with the Bank of Canada 

amount of $2 billion equiva

that with the Banco de Mexic

amount of $3 billion equival

arrangements are associated 

Federal Reserve’s participati

North American Framework A

of 1994. The vote to renew the 

participation in the swap arra

maturing in December was tak

meeting because of the prov

each party must provide si

prior notice of an intention to 

its participation. Mr. Lacker 

because of his opposition, as 

at the January meeting, to 

exchange market interventio

Federal Reserve, which su

arrangements facilitate, and b

his opposition to direct lendi

eign central banks.

By unanimous vote, the C

delegated the authority to re

determine appeals of a denial 

to Committee records under F

other rules to the Board memb

nated as the primary and alte

ministrative Governors for Fr

Information and Privacy Ac

Also by unanimous vote, the C

established a FOIA Requeste

Center and designated Carol R

fulfill the associated responsib
The information reviewed at this

meeting suggested that economic activity expanded strongly in the first quarter

and that gains were widespread across

most categories of final sales. Consumer

spending posted a sizable increase,

driven by January’s bounceback in

motor vehicle purchases and an acceleration in spending on other goods at the

turn of the year. In addition, favorable

weather boosted housing construction

early in the quarter. Later in the quarter,

however, the pace of consumer spending

moderated, and housing starts retraced

their earlier run-up. Business investment

spending strengthened in the first quarter, in part because of a surge in the

purchases of transportation and hightech equipment and a step-up in nonresidential construction. Manufacturing production also posted solid gains in the

first quarter and payroll growth moderated a bit in April after robust gains in

employment in the first quarter. Overall

consumer prices jumped in March because of higher energy prices, while

core prices rose a bit more rapidly than

in earlier months.

Nonfarm payrolls increased by

138,000 jobs in April following robust

growth in March. The gains in April

were widespread: Manufacturing and related industries registered significant

increases, mining activity and employment were boosted by rising energy

prices, construction hiring posted a moderate gain, and a range of servicesproducing industries strengthened, with

the important exception of retail trade,

which more than reversed its March

gains. Average hours of production or

nonsupervisory workers on private nonfarm payrolls edged up in April. The

increases in the workweek and employment in April led to notable growth in

aggregate hours of production or nonsupervisory workers. The unemployment

rate edged down to 4.7 percent 

and remained at that level in A

Industrial production in M

panded at about the same stron

it did in February, with gai

across all major components 

dex. Manufacturing activity p

in March after a lull in Februa

manufacturing growth for the 

ter as a whole slowed from 

pace of the fourth quarter, it 

that of the previous year. Man

capacity utilization during th

was a bit above its long-run 

Mining output—which includ

natural gas extraction—streng

the first quarter as a whole. W

quarter, however, the boo

hurricane-related recovery s

ebb. While utility output surge

ruary and moved up a bit 

March, these increases on

reversed the weather-related 

January.

Growth of consumer 

appeared to moderate after po

able gains around the turn of 

Excluding motor vehicles, re

rose temperately in March, b

the continued rise in spendin

vices. Spending on goods 

motor vehicles posted a secon

monthly decline after robust g

the previous four months. Sal

vehicles held steady in M

picked up a bit in April, bri

average pace for the year w

that of the fourth quarter but a

with the rate of last year. Alth

tinued improvements in the l

ket had been generating co

gains in nominal wage an

income, rising gasoline pr

down the increase in real d

personal income in March 

expected to damp it in Apri

Ongoing increases in home p

additional gains in the stoc
however, further boosted household

wealth during the first quarter. Measures

of consumer confidence remained

consistent with moderate increases in

consumer spending.

The underlying pace of residential activity seemed to moderate in the first

quarter. After unseasonably warm

weather allowed a high level of singlefamily housing starts in January and

February, starts fell in March to their

lowest level in a year. New permit issuance for single-family homes also fell in

March, continuing its downward trend.

Multifamily starts recovered a bit in

March from their low rate in February

but remained well within their historical

range. Home sales also declined, on net,

in recent months. Although sales of existing single-family homes edged up in

February and March, the level of sales

for the first quarter as a whole was

notably below the record high in the

second quarter of last year. Sales of new

homes also moved up in March, but

their average in the first quarter was

down substantially from the peak in the

third quarter of last year. House price

appreciation appeared to have slowed

from the elevated rates seen over the

past summer. Growth in the average

sales price of existing homes in March,

versus a year earlier, decelerated

sharply, and the average price for new

homes in March fell compared to a year

earlier. In addition, other indicators,

such as months’ supply of both new and

existing homes for sale and the index of

pending home sales, supported the view

that housing markets had cooled in

recent months.

Real outlays for equipment and software surged in the first quarter after a

relatively subdued performance in the

fourth quarter of last year. Much of the

growth reflected a sharp jump in business purchases of transportation equipment, such as airplanes and motor vehicles. Spending on high-tech e

and software also improved 

tionally strong growth in exp

for communications equipm

than compensated for fairly s

ing on computers and peripher

software. Conditions in the no

tial construction sector improv

ably. Although spending on no

tial building construction rema

short of the robust levels se

2000, growth of expenditure

sector was at its fastest pace i

quarter in nearly six years. O

drilling and mining structures 

to climb in the first quarter, 

able data pointed to ongoing g

Real nonfarm inventories 

down in the first quarter, large

ing a decline in investment 

vehicle inventories. Excludi

vehicles, inventories increased 

well above that in the fourt

Over the past twelve month

tories relative to shipments 

had moved down moderately 

ance, extending the long-run d

trend.

The U.S. international tra

narrowed in February as 

decrease in imports more tha

modest fall in exports. The d

both categories were genera

spread across sectors with the 

of oil imports, which were 

imported services, which ros

ing data for foreign industri

mies were generally favor

pointed to continued expansio

able data showed continued 

GDP in the United Kingdom i

quarter, continuing strong dom

mand in Canada through Feb

going recovery in Japan, an

quarter rebound in euro-area 

performance.

Headline inflation turne

March. Although the price of n
had fallen because of continued plentiful inventories, retail gasoline prices

surged, leading to a jump in overall

energy prices for the month. Prices of

core goods and services also rose more

quickly in March, largely because of a

spike in the apparel component that unwound a decline in February and a onetime step-up in medical prices related to

changes in Medicare reimbursement

rules. During the twelve months ending

in March, overall inflation rose at a

slightly faster pace than that in the preceding twelve-month period, while core

prices for the same period increased a

bit more slowly than in the previous

year. Producer price inflation also

moved up in March, driven largely by

higher food and energy prices. Readings

on the growth in the cost of labor were

mixed. Over the three months ending in

March, the employment cost index for

hourly compensation of private industry

workers rose at its slowest pace in several years. Data on compensation per

hour in the nonfarm business sector,

however, pointed toward notably faster

growth in the first quarter. Some

financial-market and survey indicators

suggested that inflation expectations,

both for the upcoming year and for the

longer term, had moved up since the

March meeting.

At its March meeting, the Federal

Open Market Committee decided to

raise its target for the federal funds rate

25 basis points, to 43⁄4 percent. In its

accompanying statement, the Committee indicated that the slowing of the

growth of real GDP in the fourth quarter

of 2005 seemed largely to have reflected

temporary or special factors. Economic

growth had rebounded strongly in the

first quarter but seemed likely to moderate to a more sustainable pace. As yet,

the run-up in the prices of energy and

other commodities appeared to have had

only a modest effect on core inflation,

ongoing productivity gains h

to hold the growth of unit labo

check, and inflation expecta

remained contained. Still, the 

tee noted that possible inc

resource utilization, in combin

the elevated prices of energy 

commodities, had the potentia

inflation pressures. In these 

stances, the Committee jud

some further policy firming 

needed to keep the risks to t

ment of both sustainable 

growth and price stability r

balance, but reiterated that in 

the Committee would res

changes in economic pros

needed to foster these objectiv

Investors anticipated the FO

cision at its March meeting to 

target federal funds rate 25 ba

but the Committee’s post-mee

ment evidently led them to 

somewhat their expected pat

federal funds rate. Subsequ

path was pushed up further b

leases that were, on balance

than market participants had 

Speeches by Federal Reserve 

the minutes of the March me

Congressional testimony by t

man combined to restrain poli

tations some. On net, the a

path of the federal funds rate 

next two years nonetheles

upward. Yields on inflatio

Treasury securities moved up 

intermeeting period, but yields 

nal Treasury issues rose more

of yields on investment-gra

over those on comparable

Treasury securities were a

changed, while those on sp

grade bonds declined. Major s

indexes were up a bit over the 

ing period, as positive first-qu

ings reports more than offset 
tive effects of higher energy prices and

rising interest rates.

The trade-weighted exchange value

of the dollar against major foreign currencies fell since the March meeting.

Increased focus in public debate on the

risks posed by the large U.S. external

imbalance appeared to erode investor

support for the dollar.

Domestic nonfinancial sector debt

was estimated to have grown at a robust

pace in the first quarter, down only

slightly from the brisk pace of 2005.

Business sector debt appeared to have

expanded strongly, supported by significant net issuance of U.S. corporate

bonds and double-digit growth of business loans at commercial banks. In the

household sector, consumer credit continued to rise slowly, and the growth of

household mortgage debt was thought,

based on limited data, to have moderated somewhat in the first quarter

against a backdrop of higher mortgage

interest rates and some signs of a deceleration in house prices. M2 advanced at

a pace somewhat below that of nominal

GDP in the first quarter and was estimated to have expanded moderately in

April.

The staff forecast prepared for this

meeting showed real GDP growth moderating somewhat from the average pace

of the previous several quarters. The

projected deceleration of real GDP reflected the lagged effects of the tightening of monetary policy, the waning impetus from increases in household

wealth, and reduced stimulus from fiscal

policy. While higher energy prices were

expected to boost inflation in the near

term, structural productivity was strong,

and the influence of higher energy and

material costs was thought likely to

moderate. Thus, consumer prices, after

increasing at a faster rate in the first half

of the year, were expected to decelerate

later this year and next year.

In their discussion of the 

situation and outlook, meetin

pants saw the economy as h

bounded strongly so far this 

the slowing of growth in the fo

ter. The advance in output 

vigorous in the first quarter of 

with real GDP increasing at 

5 percent annual rate. Alth

expansion appeared likely to 

it evidently remained solid. 

pressures appeared to be 

greater than the Committee h

pated at the time of its March 

Consumer prices recently had 

pace noticeably above the av

over the previous twelve mon

prices of energy and many o

modities had climbed sharpl

and inflation expectations ap

have risen slightly. If econom

continued to moderate ove

quarters, as anticipated, pre

productive resources would m

continue to be limited. Most pa

expected that, after allowing 

possible near-term volatility 

the recent jump in energy 

commodity prices, core inflat

probably remain around the le

rienced on average over the 

However, recent developme

gested that upside risks to inf

risen somewhat since the tim

March meeting.

In their discussion of major 

the economy, some participa

that growth of household spen

likely to slow over the remain

year. Anecdotal information p

some cooling of housing mar

cooling was especially notic

high-end homes and for house

kets that previously had exper

steepest appreciation. Data 

sales, permits, and starts on 

likewise suggested that act

gradually diminishing. Som
indicated that speculative building of

homes had dropped off considerably, but

inventories of unsold homes still seemed

to be expanding. Although fresh comprehensive data were not available,

home prices on average appeared still to

be rising, but at a slower pace than over

the past few years. Going forward,

growth in consumption spending was

likely to be supported by gains in employment and personal income. But

slower appreciation of home prices and

the effects of the increases in energy

prices and interest rates that had already

occurred would likely act to restrain

consumption spending somewhat. Certain features of recently popular nontraditional mortgage products had the potential to cause financial difficulties for

some households and erode mortgage

loan performance for some lenders.

Nonetheless, the household sector

seemed likely to remain in sound financial condition overall. On balance, consumption spending was viewed as most

likely to expand at a moderate pace in

coming quarters.

Several participants remarked that

business investment spending was robust. Nonresidential construction was

accelerating notably, in the process absorbing some of the resources that were

being diverted from housing. Office vacancy rates were declining, spurring

construction of new office buildings.

Drilling and mining activity was said to

be particularly strong, propelled by the

high levels of energy prices. Investment

in equipment and software appeared to

be expanding at a solid rate. Capital

formation was likely to continue to be

supported by rising output, strong balance sheets in the business sector, and

ready availability of financing on attractive terms.

Some participants commented on the

recent surge in federal tax revenues, a

development that was being mirrored at

the state level. While the preci

for the increase in federal rece

not entirely clear, robust incom

was probably an important fac

case, the effect was to trim th

federal budget deficit noticeab

theless, the longer-run federal 

balance remained a serious co

Data on economic growth o

United States indicated that t

expansion was firming, a sen

fied by reports from internati

tacts. The apparent strengtheni

bal growth was likely to sup

exports and economic acti

would also tend to maintai

pressures on energy and co

prices.

Meeting participants expres

concern about recent price 

ments and their implications 

tion prospects. Core consume

lately had been a little hig

expected. Moreover, energy p

risen steeply in the period 

March meeting, and, althou

through apparently had been 

date, the most recent increases 

reflected to a greater degre

inflation in coming months. Pa

noted that prices of non-ene

modities, such as industrial m

building supplies, also had be

ing. The recent decline in the d

another factor that could add t

pressures, although the effec

changes in the foreign excha

of the dollar on core consum

had apparently been limited. 

contacts had reported continu

ages of certain types of skilled 

related wage pressures in som

tions, which would tend to bo

However, participants also c

factors that could be expected 

inflation. Although alternative 

of labor compensation provid

gent readings, growth of total 
sation on balance appeared to remain

moderate. And, even if nominal wages

should accelerate somewhat, relatively

wide profit margins could buffer the

effect on prices of final goods and services. While firms would seek to maintain those margins, recent experience

suggested that this might be accomplished in part through further productivity gains, which had remained fairly

strong on balance in recent quarters,

rather than through more rapid price

hikes.

Participants discussed in some detail

inflation expectations—a potentially important factor influencing future inflation trends. Some surveys suggested that

inflation expectations had risen in recent

weeks, but others implied that expectations were little changed. Measures of

inflation compensation based on the difference between yields on nominal Treasury securities and inflation-indexed

issues had edged higher. It was possible,

though, that investors’ uncertainty regarding inflation prospects, not just inflation expectations themselves, had

risen. On balance, participants judged

that inflation expectations had risen

somewhat—a development that would

have to be taken into account in policymaking and warranted close monitoring—but remained contained.

Although the Committee discussed

policy approaches ranging from leaving

the stance of policy unchanged at this

meeting to increasing the federal funds

rate 50 basis points, all members believed that an additional 25 basis point

firming of policy was appropriate today

to keep inflation from rising and promote sustainable economic expansion.

Recent price developments argued for

another firming step at today’s meeting.

Core inflation recently had been a bit

higher than had been expected, and several members remarked that core inflation was now around the upper end of

what they viewed as an a

range. Moreover, a number 

were augmenting the upside r

flation: the surge in energy 

modity prices, some recent we

the foreign exchange value of 

and the possibility that the 

increase in inflation expectatio

if it persisted, impart moment

flation. In addition, the 

appeared to be operating at a 

high level of resource utiliz

had been growing quite stro

whether economic growth wou

ate to a sustainable pace wa

clear. At the same time, mem

saw downside risks to econom

ity. For example, the cumula

of past monetary policy action

recent rise in longer-term inte

on housing activity and pri

turn out to be larger than expe

it seemed most likely that, wi

further policy action, inc

25 basis point firming today, 

activity would moderate gradu

coming quarters, pressures on 

would remain limited, and cor

would stay close to levels ex

over the past year.

Given the risks to growth 

tion, Committee members we

tain about how much, if an

tightening would be needed 

day’s action. In view of the ris

outlook for inflation could w

Committee decided to repeat t

tion in the policy statement 

after the March meeting that 

ther policy firming could be 

However, the Committee agre

phasize that “the extent and 

any such firming will depen

tantly on the evolution of the 

outlook as implied by incom

mation.” Members debated the 

ate characterization of inflation 

tions in the statement. Low a
inflation expectations were key to the

attainment of the Committee’s dual objectives of price stability and maximum

sustainable economic growth. However,

the apparent pickup in longer-term expectations, while worrisome, was relatively small. They remained within the

range seen over the past couple of years,

and the increase could well reverse before long. Accordingly, it appeared appropriate to characterize inflation expectations again as “contained.”

At the conclusion of the discussion,

the Committee voted to authorize and

direct the Federal Reserve Bank of New

York, until it was instructed otherwise,

to execute transactions in the System

Account in accordance with the following domestic policy 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 longrun objectives, the Committee in the immediate future seeks conditions in reserve

markets consistent with increasing the federal funds rate to an average of around

5 percent.

The vote encompassed approval of

the paragraph below for inclusion in the

statement to be released shortly after the

meeting:

The Committee judges that some further

policy firming may yet be needed to address

inflation risks but emphasizes that the extent

and timing of any such firming will depend

importantly on the evolution of the economic outlook as implied by incoming information. In any event, the Committee will

respond to changes in economic prospects as

needed to support the attainment of its

objectives.

Votes for this action: Messrs. Bernanke

and Geithner, Ms. Bies, Messrs. Guynn,

Kohn, Kroszner, Lacker, and Olson,

Ms. Pianalto, Mr. Warsh, and Ms. Yellen. Votes against this action: None.

During the interval between the

March and May meetings, Chairman

Bernanke had appointed a su

tee on communications issu

chaired by Governor Kohn an

ing Presidents Stern and Y

today’s meeting, Governor K

cated that the objective of the 

mittee was to help the Commi

and organize discussion of a br

of such issues over coming m

The meeting adjourned at 1

Notation Vote

By notation vote completed on 

2006, the Committee unanim

proved the minutes of the Fed

Market Committee meeting 

March 27–28, 2006.

Vincent R

Meeting Held on

June 28–29, 2006

A meeting of the Federal Ope

Committee was held in the off

Board of Governors of the 

Reserve System in Washingt

on Wednesday, June 28, 200

p.m. and continued on Thurs

29, 2006 at 9:00 a.m.

Present:

Mr. Bernanke, Chairman

Mr. Geithner, Vice Chairman

Ms. Bies

Mr. Guynn

Mr. Kohn

Mr. Kroszner

Mr. Lacker

Ms. Pianalto

Mr. Warsh

Ms. Yellen

Ms. Minehan, Messrs. Mosk

and Hoenig, Alternate M

the Federal Open Marke

tee

Messrs. Fisher and Stern, Pr

the Federal Reserve Ba

las and Minneapolis, re
Mr. Stone, First Vice President, Federal

Reserve Bank of Philadelphia

Mr. Reinhart, Secretary and Economist

Ms. Danker, Deputy Secretary

Ms. Smith, Assistant Secretary

Mr. Skidmore, Assistant Secretary

Mr. Baxter, Deputy General Counsel

Ms. Johnson, Economist

Mr. Stockton, Economist

Messrs. Connors, Eisenbeis, Judd, Kamin, Madigan, Sniderman, Struckmeyer, Tracy, Weinberg, and Wilcox, Associate Economists

Mr. Kos, Manager, System Open Market Account

Messrs. Oliner and Slifman, Associate

Directors, Division of Research

and Statistics, Board of Governors

Ms. Zickler, Deputy Associate Director,

Division of Research and Statistics, Board of Governors

Mr. English, Assistant Director, Division of Monetary Affairs, Board of

Governors

Messrs. Dale6 and Simpson, Senior Advisers, Divisions of Monetary

Affairs and Research and

Statistics, respectively, Board of

Governors

Mr. Gross, Special Assistant to the

Board, Office of Board Members,

Board of Governors

Mr. Small, Project Manager, Division

of Monetary Affairs, Board of

Governors

Mr. Nelson, Section Chief, Division

of Monetary Affairs, Board of

Governors

Mr. Perli, Senior Economist, Division

of Monetary Affairs, Board of

Governor

Mr. Doyle and Ms. Judson, Economists,

Divisions of International Finance

and Monetary Affairs, respectively,

Board of Governors

Mr. Luecke, Senior Financial Analyst,

Division of Monetar

Board of Governors

Ms. Low, Open Market Secr

cialist, Division of 

Affairs, Board of Gover

Mr. Moore, First Vice Pres

eral Reserve Bank of C

Messrs. Fuhrer and Rosenblu

tive Vice Presidents

Reserve Banks of Bosto

las, respectively

Mr. Evans, Ms. Mester, an

Rasche, Rolnick, an

Senior Vice President

Reserve Banks of Chic

delphia, St. Louis, M

and Kansas City, respec

Ms. Mucciolo, Vice Preside

Reserve Bank of New Y

By unanimous vote, the C

approved a “Report and Pla

Federal Open Market Com

Improve FOIA Operations” 

proved a delegation of author

Chairman (or his designee) 

actions required under the Fr

Information Act.

The Manager of the Syst

Market Account reported on 

velopments in foreign excha

kets. There were no open mar

tions in foreign currencies 

System’s account in the period 

previous meeting. The Manag

ported on developments in 

financial markets and on Sys

market transactions in governm

rities and federal agency o

during the period since the 

meeting. By unanimous vote, 

mittee ratified these transactio

The information reviewed a

meeting suggested that the g

economic activity in the secon

slowed substantially from its r

quarter pace. The expansion 

6. Attended Thursday’s session only. sumer spending softened, and 
the housing market continued to cool. In

contrast, the underlying rate of business

spending remained strong and was well

supported by fundamentals. The demand

for labor appeared to moderate as hiring

stepped down in recent months. Consumer price inflation remained elevated

in April and May, reflecting sharp rises

in energy prices and more rapid increases in core prices.

Gains in nonfarm private payrolls

averaged 112,000 over the three months

ending in May, a pace considerably below the average of about 170,000 jobs

per month for the prior three-month

period. The slowing in hiring was most

pronounced in retail trade but was also

evident in construction and information

services. Establishments in professional

and business services, nonbusiness services, and wholesale trade continued to

add jobs at roughly the same pace as

earlier in the year. Average hours of

production or nonsupervisory workers

on private nonfarm payrolls edged up in

April but reversed these gains in May.

The unemployment rate was 4.6 percent

in May, near its average for the year so

far.

Industrial production edged down in

May after strong growth in April,

largely reflecting the patterns of manufacturing output. For the year to date,

manufacturing production advanced at a

rate significantly below its rapid fourthquarter growth rate but only a bit below

its average pace of expansion since mid2003. The mining sector, which includes

oil and natural gas extraction, expanded

solidly in April before falling back in

May. Utilities output also grew strongly

in April but retreated in May as temperatures returned to normal after having

been unseasonably warm in April. Capacity utilization in manufacturing

remained somewhat above its long-run

average in both April and May.

Real consumer spending ap

be on track to decelerate not

the current quarter after posti

growth in the first quarter. Th

reflected both a marked reduc

growth in real outlays for m

cles from an elevated first-qu

and a moderation in the advan

expenditures for other goods 

months. Underlying this slow

expansion of consumer exp

was a moderation in the fun

determinants of spending. Th

nominal wages and salaries be

the fourth quarter of 2005 w

down considerably, and rising 

prices held down the gains in 

posable income. Higher inte

also likely restrained spendin

theless, despite recent declines 

prices, the wealth-to-incom

remained well above its histor

age, and consumer sentime

dipped in May, rebounded som

June.

Residential construction acti

erated over the past few m

remained at a historically h

Single-family starts posted 

drop in May for the third co

month. Although a substantial 

May’s decline seemed to be 

payback for the elevated leve

early in the year, when weath

tions had been favorable, the u

pace of single-family housing 

tion appeared to have slowe

multifamily sector, starts in M

well within the typical range 

1995. Sales of both new and 

single-family homes in April 

were significantly below their 

the summer of 2005, though n

sales continued to regain som

after having fallen in Febru

most reliable measures of ho

indicated modest growth foll

rapid increases seen last year.
After a first-quarter surge, real spending on equipment and software appeared

on track for a much smaller gain in the

second quarter. Incoming data for the

current quarter suggested that spending

on transportation equipment reversed

the run-up that occurred in the first quarter. Spending on high-tech equipment

and software advanced at a slower pace

in the second quarter as a flattening out

of spending on communications equipment after a huge increase in the first

quarter offset some pickup in businesssector demand for computers and software. The construction of nonresidential

buildings picked up noticeably so far

this year, although activity remained

well short of its previous peak in mid2000. Outlays on drilling and mining

structures continued to climb in response to high projected energy prices.

The book value of manufacturing and

trade inventories excluding motor vehicles stepped up in April. The ratio of

book-value inventories to sales held

steady for the year so far after having

fallen considerably last year. In general,

inventories appeared to be well aligned

with demand, and business surveys suggested that firms were comfortable with

the level of inventories.

The U.S. international trade deficit

widened in April, reflecting a large

increase in imports coupled with a slight

decline in exports. Import growth was

led by sharp rises in the value of imported oil and natural gas and increased

imports of automotive products and

capital goods. Exports were restrained

in part by a decline in aircraft exports.

Expansion of economic activity in the

foreign industrial countries was solid in

the first quarter, but indications for the

second quarter were more mixed. Incoming data pointed to a possible slowing in Canada, but signs of further

expansion in the euro area and of continued growth in Japan were evident, notwithstanding sharp declines 

indexes in these countries.

Headline inflation picked u

and May, driven partly 

increases in the prices of p

based products. In contrast, n

prices continued to decline in 

to excess supply, fully reve

autumn’s rises. Higher oil pric

through to producer prices for 

of energy-intensive intermedi

Consumer food prices decelera

edly since January, reflectin

price increases for food aw

home and declines, on balan

prices of fruits and vegetab

price inflation rose less than 

inflation in April and May but 

pace earlier in the year. Co

were boosted in part by an ac

in shelter costs, especially 

puted for owner-occupied r

Readings on the growth of la

were revised down for the four

of 2005 and first quarter of 

recent data suggested a pick

second quarter. A number of 

of inflation expectations la

versed increases recorded in t

At its May meeting, the Fed

Market Committee (FOMC) d

raise its target for the federal 

25 basis points, to 5 percent. T

mittee’s accompanying statem

cated that economic growth 

quite strong so far this year. T

mittee saw growth as likely to 

to a more sustainable pace, 

flecting a gradual cooling of th

market and the lagged e

increases in interest rates an

prices. At that time, the run-

prices of energy and other com

appeared to have had only 

effect on core inflation. Ong

ductivity gains had helped to 

growth of unit labor costs in c

inflation expectations remai
tained. Still, possible increases in

resource utilization and the elevated

prices of energy and other commodities

had the potential to add to inflation pressures. In these circumstances, the Committee foresaw the possibility of a need

for some further policy firming to address inflation risks but emphasized that

the extent and timing of any such firming would depend importantly on the

evolution of the economic outlook as

implied by incoming information.

Investors anticipated the FOMC’s decision at its May meeting to raise the

federal funds rate target 25 basis points,

but near-term policy expectations edged

up, apparently in response to the accompanying statement. Subsequent data releases reporting higher-than-expected

inflation, the release of the FOMC minutes, and speeches by Federal Reserve

policymakers all led investors to push

up their expectations for the future path

of the federal funds rate. Yields on nearterm nominal Treasury securities rose in

line with policy expectations over the

intermeeting period, but those on longerdated securities moved up by smaller

amounts. Yields on inflation-indexed

Treasury securities increased by more

than those on nominal securities, and the

resulting decline in inflation compensation retraced a substantial share of the

rise that had occurred over the preceding intermeeting period. Major stock

price indexes fell sharply over the

period. Spreads of yields on corporate

bonds over those on comparablematurity Treasury securities widened

somewhat, while those on speculativegrade issues rose by more.

After changing little on balance during much of May, the dollar’s foreign

exchange value against other major currencies moved up in June and showed a

modest increase, on net, over the intermeeting period. The dollar appreciated

after comments by FOMC policymakers

that were interpreted by mark

pants as suggesting a higher 

of policy tightening at the Jun

meeting. Prices of precious a

trial metals, which had rise

since early March, particularl

reversed those gains later in 

meeting period.

Debt of the domestic no

sectors was estimated to hav

ated in the second quarter afte

first-quarter increase. Busine

debt advanced more slowly i

ond quarter, although the exp

business loans remained bris

issuance of corporate bonds w

In the household sector, mort

rowing slowed in response to 

dued housing activity and m

house-price appreciation. M2 

the second quarter was tepi

growth of nominal income h

ently softened and rising op

cost continued to dampen de

money.

The staff forecast prepared 

meeting indicated that, after th

cant deceleration of real GD

current quarter from the first 

2006, growth would proceed 

the end of 2007 at a pace a bit 

rate of growth of the econom

tial. The outlook for modest 

real GDP reflected a slowdo

housing market, the effects of 

icy tightening, and a diminishe

consumer spending from inc

household wealth. Core consu

inflation was projected to hav

up in the second quarter from 

age pace over the precedin

quarters but to then drop ba

what, albeit to a level higher t

ously forecasted, as energy a

prices flatten out and som

emerges in labor and product 

In their discussion of the 

situation and outlook, meetin
pants saw economic growth as having

moderated in the second quarter from its

robust pace in the first quarter, reflecting

a cooling of the housing market and the

lagged effects of increases in interest

rates and energy prices. Most participants expected output to advance over

the next year and a half at a pace close

to that which the economy can sustain

over time. All participants found the

elevated readings on core inflation of

recent months to be of concern and, if

sustained, inconsistent with the maintenance of price stability. However, contained inflation expectations, the abatement of upward pressure from past

increases in energy and other commodity prices, and the slowing in the growth

of economic activity that was under way

were expected to contribute to a moderation in core inflation in coming quarters.

Nonetheless, participants noted a risk

that the drop-back in inflation could be

slower or more limited than the Committee would find desirable since

resource utilization was currently tight

and the pickup in price increases had

been broadly based rather than being

limited to a few specific sectors that

could be linked to energy costs.

In preparation for the Federal Reserve’s semiannual report to the Congress on monetary policy, the members

of the Board of Governors and the presidents of the Reserve Banks submitted

individual projections of the growth of

GDP, the rate of unemployment, and

core consumer price inflation for 2006

and 2007, conditioned on the participants’ views of the appropriate path for

monetary policy. The forecasts of the

rate of fourth-quarter to fourth-quarter

expansion in real GDP for 2006 were in

a range of 3 to 33⁄4 percent, with a

central tendency of 31⁄4 to 31⁄2 percent,

and those for 2007 were in a range of

21⁄2 to 31⁄4 percent, with a central tendency of 3 to 31⁄4 percent. These rates of

growth were associated with 

unemployment rate in a range 

5 percent in the fourth quart

year and 41⁄4 to 51⁄4 percent in 

quarter of 2007, with a central 

at both horizons of 43⁄4 to 5 

Forecasts of the rate of inf

measured by the change in th

fourth-quarter core PCE pr

from a year earlier, ranged fr

3 percent for this year, with 

tendency of 21⁄4 to 21⁄2 percen

range and central tendency w

21⁄4 percent for next year.

In their discussion of the m

tors of the economy, partici

served that housing constructio

had declined notably in recen

as indicated by lower housing 

permits; moreover, higher inve

unsold homes, a sharp rise in 

tions of new home sales, an

from construction companies 

that the weakness was like

extended. Several participant

out that the decline was broad

with expectations in light of th

ing in monetary policy and 

run-up in home prices and r

construction in recent years. Pa

also observed that the eviden

indicated that the slowdown w

but were mindful of the possi

sharper downturn in the sector

The growth of consumer 

had dropped off significantly i

ond quarter from a robust pace 

the year. The slowdown was 

in part to higher energy price

to a likely downshift in ho

appreciation and higher intere

reduction in the attractiveness 

equity borrowing was mention

sibly contributing to the s

Some retailers, especially thos

to lower- and middle-income c

reported weaker growth in sa

sumer spending was expecte
vance modestly in coming quarters as

the effects of more moderate gains in

home prices and a gradual rebound in

the household saving rate from recent

historically low levels were offset by

further gains in employment and growth

in labor income. A few participants

noted that the surge in federal tax

receipts this year and a similar advance

in revenue at the state level could be a

sign of vigorous gains in income,

indicating that household spending may

expand more rapidly than many were

anticipating.

Participants interpreted the incoming

data on orders and shipments of durable

goods, positive readings on business

sentiment, and continued high levels of

corporate profitability as suggesting that

business investment would remain a

source of strength going forward. In a

shift from the pattern observed in the

past few years, some contacts suggested

that businesses were now directing their

capital expenditures toward expanding

capacity rather than increasing efficiency, a signal of the anticipation of

continued solid growth in demand. Business expenditures on nonresidential

structures also were seen to be advancing robustly in a number of markets,

possibly providing some offset to reduced residential construction activity.

Several participants observed that the

continued ready availability of credit

would support business expenditures.

Others, however, noted that the pullback

from risk-taking that had been observed

in some financial markets over the preceding few months could intensify, raising the cost of funds.

Participants observed that many foreign central banks had tightened monetary policy over the intermeeting period

in response to strengthening activity and

indications of inflation pressures.

Greater uncertainty about inflation pressures and the needed policy response

had perhaps contributed to a 

ment of risks by investors glo

spite the tighter policy, how

nomic growth in the Unite

major trading partners appea

to remain solid, supporting U.S

Participants also discussed th

global capacity utilization in 

tion process.

All meeting participants 

concern about recent elevated 

on core inflation. A key issu

extent to which this spring’s i

inflation reflected transitory 

tent influences. Many noted th

ber of factors were temporarily 

inflation. The pass-through o

stantial rise in energy pric

account for a considerable p

step-up in core inflation in re

ters. In addition, rising rents 

boosting the cost of shelter an

tributing to the increase in c

tion. However, energy pri

expected to level out, and re

difficult to forecast, were v

some participants as likely to 

in coming quarters. The mod

the economic expansion was 

to prevent pressures on resour

tion from intensifying. In sum

flation expectations contained 

labor costs held down by ongo

in productivity and modest ad

compensation, inflation was 

most participants as likely to e

Nevertheless, several fact

cited as potentially sustainin

pressure on inflation, and the 

participants’ forecasts for core 

in 2007 rose by 1⁄4 percent

relative to the range of forecas

February. Some participants n

businesses in their Districts we

encing difficulty hiring certain 

skilled workers, suggesting 

creased wage pressures migh

In addition, some business con
cated a greater ability to pass higher

costs on to customers, although other

businesses continued to report that their

pricing power remained limited. The

relatively taut resource markets and the

lagged effects of the increase in energy

prices raised the possibility that inflation could continue at somewhat elevated levels for some time. Higher levels of inflation, should they persist,

could become embedded in inflation expectations. In that vein, several participants noted that inflation expectations

had been sensitive to incoming data and

to communications regarding monetary

policy over the intermeeting period.

All Committee members agreed that

raising the target for the federal funds

rate 25 basis points, to 51⁄4 percent, at

this meeting was appropriate given the

recent readings on inflation and the associated deterioration in the inflation

outlook. Such an action would also help

preserve the decline in inflation expectations that had occurred over the intermeeting period and which appeared to

be conditioned on an outlook for a policy firming. Characterizing the resulting

stance of policy was quite difficult in the

view of most members; those who did

venture a judgment saw the stance as

ranging from modestly restrictive to

somewhat accommodative. Many members noted that significant uncertainty

accompanied the appropriate setting of

policy going forward, and one indicated

that the decision to raise the target federal funds rate at this meeting was a

close call.

In their discussion of the wording of

the statement to be released after the

meeting, members expressed a wide

range of views. Some members favored

a shorter statement that focused on the

Committee’s desire to see core inflation

decline from its recent elevated levels,

while others were inclined to provide

more information about the forces that

would likely influence the futu

policy. In light of the possibili

lessening of inflation pressure

more limited than consistent 

tained good performance of 

omy, members agreed to ind

“[a]lthough the moderation 

growth of aggregate demand sh

to limit inflation pressures ove

some inflation risks remain.” 

less, with the economy slo

some of the effects of past 

still in the pipeline, members r

the value of accumulating m

mation for determining wha

additional policy action w

needed following the tightenin

at the current meeting. To ind

policy action at future meeting

foreordained and would depe

forecasts for inflation and acti

medium term, the Committee 

state that “[t]he extent and tim

additional firming that may be 

address these risks will depe

evolution of the outlook for b

tion and economic growth, a

by incoming information.”

After consulting with the pa

the communications subcomm

ommended that the Committee 

discussions of communication

the FOMC meeting in Augus

the FOMC meetings schedule

this year be lengthened to allo

initial discussion of some 

issues. The Committee also 

briefly the schedule for FOMC 

next year and tentatively a

increase the number of two-d

ings to four.

At the conclusion of the d

the Committee voted to auth

direct the Federal Reserve Ban

York, until it was instructed 

to execute transactions in th

Account in accordance with th

ing domestic policy 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 longrun objectives, the Committee in the immediate future seeks conditions in reserve

markets consistent with increasing the federal funds rate to an average of around

51⁄4 percent.

The vote encompassed approval of

the paragraph below for inclusion in the

statement to be released shortly after the

meeting:

Although the moderation in the growth of

aggregate demand should help to limit inflation pressures over time, the Committee

judges that some inflation risks remain. The

extent and timing of any additional firming

that may be needed to address these risks

will depend on the evolution of the outlook

for both inflation and economic growth, as

implied by incoming information. In any

event, the Committee will respond to

changes in economic prospects as needed to

support the attainment of its objectives.

Votes for this action: Messrs. Bernanke

and Geithner, Ms. Bies, Messrs. Guynn,

Kohn, Kroszner, and Lacker, Ms. Pianalto, Mr. Warsh, and Ms.Yellen. Votes

against this action: None.

The meeting adjourned at 11:10 a.m.

Notation Vote

By notation vote completed on May 30,

2006, the Committee unanimously approved the minutes of the Federal Open

Market Committee meeting held on May

10, 2006.

Vincent R. Reinhart

Secretary

Meeting Held on

August 8, 2006

A meeting of the Federal Open Market

Committee was held in the offices of the

Board of Governors of the Federal

Reserve System in Washingt

on Tuesday, August 8, 2006 at 

Present:

Mr. Bernanke, Chairman

Mr. Geithner, Vice Chairman

Ms. Bies

Mr. Guynn

Mr. Kohn

Mr. Kroszner

Mr. Lacker

Ms. Pianalto

Mr. Warsh

Ms. Yellen

Mr. Hoenig, Ms. Mineha

Moskow and Poole, 

Members of the Fed

Market Committee

Messrs. Fisher, Plosser, a

Presidents of the Feder

Banks of Dallas, Philad

Minneapolis, respective

Mr. Reinhart, Secretary and 

Ms. Smith, Assistant Secreta

Mr. Skidmore, Assistant Sec

Mr. Alvarez, General Couns

Ms. Johnson, Economist

Mr. Stockton, Economist

Messrs. Connors, Eisenbei

Madigan, Sniderman

meyer, and Wilcox, 

Economists

Mr. Kos, Manager, System 

ket Account

Mr. English and Ms. Liang

Directors, Divisions of 

Affairs and Resea

Statistics, respectively, 

Governors

Mr. Reifschneider, Deputy 

Director, Division of Re

Statistics, Board of Gov

Messrs. Dale and Orphanid

Advisers, Division of 

Affairs, Board of Gover

Mr. Gross, Special Assist

Board, Office of Board 

Board of Governors

Mr. Small, Project Manage

of Monetary Affairs, 

Governors
Mr. Luecke, Senior Financial Analyst,

Division of Monetary Affairs,

Board of Governors

Ms. Beechey, Economist, Division

of Monetary Affairs, Board of

Governors

Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors

Mr. Barron, First Vice President, Federal Reserve Bank of Atlanta

Messrs. Fuhrer and Rosenblum, Executive Vice Presidents, Federal Reserve Banks of Boston and Dallas,

respectively

Mr. Hakkio, Ms. Mester, Messrs. Rasche and Williams, Senior Vice

Presidents, Federal Reserve Banks

of Kansas City, Philadelphia,

St. Louis, and San Francisco,

respectively

Messrs. Peach and Krane, and Ms.

Weir, Vice Presidents, Federal Reserve Banks of New York, Chicago, and New York, respectively

Mr. Weber, Senior Research Officer,

Federal Reserve Bank of

Minneapolis

Mr. Hetzel, Senior Economist, Federal

Reserve Bank of Richmond

The Manager of the System Open

Market Account reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the

System’s account in the period since the

previous meeting. The Manager also reported on developments in domestic financial markets and on System open

market transactions in government securities and federal agency obligations

during the period since the previous

meeting. By unanimous vote, the Committee ratified these transactions.

The information reviewed at the

meeting suggested that the growth of

economic activity in the second quarter

slowed from its rapid pace in 

quarter. Residential investm

tracted as activity in the housi

continued to cool. Consumer 

and business investment d

after posting substantial increa

first quarter. The demand for l

erated, with hiring in recent m

low the pace of earlier this y

sumer price inflation remained 

in July, reflecting further inc

energy prices and shelter costs

Nonfarm payrolls increase

and July, but more slowly th

first quarter. The moderation 

was most pronounced in retail 

was also evident in constru

non-business services. Establis

professional and business serv

tinued to add jobs at roughly 

pace as that of earlier in the y

age hours of production or no

sory workers on private non

rolls edged up. The unemploy

rose to 4.8 percent in July, 

average over the first half of t

Industrial production pick

June. For the second quarter a

it grew at a robust rate that w

than its first-quarter pace. 

manufacturing production w

spread across industries. Th

sector, which includes oil an

gas extraction, expanded solid

although average growth in t

quarter was below that of the 

ter, in part because the recov

the disruptions caused by l

hurricanes neared completion

output grew strongly in th

quarter. The rate of capacity 

in the manufacturing sector s

in June and remained above it

average.

The growth of consumer 

slowed considerably in the sec

ter after the surge in purchas

the turn of the year. Spending 
excluding motor vehicles posted a modest increase in June after remaining flat,

on average, over the previous four

months. Although nominal wages and

salaries rose briskly in the first half of

the year, gains in real disposable income

were held down by rising consumer

prices. While past gains in household

wealth, particularly from home prices,

supported consumer spending, higher

interest rates and energy prices were

likely a restraining influence. Indicators

of consumer sentiment for July were

mixed.

Residential construction activity contracted in the second quarter. Singlefamily starts declined in June to a level

well below the average of the previous

twelve months. Construction in the multifamily sector remained steady, with

starts in June well within the typical

range seen since 1995. Sales of both

new and existing single-family homes

slowed in June and were significantly

below their peaks of the summer of

2005. Available measures of house

prices indicated that price increases had

moderated over the past four quarters.

After surging in the first quarter, real

spending on equipment and software

edged down in the second quarter. The

decline was accounted for primarily by

a drop in expenditures on communications and transportation equipment.

Spending on high-tech equipment and

software declined as well. The construction of nonresidential buildings moved

up at a solid pace over the first half of

the year, although activity remained well

short of its previous peak in mid-2000.

Outlays on drilling and mining structures continued to climb in response to

high energy prices, and spending on office construction edged up as vacancy

rates continued to trend down. Overall,

economic fundamentals and business

sentiment continued to support increased investment.

The book value of manufac

trade inventories excluding m

cles rose in May, and real 

inventories excluding motor 

appeared to be slightly high

second quarter than earlier in 

The ratio of book-value inve

sales edged down in May in 

trade and manufacturing sec

having remained relatively st

the previous three months. In 

facturing sector, however, in

ticked up again in June. In 

inventories appeared to be we

with demand, and business sur

gested that firms were comfor

the level of inventories.

The U.S. international tra

widened in May, reflecting 

increase in imports that more t

a sizable gain in exports. Impo

was heavily concentrated in o

ing both higher prices and q

other categories of imports fe

ance. Exports rose across almo

jor product categories; the lar

were in consumer goods an

goods, especially aircraft. Exp

economic activity in the adva

eign economies appeared to c

the second quarter at a pac

comparable to that of the fir

on net. Incoming data for th

quarter pointed to a pickup in 

growth in the euro area and 

indicated that growth slowed 

in Canada. Recent economic 

from the developing econom

mixed but, in general, sugge

moderation in growth from 

first-quarter pace.

Headline inflation continue

up, on balance, in recent mo

consumer prices increased a

pace in the second quarter tha

previous twelve months. C

energy prices, while declinin

in June, surged during the sec
ter, on net. Core consumer prices also

continued to rise, boosted by an acceleration in shelter costs, particularly

those for owner-occupied residences,

and some pass-through of energy cost

increases. Higher oil prices showed

through in producer prices for a variety

of energy-intensive intermediate goods.

Rising import prices, higher domestic

rates of capacity utilization, and strong

global demand for materials were factors underlying an acceleration in core

prices for intermediate materials. The

price of crude oil increased further over

the intermeeting period, and strong

weather-related demand caused the price

of natural gas to rise considerably. The

employment cost index rose somewhat

faster in the second quarter than over the

preceding three months, but the twelvemonth change was less than that of a

year ago. Survey measures of households’ inflation expectations in June and

July reversed their increases in April

and May.

At its June meeting, the Federal Open

Market Committee (FOMC) decided to

raise its target for the federal funds rate

25 basis points, to 51⁄4 percent. The

Committee’s accompanying statement

indicated that economic growth had

been moderating from its quite strong

pace earlier in the year, partly reflecting

a gradual cooling of the housing market

and the lagged effects of increases in

interest rates and energy prices. Readings on core inflation had been elevated

in recent months, but ongoing productivity gains had held down the rise in

unit labor costs, and inflation expectations remained contained. However,

high levels of resource utilization and

the high prices for energy and other

commodities had the potential to sustain

inflation pressures. Although the moderation in the growth of aggregate demand would help limit inflation pressures over time, the Committee judged

that some inflation risks rema

extent and timing of any additi

ing would depend on the ev

the economic outlook as impl

coming information.

Investors anticipated the FO

cision at its June meeting to 

federal funds rate 25 basis p

near-term policy expectatio

lower, apparently in response 

companying statement. Sub

data releases on real activity 

weaker than expected, the C

testimony on the semiannual 

Policy Report, and the relea

June FOMC minutes all led in

revise down their expectation

future path of the federal fu

Yields on nominal Treasury 

fell in line with policy expecta

the intermeeting period. Y

inflation-indexed Treasury 

declined a bit more than those 

parable nominal Treasury 

leaving inflation compens

slightly, albeit within recen

Spreads of yields on corpor

over those on comparable

Treasury securities were a

changed, while those on sp

grade bonds widened. Major s

indexes rose modestly. Th

exchange value of the dolla

other major currencies fell, on 

the intermeeting period.

Debt of the domestic no

sectors was estimated to hav

ated in the second quarter afte

first-quarter increase. Busin

debt increased briskly, as the 

of business loans remained 

the household sector, mortgag

celerated from the first quart

pace in response to higher 

rates and slower house-price 

tion. M2 growth dropped in t

quarter and remained modes

consistent with moderating g
nominal income and rising opportunity

cost.

The staff forecast prepared for this

meeting indicated that real GDP growth

would slow in the second half of 2006

and 2007, and to a lower rate than had

been anticipated in the prior forecast.

The marking down of the outlook was

largely attributable to the annual revision of the national income and product

accounts, which involved downward revisions to actual GDP growth in prior

years and prompted reductions in the

staff’s estimate of potential output. The

slowdown in the housing market, the

effects of higher energy prices on household purchasing power, the waning impetus of household wealth effects on

consumer spending, and the effects of

past policy tightening were expected to

hold economic growth below potential

over the next six quarters. Core consumer price inflation was projected to

drop back somewhat later this year and

next, mainly as the effects of higher

energy and import prices abated.

In their discussion of the economic

situation and outlook, meeting participants noted that the slowing of GDP

growth in the second quarter was generally in line with expectations, reflecting

the continued cooling of the housing

market, the restraining influence on demand of higher energy prices, and the

lagged effects of past increases in interest rates. Going forward, output was

expected to advance at a pace at or

slightly below the economy’s potential

rate of growth, but several participants

noted that the annual revision to the

national income and product accounts

suggested this growth rate likely was

lower than previously believed. Incoming information with regard to inflation

had not been encouraging. Still, most

participants thought that, with energy

prices possibly leveling out, aggregate

demand moderating, and long-term inflation expectations contained, 

inflation likely would decline 

from its recent elevated leve

the upside risks to inflat

significant.

In their discussion of the m

tors of the economy, participa

that residential construction ac

continued to recede over the 

months and cited the housing s

downside risk to the outlook fo

The rate of new home sale can

which was identified as an 

leading indicator by some c

the construction industry, ha

higher. Single-family housing 

permits continued to fall, a

tories of unsold housing ap

have risen significantly, pointi

tinued slowing in this sector. S

ticipants observed that the 

seemed to be orderly thus far, 

also noted that in some are

country housing construction 

rienced a relatively sharp fal

eral, participants expressed co

uncertainty regarding prospec

housing sector.

Meeting participants noted 

continued increases in energy 

borrowing costs appeared to 

strained consumer spending 

recent months. Contacts in the 

tor generally reported a contin

ing of growth in sales, alth

situation differed somewhat 

and type of good or service. 

comprehensive data were not 

able on recent house price m

but the rate of appreciation ap

be moderating and was likel

further in coming months. T

pace of increase in housin

would restrain consumption 

though by how much was 

However, the financial con

households, as judged by indic

as bankruptcy filings and lo
quencies, appeared to remain solid.

Overall, consumption spending seemed

likely to expand at a moderate pace in

coming quarters.

Although business fixed investment

in the second quarter was a little lower

than had been expected, participants

noted that this development appeared

mainly to reflect the timing of purchases, particularly of transportation

equipment, and not weakness in the

underlying trend. Some participants

noted that nonresidential construction

had continued to strengthen, offsetting

some of the contraction in residential

construction. Looking forward, strong

business balance sheets and high profitability were seen as supporting continued growth in expenditures on software

and equipment. However, it was noted

that if the reported slowing of increases

in retail sales continued, businesses

might trim capital spending plans.

With regard to the federal sector,

spending related to last year’s hurricanes appeared likely to abate, and federal expenditures overall would probably be providing less impetus to

aggregate demand going forward. Federal receipts had been increasing rapidly, a development that reflected

continued strong growth in labor and

non-labor income.

Some participants noted that global

demand remained strong, potentially

adding to worldwide pressures on

resources. Increased geopolitical risks,

particularly related to developments in

the Middle East, continued to put pressure on energy prices, and the prices of

many other commodities also had

firmed over the intermeeting period.

Central banks had been raising interest

rates globally, however, and this was

viewed as a factor that should help to

restrain global inflation pressures. But it

was also noted that the recent decline in

the foreign exchange value of the dollar

could lead to a weakening 

competition in the form of in

the prices of tradable good

United States.

As at the June meeting, a

pants expressed concern abo

ued elevated readings on core 

and inflation risks going forw

eral participants took note of 

sions to historical data that 

more worrisome picture of co

measures of unit labor costs 

marked up, reflecting upward 

to labor compensation and d

revisions to labor productiv

PCE inflation now appeared 

been running at or above a 

annual rate for more than t

with prices accelerating over 

half of 2006. Many participa

that the extent to which the in

core inflation so far this year 

transitory or persistent influ

mained unclear. The recent 

price increases appeared to 

based, and a number of busi

tacts reported greater ability 

through higher costs. Howev

types of price pressures were 

to continue to increase. The 

celeration in shelter costs, w

tributed substantially to the in

core inflation this year, cou

short-lived. Moreover, whil

prices had risen further in the 

ing period, energy prices c

level out in coming quarters. 

anticipated moderation in agg

mand implied that pressures on 

utilization likely would not inc

could abate to a degree going 

Finally, inflation expectations 

to have remained contained d

verse news about prices. In lig

factors, most participants exp

view that core inflation was 

decline gradually over the ne
quarters, although appreciable upside

risks remained.

In the Committee’s discussion of

monetary policy for the intermeeting

period, nearly all members favored

keeping the target federal funds rate at

51⁄4 percent at this meeting. In view of

the elevated readings on costs and

prices, many members thought that the

decision to keep policy unchanged at

this meeting was a close call and noted

that additional firming could well be

needed. But with economic growth having moderated some, most members anticipated that inflation pressures quite

possibly would ease gradually over

coming quarters and the current stance

of policy could well prove to be consistent with satisfactory economic performance. Under these circumstances,

keeping policy unchanged at this meeting would allow the Committee to accumulate more information before judging

whether additional firming would be

necessary to foster the attainment of

price stability over time. The full effect

of previous increases in interest rates on

activity and prices probably had not yet

been felt, and a pause was viewed as

appropriate to limit the risks of tightening too much. Following seventeen consecutive policy firming actions, members generally saw limited risk in

deferring further policy tightening that

might prove necessary, as long as inflation expectations remained contained.

All members agreed that the statement to be released after the meeting

should convey that inflation risks

remained dominant and that consequently keeping policy unchanged at

this meeting did not necessarily mark

the end of the tightening cycle. They

concurred that an indication that economic growth had moderated was appropriate, and a consensus favored citing the same reasons for that moderation

as in the June statement. Members also

agreed that the statement sh

mention factors contributin

likely moderation of inflation 

over time and reiterate the f

were seen as having the po

sustain inflation pressures.

At the conclusion of the d

the Committee voted to auth

direct the Federal Reserve Ban

York, until it was instructed 

to execute transactions in th

Account in accordance with th

ing domestic policy directive:

The Federal Open Market 

seeks monetary and financial con

will foster price stability and pr

tainable growth in output. To furth

run objectives, the Committee in 

diate future seeks conditions 

markets consistent with maintaini

eral funds rate at an average 

51⁄4 percent.

The vote encompassed ap

the text below for inclusion in 

ment to be released at 2:15 p.m

The Committee judges that som

risks remain. The extent and tim

additional firming that may be 

address these risks will depend on 

tion of the outlook for both in

economic growth, as implied by 

information.

Votes for this action: Messrs

and Geithner, Ms. Bies, Mes

Kohn, Kroszner, Ms. Pia

Warsh, and Ms. Yellen. Vo

this action: Mr. Lacker.

Mr. Lacker dissented becau

lieved that further tightening w

to bring inflation down mor

than would be the case if the p

were kept unchanged. The infl

look had deteriorated in the 

ing period; the recent surge in 

tion had persisted and appea

broad-based, while the revisi

national income and product 

indicated a recent upswing in c

tion and unit labor costs. Alth
growth was likely to be somewhat lower

in coming quarters, in his view it was

unlikely to moderate by enough to bring

core inflation down. He noted, moreover, that real short-term interest rates

had fallen in the intermeeting period and

were still low relative to rates typically

associated with sustained expansions.

The Committee then turned to a discussion of the goals and principles that

should guide the review of its approaches to policy communications that

it had recently undertaken. Participants

agreed that communication was important for democratic accountability and

could promote the effectiveness of policy. Although considerable strides had

been made in FOMC communications

over the past ten years or so, participants generally thought that further

advances were possible. In that regard,

consideration of how the Committee expressed both its economic objectives and

its assessments of expected progress toward those objectives was likely to be

particularly important. Conveying the

degree of uncertainty and conditionality

about Committee expectations of future

developments was seen as a major challenge. It was recognized that communications should support appropriate decisionmaking, including respect for the

diversity of views that contributed to

good decisions. Participants agreed to

continue the Committee’s review of

communications issues at the FOMC

meeting in October.

The meeting adjourned at 3:05 p.m.

Notation Vote

By notation vote completed on July 19,

2006, the Committee unanimously approved the minutes of the FOMC meeting held on June 28–29, 2006.

Vincent R. Reinhart

Secretary

Meeting Held on

September 20, 2006

A meeting of the Federal Ope

Committee was held in the off

Board of Governors of the 

Reserve System in Washingt

on Tuesday, September 20, 

8:30 a.m.

Present:

Mr. Bernanke, Chairman

Mr. Geithner, Vice Chairman

Ms. Bies

Mr. Guynn

Mr. Kohn

Mr. Kroszner

Mr. Lacker

Mr. Mishkin

Ms. Pianalto

Mr. Warsh

Ms. Yellen

Ms. Cumming, Mr. Hoenig, 

han, and Messrs. Mo

Poole, Alternate Memb

Federal Open Market C

Messrs. Fisher, Plosser, a

Presidents of the Feder

Banks of Dallas, Philad

Minneapolis, respective

Mr. Reinhart, Secretary and 

Ms. Danker, Deputy Secreta

Ms. Smith, Assistant Secreta

Mr. Skidmore, Assistant Sec

Mr. Alvarez, General Couns

Mr. Baxter, Deputy General 

Ms. Johnson, Economist

Mr. Stockton, Economist

Messrs. Connors, Eisenbei

Madigan, Sniderman

meyer, Tracy, Weinberg

cox, Associate Econo

Kos, Manager, System 

ket Account

Messrs. English and Slifman

Directors, Divisions of 

Affairs and Research 

tistics, respectively, 

Governors

Mr. Reifschneider, Deputy 

Director, Division of Re

Statistics, Board of Gov
Mr. Oliner, Senior Adviser, Division of

Research and Statistics, Board of

Governors

Mr. Gross, Special Assistant to the

Board, Office of Board Members,

Board of Governors

Mr. Small, Project Manager, Division

of Monetary Affairs, Board of

Governors

Mr. Durham, Section Chief, Division

of Monetary Affairs, Board of

Governors

Mr. Luecke, Senior Financial Analyst,

Division of Monetary Affairs,

Board of Governors

Ms. Low, Open Market Secretariat Specialist, Division of Monetary

Affairs, Board of Governors

Mr. Lyon, First Vice President, Federal

Reserve Bank of Minneapolis

Messrs. Fuhrer and Rosenblum, Executive Vice Presidents, Federal

Reserve Banks of Boston and Dallas, respectively

Mr. Evans, Ms. Mester, Messrs. Rasche,

Rolnick, Rudebusch, and Sellon,

Senior Vice Presidents, Federal

Reserve Banks of Chicago, Philadelphia, 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 developments in foreign exchange markets. There were no open market operations in foreign currencies for the

System’s account in the period since the

previous meeting. The Manager also reported on developments in domestic

financial markets and on System open

market transactions in government securities and federal agency obligations

during the period since the previous

meeting. By unanimous vote, the Committee ratified these transactions.

The information reviewe

meeting suggested that econo

ity continued to decelerate 

months. Consumer and busine

ing held up well, and payrol

ment continued to rise mod

July and August. However, a 

tion in homebuilding was dam

economic expansion. Core 

price inflation eased some

nonetheless remained higher t

in 2005. Total consumer price 

moderated in August, reflecti

stantial slowing of the increase 

prices.

Nonfarm payrolls rose in A

pace similar to that recorded 

previous four months. Em

gains were widespread in th

sector, and the construction ind

added jobs, particularly in no

tial building. However, emplo

retail trade and manufacturing 

in August. Average hours of p

or nonsupervisory workers edg

The unemployment rate tic

down to 4.7 percent in Augu

remained within the narrow 

prevailed since the beginnin

year.

Industrial production rose i

edged down in August. Man

output was unchanged in Au

small increase in the prod

motor vehicles and parts was o

slight net decline in other sec

put of construction supplies, 

ple, dropped a little. In t

technology sector, the prod

computers rose tepidly through 

mer, while output of comm

equipment turned down in Au

increasing markedly during th

of the year. Semiconductor p

remained sluggish through Au

Consumer spending appea

rising at a moderate pace 

months. Spending on cars 
trucks increased somewhat in July after

a lackluster pace in the second quarter

but apparently weakened in August.

Consumer spending on goods excluding

motor vehicles increased modestly during the four months ending in July. Despite the sharp net increase in energy

prices, real disposable income rose further, with solid gains in June and July.

Increases in household wealth earlier in

the year continued to boost consumer

spending. However, consumer borrowing costs had risen since the beginning

of the year with the increase in shortterm interest rates. Recent readings on

consumer sentiment were mixed. The

personal saving rate fell further in July.

Residential construction activity continued to contract in recent months.

Single-family starts fell further in July

and August to a level well below the

peak in the third quarter of 2005. Construction in the multifamily sector also

fell back. Sales of both new and existing

single-family homes fell in July and

were significantly below the peaks of

last summer. A range of indicators suggested that housing market activity was

likely to slow further in the near term.

Pending home sales dropped noticeably

in July, and mortgage rates had

increased since the beginning of the

year. Available measures suggested that

prices of existing homes increased

through the second quarter at a much

lower rate than the one observed during

the same period last year.

After strong increases in the first half

of 2006, real spending on equipment

and software remained robust into the

summer against a backdrop of rising

business output, plentiful corporate cash

reserves, positive sentiment among executives, and falling relative prices for

high-tech equipment. Orders and shipments of communications equipment

leveled off in recent months after climbing earlier this year. Real computer

spending remained sluggish 

Business purchases of light 

picked up in August after a we

mance in July, and sales of me

heavy trucks remained brisk. 

data indicated that aircraft 

remained flat. Real spending 

ment outside the high-tech and 

tation sectors appeared to be 

moderately in the current quar

Book-value data for the m

ing and trade sectors sugge

inventory accumulation slow

modestly in July from a brisk p

second quarter. Outside the m

cle sector, inventories appea

well aligned with demand, an

indicated that firms continued 

erally comfortable with their 

inventories.

Both imports and exports in

the second quarter, but imports 

and exports decreased in July, 

the U.S. trade deficit. The g

imports was heavily concentra

reflecting higher petroleum p

in non-oil industrial supplies a

goods. Imports of services fe

Exports of capital goods and 

supplies declined after con

gains in June, but exports of te

nications equipment and a

products were strong. Expor

vices were unchanged in July.

Economic activity in the 

foreign economies decelerate

second quarter but remained 

fall in net exports held back 

in Japan and Canada, whi

domestic demand boosted gro

United Kingdom and the euro 

coming data suggested that ov

growth in these countries for t

quarter was dropping a bit 

second-quarter pace. Recent 

indicators from the emergin

economies generally pointed 

but moderating, growth.
The overall price index for personal

consumption expenditures rose relatively steeply in July and was estimated

to have increased further in August,

bringing the advance over the twelvemonth period above the year-earlier rise.

After July, though, crude oil and gasoline prices dropped back significantly,

and with inventories of natural gas

remaining near seasonal highs, natural

gas prices fell from their spike earlier

this summer. Core consumer prices

increased at a somewhat more subdued

pace over July and August, but despite

the recent moderation, the twelve-month

change in core prices remained above

the increase over the comparable period

twelve months earlier. The producer

price index for core intermediate materials rose significantly in July and August.

Substantial upward revisions to wages

and salaries boosted compensation per

hour in the first quarter. The increase

likely owed in part to the exercise of

stock options and cash bonuses; other

data that did not include such forms of

compensation pointed to more moderate

increases. Hourly compensation rose

further in the second quarter and recorded an increase of about 73⁄4 percent

from four quarters earlier. After more

favorable readings in June and July, survey measures of households’ inflation

expectations turned back up in August,

but preliminary September readings suggested a decline.

At its August meeting, the Federal

Open Market Committee (FOMC)

decided to maintain its target for the

federal funds rate at 51⁄4 percent. The

Committee’s accompanying statement

indicated that economic growth had

moderated from its quite strong pace

earlier in the year, partly reflecting a

gradual cooling of the housing market

and the lagged effects of increases in

interest rates and energy prices. Readings on core inflation had been elevated

in recent months, and the high 

resource utilization and of the 

energy and other commoditie

potential to sustain inflation 

However, inflation pressure

likely to moderate over time, 

contained inflation expectation

cumulative effects of moneta

actions, as well as reduced imp

higher energy and materials co

theless, the Committee judged 

inflation risks remained. The e

timing of any additional fir

may be needed to address th

would depend on the evoluti

outlook for both inflation and 

growth, as implied by 

information.

Investors had largely antic

FOMC’s decision at its Augus

to maintain the federal funds 

current level, and short-te

dropped only a bit in respons

quently, data on inflation t

weaker than expected, s

declines in oil prices, and the 

the minutes of the August FO

ing led investors to revise d

expectations for the future pa

federal funds rate. Over the int

period, yields on short- a

mediate-term nominal Treasu

ties fell, while yields on 

indexed Treasury secur

comparable maturity increas

what, pushing inflation com

considerably lower at those 

Nominal forward rates furthe

yield curve fell about the sam

as real forward rates, imply

change in far-forward inflation 

sation. Spreads of yields on in

and speculative-grade corpor

over those on Treasury secur

about unchanged. Major stock 

dexes posted solid gains. Th

exchange value of the dolla

other major currencies w
changed, on net, over the intermeeting

period.

Debt of the domestic nonfinancial

sectors in the third quarter was estimated to be rising at about the same

pace as in second quarter. Businesssector debt was increasing briskly, as the

expansion of business loans remained

robust. In the household sector, debt

expanded in the second quarter at a rate

slightly below that in the first quarter, as

mortgage debt decelerated somewhat.

M2 growth remained modest in August,

consistent with moderating growth of

nominal income and lagged increases in

opportunity cost.

The staff forecast prepared for this

meeting indicated that real GDP growth

would continue to slow into the second

half of 2006 before strengthening gradually thereafter. By 2008, output was projected to be expanding at a pace about

equal to the staff’s forecast of potential

output growth. The staff, however, had

again reduced its projection for potential

GDP growth, and the projected slow

pace of growth over the next several

quarters was thus consistent with an

opening of only a small gap in resource

utilization. In the near term, the cooling

of the housing market and lower motor

vehicle production were expected to

hold growth back. At the same time,

though, significantly lower energy

prices, sustained increases in labor

income, and favorable labor market conditions were anticipated to support

expansion through the end of the year.

Further ahead, the lagged effects of the

previous tightening of monetary policy

and waning stimulus from household

wealth and fiscal policy were anticipated to restrain growth, but the drag

from the downturn in residential construction was expected to abate. Core

consumer price inflation was projected

to drop back somewhat later this year

and next, reflecting the emergence of

slack in the economy and low

costs.

In their discussion of the 

situation and outlook, meetin

pants noted that the pace of t

sion appeared to be continuin

erate in the third quarter. In 

activity in the housing market 

be cooling considerably, whi

contribute to relatively subdu

over the balance of the yea

was likely to strengthen next y

housing correction abated, wi

also encouraged by the recent 

energy prices and still-support

cial conditions. In the view 

participants, economic expans

probably track close to the 

growth of the economy’s pote

year and in 2008. Many partici

noted that core inflation had 

ning at an undesirably h

Although most participants 

core inflation to decline gradu

stantial uncertainty attended 

look.

In their discussion of major 

the economy, meeting partic

cused especially on developme

housing market. Although the 

varied somewhat across th

housing activity was continuin

tract in most regions. Home 

slowed considerably, and ane

ports suggested that more bu

canceling contracts for purch

ticipants noted that inventori

sold homes had climbed sharpl

areas and that builders were 

number of measures to redu

tories. Both permits for new 

tion and housing starts had dec

nificantly. Available measures 

prices suggested that appreci

slowed considerably but price

areas were not falling, altho

sellers were reported to be 
various inducements to potential purchasers that reduced effective prices.

Thus far, the drop in housing market

activity appeared not to have spilled

over significantly to other sectors of the

economy. Indeed, consumer expenditures appeared to have been expanding

moderately over the previous few

months, buoyed by increases in employment, personal income, and household

wealth. Contacts in some Districts reported that retail sales had picked up a

little most recently. Meeting participants

noted that consumer spending going forward would be supported by the higher

levels of personal income indicated by

recent revisions to the national income

and product accounts, by further gains

in employment, and by the decline in

consumer energy prices over recent

months. However, considerable uncertainty was expressed regarding the ultimate extent of the downturn in the housing sector and the degree to which the

slowing in housing activity and the deceleration in home prices would affect

consumption and other expenditures going forward.

Business investment spending generally was seen as expanding at a reasonably good pace. Meeting participants

noted broad strength in manufacturing

of capital goods. Nonresidential

construction activity continued to

strengthen, and in the process was absorbing some of the resources that were

no longer employed in homebuilding.

Although some survey evidence suggested that some firms were trimming

capital spending plans, participants reported that their business contacts generally were quite positive about the economic outlook and the strength of

demand for their products. In this environment, investment spending would

likely continue to be supported by

expansion of overall output, strong balance sheets and profits, and the ready

availability of funding from 

markets and institutions.

Participants noted that the 

condition of federal and stat

ments continued to improve. I

tax revenues remained strong, 

with expanding personal incom

and business profits.

Economic activity abroad ap

be slowing a little from the 

rapid rate of the first half of th

still expanding at a reasona

pace overall. Foreign econom

was expected to continue, albe

at a somewhat slower pace 

pected by some outside foreca

tributing to increases in U.S. e

Participants took note of th

labor compensation in the fir

the year, but commented 

increase likely reflected in par

cise of stock options. Nonethe

participants viewed the recen

in overall compensation as p

upside risks to inflation. Partic

ported steady gains in emplo

various regions, roughly in 

expansion of the labor force. M

ness contacts continued to e

shortages of labor and ac

wages, particularly for certain 

professionals and skilled wor

in some areas, unskilled work

One participant highlighte

the staff forecast, labor forc

would begin to slow over the 

years as more members of 

boom generation retired. 

resource utilization rates w

changed, slower growth of 

force would mean that increas

ployment would be significan

on average, than those reg

recent years. In that case, th

growth of the labor force and 

ment implied that the expansi

tential GDP could be somew

than it had been earlier thi
Some participants commented, however,

that they viewed potential output

growth, as well as expansion of actual

output, as likely to remain solid over the

next several years.

Many meeting participants emphasized that they continued to be quite

concerned about the outlook for inflation. Recent rates of core inflation, if

they persisted, were seen as higher than

consistent with price stability, and participants underscored the importance of

ensuring a moderation in inflation. To

be sure, very recent data on inflation

suggested some improvement from the

situation in the late spring, partly reflecting slower increases in owners’ equivalent rent. Also, the considerably lower

level of energy prices of recent weeks, if

sustained, would help reduce overall inflation and damp increases in core

prices. Moreover, businesses would

meet more resistance to attempts to pass

through cost increases in the less robust

economic circumstances that were likely

to prevail at least for a time. However,

energy prices remained quite sensitive

to a wide range of forces, including

geopolitical developments, and might

well rebound. To date, the available evidence indicated that inflation expectations remained contained—indeed, expectations of price increases for the next

few years had fallen some as energy

prices declined. Nonetheless, several

participants worried that inflation expectations could rise and the Federal Reserve’s willingness to carry through on

its intention to seek price stability could

be called into question if cost and price

pressures mounted or even if there was

no moderation in core inflation. Looking forward, most participants thought

that the most likely outcome was a reduction in inflation pressures, but the

anticipated decline was only gradual and

the uncertainties around that forecast

were skewed toward higher r

lower inflation rates.

In the Committee’s discu

monetary policy for the int

period, nearly all members 

keeping the target federal fun

51⁄4 percent at this meeting. 

generally expected economic 

expand at a pace below th

growth of potential output in 

term before strengthening s

time. Moreover, given the un

in forecasting, significantly m

gish performance than anticipa

not be entirely ruled out. Alt

uncertainties were substantial

flation seemed most likely to e

ally from its elevated level, in 

ing to the waning effects 

increases in energy prices. T

pated expansion of economic 

a pace slightly below the rate 

of the economy’s potential wo

also play a role by easing pre

resources. Members noted th

developments of late—apprec

clines in energy prices, some s

cators of economic activity, an

lower readings on core in

pointed to a modestly better 

outlook and hence made the po

sion today somewhat less diff

it was in August, when it was 

particularly close call.

In view of the most recent 

tion on the economy, membe

that it was appropriate for 

meeting statement to charact

nomic growth as apparently c

to moderate. However, in vie

high energy and other commod

and elevated rates of resource 

as well as recent indications 

sible acceleration in labor co

bers continued to see a subst

that inflation would not decli

ticipated by the Committee

quently, the Committee agree
statement should again cite such risks to

inflation and explicitly reference the

possibility of additional policy firming.

At the conclusion of the discussion,

the Committee voted to authorize and

direct the Federal Reserve Bank of New

York, until it was instructed otherwise,

to execute transactions in the System

Account in accordance with the following domestic policy 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 longrun objectives, the Committee in the immediate future seeks conditions in reserve

markets consistent with maintaining the federal funds rate at an average of around

51⁄4 percent.

The vote encompassed approval of

the text below for inclusion in the statement to be released at 2:15 p.m.:

Nonetheless, the Committee judges that

some inflation risks remain. The extent and

timing of any additional firming that may be

needed to address these risks will depend on

the evolution of the outlook for both inflation and economic growth, as implied by

incoming information.

Votes for this action: Messrs. Bernanke

and Geithner, Ms. Bies, Messrs. Guynn,

Kohn, Kroszner, and Mishkin, Ms. Pianalto, Mr. Warsh, and Ms. Yellen.

Votes against this action: Mr. Lacker.

Mr. Lacker dissented because he believed that further tightening was needed

to bring inflation down more rapidly

than would be the case if the policy rate

were kept unchanged. Recent data indicated that inflation remained above levels consistent with price stability. Moreover, the upswing in compensation and

unit labor costs in the first half of the

year indicated that inflation risks were

tilted to the upside. Although real

growth was likely to be moderate in

coming quarters, in his view it was unlikely to be slow enough to bring core

inflation down.

The meeting adjourned at 1

Notation Vote

By notation vote completed o

28, 2006, the Committee una

approved the minutes of th

meeting held on August 8, 20

Vincent R

Meeting Held on

October 24–25, 2006

A meeting of the Federal Ope

Committee was held in the off

Board of Governors of the 

Reserve System in Washingt

on Tuesday, October 24, 200

p.m. and continued on W

October 25, 2006 at 9:00 a.m.

Present:

Mr. Bernanke, Chairman

Mr. Geithner, Vice Chairman

Ms. Bies

Mr. Kohn

Mr. Kroszner

Mr. Lacker

Mr. Mishkin

Ms. Pianalto

Mr. Warsh

Ms. Yellen

Mr. Hoenig, Ms. Minehan, a

Moskow and Poole, 

Members of the Fed

Market Committee

Messrs. Fisher, Plosser, a

Presidents of the Feder

Banks of Dallas, Philad

Minneapolis, respective

Mr. Barron, First Vice Pres

eral Reserve Bank of A

Mr. Reinhart, Secretary and 

Ms. Danker, Deputy Secreta

Ms. Smith, Assistant Secreta

Mr. Skidmore, Assistant Sec

Mr. Alvarez, General Couns

Ms. Johnson, Economist

Mr. Stockton, Economist
Messrs. Connors, Eisenbeis, Judd, Kamin, Madigan, Sniderman, Struckmeyer, and Wilcox, Associate

Economists

Mr. Kos, Manager, System Open Market Account

Messrs. English and Slifman, Associate

Directors, Divisions of Monetary

Affairs and Research and Statistics, respectively, Board of Governors

Messrs. Gagnon and Wascher, Deputy

Associate Directors, Divisions of

International Finance and Research and Statistics, respectively,

Board of Governors

Messrs. Dale and Oliner, Senior Advisers, Divisions of Monetary Affairs

and Research and Statistics, respectively, Board of Governors

Mr. Gross, Special Assistant to the

Board, Office of Board Members,

Board of Governors

Mr. Small, Project Manager, Division

of Monetary Affairs, Board of

Governors.

Ms. Weinbach, Senior Economist, Division of Monetary Affairs, Board of

Governors

Messrs. Kumasaka7 and Luecke,8

Senior Financial Analysts, Division of Monetary Affairs, Board of

Governors

Ms. Low, Open Market Secretariat Specialist, Division of Monetary

Affairs, Board of Governors

Messrs. Fuhrer and Rosenblum, Executive Vice Presidents, Federal

Reserve Banks of Boston and Dallas, respectively

Mr. Evans, Ms. Mester, and Messrs.

Rasche and Sellon, Senior Vice

Presidents, Federal Reserve Banks

of Chicago, Philadelphia, St.

Louis, and Kansas City, respectively

Ms. Mucciolo and Mr. T

Presidents, Federal Res

of New York and Minn

spectively

Ms. McConnell, Assistant V

dent, Federal Reserve 

New York

Mr. Hetzel, Senior Econom

Reserve Bank of Richm

The manager of the Syst

Market Account (SOMA) re

recent developments in for

change markets. There were 

market operations in foreign 

for the System’s account in t

since the previous meeting. T

ager also reported on develo

domestic financial markets 

System open market transa

government securities and 

agency obligations during th

since the previous meet

unanimous vote, the Committ

these transactions.

The Manager also discussed 

Committee the results of a rece

of the management of the dom

curity holdings of the SOMA. 

ager noted that in 2000, in re

reduced issuance of Treasury 

limits were adopted on the 

holdings of individual Treasu

notes, and bills that ranged 

15 percent and 35 percent of 

outstanding. In recent years, th

had created occasional op

complications for the Tradi

Meanwhile, circumstances in 

sury securities market had cha

siderably, and the Manager not

intended to revert to the prev

tice of applying a single 35 per

across all issues.

The Chairman noted that 

dent had recently signed the 

Services Regulatory Relief Ac

which among its provisions 

7. Attended Tuesday’s session only.

8. Attended Wednesday’s session only.
Federal Reserve discretion, beginning

October 2011, both to pay interest on

reserve balances and to reduce further or

eliminate reserve requirements. The Act

potentially has important implications

for many aspects of the Federal Reserve’s operations and the Chairman

asked Vincent Reinhart, Director of the

Division of Monetary Affairs, to form a

committee of Federal Reserve System

staff to consider these issues.

The information reviewed at the

October meeting suggested that economic activity increased at a slow pace

in the third quarter. The contraction in

home construction remained a significant drag on economic activity, and

steep reductions in motor vehicle assemblies further weighed on growth in the

third quarter. Nonetheless, consumer

spending and business investment continued to hold up well. Payroll employment extended its moderate expansion,

on average, through September. Sharp

declines in energy prices reduced total

consumer price inflation in September,

but the twelve-month change in core

prices remained elevated relative to

year-earlier readings.

Nonfarm payrolls rose modestly in

September after a larger increase in

August, with some of the variation apparently a result of seasonal factors. In

September, job increases in the serviceproducing sectors were fairly widespread and were again led by the healthcare industry. The construction sector

also added jobs; the lift came from gains

associated with nonresidential building

that more than offset further losses in

the residential sector. Job cutbacks in

the retail trade and manufacturing sectors continued. Aggregate hours of private production or nonsupervisory

workers again edged lower. The unemployment rate ticked down to 4.6 percent in August.

After having been flat in 

industrial production declined 

tember, reflecting a sizable 

related decrease in the output 

and a fairly broad-based red

manufacturing output. These 

were partially offset by a rise 

in the mining sector that w

gains in crude oil extractio

mined construction supplies

stone, sand, and gravel. The 

motor vehicles and parts fell i

ber, as automakers continue

production of light trucks in re

bloated inventories. Output g

the high-technology sector s

bit in September relative to th

months, reflecting a smaller r

production of semiconducto

puter production continued to 

at a tepid rate, while output o

nications equipment turned u

ably after a decline in Augus

third quarter as a whole, g

industrial production modera

relative to the first half of 

stronger output in the high-te

sector and a pickup in the pro

business equipment partially 

steep contraction in the outpu

vehicles and parts and a slow

mining output.

Real consumer spending ap

regain some steam in Septemb

lackluster August. Although n

tail sales fell noticeably in S

the steep drop in gasoline pr

than accounted for the decline

ing sales at gasoline stations, t

in consumer spending was the 

faster sales of motor vehicles a

based strength in outlays for o

gories of goods, particularly 

Real disposable income rose m

in both July and August; the 

somewhat above its secon

average. Consumer spending 

to draw support from the lagg
of the increases in household wealth

over the past two years. But interest

rates on some types of household loans,

both short- and long-term, had risen this

year, on balance. The latest readings on

consumer sentiment had been positive,

perhaps reflecting the recent declines in

oil prices. The personal saving rate

edged up in August after a dip in July.

Residential construction activity

remained weak. Single-family starts

ticked up in September, but new permit

issuance slid further to its lowest level

in nearly five years. Construction in the

multifamily sector continued to fluctuate within the range that has prevailed

for several years. Sales of new singlefamily homes edged up in August, while

sales of existing homes held steady.

Pending home sales, which rose somewhat in August after a noticeable drop

in July, and the decline in mortgage

rates since July likely indicated some

support for housing demand in the near

term. Still, the overhang of unsold

homes remained historically high, and

price appreciation of existing homes

continued to slow through the second

quarter.

Real spending on equipment and software increased at a solid pace during the

summer as the fundamental influences

on such spending remained favorable

for the most part. In particular, although

business output had recently been rising

at a slower rate, corporate financial

reserves remained plentiful and the cost

of high-tech capital goods continued to

fall. In the high-tech sector, real outlays

on communications equipment likely

stabilized in August after having surged

earlier this year, and the available data

suggested that real computer spending

picked up in the third quarter. In the

transportation sector, business purchases

of motor vehicles were brisk of late; the

Environmental Protection Agency’s

regulations on truck emissions that are

scheduled to take effect in 20

pulled forward some spendin

dium and heavy trucks. Outla

craft appeared to have risen 

in the third quarter from their 

low second-quarter level. Real 

on equipment other than high

transportation items seemed to 

tained considerable momentu

third quarter. Activity in the no

tial construction sector con

strengthen in August.

Book-value data on manu

and trade inventories, which w

able through August, suggeste

rate of stockbuilding remained 

tial in the third quarter. A maj

tion was the motor vehicle sec

the cutbacks in assemblies 

began to reduce the inventory 

in that sector. Outside of the m

cle sector, inventories 

appeared to be well aligned 

mand. Although survey data i

ber showed a noticeable rise in 

of firms that viewed their inve

being too high, a large ma

mained comfortable with their 

The U.S. international tra

widened to another record in 

reflecting a surge in imports 

than offset a sizable jump in 

The sharp increase in imp

driven importantly by oil an

gas, but imports of capital g

non-oil industrial supplies, p

metals, also exhibited large g

ports of services fell back slig

increase in exports was led b

goods, with aircraft, comput

conductors, and other mach

climbing briskly. Exports of 

supplies and consumer goods 

strongly, while exports of 

expanded modestly.

Economic activity in the 

industrial economies continu

pand at a relatively solid pa
third quarter. Investment spending

boosted the expansion in Japan. In the

euro area, data on industrial production

and retail sales were consistent with robust growth in real activity. Mixed indicators in Canada and the United Kingdom suggested that output growth in

those countries remained around recent

rates. Incoming data across the

emerging-market economies continued

to point to moderating, but solid, growth

in economic activity in the third quarter.

Core prices for personal consumption

expenditures were expected to have

risen in September at the same pace as

in July and August, leaving the change

over the twelve months ending in September a bit higher than the year-earlier

period. Increases in shelter costs, which

accounted for a significant proportion of

the pickup in core inflation over the past

year, had slowed considerably in recent

months but remained well above the

rates that prevailed from 2003 to 2005.

The price index for total personal consumption expenditures was estimated to

have fallen markedly in September because of the steep decline in gasoline

prices, bringing its twelve-month increase to a two-and-one-half-year low.

Retail gasoline prices fell especially rapidly in September as crude oil prices

declined and as the historically high

level of gasoline inventories likely led

to a sharp narrowing of margins between

retail gasoline prices and crude oil

prices. The producer price index for core

intermediate materials rose only slightly

in September; the increase was well below its average monthly advance over

the preceding twelve months, reflecting

a drop in prices of some chemicals that

have a high energy content. Average

hourly earnings increased moderately in

both August and September after a

larger gain in July. Survey measures of

households’ year-ahead inflation expectations eased substantially in early October with the sharp drop in ener

Respondents’ longer-term inf

pectations changed little, rema

within the narrow range repo

the past year.

At its September meeting, th

Open Market Committee 

decided to maintain its targe

federal funds rate at 51⁄4 per

Committee’s accompanying 

indicated that the moderatio

nomic growth had appeared t

tinuing, partly reflecting a coo

housing market. Readings on c

tion had been elevated, and 

levels of resource utilization a

prices of energy and other com

had the potential to sustain 

pressures. However, inflation 

seemed likely to moderate o

reflecting reduced impetus fro

prices, contained inflation exp

and the cumulative effects of 

policy actions and other factor

ing aggregate demand. Noneth

Committee judged that some 

risks remained. The extent and 

any additional firming that 

needed to address these risks 

pend on the evolution of the o

both inflation and economic g

implied by incoming informat

The FOMC’s decision at it

ber meeting to leave the targ

funds rate unchanged had be

anticipated by investors, and 

pectations for mid-2007 an

rose only slightly. Investo

quently revised down their ex

for the future path of the fed

rate in light of some data rel

indicated weaker-than-expec

nomic activity. However, thos

were then rolled back in the 

speeches by FOMC member

lease of the minutes of the S

FOMC meeting, and stron

expected economic data. Over 
meeting period, yields on nominal and

inflation-indexed Treasury coupon securities rose somewhat, on net. Inflation

compensation for 2007 declined modestly, perhaps reflecting the further drop

in spot energy prices, but was largely

unchanged at longer maturities. Spreads

of investment-grade corporate bond

yields over those on comparablematurity Treasury securities held steady,

while those on speculative-grade corporate bonds narrowed a little. Broad

equity indexes rose noticeably. The

trade-weighted index of the foreign

exchange value of the dollar versus major currencies rose somewhat on balance, and the gains were spread evenly

against most currencies.

Debt of the domestic nonfinancial

sectors in the third quarter was estimated to be expanding at around its

second-quarter pace. Business debt rose

more moderately as bank lending to

businesses slowed. In particular, bank

lending to finance commercial real estate activity waned in August and September, while commercial and industrial

loans, which had been expanding briskly

for many months, slowed sharply in

September. In the household sector, the

further slowing of the rate of increase of

house prices appeared to have continued

to weigh on the expansion of mortgage

debt in the third quarter. M2 grew

slowly in the third quarter, exhibiting

the lagged effects of earlier increases in

opportunity costs and the slow rise in

nominal spending.

The staff forecast prepared for this

meeting indicated that growth of real

GDP had slowed further in the third

quarter, reflecting both a significant drag

from the continuing contraction in residential construction and a steep decline

in motor vehicle assemblies. Looking

ahead, a gradual reduction in the restraining effects of the contraction in

residential investment and further solid

gains in consumer and busine

ing were expected to lead to a 

GDP growth through 2007 

2008. These gains in spend

likely to be supported by pas

in energy prices and continue

payroll employment and labo

Real GDP was expected to 

somewhat slower rate over the 

years than in 2006 in part as 

less impetus from househol

interest rates, and fiscal po

projected increase in real ou

the next year or so was a little 

staff’s estimate of potenti

growth, leading to a lessenin

sures on resource utilization. C

tion was anticipated to edge 

2007 and 2008 relative to th

half of this year because 

diminishing impetus from the 

energy and other commod

because of the modest e

resource utilization.

In their discussion of the 

situation and outlook, meetin

pants noted that incoming dat

relatively brief intermeeting p

come in broadly as anticip

most recent indicators sugge

economic growth had probab

more sharply in the third qu

had been expected at the tim

September meeting, but that ap

largely reflect the impact of 

influences. Participants con

expect the economy to expand 

close to or a little below the e

long-run sustainable pace ove

quarters. The ongoing adjustm

housing market was likely t

real activity in the near term

effect was expected to wane 

private final domestic purch

held up well in recent mo

looked set to expand at a r

good pace. Although recent m

flation readings indicated som
of core inflation from the very rapid

rates of spring and early summer, many

participants noted that current rates of

core inflation remained undesirably

high. Most participants expected core

inflation to moderate gradually, but they

were quite uncertain as to the likely

pace and extent of that moderation.

In their discussion of the major sectors of the economy, participants noted

that housing activity was likely to

remain a substantial drag on economic

growth over the next few quarters. Many

participants drew some comfort from

the most recent data, which suggested

that the correction in the housing market

was likely to be no more severe than

they had previously expected and that

the risk of an even larger contraction in

this sector had ebbed. But further adjustment in the housing market appeared

likely. Single-family housing permits

continued to fall and inventories of unsold homes remained at historically high

levels. Contacts in the building sector

suggested that construction firms were

attempting to reduce their backlogs of

unsold homes, both by cutting back

sharply on new construction and by offering substantial price incentives. Several meeting participants noted the considerable strain on some small- and

medium-sized residential construction

firms.

To date, weakness in the housing market and the associated downshift in

house price appreciation did not seem to

be spilling over into consumer spending,

which appeared to have grown at a

steady pace in recent months. Retail activity in most Districts had been relatively robust and contacts in the retail

sector were generally upbeat about the

outlook. Several participants noted,

however, that contacts within the transportation sector had reported that activity in anticipation of the holiday shopping season appeared to be softer than in

previous years. Meeting pa

judged that consumer expend

ing forward were likely to ex

steady pace a little below the 

disposable income, supported 

able financial conditions, 

increases in employment and 

and the recent decline in ener

Nonetheless, many particip

pressed concern that ongoing 

ments in the housing market c

a more pronounced impact on 

and other spending, especially 

prices declined significantly.

Investment spending also ap

be holding up well. Meeting pa

reported that their business 

were generally optimistic and 

the economic outlook as 

favorable. Several participa

that growth in nonresidential 

tion remained robust and was 

some of the resources displa

the residential sector. The st

corporate balance sheets and p

seen as likely to help mainta

profile for investment spendin

next year or so, despite some 

from the slower growth in fi

However, one participant obs

the uncertainty concerning th

severity of the current slowin

nomic growth could lead so

nesses to delay investment pla

In contrast to the steady exp

consumer and business in

spending in recent months, sev

components of output and 

appeared to have been somewh

than expected. In particular, a

uncomfortably high levels of in

within the auto sector had pr

sharp reduction in light vehicl

tion in the third quarter. Fede

ditures had been held down b

ingly weak defense outlays. A

growth in imports in July an

driven in part by a surge in oi
suggested that net exports probably

posed an arithmetic drag on economic

growth in the third quarter. However,

participants judged that the recent weakness in these components largely reflected temporary influences and was

not likely to depress the pace of economic expansion going forward. That

said, one participant did note the possibility that the recent decline in oil prices

may in part stem from weakness in global demand.

Both data and reports from businesses

indicated that the labor market remained

tight. Employment had continued to rise

at a steady pace, and participants reported that many of their contacts were

increasingly concerned about the difficulty of recruiting suitably qualified

workers. Shortages were most pronounced for certain types of professional and skilled workers. These reports of shortages and the associated

wage pressures had not unambiguously

shown through in the aggregate compensation data, which were giving contradictory signals about whether compensation increases were picking up.

However, the possibility that the tightness of the labor market could lead to a

sustained increase in wage pressure was

viewed by participants as an upside risk

to costs and their expectations of a

gradual decline in inflation. It was

noted, though, that continuing high

profit margins provided some scope for

increased labor costs to be absorbed

without necessarily leading to elevated

price pressures.

All meeting participants expressed

concern about the outlook for inflation.

Most participants expected core inflation to edge lower, in part as the effects

of the run-up in energy prices in recent

years waned. And shelter costs were not

expected to add materially to inflation

going forward. Moreover, moderate

growth in aggregate demand and the

associated modest easing of 

on resource utilization should 

tribute slightly to the slowin

inflation. Recent changes in c

had declined slightly from ear

year. Nonetheless, nearly all pa

viewed the current rates of cor

as uncomfortably high and st

importance of further modera

available measures sugges

medium- and long-term inflati

tations remained around the le

for the past several years, al

the view of some participants 

pectations were probably hi

would be consistent with the

ment of long-run price stabilit

pants were concerned that inf

pectations could begin to drif

if core inflation remained elev

protracted period. Any such ris

tion expectations and associate

pressure on inflation itself wo

prove costly to reverse. Altho

participants noted that the rec

ing in core inflation had helpe

their fears of a further sustaine

in inflation, all participants em

that the risks around the desir

ward path to inflation remain

upside.

In the Committee’s discu

monetary policy for the int

period, nearly all members 

keeping the target federal fun

51⁄4 percent at this meeting. T

mittee’s view of the outlook 

nomic growth and inflation ha

little since the previous meetin

all members expected that the 

would expand close to or a li

its potential growth rate and 

tion would ebb gradually fro

evated levels. Although subst

certainty continued to att

outlook, most members judge

downside risks to economic ac

diminished a little, and likew
members felt that the upside risks to

inflation had declined, albeit only

slightly. All members agreed that the

risks to achieving the anticipated reduction in inflation remained of greatest

concern. Members noted that a significant amount of data would be published

before the next Committee meeting in

December, giving the Committee ample

scope to refine its assessment of the

economic outlook before judging

whether any additional firming was

needed to address those risks.

Members agreed that the statement to

be released after the meeting should

continue to convey that inflation risks

remained the dominant concern and that

additional policy firming was possible.

The Committee concurred that the statement should mention both that economic

growth had slowed over the course of

the year and that, going forward, the

economy seemed likely to expand at a

moderate pace. With energy prices well

off the highs reached earlier in the year,

members felt that it was no longer appropriate to note that the high level of

energy prices had the potential to sustain inflation pressures.

At the conclusion of the discussion,

the Committee voted to authorize and

direct the Federal Reserve Bank of New

York, until it was instructed otherwise,

to execute transactions in the System

Account in accordance with the following domestic policy 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 longrun objectives, the Committee in the immediate future seeks conditions in reserve

markets consistent with maintaining the federal funds rate at an average of around

51⁄4 percent.

The vote encompassed approval of

the text below for inclusion in the statement to be released at 2:15 p.m.:

Nonetheless, the Committee j

some inflation risks remain. The 

timing of any additional firming t

needed to address these risks will 

the evolution of the outlook for 

tion and economic growth, as 

incoming information.

Votes for this action: Messrs

and Geithner, Ms. Bies, Me

Kroszner, and Mishkin, Ms

Messrs. Poole and W

Ms. Yellen. Votes against t

Mr. Lacker

Mr. Lacker dissented becau

lieved that further tightening w

to help ensure that core 

declines to an acceptable rate 

quarters.

The Committee then continu

cussion of communication i

considered the advantages and 

tages of quantifying an inflati

tive. Participants stressed that 

step had to be consistent with 

tory objectives for monetary 

that regard, it was noted that 

price stability is a prerequisite 

mum employment and mode

term interest rates. However, 

sible specification of a numer

objective raised a number of 

and interrelated issues that req

siderable further discussion. T

mittee reached no decisions 

issues at this meeting, and pa

agreed to continue the Co

review of communication iss

meeting in January 2007.

The meeting adjourned at 1

Notation Vote

By notation vote completed 

ber 10, 2006, the Committ

mously approved the minut

FOMC meeting held on Sept

2006.

Vincent R
Meeting Held on

December 12, 2006

A meeting of the Federal Open Market

Committee was held in the offices of the

Board of Governors of the Federal

Reserve System in Washington, D.C.,

on Tuesday, December 12, 2006 at

8:30 a.m.

Present:

Mr. Bernanke, Chairman

Mr. Geithner, Vice Chairman

Ms. Bies

Mr. Kohn

Mr. Kroszner

Mr. Lacker

Mr. Mishkin

Ms. Pianalto

Mr. Warsh

Ms. Yellen

Ms. Cumming, Mr. Hoenig, Ms. Minehan, and Messrs. Moskow and

Poole, Alternate Members of the

Federal Open Market Committee

Messrs. Fisher, Plosser, and Stern,

Presidents of the Federal Reserve

Banks of Dallas, Philadelphia, and

Minneapolis, respectively

Mr. Barron, First Vice President, Federal Reserve Bank of Atlanta

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, Struckmeyer, Weinberg, and Wilcox,

Associate Economists

Mr. Kos, Manager, System Open Market Account

Messrs. Clouse and English

Directors, Division of 

Affairs, Board of Gover

Ms. Liang and Mr. Slifman

Directors, Division of 

and Statistics, Board of 

Messrs. Gagnon and Wasch

Associate Directors, D

International Finance 

search and Statistics, re

Board of Governors

Mr. Dale, Senior Adviser

of Monetary Affairs, 

Governors

Mr. Gross, Special Assist

Board, Office of Board 

Board of Governors

Mr. Luecke, Senior Financi

Division of Monetar

Board of Governors

Mr. Driscoll, Economist, D

Monetary Affairs, 

Governors

Ms. Low, Open Market Secr

cialist, Division of 

Affairs, Board of Gover

Mr. Rasdall, First Vice Pres

eral Reserve Bank of K

Mr. Rosenblum, Executive V

dent, Federal Reserve 

Dallas

Mr. Hakkio, Mses. Mester 

muter, and Messrs. 

Rolnick, and William

Vice Presidents, Feder

Banks of Kansas City

phia, New York, St. Lou

apolis, and San Francis

tively

Messrs. Kahn and Sullivan, 

dents, Federal Reserve 

New York and Chicag

tively

Mr. Olivei, Senior Economi

Reserve Bank of Boston

The Manager of the Syst

Market Account (SOMA) re

recent developments in for
change markets. There were no open

market operations in foreign currencies

for the System’s account in the period

since the previous meeting. The Manager also reported on developments in

domestic financial markets and on

System open market transactions in

government securities and federal

agency obligations during the period

since the previous meeting. By unanimous vote, the Committee ratified these

transactions.

The information reviewed at the

December meeting suggested that economic activity was increasing at a subdued rate during the second half of the

year. The contraction in homebuilding

was continuing to restrain overall activity, and a step-down in motor vehicle

output held down industrial production.

In contrast, consumer spending and

business investment were increasing at a

moderate rate, and payroll employment

expanded solidly through November.

Additional sharp declines in energy

prices reduced total consumer price inflation in October, but the twelve-month

change in core prices remained above its

year-earlier level.

Indicators from the labor market were

generally strong through November.

Nonfarm payrolls increased at a solid

pace, while revisions to previous estimates showed a larger gain, on balance,

over the preceding two months. Employment in manufacturing and construction industries fell in November,

but hiring continued to be brisk in the

professional and nonbusiness service

industries. Aggregate weekly hours of

private production or nonsupervisory

workers edged up. The unemployment

rate had fallen to 4.4 percent in October

but ticked back up to 4.5 percent in

November, remaining below the average

of 4.7 percent during the first three quarters of the year.

Industrial production (IP) d

September but rose slightly in 

In October, total industrial p

was boosted by a weather-r

bound in electricity generati

output in the mining sector 

sizable gain as crude oil ext

Alaska returned to full produ

lowing pipeline repairs. Man

output fell in both months, 

cause of cutbacks in motor ve

duction as vehicle makers 

evated inventories in ligh

Although less pronounced th

motor vehicle sector, the recen

in factory output was also app

number of other sectors. A n

ception was production in 

industries, which posted ano

increase in October, reflecting 

in computer output and a rise 

conductor production attributa

rollout of a new generation 

processors.

The National Income and 

Accounts for the third quarte

rated an estimate by the Burea

nomic Analysis (BEA) that gr

of new motor vehicles incre

rapid pace in the third quarte

contrast to a drop in the IP 

motor vehicles (including par

tion) for that same period. Mu

difference could be attribute

BEA’s method of inferring m

cle output from separate data 

net international trade, and c

inventories rather than measur

directly using data on produ

addition, a large drop in the 

price index for light trucks in 

quarter resulted in a jump in t

implied unit values of light 

inventory. In the staff’s view, t

surement issues likely caused 

statement of the rate of increa

GDP in the third quarter, and th

unwinding of those effects wo
ably lead to an understatement of real

GDP growth over the next several

quarters.

Real consumer spending increased

strongly in October after a more modest

gain in September. Although purchases

of motor vehicles weakened in October,

outlays on a broad range of other categories of goods, including gasoline,

food, and apparel, rose briskly. Spurred

by sharp declines in consumer energy

prices, real disposable income also

increased rapidly in September and

October. Despite the further deceleration in house prices, the ratio of household wealth to disposable income

remained well above its historical average, buoyed by robust gains in the stock

market. Readings on consumer sentiment edged down in November and

early December but stayed above levels

seen in the summer.

Residential construction activity continued to be very weak. Single-family

housing starts dropped substantially in

October after a slight increase in September, while new permit issuance fell

to nearly its lowest level in the past ten

years. Construction in the much-smaller

multifamily sector continued to fluctuate within a range that had prevailed for

the past several years. Inventories of

unsold homes remained high in October

but were a bit lower than those in preceding months. Sales of new and existing homes showed tentative signs of

stabilizing, although at levels well below their mid-2005 peaks. Price appreciation of existing homes continued to

slow in the third quarter, and some price

measures showed outright declines.

Real spending on equipment and software continued to increase at a solid

pace in the third quarter, supported by

strong corporate cash positions and a

low cost of capital. Early indicators for

the fourth quarter, including survey

measures of business conditions, suggested a slowdown in spendin

reflecting the deceleration in 

output. Business purchases 

vehicles were likely to conti

boosted by an increase in sp

advance of the upcoming c

regulations on truck engines 

Environmental Protection 

Although spending on high-te

goods and software expanded 

pace in the third quarter, dat

orders and shipments in Octob

to more moderate growth in 

quarter. Growth of nonreside

struction spending appeared 

slowed from a rapid rate earl

year, responding in part to stil

cancy rates in the office and 

categories. The number of n

and petroleum drilling rigs in 

had moved down, on balance, 

tember in response to the mod

energy prices.

Unit stocks of light moto

dropped in the third quarter. O

motor vehicle sector, real 

inventories edged up, and th

book-value inventories to sale

the manufacturing and trade se

in September to levels last see

2005. Inventory imbalances 

more widespread than a few 

earlier, although business 

through November indicated th

majority of firms perceived 

customers’ inventories remaine

fortable levels.

The U.S. international tra

declined in September from 

level in August. The narrowi

rily reflected a sharp falloff in 

of imported oil, although no

ports, including industrial supp

tal goods, and automotive prod

declined. Export growth in S

was led by aircraft and indu

plies, while exports of automo

ucts, consumer goods, and sem
tors fell. The trade deficit shrank a bit

further in October.

Economic activity in the advanced

foreign economies rose at a moderate

rate in the third quarter. The expansion

in real activity in the euro area, although

slower than the staff had expected, was

supported by strong domestic demand.

Canada’s real GDP growth was dragged

down by weakness in inventories and

government spending, while slumping

private consumption weighed on growth

in Japan. The U.K. economy, buoyed by

strong investment, continued to expand

solidly. Recent economic indicators for

the developing economies were somewhat mixed but suggested generally

brisk growth in the third quarter.

The overall price index for personal

consumption expenditures fell in September and October, reflecting sharp

declines in energy prices in both

months; the declines left the change in

that index over the twelve months ending in October substantially lower than

over the preceding twelve-month period.

In contrast, the change in the core price

index for personal consumption expenditures over the twelve months ending

in October was still somewhat higher

than it was a year earlier, largely reflecting an acceleration in shelter costs over

that period. The producer price index for

core intermediate materials was flat in

October. Increases in average hourly

earnings had been moderate in recent

months, and compensation per hour in

the nonfarm business sector appeared to

have risen at a subdued rate in the third

quarter. The estimated increase in hourly

compensation for the second quarter had

been revised down substantially; hourly

compensation was now estimated to

have declined in the second quarter following the sharp gain recorded in the

first quarter. This uneven pattern suggested that the surge in hourly compensation in the first quarter had largely

been driven by transitory facto

compensation of private indus

ers, as measured by the em

cost index, increased at a 

faster rate in the three months 

September than it had in 

quarters.

At its October meeting, th

Open Market Committee (FO

cided to maintain its target fo

eral funds rate at 51⁄4 percent. 

mittee’s accompanying 

indicated that economic gro

slowed over the course of 

partly reflecting a cooling of 

ing market. Going forward, 

omy seemed likely to expand 

erate pace. Readings on core 

had been elevated, and the hig

resource utilization had the p

sustain inflation pressures. Ho

flation pressures seemed likel

erate over time, reflecting redu

tus from energy prices, 

inflation expectations, and th

tive effects of monetary polic

and other factors restraining 

demand. Nonetheless, the C

judged that some inflati

remained. The extent and timi

additional firming that might 

to address these risks would d

the evolution of the outlook 

inflation and economic grow

plied by incoming information

Investors had largely antic

FOMC’s decision at its Octobe

to leave the target federal f

unchanged and to make onl

changes in the accompanyin

statement. As a result, the a

ment of the decision elicited 

ket reaction, as did the subseq

lication of the minutes of the 

However, somewhat weaker-t

ipated economic data over the 

ing period apparently led to s

ening of investors’ perceptio
economic outlook. As a result, the likely

pace and extent of policy easing

expected by investors increased, and

yields on nominal and inflation-indexed

Treasury coupon securities fell. Inflation compensation measures were little

changed. Spreads of investment-grade

corporate bond yields over those of

comparable-maturity Treasury securities

remained about unchanged, while those

on speculative-grade corporate bonds

rose a bit. Broad equity indexes showed

solid gains. The foreign exchange value

of the dollar against other major currencies fell, on net, over the intermeeting

period, with pronounced declines

against the euro and sterling.

Debt of the domestic nonfinancial

sectors in the third quarter expanded at

around its second-quarter pace. Business debt rose slightly more slowly than

in the second quarter, in part reflecting

reduced borrowing in the bond and commercial paper markets. In the household

sector, mortgage debt increased at its

lowest pace since the late 1990s, reflecting the continued deceleration in house

prices. M2 rose more strongly in October and November than it had in preceding months.

The staff forecast prepared for this

meeting indicated that growth in economic activity had slowed to a pace

below that of the economy’s long-run

potential in the second half of 2006,

partly as a result of the ongoing adjustment of the housing sector. The rate of

increase in real GDP was expected to

pick up gradually as the drag from the

contraction in residential construction

diminished, returning towards the end

of 2007 to a rate close to the staff’s

estimate of potential output growth.

Core inflation was anticipated to edge

down in 2007 and 2008 in response to a

waning of the effects of higher energy

and import prices, a step-down in rent

increases, and the emergence 

amount of slack in the econom

In their discussion of the 

situation and outlook, meetin

pants noted that their assessme

medium-term prospects for 

growth and inflation were littl

from the previous meeting. 

indicators of near-term activity 

mixed, with some spending an

tion data pointing to a more 

picture than that suggested by 

solid labor market data. Man

pants judged that economic a

the second half of this year 

ably a touch softer than 

expected at the time of the 

meeting. But looking over the 

or so, participants continued 

the economy to expand at a ra

or a little below the economy’

sustainable pace. The ongoin

ment of the housing market w

to damp economic growth in 

term, but this effect was ex

dissipate, and spending in oth

ries looked set to expand at a r

good pace. Although reading

inflation had improved mode

the spring, price pressures we

viewed as convincingly on a d

trend. Most participants expe

inflation to moderate slowly o

but stressed that the risks to th

outlook remained to the upsid

In their discussion of the m

tors of the economy, participa

that developments in the housi

continued to weigh heavily on 

activity. Housing starts and p

new construction had droppe

in October, and contacts in th

sector reported that construct

were continuing to cancel o

land purchases. However, th

some indications that home sa

be starting to stabilize, aid

marked slowing in the rate o
of house prices and a decline in mortgage rates in recent months. Several participants also noted that a range of nonprice incentives and concessions were

being offered by construction firms to

bolster sales. But even if home purchases had begun to level off, residential

investment was likely to fall further in

coming quarters as homebuilders sought

to reduce their backlogs of unsold

homes.

Thus far, the adjustment of activity

and prices in the housing market did not

appear to have spilled over significantly

to consumer spending, which had

expanded at a steady pace in recent

months, buoyed by continued gains in

employment and by a decline in energy

prices. Retailers in most Districts

expected good sales over the holiday

season, although some contacts at package delivery and trucking firms reported

that activity was less busy than usual for

this time of year. Participants noted the

downward revision to the BEA’s estimate of personal income in the second

quarter of this year, but nonetheless continued to anticipate consumer expenditures to expand at a steady pace going

forward. Growth in consumer spending

was expected to be supported by favorable financial conditions and solid gains

in income from employment, outweighing any damping effect of sluggish

increases in housing wealth. Still, considerable uncertainty regarding the ultimate extent of the housing market correction meant that spillovers to

consumption could become more evident, especially if house prices were to

decline significantly.

Business investment appeared to have

decelerated recently, and surveys and

orders data pointed to a relatively slow

rise in equipment and software spending

over the next few quarters. Incoming

data on construction activity and employment also suggested that, following

very rapid growth earlier in 

increases in nonresidential co

spending could be moderating 

ably. However, the weaker cas

of these data contrasted with 

of optimism among business 

Moreover, several participants 

contacts within the construct

had reported that commercial 

activity remained robust, enco

lower vacancy rates, some f

rents, and accommodative fina

ditions. Looking further ahead

participants expected inves

expand at a solid pace, sup

strong corporate balance sh

profits and by the ready avai

funding from financial marke

stitutions, factors that were ex

be offset only partially by rest

slower growth in final sales.

Recent data suggested that 

demand in the rest of the w

likely to continue to expand a

what faster rate than in th

States. Participants noted 

strength of global demand and 

decline in the foreign exchang

the dollar should help to 

increases in U.S. exports.

The slowing in the pace of 

expansion in recent quarters 

by the business spending data 

apparent in measures of indu

duction. Much of the slowing i

tion had been concentrated in 

vehicle sector—as producers h

semblies in order to reduce hi

tory levels—and in constructi

sectors. But, more recently, in

had increased in a number of 

tors, and manufacturing produ

been trimmed in response. F

justments remained possible, s

an additional source of downs

economic growth in the near 

contrast, indicators of activity 
vices sector implied continued brisk

growth.

Participants noted that recent indicators provided mixed signals about the

strength of near-term activity. Solid

gains in employment over recent quarters stood in contrast to the softer pace

of economic expansion suggested by the

spending and production data. That difference most likely reflected lags

between movements in activity and employment, implying that growth in employment would probably slow over the

next quarter or so. Participants suggested that other forces might be at work

as well. The growth of structural labor

productivity could be weaker than currently thought, helping to reconcile the

steady growth in employment with more

subdued advances in spending and output. Moreover, the recent pace of activity may have been stronger than that

indicated by the spending and production data. With regard to this possibility,

it was noted that gross domestic income

had grown substantially more quickly

than measured GDP over the past year.

Incoming data and reports from businesses suggested that the labor market

remained tight. The unemployment rate

had moved slightly lower on balance

over recent months, and many business

contacts reported difficulties in recruiting suitably qualified workers, especially for certain types of professional

and skilled positions. The downward revision to the estimated increases in labor

compensation and unit labor costs earlier in the year had eased some participants’ concerns about the extent of the

pressures on labor resources. Nonetheless, the possibility that the tightness of

the labor market could lead to sustained

upward pressure on nominal labor costs

was viewed as an upside risk to the

expected moderation in inflation.

All meeting participants remained

concerned about the outlook for inflation. Although readings on c

tion had improved modestly 

spring, nearly all participant

core inflation as uncomfortably 

stressed the importance of fur

eration. Participants expected 

tion to edge lower over time, 

the pass-through of higher p

energy and other commoditi

course and as the moderate 

aggregate demand likely led to 

easing of pressures on resourc

participants also highlighted t

that movements in the price

vidual components of the pr

such as owners’ equivalent 

medical costs, could have on 

readings on core inflation. Mo

ally, participants stressed there 

siderable uncertainty as to the 

pace and extent of the mod

core inflation and that the ris

this desired downward path re

the upside. Moreover, partici

pressed concern that a failure 

tion to moderate as expected 

tail significant costs if an upwa

inflation expectations ensued.

In the Committee’s discu

monetary policy for the int

period, nearly all members 

keeping the target federal fun

51⁄4 percent at this meeting. Th

for economic growth and infl

thought to have changed relati

since the previous meeting. N

members felt that maintaining 

rent target for now was most 

foster moderate economic gro

gradual ebbing of core inflatio

elevated levels. Several memb

that the subdued tone of some 

indicators meant that the down

to economic growth in the nea

increased a little and become 

broadly based than previously 

Nonetheless, all members ag

the risk that inflation would fa
erate as desired remained the predominant concern.

In light of the data received over the

intermeeting period, members felt that

the statement should characterize the

cooling in the housing market as substantial and should note that recent indicators had been mixed. The Committee

thought that the statement should reiterate that the economy seemed likely to

expand at a moderate pace, while also

recognizing the possibility that measured GDP growth could be somewhat

uneven in coming quarters. Members

agreed that the statement should continue to convey that inflation risks

remained of greatest concern and that

additional policy firming was possible.

One member did not favor language that

referenced only the possibility of additional policy firming and believed that,

although the risks to inflation remained

the predominant concern, the statement

should emphasize that policy could be

adjusted in either direction depending

on the evolution of the outlook for inflation and economic growth.

At the conclusion of the discussion,

the Committee voted to authorize and

direct the Federal Reserve Bank of New

York, until it was instructed otherwise,

to execute transactions in the System

Account in accordance with the following domestic policy 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 longrun objectives, the Committee in the immediate future seeks conditions in reserve

markets consistent with maintaining the federal funds rate at an average of around

51⁄4 percent.

The vote encompassed ap

the text below for inclusion in 

ment to be released at 2:15 p.m

Nonetheless, the Committee j

some inflation risks remain. The 

timing of any additional firming t

needed to address these risks will 

the evolution of the outlook for 

tion and economic growth, as 

incoming information.

Votes for this action: Messrs

and Geithner, Ms. Bies, Me

Kroszner, and Mishkin, Ms

Messrs. Poole and Warsh

Yellen. Votes against th

Mr. Lacker

Mr. Lacker dissented becau

lieved that further tightening w

to help ensure that core 

declines to an acceptable rate 

quarters.

Meeting participants briefly 

some issues regarding comm

and the next steps in their c

discussion of the topic. At 

FOMC meeting, confirmed 

ary 30–31, 2007, the Comm

tended to consider the role 

nomic projections and forecast

in communicating information

The meeting adjourned at 1

Notation Vote

By notation vote completed o

ber 14, 2006, the Committ

mously approved the minut

FOMC meeting held on Octob

2006.

Vincent R
Litigation

During 2006, the Board of Governors

was a party in two lawsuits or appeals

filed that year and was a party in five

other cases pending from previous years,

for a total of seven cases; in 2005, the

Board 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 an

employment discrimination action.

Texas State Bank v. United States, No.

05-1168 (U.S. Supreme Court, filed

March 10, 2006), was an appeal of a

decision of the Court of Appeals for the

Federal Circuit dismissing an action

challenging on constitutional grounds

the failure to pay interest on reserve

accounts held at Federal Reserve Banks.

On June 19, 2006, the Supreme Court

denied certiorari. 126 S. Ct. 2889.

Inner City Press/Community on the

Move v. Board of Governors, No. 05-

6162 (Second Circuit, filed November

21, 2005), is an appeal of the district

court’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’s

motion for summary judgment in a Freedom of Information Act case. On September 11, 2006, the court o

affirmed in part and reversed i

ruling of the district court

manded the case. 463 F.3d 23

Price v. Bernanke, No. 05-5

Circuit, filed September 29, 2

an appeal of an order of the dis

(No. 04-CV-0973, 374 F. Supp

dismissing an employment d

tion action. On December 15, 

court of appeals affirmed th

court’s dismissal. 470 F.3d 38

Barnes v. Greenspan, No

1989 (CKK) (D.D.C., filed N

15, 2004), is a case under the 

crimination in Employment A

Jones v. Greenspan, No. 04

(RMU) (D.D.C., filed October 

is an employment discriminati

On December 13, 2005, the dis

granted in part and denied in 

Board’s motion to dismiss and 

mary judgment. 402 F. Supp. 

Artis v. Greenspan, No. 

(D.D.C., filed February 22, 20

employment discrimination a

identical action, No. 99-207

(D.D.C., filed August 3, 1999)

solidated with this action on A

2001.