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Participants agreed that falling prices for energy and other commodities and diminished economic activity had resulted in an appreciable reduction in inflationary pressures. Those pressures were seen as likely to continue to abate because of the emergence of substantial slack in resource utilization and diminishing pricing power. Participants were uncertain about the extent to which inflation would fall. Some saw inflation leveling out near desired levels, while others expressed concern that inflation might decline below levels consistent with price stability in the medium term. Participants generally agreed that inflation expectations were an important determinant of future price dynamics. Some noted that those expectations, especially at longer horizons, appeared well anchored. However, some survey evidence suggested that firms expected prices to continue to decline as they had over the previous few months. Several participants observed that monitoring measures of inflation expectations for signs of disinflationary dynamics would be especially important going forward.

In a joint session of the Federal Open Market Committee and the Board of Governors, meeting participants discussed extensively how in current circumstances the Committee could best support the resumption of sustainable economic growth and promote the maintenance of price stability over the medium term. Participants noted that very low levels of the federal funds rate had the potential to help buoy aggregate demand and economic activity, but they also had potential costs in terms of the functioning of certain financial markets and some financial institutions. Most participants judged that the benefits in terms of support for the overall economy of federal funds rates close to, but slightly above, zero probably outweighed the adverse effects. With the federal funds rate already trading at very low levels as a result of the large volume of excess reserves associated with the Federal Reserve's liquidity operations, participants agreed that the Committee would need to focus on other tools to impart additional monetary stimulus to the economy in the near term. One broad class of such tools was the use of FOMC communication with the public to provide more information regarding future policy intentions. In particular, participants judged that communicating the Committee's expectation that short-term interest rates were likely to stay exceptionally low for some time could be useful because it could lead to pricing of longer-term interest rates consistent with the path of monetary policy that policymakers saw as most likely.
Participants emphasized the importance of explicitly conditioning communication regarding future policy on the evolution of the economic outlook. Another possible form of communication that participants discussed was a more explicit indication of their views on what longer-run rate of inflation would best promote their goals of maximum employment and price stability. The added clarity in that regard might help forestall the development of expectations that inflation would decline below desired levels, and hence keep real interest rates low and support aggregate demand.

Meeting participants also discussed how best to employ the Federal Reserve's balance sheet to promote monetary policy goals. The Federal Reserve had already adopted a series of programs that were providing liquidity support to a range of institutions and markets, and participants generally agreed that a continued focus on the quantity and the composition of Federal Reserve assets would be necessary and desirable. Specifically, participants discussed the merits of purchasing large quantities of longer-term securities such as agency debt, agency mortgage-backed securities, and Treasury securities. The available evidence indicated that such purchases would reduce yields on those instruments, and lower yields on those securities would tend to reduce borrowing costs for a range of private borrowers, although participants were uncertain as to the likely size of such effects. Participants also generally believed that the special liquidity and lending facilities implemented or announced recently would support the availability of credit to businesses and households and thus help sustain economic activity. Many participants thought that the Federal Reserve should continue to consider whether expanding some of the existing facilities and creating new facilities could be helpful.
Participants emphasized that the ultimate objective of special lending facilities and asset purchases was to support overall market functioning, financial intermediation, and economic growth.
Participants acknowledged that the effective federal funds rate probably would need to remain very low for some time. However, they also recognized that, as economic activity recovered and financial conditions normalized, the use of certain policy tools would need to be scaled back, the size of the balance sheet and level of excess reserves would need to be reduced, and the Committee's policy framework would return to focus on the level of the federal funds rate.

A number of participants observed that, under the approach of conducting monetary policy by acquiring a variety of assets as needed to address financial and macroeconomic strains, the quantity of excess reserves and the size of the Federal Reserve's balance sheet would be determined by the Federal Reserve's asset purchases and the usage of its lending facilities. It was likely that, during the period of financial turmoil, the size of the Federal Reserve's balance sheet would need to be maintained at a high level.
Participants discussed the potential advantages and disadvantages of setting quantitative targets for bank reserves or the monetary base. Some were of the view that quantitative targets for an increasing reserve base could be effective in preventing deflationary dynamics and useful in communicating to the public the Committee's determination to take the steps needed to avoid such an outcome. Several other participants, however, noted that increases in excess reserves or the monetary base, by themselves, might not have a significant stimulative effect on the economy or prices because the normal bank intermediation mechanism appeared to be impaired, and banks may not be willing to lend their excess reserves. Conversely, a decline in excess reserves or the monetary base would not necessarily be contractionary if it occurred in the context of improving financial market conditions. A few of those who supported quantitative base or reserve targets did so because they saw them as helping to coordinate the actions of the Board of Governors, which is responsible for authorizing most special liquidity and lending facilities, and the Committee, which is responsible for open market operations. Most participants, however, were of the view that such coordination would best be achieved by continued close cooperation and consultation between the Committee and the Board. Going forward, consideration will be given to whether various quantitative measures would be useful in calibrating and communicating the stance of monetary policy.