BERNANKE IS SHOWING signs of a break with Greenspan by distinguishing between the Fed’s two main roles of maintaining financial and economic stability.  12:20 a.m.

• Video: Greg Ip on what the break suggests

• Vote: Is Bernanke more effective than Greenspan?

Bernanke Breaks Greenspan Mold

Managing Crisis, Fed Chief
Dulls Notion That Turmoil
In Market Leads to Rate Cut

By GREG IP

WSJ
August 30, 2007; Page A3

WASHINGTON — When Ben Bernanke was nominated to head the Federal Reserve in 2005, he promised to “maintain continuity with the policies and policy strategies established during the Greenspan years.” But in handling his first financial crisis, Mr. Bernanke shows signs of a break with Alan Greenspan, the Fed’s chairman from 1987 to 2006.

That shift is important in understanding why Mr. Bernanke hasn’t cut the Fed’s main interest rate yet, and it could alter investors’ expectations of how the Bernanke Fed will function.

The Fed historically has had two major economic duties. Maintaining financial stability is one. Controlling inflation while preventing recession is the other.

To Mr. Greenspan, market confidence and the economy’s growth prospects were so intertwined as to make the Fed’s two duties almost inseparable. He cut rates after the 1987 stock-market crash and the near-collapse of hedge fund Long-Term Capital Management in 1998 to prevent investor reluctance to take risks from undermining the nation’s economic growth.

By contrast, Mr. Bernanke distinguishes between the central bank’s two functions. So, on Aug. 17, the Fed cut the interest rate and lengthened the term on loans to banks from its little-used discount window in hopes banks would use the window — or at least the knowledge it was available — to lend to solid borrowers having trouble getting credit amidst the market turmoil. The action was aimed at restoring the normal functioning of disrupted credit markets, not primarily at boosting growth.

The Fed, meanwhile, hasn’t cut the far more economically important federal-funds rate, charged on loans between banks, which is the benchmark for all short-term U.S. borrowing costs.

To be sure, all central bankers see a link between financial and economic stability. Falling prices for assets like stocks, bonds and homes and tighter credit conditions can damp spending and investment.

But, “There’s no doubt they were trying to draw a distinction between using the main tool of monetary policy, which is the federal-funds rate, and aiming the discount rate at restoring the plumbing,” says Alan Blinder, a former Fed vice chairman.

To be sure, if Mr. Bernanke eventually cuts the federal-funds rate, as markets anticipate, the contrast with Mr. Greenspan will be less sharp. Mr. Bernanke will elaborate on the outlook tomorrow at the Federal Reserve Bank of Kansas City’s annual symposium in Jackson Hole, Wyo.

Yesterday, Sen. Charles Schumer, a New York Democrat, released a letter from Mr. Bernanke dated Monday that repeated the Fed’s Aug. 17 pledge to “act as needed” to help the economy. Though there was nothing new in the pledge, traders said it contributed to the Dow Jones Industrial Average rising 1.9% to 13289.29. (See article.)

Mr. Bernanke’s approach to the credit crunch is, in part, an effort to undo perceptions fostered by Mr. Greenspan’s rate-cutting interventions. Though successful, they drew allegations of “moral hazard” — that is, of encouraging investors to act more recklessly because they think the Fed will protect them.

Neither Mr. Bernanke nor his closest colleagues, some of whom served under Mr. Greenspan, believe there ever was a “Greenspan put,” a reference to a contract that protects an investor from loss.

Yet officials acknowledge the perception that the Fed has bailed out investors in the past. When the stock market crashed in 1987, Mr. Greenspan, then on the job for just two months, used aggressive open-market operations — buying and selling government securities — to pump banks full of cash, which caused the federal-funds rate to fall to about 6.75% from 7.25%. His priority was to keep banks well supplied with cash so that strapped securities dealers wouldn’t fail for lack of financing.

“We shouldn’t really focus on longer-term policy questions until we get beyond this immediate period of chaos,” transcripts record him telling colleagues the day after the crash. The Fed kept the funds rate low in ensuing months, and the economy didn’t skip a beat.

In 1998, Russia’s default on its debt, followed by the near-collapse of Long-Term Capital Management, caused credit markets to freeze up, much as they have recently. Mr. Greenspan’s reaction illustrated how much he considered investors’ attitudes toward risk as intrinsic to the economy’s health.

“It would be wrong to say that the change in psychology is all ephemeral just because we have not seen it in the hard data yet,” he told colleagues. “It is the change in value judgments that alters the real world.” The Fed cut interest rates three times by a total of three-quarters of a percentage point that fall. The economy accelerated, and the stock market, erasing its losses, went on to more spectacular gains.

Al Broaddus, research director and later president of the Federal Reserve Bank of Richmond during Mr. Greenspan’s tenure, says Mr. Greenspan’s response in 1987 was right. “A 20% drop in the stock market was a clear threat to economic conditions.” But he says that in 1998, he and some others were skeptical of the need for such drastic action to deal with market instability. “If we could have argued for something like Bernanke is doing this time as opposed to three funds-rate reductions, we might have done that.”

Mr. Bernanke may yet have to cut rates. But the longer he waits, the more likely he can break investors of the assumption that market convulsions lead to interest-rate cuts. There is evidence he is succeeding. On Aug. 16, with stocks plunging and debt markets in disarray, money manager Bridgewater Associates wrote in its widely read daily commentary: “Credit in the economy is shutting down, and the Fed needs to ease now.”

By this past Tuesday, with markets having settled down, the same firm wrote: “If we were in the Fed’s shoes, we certainly wouldn’t be in a hurry to ’save the system’ until there was more evidence that the system needed saving.”

Write to Greg Ip at greg.ip@wsj.com

Wall Street All Ears for Fed Chief’s Big Speech
Washington Post - 3 hours ago
By Neil Irwin Tomorrow, Ben S. Bernanke will deliver the most important speech in his 19 months as the world’s most powerful central banker.
The Worst of All Policies - Federal Reserve Policy Blunders The Market Oracle
Wall St rallies after Bernanke pledge Financial Times
Canada.com - Wall Street Journal - Melbourne Herald Sun - Forbes
all 66 news articles »

“Instead of talking about the contemporary flashpoint, it will be a scholarly disquisition,” said Alan S. Blinder, a Princeton University economist and former Fed vice chairman. “I don’t expect to hear out of his mouth the words BNP Paribas, Countrywide, Bear Stearns, or any of that,” he said, referring to companies that have been central to the recent market fluctuations.

“He doesn’t want to rock a lot of boats,” Blinder said. “One objective is not to make news.”

Bernanke Opposes Lift Of Fannie, Freddie Caps

David S. Hilzenrath, D04 (Post)

08/30/2007

Article

Federal Reserve Chairman Ben S. Bernanke said Fannie Mae and Freddie Mac don’t need a loosening of regulatory constraints to help borrowers threatened with foreclosure…

Wall Street All Ears for Fed Chief’s Big Speech

Remarks to Be First Since Credit Crunch

Washington Post Staff Writer
Thursday, August 30, 2007; Page D01

Tomorrow, Ben S. Bernanke will deliver the most important speech in his 19 months as the world’s most powerful central banker.

In his first public comments since financial markets unraveled this month, the Federal Reserve chairman faces risks on all sides. If he seems indifferent to turmoil on Wall Street, markets could go haywire all over again. If he seems too eager to take actions to help the markets, it might encourage investors to behave irresponsibly in the future.

What he is likely to do, close watchers of Bernanke and the Fed said, is lay out his view that it is important to distinguish between prices of securities dropping and a breakdown in the markets. As Bernanke has explained in past speeches and writings, the Fed need not take action just because the prices of, say, complicated securities backed by mortgage debt have plummeted.

But the Fed does need to worry, in his view, when there is sustained panic and markets freeze up, as they did in early August, such that investors will not buy corporate debt or other assets at any price. The fear is that a credit crisis makes it difficult for sound businesses to invest or consumers to engage in day-to-day transactions.

“The chief characteristic of a financial panic is that investors lose their bearing,” said Lyle Gramley, a former Fed governor who is now senior economic adviser to Stanford Washington Research Group. “They’ve become frightened. They don’t know what to think about where things are going.”

Wall Street will be scrutinizing every word for hints about whether the Fed will cut a key interest rate — and if so, how much — at a meeting of its policymaking committee Sept. 18. Trillions of dollars in trades hang on every comma. But Bernanke’s past practice has been to deal with such questions obliquely, and Fed watchers say he is highly unlikely to lay out specific new policy steps for the central bank.

The Fed’s next big move depends heavily on what happens in financial markets and the economy from now to its Sept. 18 meeting. And interpreting that information will be tricky.

The Federal Open Market Committee, which sets the central bank’s policy on interest rates, typically relies heavily on a sophisticated computer model that projects where the U.S. economy is heading. Several committee members have customized versions of the model, which they use to develop their personal projections.

But such models are not terribly useful in times of financial crisis, economists say. Most of the data are weeks or months old, and in moments of turmoil, the economy tends to shift in unpredictable ways.

Fed policymakers will also be listening carefully to the presidents of the 12 regional Federal Reserve banks around the country. Each president is in frequent contact with business leaders in his or her region.

If the regional bank presidents report that their business contacts view the problems in credit markets to be confined to Wall Street, the Fed will feel little pressure to act. If, on the other hand, they report that their access to capital has been choked off or that consumer spending is slowing, that would weigh heavily as a reason for the Fed to cut the federal funds rate or take other aggressive action.

To the degree that they can use economic data to decide about a rate cut, Fed policymakers might look closely to more arcane data than that which normally shapes their decision-making.

Companies tend to be slow to lay off employees when hard times hit, but they are quicker to cease hiring. Similarly, workers are disinclined to quit when there are few openings elsewhere. So in the early phases of a downturn, job growth remains steady and the unemployment rate does not change, even as fewer people are switching jobs.

That shows up in the Labor Department’s job openings and labor-turnover report, published each month. If the July report, to be released Sept. 11, shows that the nation’s job market was starting to freeze up, it could be a sign of trouble.

Each Thursday, the Labor Department reports how many workers filed for initial unemployment benefits in the previous weeks, an early but volatile sign of widespread job cuts. There were 322,000 such claims last week, a number that does not raise alarm bells among economists.

Consumer confidence and other survey data show how market problems are affecting peoples’ views. On Tuesday, the Conference Board said its consumer confidence measure fell to the lowest level in two years.

“What the Fed does is very scenario-driven,” said Peter Hooper, chief economist of Deutsche Bank Securities who previously was on the Fed staff. “A September rate cut would be driven by a feeling that confidence has really taken a hit.”

But that measure can plummet without necessarily meaning the economy is on the rocks, as was the case following Hurricane Katrina.

Fed policymakers are not particularly interested in the exact level of the Dow Jones industrial average or the interest rate for a jumbo mortgage. Rather, they focus on whether transaction volume in troubled credit markets is increasing. They would like the difference between what buyers of assets are willing to pay and what sellers will accept, known as the “bid-ask spread,” to narrow.

Assuming he follows his past practice, Bernanke, in his speech, is expected to take an academic approach, as befits a man who was a college professor for 23 years. He is likely explain the intellectual prism through which he is inclined to make decisions in the months ahead, not what those decisions will be.

“Instead of talking about the contemporary flashpoint, it will be a scholarly disquisition,” said Alan S. Blinder, a Princeton University economist and former Fed vice chairman. “I don’t expect to hear out of his mouth the words BNP Paribas, Countrywide, Bear Stearns, or any of that,” he said, referring to companies that have been central to the recent market fluctuations.

“He doesn’t want to rock a lot of boats,” Blinder said. “One objective is not to make news.”

http://www.washingtonpost.com/wp-dyn/

content/article/2007/08/29/AR2007082902153_2.html

“With $34.4 trillion worth of swaps floating around,” Shedlock concludes, “we are talking about the possibility of a major waterfall in CDSs. And that is just the CDS market. The total derivatives market as of year-end 2006 was $285.7 trillion, according to the International Swaps and Derivatives Association (ISDA). That’s a lot of potential bag holders, is it not?”

http://www.howestreet.com/articles/index.php?article_id=4635 

August 29, 2007, 4:29 pm

Fed Paper Looks at Yield Curve-Recession Connection

The ability to predict a recession is a skill that seems to elude most forecasters, but a new working paper from the San Francisco Federal Reserve suggests the yield curve may be a reliable indicator that many overlook.

10-Year Treasury yield (blue) compared to 3-Month Bill yield (Orange) for 12 months ended 8/29/07

Glenn D. Rudebusch and John C. Williams of the San Francisco Fed write in a paper entitled “Forecasting Recessions: The Puzzle of the Enduring Power of the Yield Curve” that “the yield curve, specifically the spread between long- and short-term interest rates, does contain useful information at that forecast horizon for predicting aggregate economic activity and, especially, for signaling future recessions.”

Although ignored by most forecasters, a vocal minority places a lot of emphasis on an inverted yield curve as a predictor of recession. The inverted yield curve is an unusual occurrence in which short-term interest rates are higher than long-term rates. The study used the average spread between the yield on a 10-year U.S. Treasury note and the 3-month Treasury bill over the course of a quarter.

“We find that a simple model for predicting recessions that uses only real-time yield curve information would have produced better forecasts of recessions than the professional forecasters provided,” Rudebusch and Williams said.

The authors offer some possible reasons why forecasters may not use the yield curve to predict recessions. They suggest economists may dismiss the yield curve because of it is unclear why it would predict recessions, and although it has worked in the past since its relationship isn’t understood it may not work in the future. “This paper, however, shows that the relative predictive power of the yield curve does not appear to have diminished much, if at all [in some 20 years],” the authors said.

The conclusions are at odds with the views of Fed Chairman Ben Bernanke, who believes the yield curve isn’t as good a recession predictor as it once was. “I would not interpret the currently very flat yield curve as indicating a significant economic slowdown to come,” he said early last year. In the past, when the yield curve was inverted, short-term rates were “quite high,” but now, they aren’t. Second, the flattening could result from a structural fall in the “term premium,” that is the additional return investors require for holding long as opposed to short-term debt securities. –Phil Izzo

Permalink | Trackback URL: http://blogs.wsj.com/economics/2007/08/29/fed-paper-looks-at-yield-curve-recession-connection/tr

August 29, 2007, 3:13 pm

Text of Bernanke’s Letter to Schumer

The following is the text of a letter sent by Federal Reserve Chairman Ben Bernanke to Sen. Charles Schumer.

The Honorable Charles E. Schumer
United States Senate
Washington, D.C. 20510

Dear Senator:
Thank you for your recent letters of August 8 and 22, in which you express concern about the potential effects of volatility in financial markets and the tightening of credit conditions on homebuyers, consumers, and the economy as a whole.

I want to assure you that the Federal Reserve, in cooperation with other federal agencies, is closely monitoring developments in financial markets. As you recognized, the Federal Reserve has also taken steps to increase liquidity in the markets. In particular, our changes to our discount window program are designed to assure depositories of the availability of a backstop source of liquidity so that concerns about funding do not constrain them from extending credit and making markets. Also, the Federal Open Market Committee has stated that it is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.

I share your concern about the potential impact of scheduled payment resets on homeowners with variable-rate subprime mortgages. Over the next several years, many such homeowners will face significantly higher monthly payments and, consequently, an increased risk of losing their homes to forced sale or foreclosure. The federal banking regulators have encouraged banks and thrifts to work actively with troubled borrowers to modify loans or to refinance as needed to avoid default or foreclosure and have jointly issued guidances to address underwriting and disclosure practices related to subprime mortgage lending.

The twelve Federal Reserve Banks around the country are working closely with community and industry groups dedicated to reducing the risks of foreclosure and financial distress among homebuyers. The Board is also engaged in these issues; for example, Governor Randall Kroszner serves as the Federal Reserve’s representative on the board of directors of NeighborWorks America, which has a program to encourage borrowers facing mortgage payment difficulties to seek help by making early contact with their lenders, servicers, or trusted counselors. And as I noted in my testimony in July, in order to strengthen consumer protections, the Federal Reserve Board is currently undertaking a comprehensive review of the rules regarding loans subject to the Home Owner Equity Protection Act as well as some rules pertaining to mortgage-related disclosures under the Truth in Lending Act.

It might be worth considering at this juncture whether the private and public sectors, separately or in collaboration, could help the situation by developing a broader range of mortgage products which are appropriate for low-and moderate-income borrowers, including those seeking to refinance. Such products could be designed to avoid or mitigate the risk of payment shock and to be more transparent with respect to their terms. They might also contain features to improve affordability, such as variable maturities or shared-appreciation provisions for example. One public agency with considerable experience in providing home financing for low-and moderate-income borrowers is the Federal Housing Administration (FHA). The Congress might wish to consider FHA reforms that allow the agency more flexibility to design new products and to collaborate with the private sector in facilitating the refinancing of creditworthy subprime borrowers facing large resets.

As you note, the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac are currently assisting in subprime refinancings. However, the GSEs’ charters limit their ability to take on higher-risk mortgages and their programs are relevant only to a relatively small share of subprime borrowers. The GSEs should be encouraged to provide products for subprime borrowers to the extent permitted by their charters. The current caps on GSE portfolios–which were imposed for safety and soundness reasons-need not be lifted to allow them to accommodate new borrowers. Currently, the GSE portfolios include substantial holdings of GSE-guaranteed mortgage products, which are easily placed in the private secondary market even under current conditions. Thus, the GSEs could readily sell these securities to make space for new mortgages if they wished to do so. Policymakers may also want to encourage the GSEs to increase their mortgage securitization efforts, which are not constrained by their portfolio caps.

We will continue to keep the Congress informed of developments in the subprime markets and in the credit markets more generally. As you know, Federal Reserve governors and staff have made numerous appearances before the Congress and in other forums on subprime-related issues. Board staff members have continued to brief members of Congressional staffs on these matters. Board staff members are also assisting the Government Accountability Office in the report that they are preparing that will provide a comprehensive review of developments in the subprime mortgage market.

Again, thank you for your interest and please be assured that we are following these issues closely.

Sincerely,
Ben S. Bernanke

Permalink | Trackback URL: http://blogs.wsj.com/economics/2007/08/29/text-of-bernankes-letter-to-schumer/trackback/

Ben Bernanke Walks the Line

http://www.time.com/time/magazine/article/0,9171,1655699,00.html

Thursday, Aug. 23, 2007 By JUSTIN FOX

Enlarge Photo

Federal Reserve Chairman Ben Bernanke appears before Congress in this file photo from Wednesday, Feb. 15, 2006, in Washington.

J. Scott Applewhite / AP Photo

Much of what Ben Bernanke spends his days doing oscillates between the incomprehensibly arcane and the unspeakably dull. Lately, though, the Federal Reserve chairman has a stark, even exciting task at hand. He’s been imitating Jimmy Stewart in It’s a Wonderful Life and trying to halt a bank run.

While Stewart’s George Bailey had to make do with his powers of persuasion and his honeymoon fund to save the Bailey Building and Loan, Bernanke has the full faith and credit of the U.S. government behind him. The Fed can effectively print U.S. dollars at will. It can even, as Bernanke famously suggested in 2002, drop them out of helicopters, if that’s what it takes.

Unlike Bailey, though, Bernanke doesn’t know all his customers or even his loan officers. He cannot reassure nervous depositors (a.k.a. lenders) by telling them exactly where their money is invested, because he has no clear idea himself. He probably suspects that many borrowers and lenders have been up to no good and richly deserve the bad things that are happening to them. And while he can manufacture cash, he knows that if he overdoes it, hyperinflation and a dollar crash could result.

So Bernanke walks a thin line. Too far in one direction, and he bails out all the irresponsible people and institutions that have gotten us into the subprime mess and subsequent debt-market crunch. Too far in the other, and the global financial system collapses on his watch. “In a run, fear that a bank may fail induces depositors to withdraw their money, which in turn forces liquidation of the bank’s assets,” Bernanke wrote in 1983 as a young economics professor. “The need to liquidate hastily, or to dump assets on the market when other banks are also liquidating, may generate losses that actually do cause the bank to fail.”

It’s a self-fulfilling panic, one that really needs to be nipped in the bud. At banks serving retail customers, it is automatically nipped these days by federal deposit insurance. Fretful depositors have still lined up at branches of the bank arm of troubled mortgage lender Countrywide, but there’s really no rational reason to do so.

For other investments, though, the old rules apply. If you’re worried about the soundness of the mortgage securities you’ve bought or the corporate loans you’ve made or the money-market funds you’ve invested in, it’s entirely rational to pull out your money if you can. When everybody does that, though, the system freezes up. It gets called a liquidity crisis or a credit crunch, but the mechanics are the same as those of a bank run.

It is also, says Robert F. Bruner, dean of the University of Virginia’s Darden School of Business, a classic “prisoner’s dilemma.” In game theory, the dilemma involves two arrestees deciding whether to squeal. Here it’s about whether to pull your money from the market. For each worried individual, the rational answer is yes, but the financial system is far better off if everybody agrees not to. The invisible hand of the market can’t deliver the best outcome; collective action, Bruner says, is the only good answer.

Bruner has been thinking about this a lot lately because he has co-written, with his Darden colleague Sean D. Carr, a fortuitously timed new book titled The Panic of 1907: Lessons Learned from the Market’s Perfect Storm. That year saw a string of bank failures and a stock-market collapse that was halted only when J.P. Morgan browbeat his fellow moguls into ponying up cash to stop the panic. The 1907 crisis in turn led to the creation of the Federal Reserve, which was supposed to do what Morgan did, only more reliably.

The Fed failed its first big test–the bank runs of the early 1930s, which it allowed to snowball into the Great Depression. After that, tight domestic regulations and global exchange-rate controls kept financial-market panics at bay for decades, essentially by keeping markets themselves at bay. But when the exchange controls and bank regs proved too inflexible in the 1970s, markets made a comeback.

The first big global liquidity crisis came a few years later, on the morning after the 1987 stock-market crash. Fearful banks stopped lending until new Fed Chairman Alan Greenspan restored confidence with reassuring words and piles of cash. Greenspan did the same when credit markets froze after the Russian government defaulted on its debts in 1998. But he was criticized afterward for being perhaps too generous and reassuring and for launching an era of overly easy money.

Now it’s Bernanke’s turn. He and his Fed colleagues have sprinkled cash around and made loans to banks, but they’ve also made a point of moving so slowly and deliberately as to enrage some on Wall Street. Are they getting the balance right? We should know by the time the movie version comes out.

http://www.time.com/time/magazine/article/0,9171,1655699,00.html

http://online.wsj.com/article/SB118834628643411659.html?mod=hps_us_at_glance_pj

Cutting the Risk
Of a State Audit
When You Move

By TOM HERMAN and RACHEL EMMA SILVERMAN
August 29, 2007; Page D1

No-income-tax states such as Florida, Nevada and Texas are looking increasingly attractive to people getting ready for retirement.

Some individuals want to cut their tax burden because of mounting concerns they could outlive their savings, while others simply want to keep more for themselves and their heirs. But before moving to a tax haven, it’s important to pay attention to the fine print of how to move. It’s easy to make seemingly minor mistakes that can trigger a painful audit — and a hefty bill — from the high-tax jurisdiction you thought you had left behind.

ADDITIONAL READING

• Links to state tax departments

• Details on alternative minimum tax (PDF)

State residency rules can be complex, and audits conducted by tax officials can be highly subjective. So tax experts suggest individuals make sure their move is genuine. Some tips: Don’t leave personal items such as family photos and jewelry in a part-time residence or a safe-deposit box in your former home state, and join clubs and execute a new will in your new home state.

More red flags for auditors: People with homes in more than one state, especially those with large incomes, and people who made a large sale of a partnership interest or stock in their business shortly after saying they’d moved to a low or no-tax state, warns Mark Klein, a lawyer at Hodgson Russ LLP in New York.

Lawyers and accountants say they’re doing a brisk business catering to the growing numbers of high-income people seeking advice on how to relocate to low-tax places. “It’s our primary source of new clients. We’ve made a niche business out of it,” says George Ashley of Ashley Quinn, an Incline Village, Nev., CPA firm that works with many clients who move from high-tax California to Nevada, which has no state income tax.

Some relatively high-tax states are increasingly cracking down on individuals who claim to have moved out of state, but still maintain strong connections to their former homes. Massachusetts plans to hire additional tax examiners over the next few months, some of whom will be assigned to a special “domicile unit” as part of its tax-audit program. “We are confident there are a significant number of cases for us in this area,” says a Massachusetts Department of Revenue spokesman.

And in New York, considered among the most aggressive states in pursuing such cases, tax officials say they have improved their techniques for targeting tax dodgers. New York state-tax revenue collections from residency audits rose to $112.9 million in fiscal 2007 from $83.4 million a year earlier, although the number of audits is down.

Of course, people who change states are still subject to federal income tax rules. State and local jurisdictions levy a variety of taxes and fees, such as sales and property taxes, which can make direct comparisons difficult. Still, state income tax rates can run as high as 10.3% in California and 8.97% in New Jersey. Besides Florida, Nevada and Texas, other states with no state income tax for individuals include Washington, Alaska, South Dakota and Wyoming. New Hampshire and Tennessee don’t have a broad wage-based income tax but do tax interest and dividends. (For more on state taxes, see www.retirementliving.com/RLtaxes.html.)

It isn’t clear how many people move exclusively or mainly for tax reasons. But from April 2000 through June 2006, there was a net migration of 2.3 million people moving from states with income taxes to states with no income taxes, an average of more than 1,000 people moving per day, says Richard Vedder, an economics professor at Ohio University in Athens, Ohio, based on an analysis of census data. He says the data, which exclude immigrant populations, don’t reveal the reasons people moved.

Careful planning before moving is especially important these days because of the recent rapid spread of the alternative minimum tax, which doesn’t allow certain taxpayers to deduct any state or local taxes. About four million people were caught by the AMT for 2006. Unless Congress overhauls the law in coming months, the AMT will hit more than 23 million for 2007.

For wealthy people, another key factor is that more states have begun imposing their own estate taxes. Nearly half of the states now have their own estate or inheritance taxes in addition to federal estate taxes, says Bruno Graziano at CCH, a Riverwoods, Ill., unit of Wolters Kluwer. Moreover, while the federal estate-tax exemption for an individual this year is $2 million, some states have much lower exemptions, meaning that more money may be subject to estate taxes. For example, New Jersey’s estate-tax exclusion is $675,000.

Florida, long a favorite retirement spot, has no state or local individual income tax and no state estate or inheritance tax either. This year, Florida became even more appealing for many wealthy investors: It eliminated its “intangibles” tax, an annual levy imposed on the fair-market value of certain stocks and other assets. State officials said the demise of this tax would benefit an estimated 300,000 people.

Gibraltar Private Bank & Trust, a Coral Gables, Fla., unit of Boston Private Financial Holdings Inc., has put together a special booklet to help growing numbers of “Northern transplants” avoid tax headaches, says Fred Sandstrom, Gibraltar’s wealth-management director. Among the tips: Use your Florida address when traveling and when corresponding with out-of-state utility and telephone companies.

New York’s residency rules are complex. In general, though, if you maintain a permanent abode in the state and are in the state more than 183 days a year, you’re considered a resident. Even if you’re in the state less than that, you still may face a challenge because New York looks at numerous factors to gauge where your “domicile” really is, says Mr. Klein, the New York lawyer. This is a subjective test based on many factors, including your business and family ties, a comparison of your New York residence with the location you’re claiming as your domicile, and where you keep “near and dear” items. That’s why Mr. Klein recommends people keep near-and-dear items, such as artwork, family photos, jewelry and furs, in their non-New York home. He also recommends closing a New York safe deposit box. “It’s hard to explain to auditors why your most valuable possessions are not in your home but are with you” in New York, he says.

In an audit, you need to be able to prove to skeptical tax examiners that you’ve really transferred your life to some new place, and auditors often demand large amounts of proof. A New York residency audit often feels like a “tax colonoscopy,” says Israel Keller, a CPA and tax manager at RSM McGladrey Inc. in New York.

Mr. Keller says that in one recent case, a money manager and his wife moved from New York City to Florida. Among the items that New York state auditors have asked for are three years of diaries, appointment books or office calendars; three years of personal and business credit-card statements, and three years of phone bills for New York and their Florida residence, he says.

In your new home state, tax experts say it’s important to make your move official. Register to vote, get a driver’s license and register your car in the new state, and change your address on bills and important documents. Even so, establishing a legal residence in the eyes of the taxman is often based on subjective factors, including the intent of the taxpayer, which is why it’s important to get advice from a tax-savvy adviser.

* * *

WATCH OUT for a new email scam, the IRS says.

The latest twist is an email that appears to come from the IRS, telling taxpayers they can get $80 for filling out an online “customer satisfaction” survey. Just ignore it. It’s another attempt by would-be thieves to “phish” for sensitive taxpayer information. (More details on the scam)

The IRS says it “does not initiate contact with taxpayers through email.”

* * *

BRIEFS: Who’s news: Richard E. Byrd Jr. will become commissioner of the IRS’s wage and investment division following the January retirement of Richard Morgante, the current commissioner. Frank Y. Ng will take over as commissioner of the large and midsize business division following the October retirement of Deborah M. Nolan. (Read more on changes in IRS leadership positions)

• Email: taxreport@wsj.com.

RELATED ARTICLES AND BLOGS

Related Articles from the Online Journal

•  Missouri Case Could Ring Up Cellphone Taxes

•  Strapped FDA Turns to States

•  The Smart Way to Soak the Rich

•  The Wealth Effect

Blog Posts About This Topic

•  Retirement Tax Havens - AOL Money & Finance  money.aol.com

•  August 2007 Newsletter  skylerfairchild.com

Text of the Fed Minutes
August 28, 2007 2:13 p.m.

Minutes of the Federal Open Market Committee

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.

Present:

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 Governors
Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors
Mr. Meyer, Visiting Reserve Bank Officer, Division of Monetary Affairs, Board of Governors
Ms. Dykes, Project Manager, Division of Monetary Affairs, Board of Governors
Mr. Luecke, Senior Financial Analyst, Division of Monetary Affairs, Board of Governors
Mr. Driscoll, Economist, Division of Monetary Affairs, Board of Governors
Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors
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 July.

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
Secretary