The following is the unedited transcript of the news release from the Federal Open Market Committee.


The Manager of the System Open Market Account (SOMA) 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 the December meeting suggested that economic activity was increasing at a subdued rate during the second half of the year. The contraction in homebuilding was continuing to restrain overall activity, and a step-down in motor vehicle output held down industrial production. In contrast, consumer spending and business investment were increasing at a moderate rate, and payroll employment expanded solidly through November. Additional sharp declines in energy prices reduced total consumer price inflation in October, but the twelve-month change in core prices remained above its year-earlier level.

Indicators from the labor market were generally strong through November. Nonfarm payrolls increased at a solid pace, while revisions to previous estimates showed a larger gain, on balance, over the preceding two months. Employment in manufacturing and construction industries fell in November, but hiring continued to be brisk in the professional and nonbusiness service industries. Aggregate weekly hours of private production or nonsupervisory workers edged up. The unemployment rate had fallen to 4.4 percent in October but ticked back up to 4.5 percent in November, remaining below the average of 4.7 percent during the first three quarters of the year.

Industrial production (IP) declined in September but rose slightly in October. In October, total industrial production was boosted by a weather-related rebound in electricity generation, while output in the mining sector posted a sizable gain as crude oil extraction in Alaska returned to full production following pipeline repairs. Manufacturing output fell in both months, partly because of cutbacks in motor vehicle production as vehicle makers pared elevated inventories in light trucks. Although less pronounced than in the motor vehicle sector, the recent softness in factory output was also apparent in a number of other sectors. A notable exception was production in high-tech industries, which posted another solid increase in October, reflecting a pickup in computer output and a rise in semiconductor production attributable to the rollout of a new generation of microprocessors.

The National Income and Product Accounts for the third quarter incorporated an estimate by the Bureau of Economic Analysis (BEA) that gross output of new motor vehicles increased at a rapid pace in the third quarter, a sharp contrast to a drop in the IP index for motor vehicles (including parts production) for that same period. Much of that difference could be attributed to the BEA''s method of inferring motor vehicle output from separate data on sales, net international trade, and changes in inventories rather than measuring output directly using data on production. In addition, a large drop in the producer price index for light trucks in the third quarter resulted in a jump in the BEA''s implied unit values of light trucks in inventory. In the staff''s view, these measurement issues likely caused an overstatement of the rate of increase in real GDP in the third quarter, and the gradual unwinding of those effects would probably lead to an understatement of real GDP growth over the next several quarters.

Real consumer spending increased strongly in October after a more modest gain in September. Although purchases of motor vehicles weakened in October, outlays on a broad range of other categories of goods, including gasoline, food, and apparel, rose briskly. Spurred by sharp declines in consumer energy prices, real disposable income also increased rapidly in September and October. Despite the further deceleration in house prices, the ratio of household wealth to disposable income remained well above its historical average, buoyed by robust gains in the stock market. Readings on consumer sentiment edged down in November and early December but stayed above levels seen in the summer.

Residential construction activity continued to be very weak. Single-family housing starts dropped substantially in October after a slight increase in September, while new permit issuance fell to nearly its lowest level in the past ten years. Construction in the much-smaller multifamily sector continued to fluctuate within a range that had prevailed for the past several years. Inventories of unsold homes remained high in October but were a bit lower than those in preceding months. Sales of new and existing homes showed tentative signs of stabilizing, although at levels well below their mid-2005 peaks. Price appreciation of existing homes continued to slow in the third quarter, and some price measures showed outright declines.

Real spending on equipment and software continued to increase at a solid pace in the third quarter, supported by strong corporate cash positions and a low cost of capital. Early indicators for the fourth quarter, including survey measures of business conditions, suggested a slowdown in spending, in part reflecting the deceleration in business output. Business purchases of motor vehicles were likely to continue to be boosted by an increase in spending in advance of the upcoming change in regulations on truck engines from the Environmental Protection Agency.

Although spending on high-tech capital goods and software expanded at a robust pace in the third quarter, data on new orders and shipments in October pointed to more moderate growth in the fourth quarter. Growth of nonresidential construction spending appeared to have slowed from a rapid rate earlier in the year, responding in part to still-high vacancy rates in the office and industrial categories. The number of natural gas and petroleum drilling rigs in operation had moved down, on balance, since September in response to the moderation in energy prices.

Unit stocks of light motor vehicles dropped in the third quarter. Outside the motor vehicle sector, real nonfarm inventories edged up, and the ratio of book-value inventories to sales for both the manufacturing and trade sectors rose in September to levels last seen in mid-2005. Inventory imbalances appeared more widespread than a few months earlier, although business surveys through November indicated that a large majority of firms perceived that their customers'' inventories remained at comfortable levels.

The U.S. international trade deficit declined in September from a record level in August. The narrowing primarily reflected a sharp falloff in the value of imported oil, although non-oil imports, including industrial supplies, capital goods, and automotive products, also declined. Export growth in September was led by aircraft and industrial supplies, while exports of automotive products, consumer goods, and semiconductors fell. The trade deficit shrank a bit further in October.

Economic activity in the advanced foreign economies rose at a moderate rate in the third quarter. The expansion in real activity in the euro area, although slower than the staff had expected, was supported by strong domestic demand. Canada''s real GDP growth was dragged down by weakness in inventories and government spending, while slumping private consumption weighed on growth in Japan. The U.K. economy, buoyed by strong investment, continued to expand solidly. Recent economic indicators for the developing economies were somewhat mixed but suggested generally brisk growth in the third quarter.

The overall price index for personal consumption expenditures fell in September and October, reflecting sharp declines in energy prices in both months; the declines left the change in that index over the twelve months ending in October substantially lower than over the preceding twelve-month period. In contrast, the change in the core price index for personal consumption expenditures over the twelve months ending in October was still somewhat higher than it was a year earlier, largely reflecting an acceleration in shelter costs over that period.

The producer price index for core intermediate materials was flat in October. Increases in average hourly earnings had been moderate in recent months, and compensation per hour in the nonfarm business sector appeared to have risen at a subdued rate in the third quarter. The estimated increase in hourly compensation for the second quarter had been revised down substantially; hourly compensation was now estimated to have declined in the second quarter following the sharp gain recorded in the first quarter. This uneven pattern suggested that the surge in hourly compensation in the first quarter had largely been driven by transitory factors. Hourly compensation of private industry workers, as measured by the employment cost index, increased at a somewhat faster rate in the three months ending in September than it had in preceding quarters.

At its October meeting, the Federal Open Market Committee (FOMC) decided to maintain its target for the federal funds rate at 5-1/4 percent. The Committee''s accompanying statement indicated that economic growth had slowed over the course of the year, partly reflecting a cooling of the housing market. Going forward, the economy seemed likely to expand at a moderate pace. Readings on core inflation had been elevated, and the high level of resource utilization had the potential to sustain inflation pressures.

However, inflation pressures seemed likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand. Nonetheless, the Committee judged that some inflation risks remained. The extent and timing of any additional firming that might be needed to address these risks would depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Investors had largely anticipated the FOMC''s decision at its October meeting to leave the target federal funds rate unchanged and to make only modest changes in the accompanying policy statement. As a result, the announcement of the decision elicited little market reaction, as did the subsequent publication of the minutes of the meeting. However, somewhat weaker-than-anticipated economic data over the intermeeting period apparently led to some softening of investors'' perception of the economic outlook.

As a result, the likely pace and extent of policy easing expected by investors increased, and yields on nominal and inflation-indexed Treasury coupon securities fell. Inflation compensation measures were little changed. Spreads of investment-grade corporate bond yields over those of comparable-maturity Treasury securities remained about unchanged, while those on speculative-grade corporate bonds rose a bit. Broad equity indexes showed solid gains. The foreign exchange value of the dollar against other major currencies fell, on net, over the intermeeting period, with pronounced declines against the euro and sterling.