Consumer prices advanced 0.5 percent in December 2010, capping six straight monthly gains. Many forecasters were pegging an inflation rate that hovered closer around 0.4 percent. Consumer prices were up 0.1 percent in November, but back then energy prices were in check as they had risen by the smallest amount in five months.

Most items the government tracks actually ticked only modesty higher in December 2010, but not energy. Prices at the pump soared. Gasoline jumped 8.5 percent in December 2010 versus a 0.7 percent increase during the previous month.

"The gasoline index rose sharply and accounted for about 80 percent of the all items seasonally adjusted increase," the US Labor Department reported Friday morning in its monthly Consumer Price Index (CPI) statement.

Food costs edged slightly higher, climbing 0.1 percent last month. That was lower than the previous monthly 0.2 percent gain.

Stripping out the more volatile food and energy items, the so-called core US inflation rate advanced 0.1 percent in December 2010, the same as in November.

"The index for all items less food and energy also rose in December. An increase in the shelter index accounted for about 60 percent of the rise, and the indexes for airline fares, medical care and apparel rose as well," noted the Labor Department’s report. "These increases more than offset declines in the indexes for communication, recreation, and household furnishings and operations."

The Federal Reserve noted on Wednesday that companies are having to pay more to produce goods and services, but that "competitive pressures" were limiting how those costs were getting passed down to the consumer level.

US Inflation climbed 1.5 percent year. That is higher than the 1.1 percent 12-month reading reported in November. US inflation was at 2.7 percent in 2009.

"It is disconcerting that inflation is starting to accelerate, and you have to wonder, with gas prices moving above $3 a gallon, whether the rate of inflation will continue to escalate," Bernard Baumohl, chief global economist with The Economic Outlook Group, said and was quoted on CNNMoney.com.

The core US inflation rate rose 0.8 percent on an annual basis, which was the same reading as in the previous month and still close to the 0.6 percent rise in October which was the lowest 12-month increase since record-keeping began in 1957. However, as 2010 is now closed, the 0.8 percent reading marks a new record low for a year. Core US inflation was up 1.8 percent in the prior year. The latest level continues to remain well below the Federal Reserve’s target range of 1-2 percent, as noted in the Fed’s monthly FOMC statement last month:

"Longer-term inflation expectations have remained stable, but measures of underlying inflation have continued to trend downward," said the Federal Open Market Committee (FOMC).

"The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period," the FOMC added.

"The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate."

The FOMC’s next two-day meeting, with its economic policy statement and views on inflation to follow at the conclusion, is scheduled for January 25-26.

Consumer prices as reported by the US Labor Department follow:

December 2010 Consumer Prices – Gains (%)

The Labor Department’s Consumer Price Index for January 2011 is scheduled for release on February 17, 2011, at 8:30 a.m. (ET). The CPI data is used as the core engine for the US Inflation Calculator.

The FOMC’s official statement last month noted that inflation was "somewhat below" desired levels. The minutes from the meeting elaborate and provide background:

"Several members noted that unless the pace of economic recovery strengthened or underlying inflation moved back toward a level consistent with the Committee’s mandate, they would consider it appropriate to take action soon."

To that end, the addition of inflation language within the statement was deemed "appropriate" in order to "make it clear that underlying inflation had been running below levels that the Committee judged to be consistent with its mandate for maximum employment and price stability, in part to help anchor inflation expectations."

Since the Fed’s meeting, several economic reports, including worse-than-expected jobs data for September, have most market players speculating that a second round of easing is forthcoming in November. Speculation may turn to reality.

"Many participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate or if inflation continued to come in below levels consistent with the FOMC’s dual mandate, it would be appropriate to provide additional monetary policy accommodation. However, others thought that additional accommodation would be warranted only if the outlook worsened and the odds of deflation increased materially," the FOMC minutes stated.

The outlook appears worse, but the second condition — where inflation/deflation is at now — is currently unknown. September’s inflation rate will be revealed in the Labor Department’s Consumer Price Index report that is scheduled for release on Friday, October 15.

The August inflation core rate came in at 0.9 percent over the prior 12 months. The level of increase has been the same since April, and the smallest since 1966. It is below the Fed’s target range of 1-2 percent.

The entirety of the minutes and most recent statement may be read on the Federal Reserve website.

The Labor Department on Friday reported 12-month inflation at 1.1 percent, and that core inflation, which exludes volatile food and energy prices, was 0.9 percent — the smallest increase since January 1966. The level, while the same since April, is below the Feds target range of 1-2 percent.

"Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability," the FOMC statement said.

The shift from past statements signals the Federal Reserve is more concerned that deflation could take hold. Deflation — the opposite of inflation, is a persistent decrease in prices.

"Although the Fed’s assessment of the economy remained mostly unchanged, their emphasis on inflation being below the level consistent with their mandate indicates that the feeble recovery is not the only reason why the Fed could inject additional stimulus into the U.S. economy," said Kathy Lien, director of currency research at GFT Forex.

"By saying that they are prepared to provide additional accommodation if needed to support the economic recovery AND to return inflation to levels consistent with its mandate, the central bank is essentially telling us there are a number of reasons why the balance sheet may be expanded in November."

The released Fed statement follows in its entirety:

Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts are at a depressed level. Bank lending has continued to contract, but at a reduced rate in recent months. The Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be modest in the near term.

Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.

The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh.

Voting against the policy was Thomas M. Hoenig, who judged that the economy continues to recover at a moderate pace. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and will lead to future imbalances that undermine stable long-run growth. In addition, given economic and financial conditions, Mr. Hoenig did not believe that continuing to reinvest principal payments from its securities holdings was required to support the Committee’s policy objectives

The latest Labor Department monthly report reveals that the Consumer Price Index, which measures inflation pressures at the consumer level, increased 1.8% from a year ago, and rose 0.4% in November.

The November reading was inline with most analysts’ expectations, and follows a 0.3% gain in October. The cost of living for Americans increased due to several categories, but was led by 4.1% jump in energy prices — the fourth straight monthly increase. Oil prices shot up 9%. Gasoline prices notably rose as well, soaring 6.4% in November after an increase of 1.6% in the month prior.

The so-called core consumer index that excludes the more volatile food and energy items was unchanged in November, marking the first month in ten without an increase. Analysts were expecting a 0.1% increase. The core CPI rose 0.2% in October.

The annual inflation increase of 1.8% compares to the 0.2% drop in the past 12 months that was reported in October. Core inflation increased 1.7% over the past 12 months, matching the annual reading in October. The inflation figure is within the Federal Reserve’s comfort range of between 1%-2%.

Fed policy makers are scheduled to wrap up a two-day meeting later today. No significant changes in policy are expected, with interest rates likely held at 0% to 0.25%.

"I expect more of the same from today’s Fed comments. I think they’ll talk up continued low interest rates and economic healing. I don’t think expect them to change their tune," John Massey, portfolio manager at AIG Sunamerica Asset Management in Jersey City, New Jersey, said on Reuters.

Consumer price details

Rising November prices include:

• New vehicles prices rose 0.6% after a 1.6% rise in October
• Used car and truck prices climbed 2.0% compared to the 3.4% increase during the month prior
• Energy prices soared 4.1% following a 1.5% increase in October
• Gasoline prices jumped 6.4% following an increase of 1.6% from the month prior
• Fuel oil prices surged 9.0%. They rose 6.3% in October.
• Electricity costs were up 1.4% after increasing 0.6% in the two previous months
• Food prices rose 0.1%, matching October
• Airfares rose for the fifth straight month, increasing 3.8% in November
• Natural gas prices rose 1.5% following a 1.9% up tick in October
• Medical care prices climbed 0.3% in November. Prices were up 0.2% in October.
• Prescription drugs climbed by 0.2%.
• Tobacco prices advanced 1%

Declining November prices include:

• Dairy and related products declined 0.7% after increasing 1.0% in October
• Lodging away from home prices fell 1.5% after a rise of rose 0.4%
• Clothing prices declined 0.3% in November after declining 0.4% in the month prior
• Housing prices, which accounts for about a third of the CPI index, decreased 0.2% after unchanged readings from the two prior months

On Tuesday, the Labor Department released the Producer Price Index, which measures prices at the factory door and inflation pressures before they reach the consumer. The PPI showed a 1.8% surge in November. Discounting volatile food and energy prices, the core reading climbed more than expected at 0.5% — the biggest increase since October 2008. Core prices retreated 0.6% in the month prior.

To find out how the buying power of the dollar has changed over time, check out the updated US Inflation Calculator.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

September inflation data indicated that consumer prices declined 1.3% during the prior 12 months and that core annual inflation, which excludes volatile food and energy prices, rose just 1.5% — well within the Federal Reserve’s comfort range of between 1%-2%.

It appears its benchmark federal funds rate will remain virtually at zero for some time as the "economic activity is likely to remain weak for a time," according to the FOMC.

"The one consistent theme with all the Fed speakers is that they’re not going to raise rates any time soon," Drew Matus, an economist at Bank of America-Merrill Lynch, was quoted on NYTimes.com. "That is the one consistent theme that gets hammered home time and again."

In a unanimous vote, the FOMC decided to keep its key rate unchanged in a range of zero to 0.25 percent.

The released Fed statement follows in its entirety:

Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up. Conditions in financial markets were roughly unchanged, on balance, over the intermeeting period. Activity in the housing sector has increased over recent months. Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.

Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt.

In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

To provide support to mortgage lending and housing markets, the Fed noted that it expects to finish purchases of "$1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt" in a slowing pace until the first quarter of 2010.

August inflation data showed that consumer prices had decreased 1.5% during the prior 12 months and that core annual inflation, which excludes volatile food and energy prices, rose just 1.4%. That was the smallest year-over-year gain since February 2004, and well within the Federal Reserve’s traditional comfort zone of between 1%-2%.

However, with the massive Fed injection of money into the markets to stimulate the economy, the fear of approaching inflation is a concern for many.

"The Fed has printed a lot of money and unless Milton Friedman was wrong, when you print money inflation is going to be a problem," said John Norris, managing director of wealth management with Oakworth Capital Bank in Birmingham, Ala., in reference to the late Nobel Prize-winning economist and free market champion.

The Fed doubled the size of its balance sheet to more than $2 trillion.

An overview of the two-day meeting is provided in the following video report by Conway Gittens from Reuters.

In addition, the released FOMC statement follows in its entirety:

Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn.  Conditions in financial markets have improved further, and activity in the housing sector has increased.  Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.  Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.  Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability.  The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.  To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt.  The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.  As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009.  The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.  The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

Led by a 9.1% increase in gasoline prices, the Consumer Price Index rose 0.4% in August and followed no change in July, according to the Labor Department. The core CPI, which excludes volatile energy and food prices, increased 0.1% in August, the same level as July.

"For inflation to be a concern, we’d have to see core rates rising consistently above 0.2% each month and wages start to rise," PNC analyst Robert Dye was quoted on CNNMoney. "The labor markets are far from healed enough for that to happen."

The latest data also helps to ease concerns of rising inflation due to recent government spending and the Federal Reserve monetary policy of injecting cash into the US economy in a continuing effort to stimulate a recovery.

"What we’re seeing is a gradual disinflation that reflects the persistent slack in our economy," Richard DeKaser, chief economist at Woodley Park Research in Washington, who accurately forecast the monthly increase in overall prices, was quoted on Bloomberg. "This is providing the Fed with lots of patience in reversing monetary policy."

The latest data also reinforces comments from former Fed Chairman Alan Greenspan, who spoke Tuesday from Washington.

"We’ve got worldwide disinflation in train and it will continue for a short while," he said. "Our model says that by the early months of next year the rate of inflation will fall below 1 percent on an annual rate" before starting to climb.

The Labor Department data also shows that annual inflation has fallen 1.5%. That compares to the 2.1% decline in the 12 months ending in July, which also marked the sharpest annual drop since 1950.

Core annual inflation rose 1.4%, registering the smallest year-over-year gain since February 2004. The figure is well within the Federal Reserve’s traditional comfort 1%-2% range. The core annual rate climbed 1.5% in July.

Consumer price details

Rising August prices include:

• Medical care rose 0.3% after a 0.2% increase in July
• Energy prices climbed 4.6% after a 0.4% decline in July and a 7.4% increase in June
• Gasoline prices soared 9.1% following a 0.8% decline
• Housing prices, which accounts for about a third of the CPI index, rose 0.1% after July’s 0.2% increase
• Lodging away from home prices rose 0.5% after falling 2.1% in July
• Meats, poultry, fish and egg prices rose 0.4% following 1.3% decline in July
• Used car and truck prices rose 1.9% following an unchanged reading in July after rising 0.9% in June and 1.0% in May.
• Airfares climbed 1.7% following a 2.1% gain in July
• Natural gas prices increased 0.4% after a 0.9% increase in July and a 1.3% gain in June
• Public transportation prices jumped 1.3% after rising 0.2% in July

Declining August prices include:

• Electricity costs declined 0.1% following a 0.6% decline in July
• Prices for fruits and vegetables fell 0.7% following a 0.3% decline in July
• Dairy and related products dropped 0.4%, its ninth consecutive decline
• New vehicles prices declined 1.3% after a 0.5% increase in July, a 0.7% up tick in June, a 0.5% gain in May, and a 0.4 % increase in April
• Clothing prices fell 0.1% after rising 0.6% in July

Rent costs were unchanged for the second straight month after an increase of 0.1% in June.

On Tuesday, the Labor Department released the Producer Price Index, which measures prices at the factory door and inflation pressures before they reach the consumer. The PPI showed a 1.7% rise in August, but discounting volatile food and energy prices, the core reading rose just 0.2%.

The Labor Department said the Consumer Price Index (CPI) remained unchanged in April after decreasing 0.1% in March. However, a reduction in the cost of energy over the past 12 months helped drive the annual rate 0.7% lower, marking the second straight monthly dip and the biggest decline since August 1955.

"The era of U.S. consumer price deflation is now upon us as the ongoing economic recession and deteriorating labor market conditions continue to weaken the bargaining power of retailers and laborers alike, thereby quenching the once raging inflationary flames," Millan Mulraine, economics strategist for TD Securities, was quoted on Forbes.com

There is a debate raging between economists on whether a threat to the approaching economy is rising inflation or spiraling, out of control falling prices, known as deflation.

"It’s impossible to see how deflation can persist given the amount of liquidity in the system," Maxwell Clarke, chief U.S. economist at 4Cast.com in New York, was quoted on Bloomberg Thursday when the government reported an increase in producer prices. "With oil moving back up, the thought in people’s minds becomes that inflation could ultimately become a problem that outweighs deflation."

Federal Reserve Chairman Ben Bernanke believes the danger of deflation is "receding," recently commenting on the Fed’s monetary policy.

"We are currently of course being very aggressive because we are trying to avoid another form of price instability, which is deflation," Bernanke said at a conference in Jekyll Island, Georgia, on May 11. "We are also committed to removing accommodation in a timely way to ensure that, as we come out of this episode and we move to a sustainable recovery, that we will have price stability, low and stable inflation, going forward."

The CPI is a key government gauge for inflation. The core CPI, which excludes volatile food and energy prices, is even more closely watched. It rose by 0.3% in April following three monthly gains of 0.2%. However, 40 percent of the April increase came from a huge 9.3% rise in tobacco prices due to higher federal taxes.

The core CPI is up 1.9% over the past year. That is within the Federal Reserve’s traditional comfort 1%-2% range.

Consumer price details

Rising April prices include:

• Tobacco and smoking products rose 9.3% after a 11% jump in March
• New vehicles prices rose 0.4 % after a climb of 0.6% March and following a 0.8% increase in February
• Medical care rose 0.4% in April after a 0.2% increase in March
• Education and communication prices gained 0.3% after 0.2% increases for two straight months

Declining April prices include:

• Food and beverage prices fell 0.2% after two straight months of 0.1% declines
• Energy costs fell 2.4%. Prices had declined 3.0% in March and rose 3.3% in February
• Gasoline prices fell 2.8%. Natural gas prices fell 7%.
• Housing prices, which accounts for about 40% of the CPI index, declined 0.1% for the second straight month
• Clothing prices dropped 0.2% following the same decline in March and 1.3% surge in February — the biggest increase in nearly 20 years
• Airfares declined 1.5% after a 2.3% drop in the prior month
• Used car and truck prices fell just 0.1% after two consecutive months of 1.7% declines

In a separate report Thursday, the Labor Department said Producer price rose 0.3% in April. A companion-like report to the CPI, the PPI measures prices at the factory door and inflation pressures before they reach the consumer.

In a statement following the conclusion of its two-day policy meeting, the Federal Open Market Committee (FOMC) said it would:

• Increase its purchases of mortgage-backed securities by $750 billion, on top of the already announced $500 billion
• Buy $300 billion of long-term Treasurys over the next six months

The Fed hopes the first measure will pull down mortgage rates and the second will help ease the credit crunch. Immediately following the news, U.S. stocks rallied, bond prices surged and gold prices reversed direction.

"The Fed is printing money to buy government debt, Tom Hartmann, a commodity analyst at AltaVest Worldwide Trading Inc. in Mission Viejo, California, was quoted on Bloomberg. "This stokes fears of inflation again — why we’re seeing gold take off."

The Federal Reserve slashed its benchmark interest rate to between 0% and 0.25% in December, and decided to maintain the same range.

The following FOMC statement was released:

Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract.  Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending.  Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment.  U.S. exports have slumped as a number of major trading partners have also fallen into recession. 

Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued.  Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability.  The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. 

To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion.  Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. 

The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets.  The Committee will continue to carefully monitor the size and composition of the Federal Reserve’s balance sheet in light of evolving financial and economic developments.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen. 

Also in the news on Wednesday, the Labor Department reported an increase in inflation with consumer prices rising 0.4% in February.

The committee also noted their outlook had significant "downside risks," and provided a set of informal long-term economic projections, including that of inflation at 1.7% to 2%. After the meeting, the FOMC held the federal funds rate to a range of between 0 to 0.25%, as it first set in December, and concluded low interest rate levels would need to be kept for some time.

The released minutes make it clearer, however, how some members see the potential for excessive disinflation in 2009, or a deflation risk as St. Louis Fed’s Bullard addressed in a speech Tuesday. Deflation is a persistent decrease in general prices, or the opposite of inflation.

"Many participants noted some risk of a protracted period of excessively low inflation, especially if inflation expectations were to move down in response to lower actual inflation and increasing economic slack, and a few even saw some risk of deflation."

On the flip side, some members noted a risk that inflation could go the other way.

"Some [committee members] noted a risk that expected inflation might actually increase to an undesirably high level if the public does not understand that the Federal Reserve’s liquidity facilities will be wound down and its balance sheet will shrink as economic and financial conditions improve."

The minutes also revealed forecasts and long-term economic projections by Federal Reserve Governors and Reserve Bank presidents. Notable "informal" central tendency figures follow:

January Economic Projections:

In contrast, the projections made in October were less pessimistic (long-term figures not reported).

October Economic Projections:

FOMC’s next scheduled meeting is set for March 17-18.