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In the discussion of monetary policy for the intermeeting period, Committee members recognized that the large volume of excess reserves had already resulted in federal funds rates significantly below the target federal funds rate and the interest rate on excess reserves. They agreed that maintaining a low level of short-term interest rates and relying on the use of balance sheet policies and communications about monetary policy would be effective and appropriate in light of the sharp deterioration of the economic outlook and the appreciable easing of inflationary pressures.
Maintaining that level of the federal funds rate implied a substantial further reduction in the target federal funds rate.
Even with the additional use of nontraditional policies, the economic outlook would remain weak for a time and the downside risks to economic activity would be substantial. Moreover, inflation would continue to fall, reflecting both the drop in commodity prices that had already occurred and the buildup of economic slack; indeed some members saw significant risks that inflation could decline and persist for a time at uncomfortably low levels.

Members debated how best to communicate their decisions regarding monetary policy actions. Since the large amount of excess reserves in the system would limit the Federal Reserve's control over the federal funds rate, several members thought that it might be preferable not to set a specific target for the federal funds rate.
Indeed, those members felt that lack of an explicit target could be helpful, in that it would focus attention on the shift in the policy framework from targeting the federal funds rate to the use of balance sheet policies and communications about monetary policy as a way of providing further monetary stimulus. A few members stressed that the absence of an explicit federal funds rate target would give banks added flexibility in pricing loans and deposits in the current environment of unusually low interest rates. However, other members noted that not announcing a target might confuse market participants and lead investors to believe that the Federal Reserve was unable to control the federal funds rate when it could, in fact, still influence the effective federal funds rate through adjustments of the interest rate on excess reserves and the primary credit rate. The members decided that it would be preferable for the Committee to communicate explicitly that it wanted federal funds to trade at very low rates; accordingly, the Committee decided to announce a target range for the federal funds rate of 0 to 1/4 percent. Members also agreed that the statement should indicate that weak economic conditions were likely to warrant exceptionally low levels of the federal funds rate for some time.
The members emphasized that their expectation about the path of the federal funds rate was conditioned on their view of the likely path of economic activity.

Members also discussed how best to communicate the focus of the Federal Reserve's policy going forward. Members agreed that the statement should indicate that all available tools would be employed to promote the resumption of sustainable economic growth and to preserve price stability. They also agreed that the statement should note that it was the Committee's intention to sustain the size of the Federal Reserve's balance sheet at a high level through open market operations and other measures to support financial markets and stimulate the economy. In addition to the already-announced asset purchases and liquidity programs, members concurred that the statement should indicate that the Committee stands ready to expand purchases of agency debt and agency mortgage-backed securities, and that it is evaluating the potential benefits of purchasing longer-term Treasury securities.

In light of the use of additional tools for implementing monetary policy, the Committee revised the form of the directive to the Open Market Desk of the Federal Reserve Bank of New York. In addition to specifying that it now seeks conditions in reserve markets consistent with federal funds trading in a range of 0 to 1/4 percent, the Committee instructed the Desk to purchase up to $100 billion in housing-related GSE debt and up to $500 billion in agency-guaranteed MBS by the end of the second quarter of 2009.
Members agreed that they should not specify the precise timing of these purchases, but that they should leave discretion to the Desk to intervene depending on market and broader economic conditions.
The directive also noted that the Manager of the System Open Market Account and the Secretary of the FOMC would keep the Committee informed of developments regarding the System's balance sheet that could affect the attainment of the Committee's statutory objectives.
At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive:

"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 of 0 to 1/4 percent. The Committee directs the Desk to purchase GSE debt and agency-guaranteed MBS during the intermeeting period with the aim of providing support to the mortgage and housing markets. The timing and pace of these purchases should depend on conditions in the markets for such securities and on a broader assessment of conditions in primary mortgage markets and the housing sector. By the end of the second quarter of next year, the Desk is expected to purchase up to $100 billion in housing-related GSE debt and up to $500 billion in agency-guaranteed MBS. 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."

The vote encompassed approval of the statement below to be released at 2:15 p.m.:

"The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.

Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant.
The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity."

Votes for this action: Mr. Bernanke, Mses. Cumming and Duke, Messrs.
Fisher, Kohn, and Kroszner, Ms. Pianalto, Messrs. Plosser, Stern, and Warsh.

Votes against this action: None.

Ms. Cumming voted as the alternate for Mr. Geithner.

The Committee also continued its discussion of possible refinements to the Committee's approach to projections that could provide additional information about participants' views of longer-run sustainable rates of economic growth and unemployment and the measured rates of inflation that would be consistent with price stability, but it made no decisions regarding these issues. Finally, staff briefed the Committee on the progress of plans for implementing the Federal Reserve's Term Asset-Backed Securities Loan Facility, which had initially been announced on November 25, 2008.

It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, January 27-28, 2009.

The meeting adjourned at 3:00 p.m. on December 16, 2008.


Notation Votes
By notation vote completed on November 18, 2008, the Committee unanimously approved the minutes of the FOMC meeting held on October 28-29, 2008.

By notation vote completed on November 26, 2008, the Committee unanimously approved the extension until April 30, 2009, of its authorization for the Federal Reserve Bank of New York to engage in transactions with primary dealers through the Term Securities Lending Facility, subject to the same collateral, interest rate, and other conditions previously established by the Committee.

_____________________________
Brian F. Madigan
Secretary