WASHINGTON (MNI) – The following is an excerpt from the text of
the minutes of the Federal Open Market Committee’s September 21 meeting
published Wednesday, titled “Committee Policy Action:”

Committee Policy Action

In the discussion of monetary policy for the period ahead, most
members agreed that the revisions to the economic outlook warranted some
additional monetary policy accommodation to support a stronger recovery
and to help ensure that inflation, over time, was at a level consistent
with the Committee’s dual mandate. While they recognized that monetary
policy alone could not completely address the economy’s ills, most
members judged that additional accommodation could contribute
importantly to better outcomes in terms of the Committee’s dual mandate
of maximum employment and price stability. Those viewing greater policy
accommodation as appropriate at this meeting generally supported a
maturity extension program that would combine asset purchases and sales
to extend the average maturity of securities held in the SOMA without
generating a substantial expansion of the Federal Reserve’s balance
sheet or reserve balances. Specifically, those members supported a
program under which the Committee would announce its intention to
purchase, by the end of June 2012, $400 billion of Treasury securities
with remaining maturities of 6 years to 30 years and to sell an equal
amount of Treasury securities with remaining maturities of 3 years or
less. They expected this program to put downward pressure on longer-term
interest rates and to help make broader financial conditions more
accommodative. While the scale of such a maturity extension program was
necessarily limited by the amount of shorter-term securities in the SOMA
portfolio, most members judged the action as appropriate, given economic
conditions and the outlook. Two members said that current conditions and
the outlook could justify stronger policy action, but they supported
undertaking the maturity extension program at this meeting as it did not
rule out additional steps at future meetings. Three members concluded
that additional accommodation was not appropriate at this time. The
Committee discussed whether to specify the parameters of the maturity
extension program by stating its intention to complete the full set of
transactions by June 2012 or by stating that it would undertake these
transactions at a specified monthly pace. Members saw benefits to both
approaches: The former would provide the public greater clarity about
the likely scale of the program and the latter might allow the Committee
greater flexibility to adjust the scale of the program in response to
unexpected economic developments. A majority favored the first approach.
Members noted, however, that the Committee will continue to regularly
review the size and composition of its securities holdings and that it
is prepared to adjust those holdings as appropriate.

Most members also supported a change in the Committee’s
reinvestment policy. To help support conditions in mortgage markets, the
Committee decided to reinvest principal received from its holdings of
agency debt and agency MBS in agency MBS rather than continuing to
reinvest in longer-term Treasury securities as had been the Committee’s
practice for more than a year. The effect of this change will be to keep
the SOMA’s holdings of agency securities at an approximately constant
level; under the previous practice, those holdings were declining on an
ongoing basis. This change in reinvestment policy was expected to help
reduce the spread between yields on mortgagebacked securities and those
on comparable-maturity Treasury securities seen this year and so
contribute to lower mortgage rates. Members also noted that the change
in reinvestment policy could help prevent the shares of outstanding
longer-term Treasury securities held by the Federal Reserve from
reaching levels high enough to result in a deterioration in Treasury
market functioning. One member who opposed the maturity extension
program also opposed the change in reinvestment policy because he judged
that it would not benefit housing markets. At the same time, the
Committee decided to maintain its existing policy of rolling over
maturing Treasury securities at auction.

The Committee also decided to keep the target range for the federal
funds rate at 0 to percent and to reaffirm its anticipation that
economic conditions- including low rates of resource utilization and a
subdued outlook for inflation over the medium run-are likely to warrant
exceptionally low levels for the federal funds rate at least through
mid-2013. A couple of members noted that they would prefer to change the
Committee’s forward guidance to provide greater clarity about the
economic conditions that would be likely to warrant maintaining
exceptionally low levels of the target federal funds rate, but no
decision was taken on this point.

The Committee agreed that it was important to acknowledge, in the
statement to be released following the meeting, that economic growth
remained slow and that indicators pointed to continuing weakness in
overall labor market conditions. It also agreed to note that inflation
appeared to have moderated since earlier in the year as prices of energy
and some commodities had declined from their recent peaks, and that
longer-term inflation expectations remained stable. Members generally
continued to expect some pickup in the pace of the economic recovery
over coming quarters but anticipated that the unemployment rate would
decline only gradually and agreed that there were significant downside
risks to the economic outlook, including strains in global financial
markets. The Committee again anticipated that inflation would settle,
over coming quarters, at levels at or below those consistent with the
Committee’s mandate as the effects of past energy and commodity price
increases dissipate further.

** Market News International Washington Bureau: 202-371-2121 **

[TOPICS: MMUFE$,MGU$$$,M$U$$$,MFU$$$]