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August 7, 2007
A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors
of the Federal Reserve System in Washington, D.C., on Tuesday August 7, 2007 at 8:30 a.m.
Mr. Bernanke, Chairman
Mr. Geithner, Vice Chairman
Mr. Hoenig
Mr. Kohn
Mr. Kroszner
Mr. Mishkin
Mr. Moskow
Mr. Poole
Mr. Rosengren
Mr. Warsh
Ms. Cumming, Mr. Fisher, Ms. Pianalto, and Messrs. Plosser and Stern, Alternate
Members of the Federal Open Market Committee
Messrs. Lacker and Lockhart, and Ms. Yellen, Presidents of the Federal Reserve
Banks of Richmond, Atlanta, and San Francisco, respectively
Mr. Madigan, Secretary and Economist
Ms. Danker, Deputy Secretary
Ms. Smith, Assistant Secretary
Mr. Skidmore, Assistant Secretary
Mr. Alvarez, General Counsel
Mr. Baxter, Deputy General Counsel
Ms. Johnson, Economist
Messrs. Connors, Evans, Fuhrer, Kamin, Rasche, Sellon, Slifman, Tracy, and Wilcox,
Associate Economists
Mr. Dudley, Manager, System Open Market Account
Mr. Struckmeyer, Deputy Staff Director, Office of Staff Director for Management,
Board of Governors
Messrs. Clouse and English, Senior Associate Directors, Division of Monetary
Affairs, Board of Governors
Ms. Liang and Mr. Reifschneider, Associate Directors, Division of Research and
Statistics, Board of Governors

Messrs. Dale and Reinhart, Senior Advisers, Division of Monetary Affairs, Board of
Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of
Mr. Meyer, Visiting Reserve Bank Officer, Division of Monetary Affairs, Board of
Ms. Dykes, Project Manager, Division of Monetary Affairs, Board of Governors
Mr. Luecke, Senior Financial Analyst, Division of Monetary Affairs, Board of
Mr. Driscoll, Economist, Division of Monetary Affairs, Board of Governors
Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of
Mr. Connolly, First Vice President, Federal Reserve Bank of Boston
Messrs. Judd and Rosenblum, Executive Vice Presidents, Federal Reserve Banks of
San Francisco and Dallas, respectively
Ms. Mosser and Mr. Sniderman, Senior Vice Presidents, Federal Reserve Banks of
New York and Cleveland, respectively
Mr. Cunningham, Vice President, Federal Reserve Bank of Atlanta
Mr. Chatterjee, Senior Economic Adviser, Federal Reserve Bank of Philadelphia
Mr. Hetzel, Senior Economist, Federal Reserve Bank of Richmond
Mr. Weber, Senior Research Officer, Federal Reserve Bank of Minneapolis
In the agenda for this meeting, it was reported that advices of the election of Eric S.
Rosengren as a member of the Federal Open Market Committee had been received and that
he had executed his oath of office.
By unanimous vote, the Federal Open Market Committee selected Brian F. Madigan to serve
as Secretary and Economist until the selection of a successor at the first regularly scheduled
meeting of the Committee in 2008.
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 information reviewed at the August meeting suggested that economic activity picked up

in the second quarter from the slow pace in the first quarter. On average, the economy
expanded at a moderate pace during the first half of the year despite the ongoing drag from
the housing sector. While the growth of consumer spending slowed in the second quarter
from its rapid pace in prior quarters, wages and salaries increased solidly and household
sentiment appeared supportive of further gains in spending. Business fixed investment picked
up in the second quarter after little net change in the preceding two quarters. Inventories
generally appeared to be well aligned with sales at midyear. Overall inflation receded in June
because of a decline in energy prices, while the core personal consumption expenditure
(PCE) price index rose a bit less than its average pace over the past year.
Private nonfarm payroll employment continued to increase at a healthy pace; the rise in July
was about equal to the average increase over the first half of the year. Solid hiring in the
service sector was partly offset by declines in construction and manufacturing employment.
Most of the drop in construction employment occurred in jobs typically associated with
nonresidential construction. Both the average workweek and aggregate hours ticked down in
July. The unemployment rate edged up to 4.6 percent; it had remained between 4.4 percent
and 4.6 percent since September 2006.
Industrial production picked up in the second quarter after little net change over the
preceding two quarters. The increase was largely attributable to a smaller drag from
inventory liquidation and a modest improvement in net exports. Manufacturing production
rose solidly in the second quarter because of substantial increases in the output of light motor
vehicles, other durable consumer goods, business equipment, construction supplies, and
materials. Production in high-tech industries rose relatively modestly in comparison to its
longer-run growth.
The growth of real consumer spending slowed considerably in the second quarter after
substantial increases earlier in the year. The deceleration primarily reflected sharply slower
growth in outlays for goods as purchases of motor vehicles decreased noticeably. Although a
spike in energy prices eroded real income growth in the second quarter, there were solid
gains in wages and salaries. Despite continued softness in house prices, household wealth
moved markedly higher in the second quarter, mostly reflecting rising equity prices.
Demand for housing in the second quarter was restrained by higher interest rates and by
tightening credit conditions in the subprime mortgage market. Sales of new and existing
homes in the second quarter were down substantially from their average levels in the second
half of 2006. In June, single-family housing starts held steady at their May rate, although
adjusted permit issuance slipped further. The combination of decreased sales and unchanged
production left inventories of new homes for sale still elevated. House-price appreciation
continued to slow, with some measures again showing declines in home values.
Outlays for nonresidential construction rose rapidly in the second quarter. Business spending
on equipment and software, other than transportation equipment, posted a solid increase after
being flat, on net, in the preceding two quarters. The rise was led by a rebound in purchases
of industrial machinery. Expenditures for computers, software, and communications
equipment grew moderately in the second quarter after a brisk first-quarter increase.
Spending on transportation equipment again declined sharply. The drop was largely a
continuation of the payback from exceptionally strong purchases of heavy trucks in 2005 and
2006 in anticipation of tighter emissions standards on diesel engines. New orders for medium
and heavy trucks edged up in the second quarter, though they remained at low levels,

suggesting that the downturn in business spending on motor vehicles may be ending.
Real nonfarm inventory investment was a roughly neutral influence on real GDP growth in
the second quarter after having held down the growth rate by an average of 1 percentage
point in the previous two quarters. Businesses made considerable progress in reducing the
apparent inventory overhangs that had emerged at the end of 2006. In the motor vehicle
sector, low rates of assemblies in the first half of this year left inventories of domestic light
vehicles at the end of the second quarter fairly well aligned with sales; however, inventories
rose again in July as production accelerated and sales remained weak. More broadly, the
number of purchasing managers who viewed their customers' inventory levels as too high in
July only slightly exceeded the number who saw them as too low.
The U.S. international trade deficit widened in May, as a rise in imports more than offset an
increase in exports. Within imports, most categories of goods recorded an increase, as did
services. The value of oil imports rose sharply, boosted by a jump in the price of imported
oil. The increase in exports was largely attributable to capital goods, including aircraft,
computers and semiconductors, and industrial supplies.
Economic activity in advanced foreign economies expanded somewhat less rapidly in the
second quarter than in the prior quarter, but nonetheless appeared to have grown faster than
trend, reflecting upbeat business and consumer confidence as well as favorable labor market
conditions. Although many of those economies recently experienced sharp declines in equity
prices and widening credit spreads amid deepening concerns about credit quality, these
developments occurred too late in the intermeeting period to have any apparent effect on
incoming data. In Japan, survey evidence suggested that its economy expanded moderately.
Survey evidence indicated high levels of economic sentiment and strong capital spending
plans among large manufacturers. In the euro area, survey measures of business and
consumer confidence remained near record highs in July, and labor market conditions
generally continued to improve in May and June. In the United Kingdom, real GDP growth
rose in the second quarter, an increase driven mainly by robust expansion in the service
sector. Canada's growth seemed to continue to pick up from its disappointing rate posted in
much of last year.
Recent data indicated that economic activity in emerging-market economies remained
generally strong. The Chinese economy continued to expand at a rapid pace, and activity
elsewhere in emerging Asia appeared to have accelerated. In Latin America, Mexican
indicators pointed to a weaker-than-expected rebound in the second quarter, whereas Brazil
and Argentina appeared to have experienced solid growth. While equity prices fell and bond
spreads widened in several emerging-market economies, particularly in Latin America, there
was no evidence that this increased volatility had yet weighed on economic activity.
U.S. headline consumer price inflation slowed in June as energy prices flattened out after a
rapid increase over the preceding three months. Core PCE prices rose 0.1 percent in June, as
a decline in the price index for core goods nearly offset a rise in the index for core services.
The readings on core PCE price inflation in recent months had been held down, in part, by
declines in prices of some categories of goods, such as apparel, that tend to be volatile on a
monthly basis. Household surveys conducted in early July indicated that the median
expectation for inflation over the next year remained unchanged from June's elevated level
despite declines in gasoline prices in both months. Median expectations of longer-term
inflation ticked up and were near the top of the narrow range that had prevailed over the past

few years. The employment cost index rose somewhat faster in the second quarter than over
the preceding three months, and the twelve-month change was slightly higher than that of a
year ago.
At its June meeting, the Federal Open Market Committee (FOMC) maintained its target for
the federal funds rate at 5-1/4 percent. The statement announcing the policy decision noted
that economic growth appeared to have been moderate during the first half of the year,
despite the ongoing adjustment in the housing sector. The economy seemed likely to continue
to expand at a moderate pace over coming quarters. Readings on core inflation had improved
modestly in recent months. However, a sustained moderation in inflation pressures had yet to
be convincingly demonstrated. Moreover, the high level of resource utilization had the
potential to sustain those pressures. The Committee's predominant policy concern remained
the risk that inflation would fail to moderate as expected. Future policy adjustments would
depend on the evolution of the outlook for both inflation and economic growth, as implied by
incoming information.
Market participants had largely anticipated the FOMC's decision at its June meeting to leave
the target for the federal funds rate unchanged, although the accompanying statement
expressed greater concern about inflation than investors reportedly had foreseen and caused
the expected path for the federal funds rate to edge higher. Expectations for a policy easing
diminished somewhat more in the wake of favorable economic news early in the period.
Subsequently, the semiannual Monetary Policy Report to the Congress and the
accompanying testimony, which reported lower projections for real GDP growth than
investors apparently expected, appeared to prompt a downward shift in investors' expected
path for the federal funds rate. Later in the intermeeting period, growing apprehension that
turmoil in markets for subprime mortgages and some low-rated corporate debt might have
adverse effects on economic growth led investors to mark down their expectations for the
future path of policy considerably further. At the same time, measures of long-horizon
inflation compensation based on inflation-indexed Treasury securities edged down.
Financial market conditions were volatile during the intermeeting period, particularly over
the last few weeks of the interval. Yields on nominal Treasury securities fell on balance,
possibly reflecting an increased preference by investors for safe assets as well as revisions in
policy expectations. Conditions in markets for subprime mortgages and related instruments,
including segments of the asset-backed commercial paper market, deteriorated sharply
toward the end of the period. Credit conditions for speculative-grade corporate borrowers
tightened substantially, as investors pulled back from higher-risk assets. Spreads on
speculative-grade bonds increased to near their highest levels in the past four years. A
number of high-yield bond and leveraged loan deals intended to finance leveraged buyouts
were delayed or restructured, though other high-yield bonds were issued. In contrast, credit
conditions for investment-grade businesses and prime households were relatively little
affected by the market turbulence. Issuance of investment-grade bonds continued. Yields on
investment-grade corporate issues rose relative to yields on Treasury securities, but because
yields on Treasuries declined, yields on investment-grade bonds were about unchanged on
net. Nonfinancial commercial paper outstanding posted a modest gain in July, while the pace
of bank lending to businesses picked up from an already solid clip. Mortgage loans and
consumer credit appeared to remain readily available to households with strong balance
sheets, although late in the period some evidence pointed to diminishing availability of
jumbo mortgages.

Broad stock price indexes declined substantially, on net, over the intermeeting period despite
generally solid second-quarter earnings reports. Share prices of financial firms fell especially
sharply, reportedly a reflection, in part, of concerns about exposures to subprime mortgages
and about the effect of a potential slowdown in merger activity on operating profits. The
foreign exchange value of the dollar against other major currencies fell, on balance.
Growth of home mortgage debt likely slowed again in the second quarter, mainly reflecting
the decline in home-price appreciation over the past year and the drop in home sales. Overall
consumer credit expanded moderately through the year ending in May. The debt of
nonfinancial businesses expanded at a robust pace in the second quarter but slowed in July.
After rising at a rapid pace in the first half of the year, M2 grew at a more moderate rate in
In preparation for this meeting, the staff lowered somewhat its forecast of real GDP growth
in the second half of 2007 and in 2008. The reduction was in part due to the annual revision
of national income and product accounts (NIPA), which revealed somewhat less rapid growth
in output and productivity during the past three years than previously reported and led the
staff to trim its estimates of the growth rates of structural productivity and potential GDP; the
reduction also reflected less accommodative financial conditions and the softer tone of some
near-term indicators. The near-parallel revisions to the forecasts for potential and actual GDP
left the staff's projections for resource utilization about unchanged. Although part of the
recent favorable monthly readings on core PCE price changes was expected to be transitory,
the staff revised down slightly its forecast for core PCE price inflation in the second half of
2007; however, in light of slower growth in structural productivity and prospects of
somewhat greater pressure from import prices, the staff left its projection for core PCE
inflation unchanged for 2008. Overall PCE inflation was expected to slow in the second half
of 2007 from the elevated pace of the first half, as the effects of the sizable increases in food
and energy prices earlier this year abated, and then to move down a bit further in 2008.
In their discussion of the economic situation and outlook, meeting participants indicated that
they still saw moderate economic expansion in coming quarters as the most likely outcome
but that the downside risks to growth had increased. Participants reported that economic
expansion had continued at a moderate pace in many regions of the country despite further
weakness in the housing sector. Going forward, most participants anticipated that growth in
aggregate demand would be supported by rising employment, incomes, and exports, with the
result that growth in actual output probably would remain close to growth of potential GDP
despite the ongoing adjustment in the housing sector. Several mentioned that the revisions to
the NIPA pointed to a modest downward adjustment in projected growth of actual and
potential GDP, but thought that potential output growth was likely to be a bit higher than
forecast by the staff. However, recent spending indicators had been mixed, and credit
conditions had become tighter, suggesting greater downside risks to growth. Participants
generally expected that core inflation would edge lower over the next two years, reflecting a
slight easing of pressures on resources, well-anchored inflation expectations, and the waning
of temporary factors that had boosted prices last year and early this year. Participants
anticipated that total inflation would slow as well, particularly if market expectations of a
modest decline in energy prices in coming quarters were to prove correct. But they were
concerned that the high level of resource utilization and slower productivity growth could
augment inflation pressures. Against this backdrop, the Committee agreed that the risk that
inflation would fail to moderate as expected remained its predominant policy concern.

Participants agreed that the housing sector was apt to remain a drag on growth for some time
and represented a significant downside risk to the economic outlook. Indeed, developments
in mortgage markets during the intermeeting period suggested that the adjustment in the
housing sector could well prove to be both deeper and more prolonged than had seemed
likely earlier this year. Participants noted that investors had become much more uncertain
about the likely future cash flows from subprime and certain other nontraditional mortgages,
and thus about the valuation of securities backed by such mortgages. Consequently, the
markets for securities backed by subprime and other non-traditional mortgages had become
illiquid, and originations of new subprime mortgages had dropped sharply. While these
markets were expected to recover over time, it was anticipated that credit standards for these
types of mortgages would be tighter, and interest rates higher relative to rates on conforming
mortgages, in the future than in recent years. However, participants also observed that
mortgage loans remained readily available to most potential borrowers, and that interest rates
on conforming, conventional mortgage loans had declined in recent weeks, providing some
support to the housing sector.
Participants thought that consumer expenditures likely would expand at a moderate pace in
coming quarters, supported by solid gains in employment and real income. Though growth in
consumer spending had slowed in the second quarter, the slowing likely reflected temporary
factors in part, including some payback from unusually strong growth in prior quarters and
the surge in gasoline prices. Several participants noted the risks that house prices could
decline significantly and that credit standards for home equity loans could be tightened
substantially as factors that could weigh on consumer spending. However, the sizable upward
revision--from negative to positive--in estimates of the personal saving rate during the past
three years suggested somewhat less need for households to rebuild their savings.
Participants expected that business investment would be supported by solid fundamentals,
including high profits, strong business balance sheets, and moderate growth in output. Recent
financial market developments were thought unlikely to have an appreciable adverse effect
on capital spending. Although lenders recently appeared to be less willing to extend credit for
financial restructuring, the supply of credit to finance real investment did not appear
significantly diminished. Funding had become more costly and difficult to obtain for riskier
corporate borrowers, but there had been little net change in the cost of credit for
investment-grade businesses. Also, businesses in the aggregate continued to have sufficient
internally generated funds to finance the expected level of real investment. Nonetheless,
participants recognized that conditions in corporate credit markets could change rapidly, and
that adverse effects on business spending were possible. Moreover, heightened asset market
volatility and the associated increase in uncertainty, if they were to persist for long, could
lead businesses to pare capital spending plans. Still, participants judged that continued
growth of investment outlays going forward was the most likely outcome.
Rapid economic growth abroad and the decline in the foreign exchange value of the dollar in
recent quarters were seen as likely to boost U.S. exports and thus support the economic
expansion. Some participants also anticipated that growth in government purchases of goods
and services would support continued growth in output.
The data on core inflation received during the intermeeting period were favorable, but
meeting participants believed that the readings for the past few months likely had been
damped by transitory factors and did not provide reliable evidence that the recent level would

be sustained. Still, participants thought that a slight decrease in pressures on resources and
the stability of inflation expectations likely would foster over time a gradual moderation in
core inflation. Participants anticipated that total inflation would slow as well, particularly if
market expectations for a modest decline in energy prices in coming quarters were to prove
correct. Participants remained concerned about factors that could augment inflation
pressures, including the continuing high level of resource utilization and slower trend growth
in productivity. Some also pointed to the strength of aggregate demand worldwide and the
depreciation of the dollar, and their potential effects on the prices of imports and globally
traded commodities, as contributing to upside risks to U.S. inflation. Several participants
noted significant increases in wages in their Districts, particularly in the service sector, but it
was also observed that that overall gains in labor compensation had remained moderate,
suggesting that sustainable rates of resource utilization could be slightly higher than typically
estimated. On balance, participants continued to agree that risks to the outlook for sustained
moderation in inflation pressures remained tilted to the upside.
In their discussion of monetary policy for the intermeeting period, Committee members again
agreed that maintaining the existing stance of policy at this meeting was likely to be
consistent with the overall economy expanding at a moderate pace over coming quarters and
inflation pressures moderating over time. The expansion would be supported by solid job
gains and rising real incomes that would bolster consumption, and by increasing foreign
demand for goods and services produced in the United States. The ongoing adjustment in
housing markets likely would exert a restraining influence on overall growth for several more
quarters and remained a key source of uncertainty about the outlook. The recent strains in
financial markets posed additional downside risks to economic growth. Members expected a
return to more normal market conditions, but recognized that the process likely would take
some time, particularly in markets related to subprime mortgages. However, a further
deterioration in financial conditions could not be ruled out and, to the extent such a
development could have an adverse effect on growth prospects, might require a policy
response. Policymakers would need to watch the situation carefully. For the present,
however, given expectations that the most likely outcome for the economy was continued
moderate growth, the upside risks to inflation remained the most significant policy concern.
In these circumstances, members agreed that maintaining the target federal funds rate at 5-1/4
percent at this meeting was appropriate.
In light of the recent economic data, anecdotal information, and financial market
developments, the Committee agreed that the statement to be released after the meeting
should indicate that economic growth was moderate during the first half of the year and that
the economy seemed likely to continue to expand moderately in coming quarters, supported
by solid growth in employment and incomes and by robust economic growth abroad.
Members also agreed that the statement should incorporate their view that downside risks to
growth had increased somewhat, and should mention volatile financial markets, tighter credit
conditions for some households and businesses, and the ongoing correction in the housing
market. In addition, the Committee agreed that the statement should again note that readings
on core inflation had improved modestly in recent months but did not yet convincingly
demonstrate a sustained moderation of inflation pressures, and that the high level of resource
utilization had the potential to sustain inflation pressures. Against this backdrop, members
judged that the risk that inflation would fail to moderate as expected continued to outweigh
other policy concerns.
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 in the immediate future seeks
conditions in reserve markets consistent with maintaining the federal funds rate
at an average of around 5-1/4 percent."
The vote encompassed approval of the text below for inclusion in the statement to be
released at 2:15 p.m.:
"Although the downside risks to growth have increased somewhat, the
Committee's predominant policy concern remains the risk that inflation will fail
to moderate as expected. Future policy adjustments will depend on the outlook
for both inflation and economic growth, as implied by incoming information."
Votes for this action: Messrs. Bernanke, Geithner, Hoenig, Kohn, Kroszner, Mishkin,
Moskow, Poole, Rosengren, and Warsh.
Votes against this action: None.
It was agreed that the next meeting of the Committee would be held on Tuesday, September
18, 2007.
The meeting adjourned at 1:25 p.m.
Notation Vote
By notation vote completed on July 18, 2007, the Committee unanimously approved the
minutes of the FOMC meeting held on June 27-28, 2007.
Brian F. Madigan

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