The following is the unedited transcript of the news release from the Federal Open Market Committee of the Board of Governors of the Federal Reserve System.



Minutes of the Federal Open Market Committee
December 13, 2005
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, December 13, 2005 at 9:00 a.m.

Present:

Mr. Greenspan, Chairman
Mr. Geithner, Vice Chairman
Ms. Bies
Mr. Ferguson
Mr. Fisher
Mr. Kohn
Mr. Moskow
Mr. Olson
Mr. Santomero
Mr. Stern
Ms. Cumming, Messrs. Guynn and Lacker, Mses. Pianalto and Yellen, Alternate Members of the Federal Open Market Committee
Mr. Hoenig, Ms. Minehan, and Mr. Poole, Presidents of the Federal Reserve Banks of Kansas City, Boston, and St. Louis, respectively
Mr. Reinhart, Secretary and Economist
Ms. Danker, Deputy Secretary
Ms. Smith, Assistant Secretary
Mr. Alvarez, General Counsel
Mr. Baxter, Deputy General Counsel
Ms. Johnson, Economist
Mr. Stockton, Economist

Messrs. Connors, Freeman, and Madigan, Ms. Mester, Messrs. Oliner, Rosenblum, Tracy, and Wilcox, Associate Economists
Mr. Kos, Manager, System Open Market Account
Messrs. Slifman and Struckmeyer, Associate Directors, Division of Research and Statistics, Board of Governors
Mr. Whitesell, Deputy Associate Director, Division of Monetary Affairs, Board of Governors
Messrs. English and Sheets, Assistant Directors, Divisions of Monetary Affairs and International Finance, respectively, Board of Governors
Mr. Simpson, Senior Adviser, Division of Research and Statistics, Board ofGovernors
Mr. Skidmore, Special Assistant to the Board, Office of Board Members, Board of Governors

Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Mr. Zakrajsek, Section Chief, Division of Monetary Affairs, Board of Governors
Mr. Kumasaka, Senior Financial Analyst, Division of Monetary Affairs, Board of Governors
Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs,
Board of Governors
Mr. Barron, First Vice President, Federal Reserve Bank of Atlanta

Messrs. Fuhrer, Hakkio, Rasche, Sniderman, Weinberg, and Williams, Senior Vice Presidents, Federal Reserve Banks of Boston, Kansas City, St. Louis, Cleveland, Richmond, and San Francisco, respectively
Mr. Cunningham, Ms. Mosser, and Mr. Sullivan, Vice Presidents, Federal Reserve Banks of Atlanta, New York, and Chicago, respectively
Mr. Weber, Senior Research Officer, Federal Reserve Bank of Minneapolis 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 transactions 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 this meeting suggested that the economy continued to expand at a solid rate in the fourth quarter. Industrial production rebounded, and employment growth appeared to have recovered smartly from the depressing effects of recent hurricanes. Although some scattered signs of cooling of the housing sector had emerged, the pace of construction activity and sales remained brisk. More broadly, spending by consumers and businesses was well maintained. Core consumer price inflation remained subdued, even though some of the increase in energy costs had apparently passed through to prices of final goods and services.

Private nonfarm payrolls grew rapidly in November after a small gain in October. Construction employment posted another large increase, probably owing in part to hurricane-related activity. Broad-based gains in durable goods industries augmented manufacturing employment, and employment in the related industries of temporary help services and wholesale trade increased as well. With employment rising but the average workweek of production or nonsupervisory workers falling slightly, aggregate hours slipped in November--albeit to a level above that of their third-quarter average. The unemployment rate held steady at 5 percent, and the labor force participation rate was also unchanged. Survey measures of individuals' expectations of future labor market conditions improved in November, largely reversing post-Katrina declines.

Industrial production rebounded in October after having been held down in September by hurricanes and by a strike at Boeing. The resumption of commercial aircraft production boosted manufacturing output and more than offset a fall in the production of motor vehicles and parts. Large output gains in hurricane-affected industries--such as segments of the food, rubber and plastics, and paper industries--also contributed to the increase in manufacturing output. The growth of high-tech output slowed slightly in October, mainly as a result of smaller increases in the production of semiconductors. In contrast, production of communication equipment--particularly data networking equipment--accelerated. With many energy facilities in the Gulf region still closed, output at mines, which is defined to include oil and gas extraction, slipped further in October. Manufacturing capacity utilization moved up again in October and was only a touch below its long-run average.

Real personal consumption expenditures appeared to be increasing solidly over the course of the fourth quarter, led by improvements in the fundamental determinants of consumer spending. Real disposable personal income was bolstered by gains in employment and falling retail energy prices, while continued brisk advances in house prices and the recent strengthening of equity prices contributed importantly to increases in household wealth. Consumer sentiment picked up in November and early December; some survey measures of confidence returned to the range seen during the first half of the year. The personal saving rate--while still slightly negative--moved up in October.

Activity in the housing market remained brisk despite a rise in mortgage interest rates. Starts of new single-family homes dropped back somewhat in October from September''s very strong pace, but permit issuance remained elevated. New home sales reached a new high in October, and existing home sales eased off only a little from the high levels recorded during the summer. Other available indicators of housing activity were on the soft side: An index of mortgage applications for purchases of homes declined in November, and builders'' ratings of new home sales had fallen off in recent months. In addition, survey measures of homebuying attitudes had declined to levels last observed in the early 1990s.
Real outlays for equipment and software posted a solid gain in the third quarter. Although business purchases of motor vehicles declined in October and November, growth in investment in nontransportation equipment appeared to have been well maintained in the fourth quarter. Rising business sales, a declining cost of capital, and ample financial resources in the corporate sector continued to foster a favorable environment for capital spending, a sentiment echoed in executive surveys, which generally pointed to widespread increases in planned capital outlays. Real spending on nonresidential construction improved materially in the third quarter, boosted by substantial gains in drilling and mining expenditures.

Real nonfarm inventories ran off in the third quarter as automakers pared their motor vehicle stocks. But even outside the motor vehicle sector, inventory investment was relatively restrained, and partial data for October suggested that real stockbuilding continued to be subdued. The level of stocks appeared reasonably well aligned with sales.
The U.S. international trade deficit reached a new record in September. A surge in imports was accompanied by a fairly sizable drop in exports, part of which was due to a steep falloff in aircraft exports as a result of the strike at Boeing. The jump in the value of imports was driven by strong growth in most categories of goods and, to a lesser extent, growth in services; increases in the dollar value of imports of oil and of industrial supplies--especially natural gas--were particularly strong, a reflection of higher prices. Foreign industrialized economies expanded robustly in the third quarter, and available indicators for the fourth quarter appeared promising, on balance.

Core consumer price inflation was moderate in recent months, although some signs of pass-through of higher energy costs were evident, especially in transportation services. Consumer energy prices had retreated notably from their elevated post-hurricane levels. Wholesale and retail gasoline prices dropped as gasoline inventories rebounded. And spot prices for natural gas fell sharply through mid-November amidst unusually temperate weather, plentiful inventories, and declining prices of competing fuels; unusually cold weather in early December, however, caused spot prices to move back up to their October levels. Presumably in response to falling retail energy prices, one survey of households in November and early December showed a marked retreat in expectations for inflation over the coming year. Longer-term inflation expectations also edged down, but stayed a touch above the narrow range observed in recent years. Although recent increases in energy costs had pushed up producer prices in some sectors, overall producer price inflation remained subdued. With regard to labor costs, the twelve-month change in the employment cost index for private industry workers in September was well below its year-ago increase. Hourly compensation in the nonfarm business sector also appeared to have slowed a bit recently.

At its November meeting, the Federal Open Market Committee decided to increase the target level of the federal funds rate 25 basis points, to 4 percent. In its accompanying statement, the Committee indicated that, with appropriate monetary policy action, the upside and downside risks to the attainment of sustainable growth and price stability should be kept roughly equal. The Committee also noted that elevated energy prices and hurricane-related disruptions in economic activity had temporarily depressed output and employment. However, monetary policy accommodation, coupled with robust underlying growth in productivity, was providing ongoing support to economic activity. And although the cumulative rise in energy and other costs had the potential to add to inflation pressures, core inflation had been relatively low in recent months, and longer-term inflation expectations remained contained. In these circumstances, the Committee believed that policy accommodation could be removed at a pace that was likely to be measured but noted that it would respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

Market participants widely anticipated the Committee''s decision at its November meeting, and the policy announcement evoked little reaction in financial markets. Over the intermeeting period, investors marked up slightly their expectations for the path of monetary policy in light of stronger-than-expected data on spending and production. Nominal Treasury yields changed little, on net, but measures of inflation compensation at longer horizons--which are calculated using yields on nominal and inflation-protected securities--declined somewhat. Credit spreads on both investment- and speculative-grade corporate bonds were about unchanged over the intermeeting period. Major equity price indexes posted substantial gains, spurred by the perception that the economy had retained considerable momentum with limited inflation pressures. In foreign exchange markets, the trade-weighted value of the dollar was about unchanged over the intermeeting period.

The expansion of domestic nonfinancial debt appeared to have moderated a little from its brisk third-quarter pace. Consumer credit dipped in October, and nonfinancial firms'' net borrowing in the form of bank loans, commercial paper, and bonds was a bit below the third-quarter pace. Household bankruptcies hovered at very low levels in recent weeks after soaring to unprecedented heights just before the implementation of more-stringent bankruptcy rules in mid-October. Hurricane relief payments apparently boosted M2 in October, but that aggregate decelerated in November, partly reflecting the continued rise in the opportunity cost of holding liquid deposits.

The staff forecast prepared for this meeting suggested that growth of economic activity would slow from this year''s pace, but remain solid, with output staying near the economy''s potential over the next two years. Although hurricane-related rebuilding would boost activity, especially in the near term, this stimulus increasingly would be countered by higher interest rates, the anticipated waning of the positive wealth effect associated with large earlier gains in equity and house prices, and reduced impetus from fiscal policy. Both overall and core consumer price inflation were projected to move higher in the first half of next year, reflecting the effects of higher energy prices, but then to trend lower as those effects ebb.