Text: FOMC Minutes

Below are the minutes released by the Federal Open Market Committee after its Sept. 16 meeting on interest rate policy:

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 operations in government securities and federal agency obligations during the period since the previous meeting. By unanimous vote, the Committee ratified these transactions.

The Federal Reserve headquarters in Washington, DC.

In light of severe stresses in dollar funding markets, the Committee considered a proposal intended to provide the flexibility necessary to respond promptly to requests from foreign central banks to engage in temporary reciprocal currency ("swap") arrangements to be used in supporting dollar liquidity in their jurisdictions. After the discussion, the Committee voted unanimously to authorize its Foreign Currency Subcommittee to direct the Federal Reserve Bank of New York as needed to expand existing swap arrangements and to enter into new arrangements with foreign central banks to address strains in money markets. This authority extends through January 30, 2009.

The information reviewed at the September meeting indicated that economic activity decelerated considerably in recent months. The labor market deteriorated further in August as private payrolls declined and the unemployment rate moved markedly higher. Industrial output was little changed in July, but fell sharply in August. Consumer spending weakened noticeably in recent months. Meanwhile, residential investment continued to decline steeply through midyear. In contrast, business investment in equipment and structures generally held up through July. On the inflation front, overall consumer prices rose rapidly for a third straight month in July but then edged down in August, because of a sharp drop in energy prices. Core consumer price inflation remained elevated in July and eased somewhat in August.

The labor market continued to weaken. According to the August employment report, private payroll employment fell by a bit more than the average seen earlier this year. Most major industry groups shed jobs; manufacturing posted a particularly noticeable loss. Job losses in the construction industry diminished over July and August despite the ongoing contraction in residential investment. Hiring in nonbusiness services, which include the education and health industries, and in natural resources and mining increased in line with recent trends. The average workweek held steady and aggregate hours edged lower. The unemployment rate jumped 0.4 percentage point, to 6.1 percent, in August, while the labor force participation rate held steady.

Industrial production fell sharply in August after edging up in July. Motor vehicle assemblies dropped in August as automakers scaled back production following a sharp decline in vehicle sales in July. The output of high-tech equipment rose at a moderate rate in the first half of the year, but indicators of production gains in the high-tech sector pointed toward relatively subdued growth in the third quarter. The output of other manufacturing sectors declined for a third consecutive month in August, and indicators of near-term production suggested that the industrial sector was likely to remain soft over the next few months. For most major industry groups, factory utilization rates in August remained below their long-run averages.

Real personal consumption expenditures (PCE) turned down in June and declined more noticeably in July; over the two months, outlays for motor vehicles dropped markedly and spending on other goods weakened substantially. The recent weakness in consumer spending on goods excluding motor vehicles contrasted sharply with solid growth in the spring. Outlays for services were reported to have increased modestly in June and July. Total nominal retail sales decreased in August. Real disposable income was boosted significantly by the tax rebates in the second quarter; excluding the temporary rebates, real disposable income fell in that quarter and continued to move lower in July. Early September readings on consumer sentiment rose from the low levels recorded over the past several months.

CONTINUED

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