A HISTORY OF MONETARY POLICY: FEDERAL OPEN MARKET COMMITTEE DECISIONS IN CONTEMPORARY AND CURRENT PERSPECTIVES

JUNE 2009

ANTONIO ALONSO GONZALEZ

CONGYI LUI

Acknowledgments

The authors of this paper thank Professor King for his help and guidance through the making of this project.

Contents:

Introduction, 4

1. Conference Call 4 2. June FOMC meeting 4-34

Financial market conditions 4-5 Evolution of interest rates 5 Economic outlook 6-7 Inflation and Output Gap 7-8 Balance Sheet Developments 8-9 The Supervisory Capital Assessment Program 9-10 Reform of the Financial System 10 Liquidity facilities renewal 11 Forward Guidance 11-12 The Large Scale Asset Purchases Program 12-13 Exit Strategy 14 Policy options and final decision 15-16 Speeches 16-18 Contemporary Perspectives 19-20 Retrospective Information 20-22 References 23-24 Annexure 25-34

Introduction In this paper, we summarize the most important events and the economic and financial context that influence the monetary policy decisions taken by the Federal Open Market Committee (FOMC) of the Federal Reserve from the end of April until the June meeting of 2009, held the 23 and 24 of June. It also includes the June Conference Call in June 3. This paper also includes contemporary comments made in the economic press about the events that were occurring at that time and about the decision the FOMC took. It also contains comments on the happenings during the period we study with the lenses of the present.

The month of June presented an improved economic forecast. The FED’s staff forecasted the beginning of the recovery in the second half of the year. In spite of this improved outlook, the situation of the financial system remained fragile, and the FOMC Committee was alert of unexpected shocks. This period is particularly important because it was the exact moment in which the economic recovery from the Great Recession took place.

SUMMARY OF THE CONFERENCE CALL In June 3 there was a conference call. In this session, the members talked about the improved situation of the economy and the policy changes that the Fed might do because of this. The members of the FOMC Committee agreed on the perceived improvement of the economy and the absence of a need to change the strategy or any important policy of the FED. Even if they had that opinion, Ben Bernanke said that the decision in the 23-24 June meeting had to be made with updated and much more information. We won’t make a detail description of the meeting because the situation did not change much during the month and in the meeting we have more detail explanations, and importantly, updated numbers.

The 3 June Conference call was informal and no decision or votation of any kind was made.

23-24 FOMC JUNE MEETING

Financial Market conditions The basic insights about the development of financial markets during the period are: Risky asset prices were raising, financial institutions were raising new capital and money markets continued to heal. In a word, the situation of financial markets improved since the April FOMC meeting.

In this financial overview I do not talk about the LSAP program and the rising interest rates because I want to talk about them separately.

As the required interest rates for corporate debt was significantly reduced, issuers brought a heavy flow of new bonds to the market in the weeks before the June meeting. The spreads of corporate debt to Treasuries reduced by 176 and 405 basis points for the investment-grade and high-yield debt, respectively. The evolution of the spreads of corporate debt can be seen in the graph of the top in Figure A.6. Meanwhile, the federal government issued large amounts of debt, and state and local government debt was estimated to have expanded moderately.

In addition to that, there was an increase in the price of the stocks. The S&P raised a 5% during the period, continuing its recovery since March. (You can see the time series of stock prices in Figure A.6, at the bottom). This rising trend was partially due to the better prospects of banks. Before the release of the results of the stress test investors were scared of investing in banks because they were not sure about their solvency. The good results in the tests made possible that banks were able to raise new capital, more than $35 billion in debt. In addition to this, 10 large financial institution repaid TARP funds, returning in total $86 billion to the Treasury.

The willingness of investors to move back from safe assets in the United States to riskier assets abroad contributed to a weakening of the dollar, Figure A.7, with the broad dollar index off by about 5 percent.

One notable feature of this period is the improvement of the easiness of getting liquidity in the market. The three month LIBOR spread did fall, being in similar levels as in early 2008. This is not true for longer maturities, where the spreads were still very high.

Evolution of the market interest rates As we know, the monetary policy at that time with federal funds rate in the zero lower bound consisted on keeping the interest rates in the financial markets low by buying some specific assets (the Large Scale Asset Purchase). A distinctive feature of this period was that interest rates were rising sharply in the American financial markets.

Treasury yields, especially bills due in two years and beyond, were raising during the period. Several factors were blamed in this rising trend, including an improved economic outlook, an associated reduction is the risk of deflation, the need to hedge mortgage convexity exposure as rates increase, an ongoing reversal of the flight-to-quality flows and the substantial increases in the supply of treasury debt. Fed staff did a survey to ask market agents to give their opinion about the factors that were driving this increase. The results of the survey of the driving factors and their weight and the evolution of the yields in treasuries are included in the Annexure, figures A.1 and A.2, respectively.

This rising yields appeared despite of the large purchases of government bonds made by the FED. The final interpretation of the causes of the rising yields in the financial markets was probably the key feature of this period. In short, the FOMC Committee in the June meeting had to decide whether this rise was a signal of a problem or positive news. If the Committee thought that the run-up in long-term yields represents an unwelcomed tightening of credit conditions, then the FED had to increase the size of the LSAP Program. If the meaning of this rise was a symptom that economic recovery was coming, then they had to maintain or start reducing the size of the program.

Economic outlook The most notable change in the economic outlook of the US economy by late June was the certainty that the economy was still contracting, tough at a much lower level. In fact, the Federal Reserve had expected a higher decrease in real GDP for the two first quarters of the year in the meeting before June (April). This better outcome was produced by a much lower decrease in non-residential construction and by an increase in household consumption. As we can see in the table, economic prospects according to the FED improved although economic growth remained negative for the first two quarters.

Table: Near Term outlook for real GDP growth (Percent change at annual rate)

Despite the expected economic growth still being negative in the second quarter, the forecast for the third quarter was real positive growth. The forecast for the third quarter was 0.7 percent change at an annual rate. At some extend, this forecast of economic growth in the third quarter meant that they expected the economic crisis to be over in the third quarter. Therefore, we can say that they thought that at that point in time they were in the turning point of the crisis. This increase in the forecast for the third quarter of the year was driven by an important increase in the real federal purchases [Obama’s stimulus program] and by the elimination of cuts in local and state governments, as the fiscal stimulus package helped states and localities to maintain their spending in the face of very weak revenues. Moreover, reduction in the decrease of investments made by the private sector was thought to play a role.

The FED also calculated forecast for economic growth in the medium term. The institution expected a 1.1 percent growth in the second half on that year (2009) and a rate of economic growth of 3 percent in 2010.

Despite what seemed an improvement in the economic situation of the country, job losses remained important thought they were going down (jobs were still be destroyed, but at a slower pace). The unemployment grew compared to the unemployment rate in last meeting situating at 9.4%. After declining an average of almost 700,000 jobs per month in the first quarter, private payroll employment fell about 600,000 in April and 340,000 in May, a bit less than the FED had expected in the April Greenbook. They projected that private employment would fall an additional 400,000 in June and that job losses would taper off in the third quarter, according to their June forecast.

The expected inflation for the whole year 2009 was predicted in June to be 1.4 percent. This rise in prices was fueled by an increase in the price of energy (price of oil was expected to rise $15 in the second half of the year) but also for other reason, like the general improvement of the economic outlook and the increase of the price on imports (due to the falling value of the dollar). Predictions of inflation were 1.1 percent for 2010.

Regarding fiscal policy, the stimulus package was expected to boost the change in real GDP by 1 percentage point in 2009 and ¾ percentage point in 2010. FED analysts forecasted in June large deficits in the federal budget in 2009 and 2010. The amount of the expected deficit for each year was expected to reach $1.4 trillion dollars. This huge gap between expenditures and revenues forced the Treasury to issue a large amount of debt.

Inflation & Output Gap The committee expected overall PCE (personal consumption expenditure) inflation, which is measures the percentage change in prices of goods and services purchased by consumers throughout the economy, to slow from 1.4 percent this year to 1.1 percent in 2010. Core inflation is projected to slow a bit more. The projected deceleration in core inflation reflects the substantial drag induced by economic slack (Transcript of June 23 2009 FOMC meeting, page 103).

Typically, the output and unemployment gaps typically provide similar signals; this similarity is largely by construction, as we use information from developments in both product and labor markets to jointly inform our estimates of potential GDP and the NAIRU. However, a sizable discrepancy has opened up during this recession—with the unemployment gap suggesting an even greater degree of slack than suggested by the output gap.

Mr. Kiley employed several possible explanations for the discrepancy In the Greenbook. First, the GDP data, as currently published, may understate the contraction in real activity; indeed, the data on Gross Domestic Income, which in principle estimate overall economic activity as does GDP, have been significantly weaker than GDP since 2007.

Second, labor force participation may currently be boosted to an unusual degree by the Extended Unemployment Compensation program, by the declines in wealth and their effect on the labor supply of near-retirees or other workers, or by other factors, such as an unusual concentration of job losses among individuals with strong labor force attachment; such unusual boosts to participation would have a large influence on the unemployment gap but not much effect on the estimated GDP gap.

Finally, we may currently have underestimated the size of shifts in the NAIRU (non-accelerating inflation rate of unemployment) or other elements of potential, possibly contributing to mismeasurement of slack (Transcript of June 23 2009 FOMC meeting, page 104).

There are various models can be utilized to estimate potential GDP. The first is the staff estimate, which is loosely based on a growth accounting approach along with a number of underlying models (related to productivity dynamics, Okun’s law, and the Phillips curve, for example). The second is a trend-cycle decomposition of GDP using a simple Phillips curve in which inflation is a function of the output gap, a model that has been used in many academic studies. The third is derived from a dynamic stochastic general equilibrium (or DSGE) model developed at the Board (Transcript of June 23 2009 FOMC meeting, page 104).

The uncertainty of the estimates of these three methods is significant. 90 percent confidence interval for the second quarter of this year spans from about -2 percent of potential GDP to about -8 percent of potential GDP. Furthermore, the staff’s estimate of the output gap is in the lower half of the confidence interval, but it is not the most negative estimate; the estimate from the DSGE model is more negative, at a bit below -7 percent. Finally, the entire confidence interval for the output gap is below zero, by the largest margin seen over the past two decades. In summary, it seems highly likely that the economy currently is operating with considerable slack (Transcript of June 23 2009 FOMC meeting, page 104).

Two risks to the inflation outlook were exhibited during the meeting. An unmooring of expectations is a risk: For example, expectations could shift down markedly in response to the weak economy and decelerating wage gains; alternatively, expectations could ramp up, perhaps in response to our expanding balance sheet (Transcript of June 23 2009 FOMC meeting, page 105). Another important risk surrounding the inflation projection relates to the links between resource utilization and inflation. Inflation appears less sensitive to resource utilization than before so inflation will decelerate by less than it did during earlier periods of substantial slack

Throughout the later discussion in the meeting, Mr. Kiley also emphasized the definition of “potential” here is a statistical definition that’s consistent with the model. The model is completely independent of that statistical machinery, and wages and prices and everything are being driven by all of the things that are appropriate in a dynamic stochastic general equilibrium model. Statistically, from this model we will forecast low inflation (Transcript of June 23 2009 FOMC meeting, page 105). He also pointed once you have sticky prices and sticky wages, monopoly power, other sources of distorting shocks, there is no simple relationship between what would happen in the absence of wage and price rigidities and what would happen to inflation.

Balance Sheet Developments One of consequences of the monetary policy during the Great Recession was the huge increase in size of the Balance Sheet of the FED. This fact provoked a lot of attention on the evolvement of the size of the Balance Sheet through time. In this section, we are going to state the main changes produced during the intermeeting period.

Since the April FOMC meeting, the Federal Reserve’s total assets remained at around $2 trillion, but their composition shifted significantly. As a result of the asset purchase programs, securities held outright increased $201 billion, but this increase was roughly offset by a decrease of $206 billion in liquidity programs and other lending facilities. That is, the share of long term assets went up and the share of short term assets went down. To see the evolution of the composition of the Fed’s Balance Sheet, please see Figure A.8

In June 2009, FED reports stated that an increase of the size of the Balance Sheet to $2.8 trillion was expected. In subsequent years, they accounted, TALF loans would be repaid and securities mature so they expected the Balance Sheet to contract to just under $1.5 trillion in 2016. To see a detail version of the changes during the intermeeting period, please see the Annexure, Table 2.

The substantial changes to the size and composition during the crisis of the Federal Reserve’s balance sheet posed risks to the net income of the FED. Two were the main risks. One of the main risks was that, as the policy rate was increased, the income that the Reserve banks would earn on largely fixed-rate assets becomes insufficient to offset expenses, most importantly the interest expense on reserve balances. The second risk is the possibility that increases in the interest rates reduced the market value of the SOMA portfolio so that, in the event that the Desk needs to sell some of these securities to drain reserves to raise the federal funds rate, the System realized capital losses. According to the FED analysts, the first risk was not expected to happen, but they were really worried about the second risk.

The Supervisory Capital Assessment Program

The Supervisory Capital Assessment Program, publicly described as the bank stress tests (even though some of the companies that were subject to them were not strictly banks), was an assessment of capital conducted by the Federal Reserve to assess the financial health of the major US financial organizations. The Supervisory Capital Assessment Program focused on the nineteen largest US owned bank holding companies, those with assets of $100 billion or more. Collectively, they held about two-thirds of the assets and half the loans in the US banking system.

Although the main responsible of the accomplishment of the stress test was the Fed, it can be argued that this action was a combination of Fed and Treasury forces. It was Timothy Geithner, the Secretary of the Treasury, not Ben Bernanke the one that announced the plan on February 10. In the conduction of the valuation, both Fed and Treasury analysts intervened.

To understand why the conduction of the Supervisory Capital Assessment Program was such an important action, we must put this policy in context. Before February 2009, many steps had already been taken to help stabilize the US banking system. The Treasury Department had injected capital into banks, the Federal Deposit Insurance Corporation had expanded guarantees for bank liabilities, and the Federal Reserve had established lending programs to provide liquidity to a range of financial institutions and markets. However, confidence in banks remained tenuous in early 2009. In markets, this unease had driven up credit spreads on corporate bonds issued by banks, impaired banks’ access to short-term funding, and depressed values of bank equities.

The concerns about banking institutions aroused not only because market participants expected steep losses on banking assets, but also because the range of uncertainty surrounding estimated loss rates was exceptionally wide. The stress assessment was designated both to ensure that banks would have enough capital in the face of potentially large losses and to reduce the uncertainty about potential losses. To achieve these objectives, for each financial organization included in the SCAP, supervisors estimated potential losses for each major category of assets, as well as revenue expectations, under two macroeconomic scenarios for 2009 and 2010. The baseline scenario reflected the consensus expectations in February 2009 among professional forecasters on the depth and the duration of the recession, while the most adverse scenario was designated to characterize a recession that is longer and more severe than the consensus expectation. The actual numbers used in the valuation for the key macroeconomic indicators, for both the baseline and more adverse scenario can be seen in Table 1.

The results were published in May 7, 2009. Nine of the nineteen organizations examined had enough capital to remain viable and continue to lend normally, under the more adverse scenario. Ten organizations did not fulfill Fed's requirements and their capital needs were estimated to be around $70 billion. For a detail description of the 19 organizations under examination and their individual results, please see the Annexure, Table 4. Results show the need of capital under the most-adverse-scenario.

Banks that did not pass the examination were told that they had six months to raise enough capital to allow them to remain viable and continue to lend normally, even in the adverse scenario. If they were unable to raise the required capital from private markets within that amount of time, they would have to take capital from the TARP under conditions imposed by the Treasury.

Eventually the valuation exercise was able to eliminate most of the uncertainty that surrounded at that time to the major banks, showing clearly what banks need to raise capital and what banks enjoyed a solid enough capital reserves. The fact that the estimated losses were not as high as the most pessimistic forecasts and the fact that banks that came up short had a chance to raise capital privately and if they were unable, the Treasury was available to fill the capital needs with the TARP funds contributed to the restauration of confidence in the major financial organizations.

At the time of the meeting, the financial organizations had already announced plans to raise the $70 billion. In addition, they had already issued $35 billion in new debt, including $25 billion that did not use the FDIC guarantee program. We can see the capital raised to capital requirements by the financial organizations from 7 May to 18 June in Figure A.9.

You never want a serious crisis to go to wasted: reform of the American Financial System The financial crisis showed that the supervision of the financial system was a total failure. For this reason, a new regulatory framework was thought to be created. The U.S. Treasury Department released a proposal the 17 June for reforming the financial regulatory system. The proposal called for the creation of a Financial Services Oversight Council and for new authority for the Federal Reserve to supervise all firms that pose a threat to financial stability, including firms that do not own a bank. The earliest draft did not impose any penalty on the size of the banks but addressed the generalized belief that big size confers advantages to large institution because they will be bailed-out if they get into trouble. It faced that issue in three ways:

First, it proposed tougher capital, liquidity and risk-management standards for systematically important institutions, both banks and non-banks (such as AIG and the Wall Street investment firms). Second, the administration proposed that the FED supervise all systematically important financial companies. Third, the administration’s plan planned to give the government the legal tools to take over and dismantle systematically important financial institutions on the brink of failure.

FOMC discussion about liquidity facilities The Committee discussed extensively about the renovation of several liquidity programs that the FED had established in the course of the financial crisis because they were planned to expire in October 30. The improvement of the economy had as consequence that the use of most of the liquidity facilities declined in the months before June. Despite this lower use, meeting participants judged that the market conditions remained fragile. They acknowledged that the availability of the liquidity facilities was a factor that contributed to the reduction of financial strains and were concerned about the possibility that eliminating the liquidity programs would produce a renewed pressure on some financial institutions and markets and tighten credit conditions for business and households. In this circumstances, participants agreed that most facilities should be extended at least until early 2010.

Following the presentation by Brian Madigan and the later discussion, the Board voted unanimously to extend the AMLF, the Commercial Paper Funding Facility (CPFF), the Primary Dealer Credit Facility (PDCF), and the TSLF through February 1, 2010. In addition, the FOMC extended the swaps lines between the FED and other central banks.

The Board did not extend the Money Market Investor Funding Facility (MMIFF) beyond October 30. The Board and the FOMC jointly decided to suspend some TSLF auctions and to reduce the size and frequency of others.

Despite the fact that most liquidity programs were extended, the Committee reduce the access to most of the liquidity programs justifying this to the improvement of the economy and the decrease of the demand of liquidity. This measure affected the Term Auction Facility (TAF), the Term Securities Lending Facility (TSLF), and the Asset-Backed Commercial Paper Funding Facility (AMLF). In this sense, the Committee agreed on all the proposals presented by Brian Mandigan.

A brief summary of the thoughts of FOMC members and FED’s staff is the following: they realized that their liquidity programs were not at that time completely necessary but they though pragmatically that their existence would help a lot in the case of an unexpected emergency. They also wanted to show to the markets that liquidity facilities were available in case of need.

Forward Guidance MR. Bullard did not took a lot of time talking about forward guidance. He pointed out that naming a specific date for when we might make future interest rate moves might go the wrong direction. This will undermine the economy’s evolvement. Though some other countries have utilized such kind of method before, Bullard enforced people could get announcement effect only because they surprised the market. Of course, you could always move later and get the market to move off that, but you’re kind of drawing this line in the sand, and I’m not sure that’s what the Committee wants to do (Transcript of June 23 2009 FOMC meeting, page 185).

Also, promising keeping rates lower for longer period may work well in models, while some distortions can occur in reality. This requires everyone has rational expectations and understand what will happen in the future, which is obviously impractical. Also, when you say “lower for longer,” you mean relative to what would otherwise be the optimal policy rule, and I’m not sure that we actually have that embedded out there in the market. I think the effects that we might get from further strengthening our commitment to low rates further out in the future are

probably lost in the reality of the situation that we face(Transcript of June 23 2009 FOMC meeting, page 186). Also, due to the discounting in the future, there are limits we cannot ignore. If you promise to keep rates low far into the future, then that gets discounted by the markets the farther you go into the future. Bullard summarized just keeping the “for an extended period” language at this meeting and at future meetings.

Evolution of the Large-scale asset purchases program In this section, I am going to present the main features of the Large-scale purchases program by June 2009. To start with, given that the federal funds rate was close to zero, the FED had decided to articulate a large scale asset purchase program to reduce the interest rate of the overall economy. The program included the purchase of three different kinds of assets: long-term treasury bills, Mortgage-backed securities and agency-backed securities. The stated objective of the LSAP programs was to lower private credit rates and increase credit availability in an effort to stimulate economic activity.

The Large Scale Purchase Program had an important effect in lowering the rates of the Mortgage backed securities. The spread of these assets to the Treasures narrowed and this made possible a refinancing wave. In the period we focus on, the rate of Mortgaged backed securities went up because the investors in the market understood that the FED would not buy more assets if the rate increased. To see a comparison in the evolution of the rate of Mortgage-Backed-securities and the comparable Treasury rate, please see Figure A.4

The amount of the investment in MBS assets and agency securities and the size of this market explained why FED purchases had a large impact in the MBS rate and agency interest rates, as opposed of FED’s actions in the treasury debt market, where Fed purchases were overwhelmed by new issuance. It is important to recall that, at that time, due in part to Obama’s stimulus economic program the Federal Government had an important deficit (9.8% in 2009) that was financed with bond issues. The relationship between the total amount of government debt and the size of the purchases of Treasures made by the Fed can be seen in Figure A.5. Despite the large deficits the Federal Government was running, the yield curve was showing the same degree of steepness that had around or just after the end of previous recessions.

Given the fact that the yields were at levels considerably higher than in the prior meetings, the staff considered that the FOMC probably wanted to increase the size of the asset purchases program. In the Memos, the staff pointed out that most of the effect of the asset purchases on lowering interest rates was when the program was announced, at oppose when the FED effectively bought the assets. Despite the increase in interest rates, the staff was persuaded that the Large-Scale asset purchases was effective in lowering the interest rates of the targeted assets. A possible reason why interest rates rose so much during the period was because the market participants understood that FED’s strategy in buying assets rather than having a specific interest rate as a target, it followed a constant volume of purchases over time.

Up to June 2009, the desk had purchased relatively fixed quantities of the various asset classes each month, factoring the overall size of the purchase programs relative to the stated time

horizons of those programs. Program’s main features until June 12 are summarize in the following table.

The staff considered that if the FOMC committee decided to increase the size of the program, this increase had to be necessarily in Treasury debt. The staff was concerned about the fact that the announced amounts of purchases in agency backed securities and MBS were relatively important relative to the total market size of these assets, and an increase in the purchases would create a risk of distorting the well-functioning of these markets.

The main lessons learnt of the LSAP program at that time were:

1) For the most part, market responses on long-term interest rates occurred following announcements of LSAP programs rather than at the time of execution.

2) Short and medium-term effects could be different because of distortions induced by uncertainty about the size, path, and effect of LSAPs.

3) The effects of LSAP programs on assets prices came through both changing the stock of the financial assets that investors hold in their portfolios and the flow of the purchases. For MBS and Agency backed securities, the effects of changes in stocks and flows were equally important, while for Treasuries the stock effects were more relevant.

Another important point that I want to mention is that the staff urged the FOMC to consider the LSAP exit strategy. They warned the committee about the “cliff effects” around program end dates. That is, the risk of a sharp, volatile adjustment in in rates given an abrupt end of the LSAP program.

Eventually, the FOMC members decided not to expand the LSAP Program. They also chose not to reallocate the size of the programs within them, they did not want the FED staff to have the option to do that or to change the constant pace of the purchases. Finally, the FOMC did not support the purchase of securitizations of hybrid ARMs recommended by the staff.

EXIT STRATEGY: HOW TO UNWIND THE MEASURES THAT THEY PUT IN PLACE Prior to the crisis, the FED affected the federal funds rate by changing the supply of bank reserves. In particular, to raise the funds rate, they used to sell securities. The payments reduced the bank reserves and left banks with greater need to borrow on the interbank market. More borrowing by banks in turn pushed up the federal funds rate, the interest rate on bank loans. However, the purchases made by the LSAP program had flooded the banking system with reserves, to the point that most banks had little reason to borrow from each other. With virtually no demand for short-term loans between banks, the funds rate was close to zero. The FED traditional method to control short-term interest rates was not thought to be useful anymore.

The FED realized that they needed new methods to raise interest rates at the right time. In the June meeting, they started talking about how to unwind the measures they had put in place. They did not mean by this that they were thinking to stop the expansionary monetary policy in the meeting, but they wanted to be prepared to be able to unwind in the future the measures created due to the financial crisis.

They talked about several channels that would tighten the monetary policy (that is, to raise the federal funds rate) in a supply and demand kind of thinking.

In the presentation, the beginning point was the current situation (graph A.10), with the federal funds rate lower than the IOER (Interest Earned on Excess Reserves). To increase the federal funds rate they proposed to raise or flatten the demand curve and to reduce the supply of reserves.

On the demand side, the staff proposed to increase the reserve requirement ratios and establishing a system of voluntary reserve requirements with a higher interest rate than excess of reserves. The staff not only proposed to move the demand curve to the right, but also make it more elastic. To achieve that, the staff proposed the pay of interests on reserves for all account holders (this proposal basically meant to pay interest also to Freddie Mac, Fannie Mae and the Federal Home Loan Banks. They also proposed to flatten the demand curve to establish special accounts that would allow federal funds transactions to be collateralized by balances held at the Federal Reserve. See graph A.11 for a visual explanation

On the supply side, the staff proposed several measures, like issuance of FED bills, the development of term deposits, an expanded Supplementary Financing Program, expanded use of reserve repurchase agreements, or just simply assets sales or scaled back liquidity programs. Graph A.12 summarize graphically the shift of the supply.

In the meeting, the members of the Committee rejected the option to issue FED bonds because they believed that it was politically unfeasible. To avoid confusion in the market between signaling that the FED was able to unwind their policy measures and saying that they were going to do so in the short-term, they did not mention this issue in the Statement. This discussion was relatively informal and no votation was made. The members of the FOMC encouraged Bernanke to mention this issue in his imminent testimony of July to the Congress. In that Testimony, Bernanke states that to unwind the policies, the FED had several tool, like reverse repurchase agreements, sales of long-term assets and the most important, the ability to pay interest on balances held at the Fed by depository institutions.

Policy options considered and the final policy outcome In the context of the financial market developments and macroeconomic conditions discussed above, the Committee considered three policy alternatives (A, B, C) during the meeting.

In characterizing the information on economic activity, all of the alternatives state that the indicators of consumer and business sentiment had risen, and note that household spending has shown further signs of stabilizing but remained constraint by job losses, reduced housing wealth, and tight credit. Each statement based on each policy also refers to cuts in business spending and staffing while adding that firms are or appear to be making progress in bringing inventory stocks into better alignment with sales.

At this time, the Staff basically offered three different types of policies. One that expands the Long Term Asset purchases, one that basically let things untouched, and the other that announces that the Long Term Asset Purchases program will taper off gradually by the end of the year.

The Policy Alternative A increases the amount of purchases in Treasuries ($ 750 billion by the end of the 2009). It says that “timing, composition and amounts”, of the Long Term Asset purchases program is subject to exit strategy. It clearly states that the recovery could be undermined by higher long rates, absent further monetary stimulus. It also let the funds rate close to zero for an extended period.

The Policy Alternative B introduces no change in the Long Asset Purchase Program, and states that the federal funds rate will be low for an extended period.

The Policy Alternative C considers that some degree of economic recovery has been achieved and it starts undoing the stimulus policies. It says that the federal funds rate will remain close to zero until late this year. It also says that the Long Term Assets Purchases program will taper off gradually by the end of the year.

For a more detail summary of the policies for comparison purposes, please see Table 3.

In the FOMC meeting, the members of the committee expressed their opinions about what they thought was the best course of action. President Plosser favored Alternative C, pointing out that given the favorable economic news and forecasts they had to start preparing for the end of stimulus policies. Another member of the Committee, Janet Yellen, stated the concern that markets could anticipate the end of stimulus measures because the FED may be tempted to withdraw the accommodation policy too soon, aborting the recovery. To back her opinion, she cited historical evidence (the recession after the Great Depression, caused precisely for the early withdraw of stimulus policies). She did mention an article published at that time in the Economist by Christina Romer, one of the best economic historians in the world, about the topic. The vice-chairman Dudley draw the distinction between stressing how well the FED were prepared to exit, and actually exiting. He was afraid of confusing people into thinking the FED was about to exit because they were talking in the statement about their ability to exit.

They finally choose the Alternative B, a wait-and-see policy. The members of the FOMC pointed out the need to start thinking about how to exit the stimulus program (Large Scale Asset purchases and the federal funds rate close to zero). But at the same time, most of them emphasized the idea that it was too early to do anything. President Lockhart was probably the best in articulating this idea: “I am sympathetic to the view that was expressed by both

Presidents Plosser and Lacker that if we see better results, we should consider scaling back the LSAP programs. At the same time, I think it would be a mistake to react too early and strongly to the signs of stabilization and better financial market conditions.

We also want to mention that the FOMC not just picked Alternative B. They decided to do some minor changes in the wording of the Statement in order to lower the enthusiasm about the improvement of the economy. All the members of the FOMC Committee agreed on voting the Policy Alternative B.

A comparison of the 24 June Statement with the one of 29 April reveals that the June Statement emphasized more on the improvement of the economic and financial outlook of the economy. In addition, the June Statement, although it also pointed out that inflation would be lower than optimality, the FED expected it to be somehow higher. (For a full statement comparison, see the end of the Annexure). The 29 June Statement said for the first time that the FED was ready to make adjustments to its credit and liquidity programs as necessary.

Speeches Kevin Warsh, Governor At the Institute of International Bankers Annual Meeting, New York, New York June 16, 2009

The governor, Kevin Warsh, made a speech titled “Defining Deviancy” at the Institution of International Bankers Annual Meeting in New York on June 16, 2009. “In a seminal essay delivered about 16 years ago, Senator Daniel Patrick Moynihan offered a striking view of the degradation of standards in society.1 He observed that deviancy--measured as increases in crime, broken homes, and mental illness--reached levels unimagined by earlier generations” (FOMC governor Kevin Warsh’s speech Defining Deviancy, June 16, 2009). Gradually, this definition has expanded to describe actions that deviant from acceptable standards. The financial crisis in 2008 caused countless economic deviances, such as deep contraction in real money and high level of unemployment, that hard to accept. He enforced it is time to say no to the stability strategy when we face the deviancy of economy.

Stability is a fine goal, but it is not a final one. Long after panic conditions have ended, stability threatens to displace economic growth as the primary macroeconomic policy objective. (FOMC governor Kevin Warsh’s speech Defining Deviancy, June 16, 2009). Only holding the pursuit of stability may end up making economy less productive and adaptive. The market’s ability of self-adjusting will be lessened as well.

After experiencing 20 months of the significant deviance, reform efforts are highly needed. Sorely maintaining stability cannot bring US economy back to the ideal development track. Mr Warsh presented the conduct of monetary policy, for example, aims to achieve price stability throughout the economic cycle. But central bankers do so because we believe it is the precursor to strong and sustainable growth (FOMC governor Kevin Warsh’s speech Defining Deviancy, June 16, 2009). He also argued if the policies for fiscal, regulatory, and trade all treat stability as the ultimate objective, then we might find ourselves with lower growth and diminished economic potential.

Mr Warsh employed incipient recovery, medium-term prospects, and long-term prospects in the speech. For incipient recovery, he pointed though recent extraordinary monetary policy actions are intended to lower risk-free rates and grow balance sheet capacity to help offset the pullback

by private financial intermediaries, financial markets may extract penalty pricing if fiscal authorities are unable to demonstrate a credible return to sustainable budgets (FOMC governor Kevin Warsh’s speech Defining Deviancy, June 16, 2009). The Federal Reserve should not--and will not--compromise another kind of stability--price stability--to help achieve other government policy objectives.

In medium-term, productivity is still the key of growth. So the policies should encourage capital accumulation and trade further. Looking ahead, if policy is less encouraging of capital accumulation, or returns to innovations are constrained by policy, we may find a material reduction in the growth rate of productivity and living standards. Productivity may also suffer at the hand of policies that discourage trade. Trade enhances productivity by promoting efficient specialization, permitting economies of scale, and increasing the potential returns to innovation (FOMC governor Kevin Warsh’s speech Defining Deviancy, June 16, 2009).

In terms of long-term, we should not lose confidence in the inherent innovation, creativity, dynamism in the U.S. economy, and the inherent good sense of our citizens. If the stability experiment fails to deliver on its promise of higher employment and better economic performance, then policymakers ultimately will change their prescriptions yet again (FOMC governor Kevin Warsh’s speech Defining Deviancy, June 16, 2009).

Governor Elizabeth A. Duke At the Women in Housing and Finance Annual Meeting, Washington, D.C. June 15, 2009

During the speech, Duke looked back on the policies that have been implemented throughout the financial crisis and consider how well they have worked to lessen the broader impact of financial market disruptions. He talked the policies implemented by both Federal Reserve and the government, while we only focus on Federal Reserve part here.

Besides traditional Interest Rate Methods of Monetary Policy, which is aggressively easing short-term interest rates, the Federal Reserve has been supporting credit markets through an expansion of the asset side of its balance sheet. This approach--described as credit easing--is conceptually distinct from quantitative easing, the policy approach used by the Bank of Japan from 2001 through 2006. Credit easing and quantitative easing both share the feature that they involve the expansion of the central bank's balance sheet (FOMC governor Elizabeth A. Duke’s speech Containing the Crisis and Promoting Economic Recovery, June 15, 2009). In terms of quantitative easing, central bank undertakes more open market operations with the objective of expanding bank reserve balances. However, credit easing focuses on the mix of loans and securities that the central bank holds as assets on its balance sheet as a means to reduce credit spreads and improve the functioning of private credit markets. The ultimate objective is improvement in the credit conditions faced by households and businesses (FOMC governor Elizabeth A. Duke’s speech Containing the Crisis and Promoting Economic Recovery, June 15, 2009).

As figure 1 shown above, there are four main parts of the balance sheet. First, targeted actions to prevent the failure or substantial weakening of specific systemically important institutions include the first Maiden Lane transaction in March 2008, which extended support to facilitate the merger of Bear Stearns and JPMorgan Chase. It also includes loans and facilities supporting American International Group (AIG). Second, providing liquidity to sound financial institutions in an environment in which interbank funding markets and repurchase agreement, or repo, markets (for securities other than Treasury securities) are severely disrupted. Third, lending to support key financial markets --specifically, markets for commercial paper, asset-backed securities (ABS), and commercial mortgage backed securities (CMBS). Fourth, purchasing of high-quality assets aimed at improving mortgage lending and housing markets as well as overall conditions in private credit markets (FOMC governor Elizabeth A. Duke’s speech Containing the Crisis and Promoting Economic Recovery, June 15, 2009)

A Fiscal Policy named Emergency Economic Stabilization Act has also been initiated In October 2008 to provide confidence in the financial system and to strengthen market stability. The ultimate goal of all these initiatives was to increase the flow of financing to U.S. businesses and consumers and to support the U.S. economy. Moreover, in February of this year, the Federal Reserve, as part of the Treasury's Financial Stability Plan, initiated the Supervisory Capital Assessment Program (SCAP) to evaluate whether large U.S. banking institutions would need to raise a temporary capital buffer to be able to withstand losses in a more challenging economic environment than generally anticipated (FOMC governor Elizabeth A. Duke’s speech Containing the Crisis and Promoting Economic Recovery, June 15, 2009).

Contemporary perspectives.

Contemporary reactions to the Supervisory Capital Assessment Program As Ben Bernanke recalls in his memories: “In the first months of the new administration [Obama first mandate], completing the stabilization of the Banking System remained a top priority. It is important to recall (February-May 2009) that after the cases of Citi and Bank of America, the market confidence in the banks was very low. The share prices of the largest banks went down by more than 50% and market participants were somehow wondering what bank will fall next”

To stabilize the situation, several strategies were proposed. Finally the idea of conducting stress test won. The downside of conducting the valuation was that during the meantime, doubts about the banking system persisted. An ongoing question was what to do if the test revealed a capital hole deeper than could be filled by the remaining TARP funds. For instance Larry Summers, at the time Director of the National Economic Council, was pessimistic about the results and presumed that, if the tests were to be credible, they would have to show catastrophic losses that would overwhelm the TARP. He favored nationalizing some troubled banks. A week after the Secretary of the Treasury announced the stress test Alan Greenspan, the former head of the FED, raised the possibility of temporarily nationalizing some banks. Another prominent commentator, Paul Krugman, agreed that it might be necessary.

Before the tests were completed, the central problems were 1) whether the tests would increase or decrease confidence in any companies that did badly on their tests and 2) whether or not the $350 billion in bailout funds that remained could cover the needed funding after the tests.

The Economist, in the publication of 16 May, reacted positively to the results. They pointed out that the bank stress test helped a lot to restore some confidence in banking. This rise in the confidence of the investors was only made possible because the stress test showed a credible estimate of losses ($600 billion), although for some this estimated losses were somehow optimistic. Due to the test, “investors can now buy a bank’s share and be confident that its books are not being cooked flagrantly and that it is not about to be nationalized” in the words of the people of The Economist. The magazine in the 16 May publication emphasize that even the situation of the banks improved, the banking sector was not yet at that time able to borrow money at attractive interest rates. Similar views are found in the 7 May edition of The Wall Street Journal.

The markets judged the results to be highly credible- in part because the FED reported loss estimates more severe than those of many outside analysts. For example, the results projected that in the hypothetical adverse scenario that banks would have suffered loan losses of 9 percent over the next two years, higher than the actual losses in any two-year period since 1920, including the years of the Great Depression. However, an addition important factor the government capital from the TARP could be used to help any financial organization in real trouble. The availability of TARP funds made the results credible, there were no reason to lie on them.

To conclude this section, one of the leading companies in economic analysis that forecasted very big losses for the banks, Bridgewater, published in their Daily Observations in the 7 May that the reported estimated losses were really close to their own estimations.

Contemporary reaction to the release of the statement

The 24 June FOMC statement was well-regarded by the economic press and the markets. The economic press stressed the complex situation in which the economy was. Probably this continuation policy, although it was well-received, disappointed some people that would like to have seen a further stimulus in the economy. Both The Economist and the WSJ pointed that the FED did not mention this time a concern about the possibility of deflation. As it was pointed out by Brian Mandigan in the meeting, markets agents were expected that the FED did not change any substantial part of their core policy measures. He also pointed out that markets expected the FED to point the better outlook of the economy.

Other contemporary issues

During our time period, the economic press continuously reported worries about massive government deficits. To monetary policy, the economic press was worried that eventually the massive government debt issue combined with FED’s strategy to buy government debt would lead to high inflation rates.

The Economist reported that the FED was planning its way out, planning the exit strategy to their stimulus program in order to reduce inflation fears. The FED mentioned how the recent rise in yields on Treasury bonds were caused by this reason. The Economist mentioned that there were worries about the FED being able to unwind the policies with such a big Balance Sheet, and mentioned that reverse-repurchase agreements as the conventional tool that FED could employ. They also mentioned FED bills as a better alternative, but noted that this measure was politically difficult to implement.

Retrospective information In hindsight, the decision to do the Stress Tests revealed to be one of the best policy decisions made during the economic crisis. Both Geithner and Bernanke pointed out in their memories the release of the results of the Supervisory Capital Assessment Program as the turning point in the financial crisis. The stress test made possible the reactivation of the interbank lending and the restoration of stability and reliability of the American financial system.

Finally the forecasts were right and we observed how the summer of 2009 was the turning point of the economic crisis. The American economy started growing again, although at a small pace. It is important to know that the FED expected the economic crisis to be over in October 2007, and again in the summer of 2008, so this time they were right. The National Bureau of Economic research stated that the end of the crisis was in June 2009.

The reform of the American Financial system finally was not a great change in the regulation of financial firms. The final act was passed after several bills were introduced, and this new legislation probably did not solve the problem of the financial system. Instead of creating a clear system with few rules, the final outcome of this trial of reform was to create a much larger and complex regulation and several regulatory Agencies to avoid future crisis. The new regulation did not tackle in the issue of forcing the banks to have large capital requirements. According to Anat Admati and Martin Hellwig, banks should have around 20 to 25 percent of their assets backed by equity if we want to make sure we avoid the risk of bankruptcy. The example here is Canada. Canada has large capital requirements and does not have a bankruptcy in more than a century.

Forecast and actual events In this section, I am going to compare the forecast about economic growth and inflation with the actual numbers. I concentrate in inflation and economic growth because both indicators are the sole mandate of the Federal Reserve. I think this exercise is particularly relevant given the fact that June was the period in which the economy went out of the recession. The figure below compares these growth forecasts with retrospect information. The Real GDP growth was lower than expected for 2009 (-2.8 instead of -1.1 forecasted) especially because although in the second half of the year growth was positive, it was smaller than expected. Only the worst case scenario (green line) was closed to the actual number.

Similarly, the Figure below compares the Federal Reserve inflation forecasts with retrospective information for PCE expenditure (excluding food and energy). Here we can see that the Fed was clearly wrong in its predictions. The deflation scenario is not even close to the -1.52 final number.

References Bernanke, Ben S.: The Supervisory Capital Assessment Program-one year later. (6 May,2010) http://www.bis.org/review/r100507a.pdf

Bernanke, Ben S.: The Courage to Act. A memoir of a crisis and its aftermath, Norton, New York, 2015

Bernanke, Ben S.: Semiannually Monetary Policy Report to the Congress, (21 July 2009) https://www.federalreserve.gov/newsevents/testimony/bernanke20090721a.htm

Blinder, Alan S.: After the Music Stopped, The Penguin Press, New York, 2013

Board of Governors of the Federal Reserve System, The Supervisory Capital Assessment Program: Design and Implementation, (April 24, 2009) http://www.federalreserve.gov/bankinforeg/bcreg20090424a1.pdf

Board of Governors of the Federal Reserve System, The Supervisory Capital Assessment Program: Overview of Results, (May 9, 2009) http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090507a1.pdf

Cuñat, Vicente; “El Nuevo traje del banquero” Nada es Gratis, 20 May 2013 http://nadaesgratis.es/cunat/el-nuevo-traje-del-banquero

Federal Reserve Board, Transcript of the Federal Open Market Committee Meeting on June 23-24, 2009

http://www.federalreserve.gov/monetarypolicy/files/FOMC20090624meeting.pdf

Federal Reserve Board, Federal Open Market Committee Meeting on June 23-24, 2009 : Presentation materials. http://www.federalreserve.gov/monetarypolicy/files/FOMC20090624material.pdf

Federal Reserve Board, Federal Open Market Committee Meeting on June 23-24, 2009 SEP : Individual Proyections. http://www.federalreserve.gov/monetarypolicy/files/FOMC20090624SEPcompilation.pdf

Federal Reserve Board, Statement of the Federal Open Market Committee Meeting on June 23-24 (24 June 2009) http://www.federalreserve.gov/newsevents/press/monetary/20090624a.htm

Federal Reserve Board, Statement of the Federal Open Market Committee Meeting on April 28-29, 2009 (29 April 2009) http://www.federalreserve.gov/newsevents/press/monetary/20090429a.htm

Federal Reserve Board, Transcript of the Federal Open Market Commmittee Conference Call on June 3

http://www.federalreserve.gov/monetarypolicy/files/FOMC20090603confcall.pdf

Federal Reserve Board, Bluebook : Monetary Policy Alternatives (June 18, 2009). http://www.federalreserve.gov/monetarypolicy/files/FOMC20090429bluebook20090423.pdf

Federal Reserve Board, Beige book : Current Economic Conditions (June 10, 2009) http://www.federalreserve.gov/fomc/beigebook/2009/20090610/fullreport20090610.pdf

Federal Reserve Board, Current Economic and Financial Conditions : Summary and Outlook (Greenbook- Part I) (June 17, 2009) http://www.federalreserve.gov/monetarypolicy/files/FOMC20090624gbpt120090617.pdf

Federal Reserve Board, Current Economic and Financial Conditions : Recent Developments (Greenbook- Part II) (June 17, 2009) http://www.federalreserve.gov/monetarypolicy/files/FOMC20090624gbpt220090617.pdf

Geithner, Timothy F.: Stress Test, Crown Publishers, New York, 2014.

Staff of the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York, Large-Scale Asset Purchases: Recent Experience and Some Policy Considerations on June 16, 2009

http://www.federalreserve.gov/monetarypolicy/files/FOMC20090616memo02.pdf

Speeches of Federal Reserve Officials, Defining Deviancy on June 16, 2009

https://www.federalreserve.gov/newsevents/speech/warsh20090616a.htm

Speeches of Federal Reserve Officials, Containing the Crisis and Promoting Economic Recovery on June 15, 2009

https://www.federalreserve.gov/newsevents/speech/duke20090616a.htm

The Economist, “Finance And Economics: New foundation, walls intact; Financial reform in America” (20 June 2009) http://search.proquest.com.ezproxy.bu.edu/docview/223988013/69ECE109753346F3PQ/3?accountid=9676

The Economist, Finance And Economics: “This way out; Central banks' exit strategies” ( 6 June 2009) http://search.proquest.com.ezproxy.bu.edu/docview/223988839/B8B5A70342B14AF2PQ/5?accountid=9676 The Economist, Finance and Economics: “Hospital pass; Stress tests” (16 May 2009) http://search.proquest.com.ezproxy.bu.edu/docview/223990728/C8C4B8A392F041AFPQ/3?accountid=9676

The Economist, “Too big to swallow” (16 May 2009) http://search.proquest.com.ezproxy.bu.edu/docview/223983892/C8C4B8A392F041AFPQ/4?accountid=9676

The Wall Street Journal, “Fed Reserved as Slump Eases --- Lack of New Action Disappoints Investors; Europe Injects $622 Billion Into Banks” (25 June 2009) http://search.proquest.com.ezproxy.bu.edu/docview/399134583/5DBA3808C2394350PQ/3?accountid=9676 The Wall Street Journal, “Fed Sees Up to $599 Billion in Bank Losses --- Worst-Case Capital Shortfall of $75 Billion at 10 Banks Is Less Than Many Feared; Some Shares Rise on Hopes Crisis Is Easing” (8 May 2009) http://search.proquest.com.ezproxy.bu.edu/docview/399136659/71A4C469BB945B2PQ/2?accountid=9676

ANNEXURE Figure A.1

Figure A.2

Figure A.4

Figure A.5

Figure A.6

Figure A.7

Figure A.8

Figure A.9

Figure A.10

Figure A.11

Figure A.12

TABLE 1

TABLE 2: FEDERAL RESERVE BALANCE SHEET: BILLIONS OF DOLLARS

TABLE 3: OVERVIEW OF ALTERNATIVE LANGUAGE FOR THE JUNE 23-24, 2009 FOMC ANNOUNCEMENT

TABLE 4: FINANCIAL ORGANIZATIONS AND RESULTS IN THE SUPERVISORY CAPITAL ASSESMENT PROGRAM

Asset ranking

Bank Result: additional capital needed, or adequate

1 Bank of America $33.9 billion

2 JPMorgan Chase adequate

3 Citigroup $5.5 billion

4 Wells Fargo $13.7 billion

5 Goldman Sachs adequate

6 Morgan Stanley $1.8 billion

7 Metropolitan Life Insurance Company

adequate

8 PNC Financial Services $0.6 billion

9 U.S. Bancorp adequate

10 The Bank of New York Mellon adequate

11 GMAC $11.5 billion

12 SunTrust Banks $2.2 billion

13 Capital One adequate

14 BB&T adequate

15 Regions Financial Corporation $2.5 billion

16 State Street Corporation adequate

17 American Express adequate

18 Fifth Third Bank $1.1 billion

19 KeyCorp $1.8 billion

Source : Board of Governors of the Federal Reserve System, The Supervisory Capital Assessment Program: Overview of Results, (May 9, 2009)

STATEMENT OF THE 23-24 JUNE FOMC MEETING

Press Release Release Date: June 24, 2009

For immediate release

Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

STATEMENT COMPARISON : APRIL-JUNE 2009 Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slowerApril suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit., Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories,Businesses are cutting back on fixed investment, and staffing.,. Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, but appear to be making progress in bringing inventory stocks into better alignment with sales. Althougheconomic activity is likely to remain weak for a time. Nonetheless. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability. In light of increasing economic slack here and abroad, the Committee expectThe prices of energy and other commodities t inflation will remain subdued. Moreover,ve risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee sees some riskexpects that inflation could persist for a time below rates that best foster economic growth and price stability in the longer termwill remain subdued for some time. In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of financial and economic developmentsmonitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.