Minutes of the Federal Open Market Committee

by Stephan Smith on February 19, 2011

Welcome to the Minutes of the Federal Open Market Committee page. Here is where I will be covering the minutes of the FOMC and sharing my commentary and opinions on what was stated in the minutes. The minutes of the FOMC is one of the most important documents released by the Federal Reserve because it gives some insight as to the state of the United States economy as seen by the Federal Open Market Committee. If you’re interested in the state of the United States economy, then you should be interested in this page. If you have a question, comment or an opinion that you would like to share, please leave a comment below.

Table of Contents


January 2011

The January 25th – 26th, 2011 Minutes of the Federal Open Market Committee has just been released and it is time to see what the FOMC is reporting.

Prior to the FOMC meeting on November 2nd – 3rd, 2010, the Federal Reserve, through the Federal Reserve bank of New York and the Open Market Desk has continued to reinvest principle payments received from their investment holdings into long term United States Treasury securities. That means the Federal Reserve is still implementing the reinvesting of principle payments expansionary monetary policy to in order to increase the money supply of the United States at an incremental pace with the goal of encouraging economic growth and making money and credit easier to obtain.

Since FOMC meeting on November 2nd – 3rd, 2010, the Federal Reserve, through the Federal Reserve bank of New York and the Open Market Desk has also continued to purchase additional United States Treasury securities with their quantitative easing 2 program. Check out my article about the Fed and quantitative easing 2. So far the Federal Reserve as purchased a grand total $236 billion dollars worth of United States Treasury securities since Nov 2-3, 2010.

$69 billion dollars out of the $236 billion dollars worth of United States Treasury securities that were brought is from the reinvesting principle payments received from the agency debt and mortgage backed security holdings of the Federal Reserve. $167 billion out of the $236 billion dollars worth of United States Treasury securities that were brought is from quantitative easing expansionary monetary policy, also known as the asset purchase program.

The average duration for maturity for the United States Treasury securities purchased is around 5.5 years. That implies that the FED believes that around 5-6 years from now, the economy should be in a much better condition. Maybe in a good enough condition to end the implementation of further expansionary monetary policies.

Check out this important news regarding the rate at which the Open Market Desk is going to have to purchase United States Treasury securities. According to the November 3rd, 2010 monetary policy press release, the FED intends to purchase $600 billion worth of United States Treasury securities at a rate of $75 billion per month until the end of the second quarter of 2011 (end of June 2011).

The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.

- Federal Open Market Committee, November 3rd Monetary Press Release

But according to the Manager of the System Open Market Account in the January 25th – 26th, 2011 FOMC minutes, the FED is going to have to increase the rate at which it purchases United States Treasury securities from $75 billion per month to $80 billion per month if the FED intends to purchase $600 billion worth of securities by the end of June 2011. I would imagine that the extra $5 billion per month would provide a slightly bigger shock to the Unites States economy and will encourage further weakening of the United States dollar.

The economic situation of the United States is continuing to improve, thought the FOMC minutes did state that the improvement hasn’t been sufficient enough to improve the labor market. The FOMC did acknowledge that consumer spending did continue to improved ‘strongly’ during the final months of 2010. Construction in residential and non-residential sectors remain weak still. It appears that construction in general is relatively non-responsive to the actions taken by the Federal Reserve. It seems to me that it is going to be a few years before we see the construction sector return to normal.

The FOMC also acknowledged that industrial production has continued its growth trajectory during the last two months of 2010. Unfortunately, the unemployment rate continues to be elevated and will likely remain elevated for some time. The FOMC states that inflation continues to be subdued, which is surprising to me since the FED is in the middle of expanding its balance sheet.

The Labor market has shown weak improvement over the recent months. The unemployment rate declined to 9.4 percent in December of 2010. However, it largely had to do with the decrease in the labor participation rate.

Based on all the information obtained and reviewed by the FOMC, they deemed it appropriated to maintain the $600 billion asset purchase program and maintain the reinvestment of principle payments policy. The FOMC’s confidence on the sustainability of the United States’ recovery improved but the Committee also acknowledged the fact that the recovery hasn’t be significant enough to improve the labor market (just repeating that part).

There is some concern among the Committee that the asset program (quantitative easing program) may contribute to the realization of some unforeseen issues. The Committee maintains that they will continue to closely monitor the effects of the asset program. The FOMC minutes clearly stated that the asset program, along with the overall economic situation will likely merit an exceptionally low federal funds rate for an extended period.


December 2010

Ahhh, it’s time to read over the December 14th, 2010 minutes of the Federal Open Market Committee. Let’s see what the Fed has been up to since the last FOMC meeting. If you don’t remember, allow me to remind you that the November FOMC meeting was a significant one because it was during that meeting where the plan to expand the Federal Reserve’s balance sheet by another $600 billion dollars at the rate of $75 billion dollars per month received authorization for execution.

From November to December 2010, it seems that the FED is right on target with that goal. Month over month, the Open Market Desk at the Federal Reserve Bank of New York purchased $105 billion dollars of United States Treasury securities. Roughly $30 billion dollars out of the $105 billion dollars came from the principle payments from the Federal Reserve’s holdings and the remaining $75 billion dollars came from the created $600 billion dollar asset purchase program (quantitative easing 2).

Since the last meeting, the Open Market Desk at the Federal Reserve Bank of New York purchased a total of about $105 billion of Treasury securities, reflecting about $30 billion of purchases with the proceeds of principal payments and about $75 billion as part of the authorized expansion of the Federal Reserve’s securities holdings.

- December 14th, 2010, Minutes of the Federal Open Market Committee; Page 2

The Open Market Desk at the Federal Reserve Bank of New York did not perform any currency trading activities with foreign currencies during the intermeeting period. All actions taken by the Open Market Desk was voted on by the Federal Open Market Committee.

The Economic Situation

Great news, the information assessed by the Federal Open Market Committee indicates that the United States is experiencing an increase in economic activity at a moderate pace. The not so good news is that the United States employment situation still looks somewhat grim and the unemployment rate is still elevated. The housing market also isn’t fairing well and it is still depressed even after all this time.

The minutes of the Federal Open Market Committee revealed that industrial production, business investment in equipment and software, inventory investment and consumer spending continued to improve in recent months. The consumer price index is still concerning as it remains dangerously low.

For the most part, the United States recovery is still progressing positively. The FOMC feels that it is in the best interest of the United States that they continue to expand the Federal Reserve’s balance sheet.

Accordingly, in their discussion of monetary policy for the period immediately ahead, nearly all Committee members agreed to continue expanding the Federal Reserve’s holdings of longer-term securities as announced in November in order to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with the Committee’s mandate.

- December 14th, 2010, Minutes of the Federal Open Market Committee; Page 8


November 2010

The Federal Reserve continues to implement numerous monetary policy actions to be more accommodating to the economic recovery of the United States.

Reinvesting Principle Payments

One monetary policy that is still being implemented is the reinvesting of principle payments from the FED’s agency securities into Treasury securities. As of November 2010, the Open Market Desk at the Federal Reserve bank in New York had reinvested $65 billion dollars into United States Treasury securities since the monetary policy was first implemented back in August 2010. The $65 billion dollars was used to purchase Treasury securities with maturities of 2 to 10 years. No transactions occurred involving foreign currencies from October 2010 to November 2010. Just incase you need some clarification, all that the FED is doing here is taking the profits it is making from the agency securities and reinvesting those profits into United Sates Treasury securities. The purpose of doing that is to slightly increase the FED’s balance sheet.

The Plan from the Manger of the System Open Market Account

During the FOMC meeting, the Manager of the System Open Market Account (SOMA) prepared conceptual plans on how the Open Market Desk was to increase SOMA’s holdings of Treasury securities if the FOMC made the decision to further increase the FED’s balance sheet. The highlight of the plan is the following: The majority of reinvestment purchases will continue to be nominal Treasury securities with maturities between 2 to 10 years. The objective there is to have an average maturity rate of 5 to 6 years. The Manger also plans to purchase shorter and longer term nominal Treasury securities (less than 2 years and more than 10 years) and Treasury Inflation Protected Securities (TIPS).

The Open Market Desk believes that by reinvesting principle payments from the FED’s agency securities and agency mortgage backed securities to Treasury securities, the Open Market Desk will eventually be able to purchase $75 billion dollars worth of Treasury securities per month, which is in compliance to the FOMC decision on November 3rd 2010.

Quantitative Easing 2 Is Met With Resistance

Ever since the Federal Open Market Committee announced that they were going to purchase an additional $600 billion dollars worth of assets at a rate of $75 billion dollars per month to help improve the pace of the United States economic recovery in the November 3rd Federal Open Market Committee Statement, the Federal Reserve has been under intense criticism from many sources domestically and internationally. And I can’t blame the critics, because through monetary policy actions like quantitative easing, people around the world who hold the United States dollar are become instantly poorer. They are become poorer because the Federal Reserve is essentially devaluing the United States dollar. It also creates more debt with interest for the government.

Economic Developments

In regards to the FOMC’s assessment of the of economic situation of the United States, things seem to be moving in the right direction (but not at a sufficient enough pace), aside from consistently low levels of inflation. The FOMC acknowledged the gradual improvement of the labor market, which is definitely good news; that is the first step for a quicker recovery. Unfortunately, the unemployment rate still remains elevated at 9.6%. Though the unemployment rate remains elevated, as long as the labor market improves, everything else will follow. The FOMC acknowledged that exports posted further gains, which is no surprise due to the weaken state of the United States dollar. The FOMC also acknowledged gains in consuming spending in the third quarter. That is further good news. Increased consumer spending may be attributed to an increase in consumer confidence, an improving labor market or the fast approaching holiday season.

The FOMC recognized that industrial production decreased in recent months, manufacturing gains were small and capacity utilization was steady but well below the long term average. According to the FOMC, the housing market still remained depressed. The FOMC believes this may be the case of consumer pessimism regarding the economy and the labor market, which is at odds with my previous thoughts that consumer confidence may be starting to slowly improve due to the modest improvement in consumer spending. Business investment in equipment experienced “solid” gains in the third quarter, which points to a more optimistic forecast of the US economy. The United States’ international trade deficit continued widening in the recent months, which is surprising to me, simply because of the weakness of the United States dollar. Americans are continuing to spend money on foreign goods and services even though they are becoming increasingly expensive.

The Federal Funds Rate

Another monetary policy that is still being implemented by the FOMC to help bolster the economic recovery of the United States is maintaining the record low Federal Funds Rate. The November 2010 minutes stated that the FOMC will continue to hold the Federal Funds Rate around 0 – 1/4 percent. The FOMC in return acknowledged that investors are continuing to drive bond yields lower probably due to the fact that many investors believe that the Federal Reserve many purchase additional assets and / or keep the Federal Funds Rate low for an even longer period of time. Whether investors are correct or not remains to be seen.

FOMC’s Domestic Policy Directive

Below is the FOMC’s Domestic Policy Directive which should give you a clear understanding of what the FOMC is trying to accomplish…

“The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to ¼ percent.

The Committee directs the Desk to execute purchases of longer-term Treasury securities by the end of June 2011 in order to increase the total face value of domestic securities held in the System Open Market Account to approximately $2.6 trillion.

The Committee also directs the Desk to reinvest principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.

The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System’s balance sheet that could affect the attainment over time of the Committee’s objectives of maximum employment and price stability.”

– FOMC’s Domestic Directive

Source: Copy of the November 2010 Minutes of the Federal Open Market Committee



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