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2018-11-08T00:00:00 | 2018-11-29 | Minute | Minutes of the Federal Open Market Committee
November 7-8, 2018
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Wednesday, November 7, 2018, at 1:00 p.m. and continued on Thursday, November 8, 2018, at 9:00 a.m.1
PRESENT:
Jerome H. Powell, Chairman
John C. Williams, Vice Chairman
Thomas I. Barkin
Raphael W. Bostic
Lael Brainard
Richard H. Clarida
Mary C. Daly
Loretta J. Mester
Randal K. Quarles
James Bullard, Charles L. Evans, Esther L. George, Eric Rosengren, and Michael Strine, Alternate Members of the Federal Open Market Committee
Patrick Harker, Robert S. Kaplan, and Neel Kashkari, Presidents of the Federal Reserve Banks of Philadelphia, Dallas, and Minneapolis, respectively
James A. Clouse, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Mark E. Van Der Weide, General Counsel
Michael Held, Deputy General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
David Altig, Thomas A. Connors, Trevor A. Reeve, Ellis W. Tallman, William Wascher, and Beth Anne Wilson, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Ann E. Misback, Secretary, Office of the Secretary, Board of Governors
Matthew J. Eichner,2 Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors; Michael S. Gibson, Director, Division of Supervision and Regulation, Board of Governors; Andreas Lehnert, Director, Division of Financial Stability, Board of Governors
Daniel M. Covitz, Deputy Director, Division of Research and Statistics, Board of Governors; Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board of Governors; Michael T. Kiley, Deputy Director, Division of Financial Stability, Board of Governors
Jon Faust, Senior Special Adviser to the Chairman, Office of Board Members, Board of Governors
Antulio N. Bomfim, Special Adviser to the Chairman, Office of Board Members, Board of Governors
Brian M. Doyle, Joseph W. Gruber, Ellen E. Meade, and John M. Roberts, Special Advisers to the Board, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Eric M. Engen, Senior Associate Director, Division of Research and Statistics, Board of Governors; Christopher J. Erceg, Senior Associate Director, Division of International Finance, Board of Governors
Edward Nelson, Senior Adviser, Division of Monetary Affairs, Board of Governors; S. Wayne Passmore, Senior Adviser, Division of Research and Statistics, Board of Governors
William F. Bassett, Associate Director, Division of Financial Stability, Board of Governors; Marnie Gillis DeBoer3 and David López-Salido, Associate Directors, Division of Monetary Affairs, Board of Governors; Molly E. Mahar,3 Associate Director, Division of Supervision and Regulation, Board of Governors; Stacey Tevlin, Associate Director, Division of Research and Statistics, Board of Governors
Jeffrey D. Walker,2 Deputy Associate Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors; Min Wei, Deputy Associate Director, Division of Monetary Affairs, Board of Governors
Christopher J. Gust, Laura Lipscomb,3 and Zeynep Senyuz,3 Assistant Directors, Division of Monetary Affairs, Board of Governors; Patrick E. McCabe, Assistant Director, Division of Research and Statistics, Board of Governors
Penelope A. Beattie,4 Assistant to the Secretary, Office of the Secretary, Board of Governors
Michiel De Pooter, Section Chief, Division of Monetary Affairs, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Alyssa G. Anderson3 and Kurt F. Lewis, Principal Economists, Division of Monetary Affairs, Board of Governors
Joshua S. Louria,3 Lead Financial Institution and Policy Analyst, Division of Monetary Affairs, Board of Governors
Sriya Anbil,3 Senior Economist, Division of Monetary Affairs, Board of Governors
Randall A. Williams, Senior Information Manager, Division of Monetary Affairs, Board of Governors
Andre Anderson, First Vice President, Federal Reserve Bank of Atlanta
Jeff Fuhrer, Sylvain Leduc, Kevin Stiroh,4 Daniel G. Sullivan, and Christopher J. Waller, Executive Vice Presidents, Federal Reserve Banks of Boston, San Francisco, New York, Chicago, and St. Louis, respectively
Paolo A. Pesenti, Paula Tkac,3 Luke Woodward, Mark L.J. Wright, and Nathaniel Wuerffel,3 Senior Vice Presidents, Federal Reserve Banks of New York, Atlanta, Kansas City, Minneapolis, and New York, respectively
Roc Armenter,3 Satyajit Chatterjee, Deborah L. Leonard,3 Pia Orrenius, Matthew D. Raskin,3 and Patricia Zobel,3 Vice Presidents, Federal Reserve Banks of Philadelphia, Philadelphia, New York, Dallas, New York, New York, respectively
John P. McGowan,3 Assistant Vice President, Federal Reserve Bank of New York
Andreas L. Hornstein, Senior Advisor, Federal Reserve Bank of Richmond
Samuel Schulhofer-Wohl, Senior Economist and Research Advisor, Federal Reserve Bank of Chicago
Gara Afonso,3 Research Officer, Federal Reserve Bank of New York
Long-Run Monetary Policy Implementation Frameworks
Committee participants resumed their discussion of potential long-run frameworks for monetary policy implementation, a topic last discussed at the November 2016 FOMC meeting. The staff provided briefings that described changes in recent years in banks' uses of reserves, outlined tradeoffs associated with potential choices of operating regimes to implement monetary policy and control short-term interest rates, reviewed potential choices of the policy target rate, and summarized developments in the policy implementation frameworks of other central banks.
The staff noted that banks' liquidity management practices had changed markedly since the financial crisis, with large banks now maintaining substantial buffers of reserves, among other high-quality liquid assets, to meet potential outflows and to comply with regulatory requirements. Information from bank contacts as well as a survey of banks indicated that, in an environment in which money market interest rates were very close to the interest rate paid on excess reserve balances, banks would likely be comfortable operating with much lower levels of reserve balances than at present but would wish to maintain substantially higher levels of balances than before the crisis. On average, survey responses suggested that banks might reduce their reserve holdings only modestly from those "lowest comfortable" levels if money market interest rates were somewhat above the interest on excess reserves (IOER) rate. Across banks, however, individual survey responses on this issue varied substantially.
The staff highlighted how changes in the determinants of reserve demand since the crisis could affect the tradeoffs between two types of operating regimes: (1) one in which aggregate excess reserves are sufficiently limited that money market interest rates are sensitive to small changes in the supply of reserves and (2) one in which aggregate excess reserves are sufficiently abundant that money market interest rates are not sensitive to small changes in reserve supply. In the former type of regime, the Federal Reserve actively adjusts reserve supply in order to keep its policy rate close to target. This technique worked well before the financial crisis, when reserve demand was fairly stable in the aggregate and largely influenced by payment needs and reserve requirements. However, with the increased use of reserves for precautionary liquidity purposes following the crisis, there was some uncertainty about whether banks' demand for reserves would now be sufficiently predictable for the Federal Reserve to be able to precisely target an interest rate in this way. In the latter type of regime, money market interest rates are not sensitive to small fluctuations in the demand for and supply of reserves, and the stance of monetary policy is instead transmitted from the Federal Reserve's administered rates to market rates--an approach that has been effective in controlling short-term interest rates in the United States since the financial crisis, as well as in other countries where central banks have used this approach.
The staff briefings also examined the tradeoffs between alternative policy rates that the Committee could choose in each of the regimes. In a regime of limited excess reserves, the Federal Reserve's policy tools most directly affect overnight unsecured rates paid by banks, such as the effective federal funds rate (EFFR) and the overnight bank funding rate (OBFR). These rates could also be targeted with abundant excess reserves, as could interest rates on secured funding or a mixture of secured and unsecured rates.
Participants commented on the advantages of a regime of policy implementation with abundant excess reserves. Based on experience over recent years, such a regime was seen as providing good control of short-term money market rates in a variety of market conditions and effective transmission of those rates to broader financial conditions. Participants commented that, by contrast, interest rate control might be difficult to achieve in an operating regime of limited excess reserves in view of the potentially greater unpredictability of reserve demand resulting from liquidity regulations or changes in risk appetite, or the increased variability of factors affecting reserve supply. Participants also observed that regimes with abundant excess reserves could provide effective control of short-term rates even if large amounts of liquidity needed to be added to address liquidity strains or if large-scale asset purchases needed to be undertaken to provide macroeconomic stimulus in situations where short-term rates are at their effective lower bound. Monetary policy operations in this regime would also not require active management of reserve supply. In addition, the provision of sizable quantities of reserves could enhance financial stability and reduce operational risks in the payment system by maintaining a high level of liquidity in the banking system.
A number of participants commented that the attractive features of a regime of abundant excess reserves should be weighed against the potential drawbacks of such a regime as well as the potential benefits of returning to a regime similar to that employed before the financial crisis. Potential drawbacks of an abundant reserves regime included challenges in precisely determining the quantity of reserves necessary in such systems, the need to maintain relatively sizable quantities of reserves and holdings of securities, and relatively large ongoing interest expenses associated with the remuneration of reserves. Some noted that returning to a regime of limited excess reserves could demonstrate the Federal Reserve's ability to fully unwind the policies used to respond to the crisis and might thereby increase public acceptance or effectiveness of such policies in the future. Participants noted that the level of reserve balances required to remain in a regime where rate control does not entail active management of the supply of reserves was quite uncertain, but they thought that reserve supply could be reduced substantially below its current level while remaining in such a regime. They expected to learn more about the demand for reserves as the balance sheet continued to shrink in a gradual and predictable manner. They also observed that it might be possible to adopt strategies that provide incentives for banks to reduce their demand for reserves. Participants judged that if the level of reserves needed for a regime with abundant excess reserves turned out to be considerably higher than anticipated, the possibility of returning to a regime in which excess reserves were limited and adjustments in reserve supply were used to influence money market rates would warrant further consideration.
Participants noted that lending in the federal funds market was currently dominated by the Federal Home Loan Banks (FHLBs). Participants cited several potential benefits of targeting the OBFR rather than the EFFR: The larger volume of transactions and greater variety of lenders underlying the OBFR could make that rate a broader and more robust indicator of banks' overnight funding costs, the OBFR could become an even better indicator after the potential incorporation of data on onshore wholesale deposits, and the similarity of the OBFR and the EFFR suggested that transitioning to the OBFR would not require significant changes in the way the Committee conducted and communicated monetary policy. Some participants saw it as desirable to explore the possibility of targeting a secured interest rate. Some also expressed interest in studying, over the longer term, approaches in which the Committee would target a mixture of secured and unsecured rates.
Participants expected to continue their discussion of long-run implementation frameworks and related issues at upcoming meetings. They emphasized that it would be important to communicate clearly the rationale for any choice of operating regime and target interest rate.
Developments in Financial Markets and Open Market Operations
The manager of the System Open Market Account (SOMA) reviewed recent developments in domestic and global financial markets. The equity market was quite volatile over the intermeeting period, with U.S. stock prices down as much as 10 percent at one point before recovering somewhat. Investors pointed to a number of uncertainties in the global outlook that may have contributed to the decline in stock prices, including ongoing trade tensions between the United States and China, growing concerns about the fiscal position of the Italian government and its broader implications for financial markets and institutions, and some worries about the outcome of the Brexit negotiations. Market contacts also noted some nervousness about corporate earnings growth and an increase in longer-term Treasury yields over recent weeks as factors contributing to downward pressure on equity prices. The volatility in equity markets was accompanied by a rise in risk spreads on corporate debt, although the widening in risk spreads was not as notable as in some past stock market downturns.
On balance, the turbulence in equity markets did not leave much imprint on near-term U.S. monetary policy expectations. Respondents to the Open Market Desk's recent Survey of Primary Dealers and Survey of Market Participants indicated that respondents placed high odds on a further quarter-point increase in the target range for the federal funds rate at the December FOMC meeting; that expectation also seemed to be embedded in federal funds futures quotes. Further out, the median of survey respondents' modal expectations for the path of the federal funds rate pointed to about three additional policy firmings next year while futures quotes appeared to be pricing in a somewhat flatter trajectory.
The manager also reviewed recent developments in global markets. In China, investors were concerned about the apparent slowing of economic expansion and the implications of continued trade tensions with the United States. Chinese stock price indexes declined further over the intermeeting period and were off nearly 20 percent on the year to date. The renminbi continued to depreciate, moving closer to 7.0 renminbi per dollar--a level that some market participants viewed as a possible trigger for intensifying depreciation pressures. Anecdotal reports suggested that Chinese authorities had intervened to support the renminbi.
The deputy manager followed with a discussion of recent developments in money markets and Desk operations. The EFFR along with other overnight rates edged higher over the weeks following the increase in the target range at the previous meeting. Most recently, the EFFR had risen to the level of the IOER rate, placing it 5 basis points below the top of the target range. The upward pressure on the EFFR and other money market rates reportedly stemmed partly from a sizable increase in Treasury bill supply and a corresponding increase in Treasury bill yields. In part reflecting that development, FHLBs shifted the composition of their liquidity portfolios away from overnight lending in the federal funds market in favor of the higher returns on overnight repurchase agreements and on interest-bearing deposit accounts at banks; these reallocations in their liquidity portfolios in turn contributed to upward pressure on the EFFR. At the same time, anecdotal reports suggested that some depositories were seeking to increase their borrowing in federal funds from FHLBs, partly because of the favorable treatment of such borrowing under liquidity regulations. In addition, rates on term borrowing had moved higher over recent weeks, perhaps encouraging some depositories to bid up rates on overnight federal funds loans. To date, there were no clear signs that the ongoing decline in reserve balances in the banking system associated with the gradual normalization of the Federal Reserve's balance sheet had contributed meaningfully to the upward pressure on money market rates. Indeed, banks reportedly were willing to reduce reserve holdings in order to lend in overnight repurchase agreement (repo) markets at rates just a few basis points above the IOER rate.
However, respondents to the Desk's recent Survey of Primary Dealers and Survey of Market Participants indicated that they anticipated the reduction in the supply of reserves in the banking system could become a very important factor influencing the spread between the IOER rate and the EFFR over the last three quarters of next year. The deputy manager also provided an update on plans to incorporate additional data on overnight deposits in the OBFR. Banks had begun reporting new data on onshore overnight deposits in October. In aggregate, the volumes reported in onshore overnight deposits were substantial and the rates reported for these instruments were very close to rates reported on overnight Eurodollar transactions. The new data were expected to be incorporated in the calculation of the OBFR later next year.
Following the Desk briefings, the Chairman noted the upward trend in the EFFR relative to the IOER rate over the intermeeting period and suggested that it might be appropriate to implement another technical adjustment in the IOER rate relative to the top of the target range for the federal funds rate fairly soon. While the funds rate seemed to have stabilized recently, there remained some risk that it could continue to drift higher before the Committee's next meeting. As a contingency plan, participants agreed that it would be appropriate for the Board to implement such a technical adjustment in the IOER rate before the December meeting if necessary to keep the federal funds rate well within the target range established by the FOMC.
By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account during the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the November 7-8 meeting indicated that labor market conditions continued to strengthen in recent months and that real gross domestic product (GDP) rose at a strong rate in the third quarter, similar to its pace in the first half of the year. Consumer price inflation, as measured by the 12-month percentage change in the price index for personal consumption expenditures (PCE), was 2.0 percent in September. Survey-based measures of longer-run inflation expectations were little changed on balance.
Total nonfarm payroll employment increased at a strong pace, on average, in September and October. The national unemployment rate decreased to 3.7 percent in September and remained at that level in October, while the labor force participation rate and the employment-to-population ratio moved up somewhat over those two months. The unemployment rates for African Americans, Asians, and Hispanics in October were below their levels at the end of the previous expansion. The share of workers employed part time for economic reasons continued to be close to the lows reached in late 2007. The rates of private-sector job openings and quits both remained at high levels in September; initial claims for unemployment insurance benefits in late October were close to historically low levels. Total labor compensation per hour in the nonfarm business sector increased 2.8 percent over the four quarters ending in the third quarter, the employment cost index for private workers increased 2.9 percent over the 12 months ending in September, and average hourly earnings for all employees rose 3.1 percent over the 12 months ending in October.
Industrial production expanded at a solid pace again in September, and indicators for output in the fourth quarter were generally positive. Production worker hours in the manufacturing sector increased in October, automakers' assembly schedules suggested that light motor vehicle production would rise in the fourth quarter, and new orders indexes from national and regional manufacturing surveys pointed to solid gains in factory output in the near term.
Real PCE continued to grow strongly in the third quarter. Overall consumer spending rose steadily in recent months, and light motor vehicle sales stepped up to a robust pace in September and edged higher in October. Key factors that influence consumer spending--including solid gains in real disposable personal income and the effects of earlier increases in equity prices and home values on households' net worth--continued to be supportive of solid real PCE growth in the near term. Consumer sentiment, as measured by the University of Michigan Surveys of Consumers, remained upbeat in October.
Real residential investment declined further in the third quarter, likely reflecting a range of factors including the continued effects of rising mortgage interest rates on the affordability of housing. Starts of both new single-
family homes and multifamily units decreased last quarter, but building permit issuance for new single-family homes--which tends to be a good indicator of the underlying trend in construction of such homes--was little changed on net. Sales of both new and existing homes declined again in the third quarter, while pending home sales edged up in September.
Growth in real private expenditures for business equipment and intellectual property moderated in the third quarter following strong gains in these expenditures in the first half of the year. Nominal orders and shipments of nondefense capital goods excluding aircraft edged down over the two months ending in September after brisk increases in July, while readings on business sentiment remained upbeat. Real business expenditures for nonresidential structures declined in the third quarter both for the drilling and mining sector and outside that sector. The number of crude oil and natural gas rigs in operation--an indicator of business spending for structures in the drilling and mining sector--held about steady from late May through late October.
Total real government purchases rose in the third quarter. Real federal purchases increased, mostly reflecting higher defense expenditures. Real purchases by state and local governments also increased, as real construction spending by these governments rose and payrolls expanded.
The nominal U.S. international trade deficit widened in August and September. Exports decreased in August but more than recovered in September, reflecting the pattern of industrial supplies exports. Imports of consumer goods led imports higher in both months. The change in net exports was estimated to have been a sizable drag on real GDP growth in the third quarter.
Total U.S. consumer prices, as measured by the PCE price index, increased 2.0 percent over the 12 months ending in September. Core PCE price inflation, which excludes changes in consumer food and energy prices, also was 2.0 percent over that same period. The consumer price index (CPI) rose 2.3 percent over the 12 months ending in September, while core CPI inflation was 2.2 percent. Recent readings on survey-based measures of longer-run inflation expectations--including those from the Michigan survey, the Blue Chip Economic Indicators, and the Desk's Survey of Primary Dealers and Survey of Market Participants--were little changed on balance.
Foreign economic growth appeared to pick up in the third quarter, as a strong rebound in economic activity in several emerging market economies (EMEs) more than offset a slowdown in China and most advanced foreign economies (AFEs). Preliminary GDP data showed that Mexico's economy grew briskly, reversing its second-quarter contraction, while indicators suggested that Brazil's economy rebounded from a nationwide truckers' strike. In contrast, GDP growth slowed in China and the euro area, and indicators pointed to a step-down in Japanese growth. Foreign inflation picked up in the third quarter, boosted by higher oil prices and, in China, by higher food prices. However, underlying inflation pressures remained muted, especially in some AFEs.
Staff Review of the Financial Situation
Concerns about ongoing international trade tensions, the global growth outlook, and rising interest rates weighed on global equity market sentiment over the intermeeting period. Domestic stock prices declined considerably, on net, and equity market implied volatility rose. Nominal Treasury yields ended the period higher amid some moderate volatility, and the broad dollar index moved up. Financing conditions for nonfinancial businesses and households remained supportive of economic activity on balance.
During the intermeeting period, broad U.S. equity price indexes declined considerably, on net, amid somewhat elevated day-to-day volatility. Various factors appeared to weigh on investor sentiment including news related to ongoing international trade tensions and investors' concerns about the sustainability of strong corporate earnings growth. Stock prices in the basic materials and industrial sectors underperformed the broader market, reportedly reflecting an increase in trade tensions with China. More broadly, investors seemed to reassess equity valuations that appeared elevated. Investors also reacted to some large firms raising concerns about the effect of rising costs on their future profitability in their latest earnings reports. Option-implied volatility on the S&P 500 index at the one-month horizon--the VIX--increased, though it remained below the levels seen in early February. Despite the considerable declines in domestic stock prices, spreads of investment- and speculative-grade corporate bonds over comparable-maturity Treasury yields widened only modestly.
FOMC communications over the intermeeting period were viewed by market participants as consistent with a continued gradual removal of monetary policy accommodation. Market-implied measures of monetary policy expectations were generally little changed. Investors continued to see virtually no odds of a further quarter-point firming in the target range for the federal funds rate at the November FOMC meeting and high odds of a further firming at the December FOMC meeting. The market-implied path for the federal funds rate beyond 2018 increased a bit.
Medium- and longer-term nominal Treasury yields ended the period higher amid some moderate volatility over the intermeeting period. Meanwhile, measures of inflation compensation derived from Treasury Inflation-Protected Securities declined somewhat, with some of the decline occurring following the weaker-than-expected September CPI release.
Overnight interest rates in short-term funding markets rose in line with the increase in the target range for the federal funds rate announced at the September FOMC meeting. Over the intermeeting period, the spread between the EFFR and the IOER rate narrowed from 2 basis points to 0 basis points. Take-up at the Federal Reserve's overnight reverse repo facility remained low.
Over the intermeeting period, global investors focused on changes in U.S. equity prices and interest rates, ongoing trade tensions between the United States and China, and uncertainty regarding budget negotiations between the Italian government and the European Union. Foreign equity prices posted notable net declines; option-implied measures of foreign equity volatility spiked in October but remained well below levels seen in February and subsequently retraced some of those increases. Ten-year Italian sovereign bond spreads over German equivalents widened significantly, and there were moderate spillovers to other euro-area peripheral spreads. Bond yields in Germany and the United Kingdom fell, partly reflecting weaker-than-expected inflation data and European political developments. In contrast, Canadian yields increased slightly, bolstered by the announcement of the U.S.-Mexico-Canada trade agreement and a policy rate hike by the Bank of Canada. The dollar appreciated against most advanced and emerging market currencies, and EME-dedicated funds experienced small outflows.
Financing conditions for nonfinancial firms continued to be supportive of borrowing and spending over the intermeeting period. Net debt financing of nonfinancial firms was robust in the third quarter, as weak speculative-grade bond issuance was largely offset by rapid leveraged loan issuance. The pace of equity issuance was solid in September but slowed somewhat in October. The outlook for corporate earnings remained favorable on balance.
Respondents to the October Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) reported, on net, that their institutions had eased standards and terms for commercial and industrial loans to large and middle-market firms over the past three months. All respondents that had done so cited increased competition from other lenders as an important reason. The credit quality of nonfinancial corporations remained solid, though there were some signs of modest deterioration. Gross issuance of municipal bonds in September and October was strong, much of which raised new capital.
Financing conditions in the commercial real estate (CRE) sector remained accommodative. Banks in the October SLOOS reported, on a portfolio-weighted basis, an easing of standards on CRE loans over the third quarter on net. Interest rate spreads on commercial mortgage-backed securities (CMBS) remained near their post-crisis lows, while issuance of non-agency and agency CMBS was stable in recent months and similar to year-earlier levels.
Most borrowers in the residential mortgage market continued to experience accommodative financing conditions, although the increase in mortgage rates since 2016 appeared to have reduced housing demand, and financing conditions remained somewhat tight for borrowers with low credit scores. Growth in home-purchase mortgage originations slowed over the past year as mortgage rates stayed near their highest level since 2011, and refinancing activity continued to be very muted.
Financing conditions in consumer credit markets, on balance, remained supportive of growth in household spending, although interest rates for consumer loans continued to rise. Credit card loan growth showed signs of moderating amid rising interest rates and reported tightening of lending standards at the largest credit card banks. Compared with the beginning of this year, respondents to the October 2018 SLOOS reported, on a portfolio-weighted basis, a reduced willingness to issue credit card loans to borrowers across the credit spectrum and, in particular, to borrowers with lower credit scores; meanwhile, banks reported having eased standards on auto loans.
The staff provided its latest report on potential risks to financial stability; the report again characterized the financial vulnerabilities of the U.S. financial system as moderate on balance. This overall assessment incorporated the staff's judgment that vulnerabilities associated with asset valuation pressures continued to be elevated, that vulnerabilities from financial-sector leverage and maturity and liquidity transformation remained low, and that vulnerabilities from household leverage were still in the low-to-moderate range. Additionally, the staff judged vulnerabilities from leverage in the nonfinancial business sector as elevated and noted a pickup in the issuance of risky debt and the continued deterioration in underwriting standards on leveraged loans. The staff also characterized overall vulnerabilities to foreign financial stability as moderate while highlighting specific issues in some foreign economies, including--depending on the country--high private or sovereign debt burdens, external vulnerabilities, and political uncertainties.
Staff Economic Outlook
In the U.S. economic forecast prepared for the November FOMC meeting, the staff continued to project that real GDP would increase a little less rapidly in the second half of the year than in the first half. Hurricanes Florence and Michael had devastating effects on many communities, but they appeared likely to leave essentially no imprint on the national economy in the second half of the year as a whole. Relative to the forecast prepared for the previous meeting, the projection for real GDP growth this year was little revised. Over the 2018â20 period, output was forecast to rise at a rate above or at the staff's estimate of potential growth and then slow to a pace below it in 2021. The unemployment rate was projected to decline further below the staff's estimate of its longer-run natural rate but to bottom out in 2020 and begin to edge up in 2021. The medium-term projection for real GDP growth was only a bit weaker than in the previous forecast, primarily reflecting a lower projected path for equity prices, leaving the unemployment rate forecast little revised. With labor market conditions already tight, the staff continued to assume that projected employment gains would manifest in smaller-than-usual downward pressure on the unemployment rate and in larger-than-usual upward pressure on the labor force participation rate.
The staff expected both total and core PCE price inflation to remain close to 2 percent through the medium term. The staff's forecasts for both total and core PCE price inflation were little revised on net.
The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The staff also saw the risks to the forecasts for real GDP growth and the unemployment rate as balanced. On the upside, household spending and business investment could expand faster than the staff projected, supported in part by the tax cuts enacted last year. On the downside, trade policies and foreign economic developments could move in directions that have significant negative effects on U.S. economic growth. Risks to the inflation projection also were seen as balanced. The upside risk that inflation could increase more than expected in an economy that was projected to move further above its potential was counterbalanced by the downside risk that longer-term inflation expectations may be lower than was assumed in the staff forecast.
Participants' View on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants agreed that information received since the FOMC met in September indicated that the labor market had continued to strengthen and that economic activity had been rising at a strong rate. Job gains had been strong, on average, in recent months, and the unemployment rate had declined. Household spending had continued to grow strongly, while growth of business fixed investment had moderated from its rapid pace earlier in the year. On a 12-month basis, both overall inflation and core inflation, which excludes changes in food and energy prices, had remained near 2 percent. Indicators of longer-term inflation expectations were little changed on balance.
Based on recent readings on spending, prices, and the labor market, participants generally indicated little change in their assessment of the economic outlook, with above-trend economic growth expected to continue before slowing to a pace closer to trend over the medium term. Participants pointed to several factors supporting above-trend growth, including strong employment gains, expansionary federal tax and spending policies, and continued high levels of consumer and business confidence. Several participants observed that the stimulative effects of fiscal policy would likely diminish over time, while the lagged effects of reductions in monetary policy accommodation would show through more fully, with both factors contributing to their expectation that economic growth would slow to a pace closer to trend.
In their discussion of the household sector, participants generally continued to characterize consumption growth as strong. This view was supported by reports from District contacts, which were mostly upbeat regarding consumer spending. Although household spending overall was seen as strong, most participants noted weakness in residential investment. This weakness was attributed to a variety of factors, including increased mortgage rates, building cost increases, and supply constraints.
Participants observed that growth in business fixed investment slowed in the third quarter following several quarters of rapid growth. Some participants pointed to anecdotal evidence regarding higher tariffs and uncertainty about trade policy, slowing global demand, rising input costs, or higher interest rates as possible factors contributing to the slowdown. A couple of others noted that business investment growth can be volatile on a quarterly basis and factors such as the recent cuts in corporate taxes and high levels of business sentiment were expected to support investment going forward.
Reports from District contacts in the manufacturing, energy, and service sectors were generally favorable, though growth in manufacturing activity was reportedly moderating in a couple of Districts. Business contacts generally remained optimistic about the outlook, but concerns about trade policy, slowing foreign demand, and labor shortages were reportedly weighing on business prospects. Contacts in the agricultural sector reported that conditions remain depressed, in part, due to the effects of trade policy actions on exports and farm incomes.
Participants agreed that labor market conditions had strengthened further over the intermeeting period. Payrolls had increased strongly in October, and measures of labor market tightness such as rates of job openings and quits continued to be elevated. The unemployment rate remained at a historically low level in October, and the labor force participation rate moved up. A couple of participants saw scope for further increases in the labor force participation rate as the strong economy pulled more workers into the labor market, while a couple of other participants judged that there was little scope for significant further increases.
Contacts in many Districts continued to report tight labor markets with difficulties finding qualified workers. In some cases, firms were responding to these difficulties by increasing training for less-qualified workers, outsourcing work, or automating production, while in other cases, firms were responding by raising wages. Contacts in a couple of Districts indicated that labor shortages, particularly for skilled labor, might be constraining activity in certain industries. Participants observed that, at the national level, measures of nominal wage growth appeared to be picking up. Many participants noted that the recent pace of aggregate wage gains was broadly consistent with trends in productivity growth and inflation.
Participants observed that both overall and core PCE price inflation remained near 2 percent on a 12-month basis. In general, participants viewed recent price developments as consistent with their expectation that inflation would remain near the Committee's symmetric 2 percent objective on a sustained basis. Reports from business contacts and surveys in a number of Districts were consistent with some firming in inflationary pressure. Contacts in many Districts indicated that input costs had risen and that increased tariffs were raising costs, especially for industries relying heavily on steel and aluminum. In a few Districts, transportation costs had reportedly increased. Some contacts indicated that while input costs were higher, it appeared that the pass-through of these higher costs to consumer prices was limited.
Participants commented on a number of risks and uncertainties associated with their outlook for economic activity, the labor market, and inflation over the medium term. A few participants indicated that uncertainty had increased recently, pointing to the high levels of uncertainty regarding the effects of fiscal and trade policies on economic activity and inflation. Some participants viewed economic and financial developments abroad, including the possibility of further appreciation of the U.S. dollar, as posing downside risks for domestic economic growth and inflation. A couple of participants expressed the concern that measures of inflation expectations would remain low, particularly if economic growth slowed more than expected. Several participants were concerned that the high level of debt in the nonfinancial business sector, and especially the high level of leveraged loans, made the economy more vulnerable to a sharp pullback in credit availability, which could exacerbate the effects of a negative shock on economic activity. The potential for an escalation in tariffs or trade tensions was also cited as a factor that could slow economic growth more than expected. With regard to upside risks, participants noted that greater-than-expected effects of fiscal stimulus and high consumer confidence could lead to stronger-than-expected economic outcomes. Some participants raised the concern that tightening resource utilization in conjunction with an increase in the ability of firms to pass through increases in tariffs or in other input costs to consumer prices could generate undesirable upward pressure on inflation. In general, participants agreed that risks to the outlook appeared roughly balanced.
In their discussion of financial developments, participants observed that financial conditions tightened over the intermeeting period, as equity prices declined, longer-term yields and borrowing costs for most sectors increased, and the foreign exchange value of the dollar rose. Despite these developments, a number of participants judged that financial conditions remained accommodative relative to historical norms.
Among those who commented on financial stability, a number cited possible risks related to elevated CRE prices, narrow corporate bond spreads, or strong issuance of leveraged loans. A few participants suggested that some of these financial vulnerabilities might not currently represent risks to financial stability so much as they represent downside risks to the economic outlook; a couple of participants suggested that financial stability risks and risks to the outlook are interconnected. A couple of participants also commented on the upcoming release of the Board's first public Financial Stability Report and noted that the report would increase the transparency of the Federal Reserve's financial stability work as well as enhance communications on this topic.
In their discussion of monetary policy, participants agreed that it would be appropriate to maintain the current target range for the federal funds rate at this meeting. Participants generally judged that the economy had been evolving about as they had anticipated, with economic activity rising at a strong rate, labor market conditions continuing to strengthen, and inflation running at or near the Committee's longer-run objective. Almost all participants reaffirmed the view that further gradual increases in the target range for the federal funds rate would likely be consistent with sustaining the Committee's objectives of maximum employment and price stability.
Consistent with their judgment that a gradual approach to policy normalization remained appropriate, almost all participants expressed the view that another increase in the target range for the federal funds rate was likely to be warranted fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations. However, a few participants, while viewing further gradual increases in the target range of the federal funds rate as likely to be appropriate, expressed uncertainty about the timing of such increases. A couple of participants noted that the federal funds rate might currently be near its neutral level and that further increases in the federal funds rate could unduly slow the expansion of economic activity and put downward pressure on inflation and inflation expectations.
Participants emphasized that the Committee's approach to setting the stance of policy should be importantly guided by incoming data and their implications for the economic outlook. They noted that their expectations for the path of the federal funds rate were based on their current assessment of the economic outlook. Monetary policy was not on a preset course; if incoming information prompted meaningful reassessments of the economic outlook and attendant risks, either to the upside or the downside, their policy outlook would change. Various factors such as the recent tightening in financial conditions, risks in the global outlook, and some signs of slowing in interest-sensitive sectors of the economy on the one hand, and further indicators of tightness in labor markets and possible inflationary pressures, on the other hand, were noted in this context. Participants also commented on how the Committee's communications in its postmeeting statement might need to be revised at coming meetings, particularly the language referring to the Committee's expectations for "further gradual increases" in the target range for the federal funds rate. Many participants indicated that it might be appropriate at some upcoming meetings to begin to transition to statement language that placed greater emphasis on the evaluation of incoming data in assessing the economic and policy outlook; such a change would help to convey the Committee's flexible approach in responding to changing economic circumstances.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the Committee met in September indicated that the labor market had continued to strengthen and that economic activity had been rising at a strong rate. Job gains had been strong, on average, in recent months, and the unemployment rate had declined. Household spending had continued to grow strongly, while growth of business fixed investment had moderated recently from its rapid pace earlier in the year. On a 12-month basis, both overall inflation and inflation for items other than food and energy remained near 2 percent. Indicators of long-term inflation expectations were little changed on balance.
Members generally judged that the economy had been evolving about as they had anticipated at the previous meeting. Financial conditions, although somewhat tighter than at the time of the September FOMC meeting, had stayed accommodative overall, while the effects of expansionary fiscal policies enacted over the past year were expected to continue through the medium term. Consequently, members continued to expect that further gradual increases in the target range for the federal funds rate would be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term. Members continued to judge that the risks to the economic outlook were roughly balanced.
After assessing current conditions and the outlook for economic activity, the labor market, and inflation, members decided to maintain the target range for the federal funds rate at 2 to 2-1/4 percent. Members agreed that the timing and size of future adjustments to the target range for the federal funds rate would depend on their assessment of realized and expected economic conditions relative to the Committee's maximum employment and symmetric 2 percent inflation objectives. They reiterated that this assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. More generally, members noted that decisions regarding near-term adjustments of the stance of monetary policy would appropriately remain dependent on the evolution of the outlook as informed by incoming data.
At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the SOMA in accordance with the following domestic policy directive, to be released at 2:00 p.m.:
"Effective November 9, 2018, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 2 to 2-1/4 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 2.00 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during each calendar month that exceeds $30 billion, and to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $20 billion. Small deviations from these amounts for operational reasons are acceptable.
The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."
The vote also encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in September indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has declined. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 2 to 2-1/4 percent.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments."
Voting for this action: Jerome H. Powell, John C. Williams, Thomas I. Barkin, Raphael W. Bostic, Lael Brainard, Richard H. Clarida, Mary C. Daly, Loretta J. Mester, and Randal K. Quarles.
Voting against this action: None.
Consistent with the Committee's decision to leave the target range for the federal funds rate unchanged, the Board of Governors voted unanimously to leave the interest rates on required and excess reserve balances unchanged at 2.20 percent and voted unanimously to approve establishment of the primary credit rate at the existing level of 2.75 percent, effective November 9, 2018.
Update from Subcommittee on Communications
Governor Clarida presented a proposal from the subcommittee on communications to conduct a review during 2019 of the Federal Reserve's strategic framework for monetary policy. This assessment would consider the strategy, tools, and communications that would best enable the Federal Reserve to meet its statutory objectives of maximum employment and price stability. With labor market conditions close to maximum employment and inflation near the Committee's 2 percent objective, it was an opportune time for the Federal Reserve to undertake this review and assess the robustness of its strategic framework.
During the review, the Federal Reserve would engage with a broad range of interested stakeholders across the country and host a research conference in June 2019. FOMC participants would discuss the strategic framework at subsequent FOMC meetings, drawing on the lessons from the outreach efforts and on staff analysis. The goal of these discussions would be to identify possible ways to improve the Committee's current strategic policy framework in order to ensure that the Federal Reserve is best positioned going forward to achieve its statutory mandate.
Notation Vote
By notation vote completed on October 16, 2018, the Committee unanimously approved the minutes of the Committee meeting held on September 25-26, 2018.
_______________________
James A. Clouse
Secretary
1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes. Return to text
2. Attended through the discussion of developments in financial markets and open market operations. Return to text
3. Attended through the discussion of the long-run monetary policy implementation frameworks. Return to text
4. Attended Wednesday session only. Return to text |
2018-09-26T00:00:00 | 2018-09-26 | Statement | Information received since the Federal Open Market Committee met in August indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Household spending and business fixed investment have grown strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 2 to 2-1/4 percent.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Richard H. Clarida; Esther L. George; Loretta J. Mester; and Randal K. Quarles.
Implementation Note issued September 26, 2018 |
2018-09-26T00:00:00 | 2018-10-17 | Minute | Minutes of the Federal Open Market Committee
September 25-26, 2018
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, September 25, 2018, at 2:00 p.m. and continued on Wednesday, September 26, 2018, at 9:00 a.m.1
PRESENT:
Jerome H. Powell, Chairman
John C. Williams, Vice Chairman
Thomas I. Barkin
Raphael W. Bostic
Lael Brainard
Richard H. Clarida
Loretta J. Mester
Randal K. Quarles
James Bullard, Charles L. Evans, Esther L. George, Eric Rosengren, and Michael Strine, Alternate Members of the Federal Open Market Committee
Patrick Harker, Robert S. Kaplan, and Neel Kashkari, Presidents of the Federal Reserve Banks of Philadelphia, Dallas, and Minneapolis, respectively
Mark A. Gould, First Vice President, Federal Reserve Bank of San Francisco
James A. Clouse, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Mark E. Van Der Weide, General Counsel
Michael Held, Deputy General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
David Altig, Kartik B. Athreya, Thomas A. Connors, Mary C. Daly, David E. Lebow, Trevor A. Reeve, William Wascher, and Beth Anne Wilson, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Ann E. Misback, Secretary, Office of the Secretary, Board of Governors
Matthew J. Eichner,2 Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors; Andreas Lehnert, Director, Division of Financial Stability, Board of Governors
Jennifer L. Burns, Deputy Director, Division of Supervision and Regulation, Board of Governors; Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board of Governors; Michael T. Kiley, Deputy Director, Division of Financial Stability, Board of Governors
Jon Faust, Senior Special Adviser to the Chairman, Office of Board Members, Board of Governors
Antulio N. Bomfim, Special Adviser to the Chairman, Office of Board Members, Board of Governors
Joseph W. Gruber and John M. Roberts, Special Advisers to the Board, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Eric M. Engen, Joshua Gallin, and Michael G. Palumbo, Senior Associate Directors, Division of Research and Statistics, Board of Governors; Christopher J. Erceg, Senior Associate Director, Division of International Finance, Board of Governors
Ellen E. Meade, Edward Nelson, and Joyce K. Zickler,3 Senior Advisers, Division of Monetary Affairs, Board of Governors; Jeremy B. Rudd, Senior Adviser, Division of Research and Statistics, Board of Governors
David López-Salido, Associate Director, Division of Monetary Affairs, Board of Governors; Stacey Tevlin, Associate Director, Division of Research and Statistics, Board of Governors
Eric C. Engstrom, Deputy Associate Director, Division of Monetary Affairs, and Adviser, Division of Research and Statistics, Board of Governors
Penelope A. Beattie,4 Assistant to the Secretary, Office of the Secretary, Board of Governors
Jeffrey Huther, Section Chief, Division of Monetary Affairs, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Benjamin K. Johannsen, Senior Economist, Division of Monetary Affairs, Board of Governors
Achilles Sangster II, Information Management Analyst, Division of Monetary Affairs, Board of Governors
Gregory L. Stefani, First Vice President, Federal Reserve Bank of Cleveland
Michael Dotsey and Geoffrey Tootell, Executive Vice Presidents, Federal Reserve Banks of Philadelphia and Boston, respectively
Edward S. Knotek II, Spencer Krane, and Mark L.J. Wright, Senior Vice Presidents, Federal Reserve Banks of Cleveland, Chicago, and Minneapolis, respectively
Jonathan P. McCarthy and Jonathan L. Willis, Vice Presidents, Federal Reserve Banks of New York and Kansas City, respectively
William Dupor, Assistant Vice President, Federal Reserve Bank of St. Louis
Jim Dolmas, Senior Research Economist, Federal Reserve Bank of Dallas
Developments in Financial Markets and Open Market Operations
The manager of the System Open Market Account (SOMA) discussed U.S. and global financial developments. In global markets, strains in emerging market economies (EMEs) contributed to volatility in currency and equity markets over the period. In addition, concerns about trade tensions between the United States and China were the focus of a great deal of attention among market participants. Such concerns led the Shanghai Composite index to drop as much as 8 percent at one point over the intermeeting period before recovering somewhat. The renminbi, however, was relatively stable, reportedly in part because investors believed that Chinese authorities were prepared to take measures to counter significant renminbi depreciation.
Regarding domestic financial markets, the manager noted that U.S. equity markets had posted strong gains, spurred by optimism regarding the U.S. economic outlook and rising corporate earnings. Longer-term Treasury yields moved higher, and market-based measures of the expected path of the funds rate edged up. According to the Open Market Desk's Survey of Primary Dealers and Survey of Market Participants, a 25 basis point increase in the target range for the federal funds rate at the September meeting was widely expected; moreover, investors appeared to be placing high odds on a further quarter-point policy firming at the December meeting. In U.S. money markets, the spread between the three-month London interbank offered rate and three-month overnight index swap (OIS) rates continued to narrow. The widening in that spread earlier in the year appeared to reflect an especially rapid run-up in Treasury bill supply. Treasury bill supply remained elevated and reportedly continued to contribute to upward pressure on overnight repurchase agreement (repo) rates. The relatively high level of repo rates was associated with continued very modest take-up in the Federal Reserve's overnight reverse repurchase agreement (ON RRP) operations. Elevated repo rates may also have contributed to the relatively tight spread between the interest on excess reserves (IOER) rate and the effective federal funds rate. That spread stood at 3 basis points over much of the period and seemed likely to narrow to 2 basis points in the near future. As yet, there were no signs that the upward pressure on the federal funds rate relative to the IOER rate was due to scarcity of aggregate reserves in the banking system. The level of reserves in the banking system temporarily dipped sharply in mid-September in connection with a sizable inflow of tax receipts to the Treasury's account at the Federal Reserve; however, that reduction in reserves in the banking system did not seem to have any effect on the federal funds market or the effective federal funds rate.
In reviewing Federal Reserve operations, the manager noted that market reaction to the ongoing reduction in the System's holdings of Treasury and agency securities had been muted to date. With the increase in the caps on redemptions to be implemented beginning in October, reinvestment of Treasury securities would occur almost exclusively in the middle month of each quarter in connection with the Treasury's midquarter refunding auctions. Under the baseline path for interest rates, the Federal Reserve's reinvestments of principal payments on agency mortgage-backed securities would likely fall to zero beginning in October; however, prepayments could rise somewhat above the redemption cap in some months in the future given the uncertainties surrounding prepayment projections.
By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account during the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the September 25-26 meeting indicated that labor market conditions continued to strengthen in recent months and that real gross domestic product (GDP) appeared to be rising at a strong rate in the third quarter, similar to its pace in the first half of the year. The flooding and damage from Hurricane Florence, which made landfall on September 14, seemed likely to have a modest, transitory effect on national economic growth in the second half of the year. Consumer price inflation, as measured by the 12-month percentage change in the price index for personal consumption expenditures (PCE), remained near 2 percent in July. Survey-based measures of longer-run inflation expectations were little changed on balance.
Total nonfarm payroll employment increased at a strong pace, on average, in July and August. The national unemployment rate decreased to 3.9 percent in July and remained at that level in August, while the labor force participation rate and the employment-to-population ratio moved down somewhat, on balance, over those two months. The unemployment rates for African Americans, Asians, and Hispanics in August were below their levels at the end of the previous expansion. The share of workers employed part time for economic reasons declined further to below its level in late 2007. The rate of private-sector job openings continued to be elevated in June and July, while the rate of quits moved higher on balance; initial claims for unemployment insurance benefits were at a historically low level in mid-September. Total labor compensation per hour in the nonfarm business sector increased 3.3 percent over the four quarters ending in the second quarter, and average hourly earnings for all employees rose 2.9 percent over the 12 months ending in August.
Industrial production expanded at a solid pace in July and August. Automakers' assembly schedules suggested that light motor vehicle production would be roughly flat in the fourth quarter, although broader indicators of manufacturing production, such as the new orders indexes from national and regional manufacturing surveys, pointed to further solid gains in factory output in the near term.
Real PCE appeared to be rising strongly in the third quarter. Retail sales increased somewhat in August, and the data for July were revised up to show a sizable gain. However, the rate of light motor vehicle sales moved down in July and August from the robust pace in the second quarter. The staff's preliminary assessment was that the consequences of Hurricane Florence would have a slight negative effect on aggregate real PCE growth in the third quarter but that spending would bounce back in the fourth quarter. More broadly, recent readings on key factors that influence consumer spending--including gains in employment, real disposable personal income, and households' net worth--continued to be supportive of solid real PCE growth in the near term. Moreover, consumer sentiment, as measured by the University of Michigan Surveys of Consumers, remained upbeat in August and early September.
Real residential investment looked to be declining further in the third quarter. Starts for new single-family homes and multifamily units were, on average, below their second-quarter rates in July and August. The issuance of building permits for both types of housing stepped down, on net, over those two months, which suggested that starts might move lower in coming months. Sales of both new and existing homes declined somewhat in July, and existing home sales were flat in August.
Growth in real private expenditures for business equipment and intellectual property appeared to be moderating a little in the third quarter following strong gains in expenditures in the first half of the year. Nominal shipments of nondefense capital goods excluding aircraft rose briskly in July, although spending for transportation equipment investment moved down in recent months. Forward-looking indicators of business equipment spending--such as increases in new and unfilled capital goods orders, along with upbeat readings on business sentiment from national and regional surveys--pointed to robust gains in equipment spending in the near term. Nominal business expenditures for nonresidential structures outside of the drilling and mining sector declined in July, and the number of crude oil and natural gas rigs in operation--an indicator of business spending for structures in the drilling and mining sector--held about steady in recent weeks.
Total real government purchases looked to be rising further in the third quarter. Nominal defense spending in July and August was consistent with continued increases in real federal purchases. Real expenditures by state and local governments appeared to be roughly flat, as state and local government payrolls decreased slightly in July and August, while nominal construction spending by these governments rose modestly in July.
The nominal U.S. international trade deficit widened in June and July, with declining exports and rising imports. The decline in exports largely reflected lower exports of capital goods, while greater imports of industrial supplies boosted overall imports. The available data suggested that the change in net exports would be a notable drag on real GDP growth in the third quarter.
Total U.S. consumer prices, as measured by the PCE price index, increased 2.3 percent over the 12 months ending in July. Core PCE price inflation, which excludes changes in consumer food and energy prices, was 2.0 percent over that same period. The consumer price index (CPI) rose 2.7 percent over the 12 months ending in August, while core CPI inflation was 2.2 percent. Recent readings on survey-based measures of longer-run inflation expectations--including those from the Michigan survey, the Survey of Professional Forecasters, and the Desk's Survey of Primary Dealers and Survey of Market Participants--were little changed on balance.
Foreign economic growth slowed in the second quarter, as a pickup in growth for the advanced foreign economies (AFEs) was more than offset by slower growth in the EMEs. Incoming indicators for the AFEs pointed to some moderation in the pace of growth in the third quarter, especially for Canada and Japan, while indicators for the EMEs suggested a pickup in many countries from the unusually slow pace of the second quarter. Foreign inflation had risen a bit recently, boosted by higher oil prices and, in the EMEs, higher food prices and recent currency depreciation.
Staff Review of the Financial Situation
Nominal Treasury yields increased over the intermeeting period, as market reactions to domestic economic data releases that were, on balance, slightly stronger than expected appeared to outweigh ongoing concerns about trade policy and negative developments in some EMEs. FOMC communications over the period were largely in line with expectations and elicited little market reaction. Domestic stock prices rose, buoyed in part by positive news about corporate earnings, while foreign equity indexes declined and the broad dollar index moved up. Financing conditions for nonfinancial businesses and households remained supportive of economic activity on balance.
Global financial markets were volatile during the inter-meeting period amid significant stress in some EMEs, ongoing focus on Brexit and on fiscal policy in Italy, and continued trade tensions. On balance, the dollar was little changed against AFE currencies and appreciated against EME currencies, as financial pressures on some EMEs weighed on broader risk sentiment. Turkey and Argentina experienced significant stress, and other countries with similar macroeconomic vulnerabilities also came under pressure. There were small outflows from dedicated emerging market funds, and EME sovereign bond spreads widened. Trade tensions weighed on foreign equity prices, as the United States continued its trade negotiations with Canada and placed additional tariffs on Chinese products.
FOMC communications elicited limited price reactions in financial markets over the intermeeting period, and market-implied measures of monetary policy expectations were little changed. The probability of an increase in the target range for the federal funds rate occurring at the September FOMC meeting, as implied by quotes on the federal funds futures contracts, increased to near certainty. The market-implied probability of an additional rate increase at the December FOMC meeting rose to about 75 percent. The market-implied path for the federal funds rate beyond 2018 increased a touch.
Evolving trade-related risks and other international developments reportedly weighed somewhat on market sentiment. However, domestic economic data releases came in a bit above market expectations, on net, with the stronger-than-expected average hourly earnings in the August employment report notably boosting Treasury yields. Nominal Treasury yields moved up over the intermeeting period, with the 10-year yield rising above 3 percent. Measures of inflation compensation derived from Treasury Inflation-Protected Securities over the next 5 years ticked up and were little changed 5 to 10 years ahead.
Broad U.S. equity price indexes increased about 4 percent since the August FOMC meeting, as positive news about corporate earnings and the domestic economy outweighed negative international developments. Stock prices increased for many sectors in the S&P 500 index, as the second-quarter earnings reports for firms that reported later in the earnings cycle came in strong. However, concerns about economic prospects abroad--particularly with respect to trade policy and China--appeared to weigh on stocks in the energy and basic materials sectors, which declined. Option-implied volatility on the S&P 500 index at the one-month horizon--the VIX--moved down but remained somewhat above the extremely low levels seen in late 2017. Spreads of investment- and speculative-grade corporate bond yields over comparablematurity Treasury yields narrowed a bit on net.
Short-term funding markets functioned smoothly over the intermeeting period. An elevated level of Treasury bills outstanding, following heavy issuance this summer, continued to put upward pressure on money market rates and reduced the attractiveness of the Federal Reserve's ON RRP facility. Take-up at the facility averaged $2.9 billion per day over the intermeeting period. Spreads of unsecured funding rates over comparable-maturity OIS rates continued to retrace the rise in spreads recorded earlier this year.
On balance, financing conditions for large nonfinancial firms remained accommodative in recent months. Demand for corporate borrowing appeared to have declined, in part because of strong earnings, rising interest rates, and seasonal factors. In July and August, gross issuance of corporate bonds was relatively weak, while commercial and industrial loan growth moderated. Meanwhile, the pace of equity issuance was solid in July but fell in August, reflecting seasonal factors. Financing conditions for small businesses remained favorable, and survey-based measures of credit demand among small business owners showed signs of strengthening, although demand was still weak relative to pre-crisis levels. Gross issuance of municipal bonds continued to be solid.
In the commercial real estate (CRE) sector, financing conditions also remained accommodative. Although CRE loan growth at banks moderated in July and August, issuance of commercial mortgage-backed securities (CMBS) was robust. CMBS spreads were little changed over the intermeeting period and stayed near their post-crisis lows.
Residential mortgage financing conditions remained accommodative on balance. For borrowers with low credit scores, however, conditions were still somewhat tight despite continued easing in credit availability. Refinancing activity continued to be muted in recent months, and the growth in purchase mortgage originations slowed a bit relative to year-earlier levels, in part reflecting the notable increase in mortgage rates earlier this year.
On net, financing conditions in consumer credit markets were little changed in recent months and remained largely supportive of growth in household spending. However, the supply of credit to consumers with sub-prime credit scores remained tight. More broadly, although interest rates for credit cards and auto loans continued to rise, consumer credit expanded at a solid pace.
Staff Economic Outlook
In the U.S. economic forecast prepared for the September FOMC meeting, real GDP was projected to increase in the second half of this year at a rate that was just a little slower than in the first half of the year. The staff's preliminary assessment was that the effects of Hurricane Florence would lead to a slight reduction in real GDP growth in the third quarter and a small addition to growth in the fourth quarter as economic activity returned to more normal levels and some disrupted activity was made up. Over the 2018-20 period, output was projected to rise at a rate above or at the staff's estimate of potential growth and then slow to a pace below it in 2021. The unemployment rate was projected to decline further below the staff's estimate of its longer-run natural rate but to bottom out in 2020 and begin to edge up in 2021. Relative to the forecast prepared for the previous meeting, the projection for real GDP growth this year was revised up a little, primarily in response to stronger-than-expected incoming data on household spending and business investment. The projection for the medium term was not materially changed, in part because the recently enacted tariffs on Chinese goods and the retaliatory actions of China were judged to have only a small net effect on U.S. real GDP growth over the next few years. In addition, the staff continued to anticipate that supply constraints might restrain output growth somewhat in the medium term. The unemployment rate was projected to be a little lower over the medium term than in the previous forecast, partly in response to the staff's assessment that the natural rate of unemployment was a bit lower than previously assumed. With labor market conditions already tight, the staff continued to assume that projected employment gains would manifest in smaller-than-usual downward pressure on the unemployment rate and in larger-than-usual upward pressure on the labor force participation rate.
The staff forecast for total PCE price inflation in 2018 was revised up slightly, mainly because of a faster-than-expected increase in consumer energy prices in the second half. The staff continued to project that total PCE inflation would remain near the Committee's 2 percent objective over the medium term and that core PCE price inflation would run slightly higher than total inflation over that period because of a projected decline in consumer energy prices in 2019 through 2021.
The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The staff also saw the risks to the forecasts for real GDP growth and the unemployment rate as balanced. On the upside, household spending and business investment could expand faster than the staff projected, supported in part by the tax cuts enacted last year. On the down-side, trade policies and foreign economic developments could move in directions that have significant negative effects on U.S. economic growth. Risks to the inflation projection also were seen as balanced. The upside risk that inflation could increase more than expected in an economy that was projected to move further above its potential was counterbalanced by the downside risk that longer-term inflation expectations may be lower than was assumed in the staff forecast.
Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, members of the Board of Governors and Federal Reserve Bank presidents submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2018 through 2021 and over the longer run, based on their individual assessments of the appropriate path for the federal funds rate. The longer-run projections represented each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These projections are described in the Summary of Economic Projections (SEP), which is an addendum to these minutes.
In their discussion of the economic situation and the outlook, meeting participants agreed that information received since the FOMC met in August indicated that the labor market continued to strengthen and that economic activity rose at a strong rate. Job gains were strong, on average, in recent months, and the unemployment rate stayed low. Recent data suggested that household spending and business fixed investment grew strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy remained near 2 percent. Indicators of longer-term inflation expectations were little changed on balance.
Meeting participants noted that a number of communities suffered devastating losses associated with Hurricane Florence. Despite the magnitude of the storm-related destruction, participants expected the imprint on the level of overall economic activity at the national level to be relatively modest, consistent with the experience following several previous major storms.
Based on recent readings on spending, employment, and inflation, almost all participants saw little change in their assessment of the economic outlook, although a few of them judged that recent data pointed to a pace of economic activity that was stronger than they had expected earlier this year. Participants noted a number of favorable economic factors that were supporting above-trend GDP growth; these included strong labor market conditions, stimulative federal tax and spending policies, accommodative financial conditions, solid household balance sheets, and continued high levels of household and business confidence. A number of participants observed that the stimulative effects of the changes in fiscal policy would likely diminish over the next several years. A couple of participants commented that recent strong growth in GDP may also be due in part to increases in the growth rate of the economy's productive capacity.
In their discussion of the household sector, participants generally characterized consumption growth as strong, and they judged that robust increases in disposable income, high levels of consumer confidence, and solid household balance sheets had contributed to the strength in spending. Several participants noted that the household saving rate had been revised up significantly in the most recent estimates published by the Bureau of Economic Activity. A few of those participants remarked that the upward revision in the saving rate could be viewed as evidence of the strength of the financial position of the household sector and could be a factor that would further support solid expansion of consumption spending. However, a couple of participants noted that the higher saving rate may not be a precursor to higher future consumption growth. For example, the higher saving rate may indicate some greater caution on the part of consumers, greater inequality of income and wealth--which would imply a lower aggregate propensity to spend--or changing consumer behavior in a low interest rate environment. With regard to residential investment, a few participants noted weak residential construction activity at the national or District level, which was attributed in part to higher interest rates or supply constraints.
Participants noted that business fixed investment had grown strongly so far this year. A few commented that recent changes in federal tax policy had likely bolstered investment spending. Contacts in most sectors remained optimistic about their business prospects, and surveys of manufacturing activity were broadly favorable. Despite this optimism, a number of contacts cited factors that were causing them to forego production or investment opportunities in some cases, including labor shortages and uncertainty regarding trade policy. In particular, tariffs on aluminum and steel were cited as reducing new investment in the energy sector. Contacts also suggested that firms were attempting to diversify the set of countries with which they trade--both imports and exports--as a result of uncertainty over tariff policy. Contacts in the agricultural industry reported that tariffs imposed by China had resulted in lower crop prices, further depressing incomes in that sector, although a new federal program was expected to offset some income losses.
In their discussion of labor markets, participants generally agreed that conditions continued to strengthen. Contacts in many Districts reported tight labor markets, with difficulty finding qualified workers. In some cases, firms were coping with labor shortages by increasing salaries, benefits, or workplace amenities in order to attract and retain workers. Other business contacts facing labor shortages were responding by increasing training for less-qualified workers. For the economy overall, participants generally agreed that, on balance, recent data suggested some acceleration in labor costs, but that wage growth remained moderate by historical standards, which was due in part to tepid productivity growth.
Regarding inflation, participants noted that on a 12-month basis, both overall inflation and inflation for items other than food and energy remained near 2 percent. Indicators of longer-term inflation expectations were little changed on balance. In general, participants viewed recent consumer price developments as consistent with their expectation that inflation was on a trajectory to achieve the Committee's symmetric 2 percent objective on a sustained basis. Several participants commented that inflation may modestly exceed 2 percent for a period of time. Reports from business contacts and surveys in a number of Districts also indicated some firming in inflationary pressures. In particular, some contacts indicated that input prices had been bolstered by strong demand or import tariffs. Moreover, several participants reported that firms in their Districts that were facing higher input prices because of tariffs perceived that they had an increased ability to raise the prices of their products. A couple of participants emphasized that because inflation had run below the Committee's 2 percent objective for the past several years, some measures of trend inflation or longer-term inflation expectations were below levels consistent with the 2 percent objective; these participants judged that a modest increase in inflation expectations would be important for achieving the inflation objective on a sustained basis.
In their discussion of developments in financial markets, a number of participants noted that financial conditions remained accommodative: The rise in interest rates and appreciation of the dollar over the intermeeting period had been offset by increases in equity prices, and broader measures continued to point to accommodative financial conditions. Some participants commented about the continued growth in leveraged loans, the loosening of terms and standards on these loans, or the growth of this activity in the nonbank sector as reasons to remain mindful of vulnerabilities and possible risks to financial stability.
Participants commented on a number of risks and uncertainties associated with their outlook for economic activity, the labor market, and inflation over the medium term. Participants generally agreed that risks to the outlook appeared roughly balanced. Some participants commented that trade policy developments remained a source of uncertainty for the outlook for domestic growth and inflation. The divergence between domestic and foreign economic growth prospects and monetary policies was cited as presenting a downside risk because of the potential for further strengthening of the U.S. dollar; some participants noted that financial stresses in a few EMEs could pose additional risks if they were to spread more broadly through the global economy and financial markets. With regard to upside risks, participants variously noted that high consumer confidence, accommodative financial conditions, or greater-than- expected effects of fiscal stimulus could lead to stronger-than-expected economic outcomes. Tightening resource utilization and an increasing ability of firms to raise output prices were cited as factors that could lead to higher-than-expected inflation, while lower-than-expected growth, a strengthening of the U.S. dollar, or inflation expectations persistently running below 2 percent were mentioned as risks that could lead to lower inflation.
A few participants offered perspectives on the term structure of interest rates and what a potential inversion of the yield curve might signal about economic prospects in light of the historical regularity that an inverted yield curve has often preceded the onset of recessions in the United States. On the one hand, an inverted yield curve could indicate an increased risk of recession; on the other hand, the low level of term premiums in recent years--reflecting, in part, central bank asset purchases--could temper the reliability of the slope of the yield curve as an indicator of future economic activity. In addition, the recent rise and possible further increases in longer-term interest rates might diminish the likelihood that the yield curve would invert in the near term.
In their consideration of monetary policy at this meeting, participants generally judged that the economy was evolving about as anticipated, with real economic activity rising at a strong rate, labor market conditions continuing to strengthen, and inflation near the Committee's objective. Based on their current assessments, all participants expressed the view that it would be appropriate for the Committee to continue its gradual approach to policy firming by raising the target range for the federal funds rate 25 basis points at this meeting. Almost all considered that it was also appropriate to revise the Committee's postmeeting statement in order to remove the language stating that "the stance of monetary policy remains accommodative." Participants discussed a number of reasons for removing the language at this time, noting that the Committee would not be signaling a change in the expected path for policy, particularly as the target range for the federal funds rate announced after the Committee's meeting would still be below all of the estimates of its longer-run level submitted in the September SEP. In addition, waiting until the target range for the federal funds rate had been increased further to remove the characterization of the policy stance as "accommodative" could convey a false sense of precision in light of the considerable uncertainty surrounding all estimates of the neutral federal funds rate.
With regard to the outlook for monetary policy beyond this meeting, participants generally anticipated that further gradual increases in the target range for the federal funds rate would most likely be consistent with a sustained economic expansion, strong labor market conditions, and inflation near 2 percent over the medium term. This gradual approach would balance the risk of tightening monetary policy too quickly, which could lead to an abrupt slowing in the economy and inflation moving below the Committee's objective, against the risk of moving too slowly, which could engender inflation persistently above the objective and possibly contribute to a buildup of financial imbalances.
Participants offered their views about how much additional policy firming would likely be required for the Committee to sustainably achieve its objectives of maximum employment and 2 percent inflation. A few participants expected that policy would need to become modestly restrictive for a time and a number judged that it would be necessary to temporarily raise the federal funds rate above their assessments of its longer-run level in order to reduce the risk of a sustained overshooting of the Committee's 2 percent inflation objective or the risk posed by significant financial imbalances. A couple of participants indicated that they would not favor adopting a restrictive policy stance in the absence of clear signs of an overheating economy and rising inflation.
Participants reaffirmed that adjustments to the path for the policy rate would depend on their assessments of the evolution of the economic outlook and risks to the outlook relative to the Committee's statutory objectives. Many of them noted that future adjustments to the target range for the federal funds rate will depend on the evaluation of incoming information and its implications for the economic outlook. In this context, estimates of the level of the neutral federal funds rate would be only one among many factors that the Committee would consider in making its policy decisions.
Building on comments expressed at previous meetings, a couple of participants indicated that it would be desirable to assess the Committee's strategic approach to the conduct of policy and to hold a periodic and systematic review of the strengths and weaknesses of the Committee's monetary policy framework.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the Committee met in August indicated that the labor market had continued to strengthen and that economic activity had been rising at a strong rate. Job gains had been strong, on average, in recent months, and the unemployment rate had stayed low. Household spending and business fixed investment had grown strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy remained near 2 percent. Indicators of longer-term inflation expectations were little changed on balance.
Members viewed the recent data as consistent with an economy that was evolving about as they had expected. Consequently, members expected that further gradual increases in the target range for the federal funds rate would be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term. Members continued to judge that the risks to the economic outlook remained roughly balanced.
After assessing current conditions and the outlook for economic activity, the labor market, and inflation, members voted to raise the target range for the federal funds rate to 2 to 2-1/4 percent. Members agreed that the timing and size of future adjustments to the target range for the federal funds rate would depend on their assessment of realized and expected economic conditions relative to the Committee's maximum-employment objective and symmetric 2 percent inflation objective. They reiterated that this assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
With regard to the postmeeting statement, members agreed to remove the sentence indicating that "the stance of monetary policy remains accommodative." Members made various points regarding the removal of the sentence from the statement. These points included that the characterization of the stance of policy as "accommodative" had provided useful forward guidance in the early stages of the policy normalization process, that this characterization was no longer providing meaningful information in light of uncertainty surrounding the level of the neutral policy rate, that it was appropriate to remove the characterization of the stance from the Committee's statement before the target range for the federal funds rate moved closer to the range of estimates of the neutral policy rate, and that the Committee's earlier communications had helped prepare the public for this change.
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 SOMA in accordance with the following domestic policy directive, to be released at 2:00 p.m.:
"Effective September 27, 2018, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 2 to 2-1/4 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 2.00 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during September that exceeds $24 billion, and to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during September that exceeds $16 billion. Effective in October, the Committee directs the Desk to roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during each calendar month that exceeds $30 billion, and to reinvest in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $20 billion. Small deviations from these amounts for operational reasons are acceptable.
The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."
The vote also encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in August indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Household spending and business fixed investment have grown strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 2 to 2-1/4 percent.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments."
Voting for this action: Jerome H. Powell, John C. Williams, Thomas I. Barkin, Raphael W. Bostic, Lael Brainard, Richard H. Clarida, Esther L. George, Loretta J. Mester, and Randal K. Quarles.
Voting against this action: None.
Ms. George voted as alternate member at this meeting.
To support the Committee's decision to raise the target range for the federal funds rate, the Board of Governors voted unanimously to raise the interest rates on required and excess reserve balances to 2.20 percent, effective September 27, 2018. The Board of Governors also voted unanimously to approve a 1/4 percentage point increase in the primary credit rate (discount rate) to 2.75 percent, effective September 27, 2018.5
Following the vote, Chairman Powell noted that he had asked Governor Clarida to serve as chair of a subcommittee on communications issues. The other members of the subcommittee will include Governor Brainard, President Kaplan, and President Rosengren. The role of the subcommittee will be to help prioritize and frame communications issues for the Committee.
It was agreed that the next meeting of the Committee would be held on Wednesday-Thursday, November 7-8, 2018. The meeting adjourned at 10:00 a.m. on September 26, 2018.
Notation Vote
By notation vote completed on August 21, 2018, the Committee unanimously approved the minutes of the Committee meeting held on July 31-August 1, 2018.
_____________________________
James A. Clouse
Secretary
1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes. Return to text
2. Attended through the discussion of developments in financial markets and open market operations. Return to text
3. Attended opening remarks for Tuesday session only. Return to text
4. Attended Tuesday session only.* Return to text
5. In taking this action, the Board approved requests submitted by the boards of directors of the Federal Reserve Banks of Boston, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Kansas City, Dallas, and San Francisco. This vote also encompassed approval by the Board of Governors of the establishment of a 2.75 percent primary credit rate by the remaining Federal Reserve Banks, effective on the later of September 27, 2018, and the date such Reserve Bank informed the Secretary of the Board of such a request. (Secretary's note: Subsequently, the Federal Reserve Bank of New York and Minneapolis were informed by the Secretary of the Board of the Board's approval of their establishment of a primary credit rate of 2.75 percent, effective September 27, 2018.) The second vote of the Board also encompassed approval of the establishment of the interest rates for secondary and seasonal credit under the existing formulas for computing such rates. Return to text
* The HTML version of the September Minutes inadvertently included text from footnote 3 in footnote 4. Footnote 4 has been corrected. |
2018-08-01T00:00:00 | 2018-08-22 | Minute | Minutes of the Federal Open Market Committee
July 31-August 1, 2018
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, July 31, 2018, at 10:00 a.m. and continued on Wednesday, August 1, 2018, at 9:00 a.m.1
PRESENT:
Jerome H. Powell, Chairman
John C. Williams, Vice Chairman
Thomas I. Barkin
Raphael W. Bostic
Lael Brainard
Loretta J. Mester
Randal K. Quarles
James Bullard, Charles L. Evans, Esther L. George, Eric Rosengren, and Michael Strine, Alternate Members of the Federal Open Market Committee
Patrick Harker, Robert S. Kaplan, and Neel Kashkari, Presidents of the Federal Reserve Banks of Philadelphia, Dallas, and Minneapolis, respectively
Mark A. Gould, First Vice President, Federal Reserve Bank of San Francisco
James A. Clouse, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Mark E. Van Der Weide, General Counsel
Michael Held, Deputy General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
Kartik B. Athreya, Thomas A. Connors, Mary Daly, David E. Lebow, Trevor A. Reeve, Ellis W. Tallman, William Wascher, and Beth Anne Wilson, Associate Economist
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Ann E. Misback, Secretary, Office of the Secretary, Board of Governors
Matthew J. Eichner,2 Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors; Michael S. Gibson, Director, Division of Supervision and Regulation, Board of Governors; Andreas Lehnert, Director, Division of Financial Stability, Board of Governors
Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board of Governors
Jon Faust, Senior Special Adviser to the Chairman, Office of Board Members, Board of Governors
Antulio N. Bomfim, Special Adviser to the Chairman, Office of Board Members, Board of Governors
Joseph W. Gruber and John M. Roberts, Special Advisers to the Board, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Christopher J. Erceg, Senior Associate Director, Division of International Finance, Board of Governors; Gretchen C. Weinbach, Senior Associate Director, Division of Monetary Affairs, Board of Governors
Ellen E. Meade, Edward Nelson, and Robert J. Tetlow, Senior Advisers, Division of Monetary Affairs, Board of Governors; Jeremy B. Rudd, Senior Adviser, Division of Research and Statistics, Board of Governors
John J. Stevens, Associate Director, Division of Research and Statistics, Board of Governors
Luca Guerrieri, Deputy Associate Director, Division of Financial Stability, Board of Governors
Glenn Follette and Shane M. Sherlund, Assistant Directors, Division of Research and Statistics, Board of Governors; Christopher J. Gust, Assistant Director, Division of Monetary Affairs, Board of Governors
Penelope A. Beattie,3 Assistant to the Secretary, Office of the Secretary, Board of Governors
Etienne Gagnon,4 Section Chief, Division of Monetary Affairs, Board of Governors; Matthias Paustian,4 Section Chief, Division of Research and Statistics, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Hess T. Chung,4 Group Manager, Division of Research and Statistics, Board of Governors
Andrea Ajello, Edward Herbst, and Bernd Schlusche,4 Principal Economists, Division of Monetary Affairs, Board of Governors
Randall A. Williams, Senior Information Manager, Division of Monetary Affairs, Board of Governors
James M. Trevino,4 Technology Analyst, Division of Monetary Affairs, Board of Governors
Michael Dotsey, Beverly Hirtle, and Christopher J. Waller, Executive Vice Presidents, Federal Reserve Banks of Philadelphia, New York, and St. Louis, respectively
Anna Paulson, Senior Vice President, Federal Reserve Bank of Chicago
Joe Peek, Vice President, Federal Reserve Bank of Boston
Karel Mertens, Senior Economic Policy Advisor, Federal Reserve Bank of Dallas
A. Lee Smith, Senior Economist, Federal Reserve Bank of Kansas City
Brent Meyer, Policy Advisor and Economist, Federal Reserve Bank of Atlanta
Cristina Arellano, Monetary Advisor, Federal Reserve Bank of Minneapolis
Monetary Policy Options at the Effective Lower Bound
The staff provided a briefing that summarized its analysis of the extent to which some of the Committee's monetary policy tools could provide adequate policy accommodation if, in future economic downturns, the policy rate were again to become constrained by the effective lower bound (ELB).5 The staff examined simulations from the staff's FRB/US model and various other economic models to assess the likelihood of the policy rate returning to the ELB and to evaluate how much additional policy accommodation could be delivered by the current toolkit. This toolkit included threshold-based forward-guidance policies, in which the Committee communicates that the federal funds rate will remain at the ELB until either inflation or the unemployment rate reaches a certain threshold, and balance sheet policies, involving increases in the size or duration of the Federal Reserve's asset holdings.
The staff's analysis indicated that under various policy rules, including those prescribing aggressive reductions in the federal funds rate in response to adverse economic shocks, there was a meaningful risk that the ELB could bind sometime during the next decade. That analysis also implied that threshold-based forward guidance and balance sheet actions could provide additional accommodation that could help support economic activity and mitigate disinflationary pressures in these episodes. In the model simulations, because of unanticipated shocks and lags in the transmission of the effects of monetary policy actions on economic activity and inflation, the effectiveness of monetary policy in general, including forward-guidance and balance sheet policies, was limited in mitigating the initial downturn in the economy. The staff noted that there was considerable uncertainty surrounding the estimated effects of those policies on the economy; in addition, estimates of how frequently the ELB could bind in the future differed across the models that the staff examined.
In the discussion that followed the staff's briefing, participants generally agreed that their current toolkit could provide significant accommodation but expressed concern about the potential limits on policy effectiveness stemming from the ELB. They viewed it as a matter of prudent planning to evaluate potential policy options in advance of such ELB events. Many participants commented on the monetary policy implications of the apparent secular decline in neutral real interest rates. That decline was viewed as likely driven by various factors, including slower trend growth of the labor force and productivity as well as increased demand for safe assets. In such circumstances, those participants saw monetary policy as having less scope than in the past to reduce the federal funds rate in response to negative shocks. Accordingly, in their view, spells at the ELB could become more frequent and protracted than in the past, consistent with the staff's analysis. Moreover, the secular decline in interest rates was a global phenomenon, and a couple of participants emphasized that this decline increased the likelihood that the ELB could bind simultaneously in a number of countries. A few other participants raised the concern that frequent or extended ELB episodes could result in expectations for inflation that were below the Committee's symmetric 2 percent objective, further limiting the scope for reductions in the federal funds rate to serve as a buffer for the economy and increasing the likelihood of ELB episodes. Fiscal policy was viewed as a potentially important tool in addressing a future economic downturn in which monetary policy was constrained by the ELB; however, countercyclical fiscal policy actions in the United States may be constrained by the high and rising level of federal government debt. A couple of participants saw macroprudential and regulatory policies as tools that could be used to mitigate the risk of financial imbalances inducing an economic downturn in which the ELB constrained the federal funds rate.
Participants generally agreed that both forward guidance and balance sheet actions would be effective tools to use if the federal funds rate were to become constrained by the ELB. In the Addendum to the Policy Normalization Principles and Plans statement issued in June 2017, the Committee indicated that it would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate. However, participants acknowledged that there may be limits to the effectiveness of these tools in addressing an ELB episode. They also emphasized that there was considerable uncertainty about the economic effects of these tools. Consistent with that view, a few participants noted that economic researchers had not yet reached a consensus about the effectiveness of unconventional policies. A number of participants indicated that there might be significant costs associated with the use of unconventional policies, and that these costs might limit, in particular, the extent to which the Committee should engage in large-scale asset purchases.
Participants discussed the prominent role that previous communications about forward guidance and balance sheet actions, in conjunction with those policy measures, had in shaping public expectations about the potential future use of these tools and in determining their effectiveness. In general, advance communications about these policies were seen as important in reinforcing public understanding of the Committee's commitment to achieving its dual-mandate objectives. However, several participants cautioned against being too specific about how the Committee would deploy such tools. In particular, it was difficult to anticipate the forces that might push the economy into a recession, and thus preserving some flexibility in responding to an economic downturn could be appropriate. Moreover, although making multiyear commitments regarding asset purchases or the future path of the federal funds rate could enhance the effectiveness of these policies, such commitments could unduly constrain the choices of the Committee in the future.
While the Committee's current toolkit was judged to be effective, participants agreed, as a matter of prudent planning, to discuss their policy options further and to broaden the discussion to include the evaluation of potential alternative policy strategies for addressing the ELB. Building on their discussions at previous meetings, participants suggested that a number of possible alternatives might be worth consideration and agreed to return to this topic at future meetings. Several participants indicated that it would be desirable to hold periodic and systematic reviews in which the Committee assessed the strengths and weaknesses of its current monetary policy framework.
Developments in Financial Markets and Open Market Operations
The manager of the System Open Market Account (SOMA) provided a summary of developments in domestic and global financial markets over the intermeeting period. Asset prices were influenced by a number of factors, including reports concerning trade tensions among the United States and its major trading partners, foreign monetary policy developments, and data pointing to strong growth momentum in the United States. Escalating trade tensions between China and the United States prompted notable market moves, particularly in foreign exchange markets. News on an agreement between the United States and the European Union to continue talks to resolve their trade disputes provided some support for global equity prices. The manager summarized recent policy announcements by the European Central Bank (ECB) and the Bank of Japan (BOJ). European yields moved lower following a revision of the ECB's forward guidance at its June meeting concerning asset purchases and the path of short-term rates. The Japanese yield curve steepened following reports that the BOJ may facilitate an increase in longer-term interest rates. At its July meeting, the BOJ announced a number of changes with respect to forward guidance on its policy outlook, including its intention to keep interest rates low for an extended period. Meanwhile, expectations concerning the path of monetary policy in the United States were little changed over the intermeeting period. Futures quotes indicated that market participants placed high odds on a further quarter-point firming in the federal funds rate at the September FOMC meeting. Responses to the Open Market Desk's Survey of Primary Dealers and Survey of Market Participants indicated that concerns about trade tensions had not affected the outlook for U.S. monetary policy.
The deputy manager followed with a discussion of money markets and open market operations. Money market rates had moved up in line with the 20 basis point increase in the interest on excess reserves (IOER) rate at the June meeting. Over the days following the June FOMC meeting, the effective federal funds rate (EFFR) moved up relative to the IOER rate, reportedly reflecting some special factors in the federal funds market, including increased demand for overnight funding by banks in connection with liquidity regulations and a pullback by Federal Home Loan Banks in their lending in the federal funds market. These developments proved temporary, and the EFFR subsequently returned to a level about 4 basis points below the IOER rate. The deputy manager also discussed the Desk's plans for small-value purchases of agency mortgage-backed securities (MBS). The staff projected that principal payments from the Federal Reserve's holdings of agency MBS would fall below the FOMC's monthly redemption cap beginning in October. If principal payments followed this anticipated trajectory, the Desk planned to begin conducting monthly small-value purchases of agency MBS at that time to maintain operational readiness. The deputy manager also discussed the Federal Housing Finance Agency's Single Security Initiative, under which Uniform Mortgage-Backed Securities (UMBS) would be issued by both Fannie Mae and Freddie Mac beginning in June 2019. The Desk planned to develop the capability to conduct UMBS transactions and, to more efficiently manage the portfolio, convert some portion of the SOMA's existing agency MBS holdings to UMBS where appropriate.
By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account during the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the July 31-August 1 meeting indicated that labor market conditions continued to strengthen in recent months and that real gross domestic product (GDP) rose at a strong rate in the first half of the year. Consumer price inflation, as measured by the 12âmonth percentage change in the price index for personal consumption expenditures (PCE), remained near 2 percent in June. Surveyâbased measures of longer-run inflation expectations were little changed on balance.
Total nonfarm payroll employment expanded at a strong pace again in June. The national unemployment rate moved up to 4.0 percent, but the labor force participation rate rose by a similar amount, leaving the employment-to-population ratio unchanged from May. The three-month moving averages of the unemployment rates for African Americans, Asians, and Hispanics were each at or below the lows achieved during the previous expansion. The share of workers employed part time for economic reasons edged down to its lowest level since late 2007. The rate of private-sector job openings ticked down in May but remained elevated, while the rate of quits moved higher; initial claims for unemployment insurance benefits continued to be low through mid-July.
Recent readings showed that increases in hourly labor compensation stepped up modestly over the past year. The employment cost index for private workers increased 2.9 percent over the 12 months ending in June (compared with 2.4 percent over the same 12 months a year earlier), and average hourly earnings for all employees rose 2.7 percent over that period (compared with 2.5 percent over the same 12 months a year earlier). (Data on compensation per hour that reflected the comprehensive revision of the national income and product accounts by the Bureau of Economic Analysis (BEA) were not available at the time of the meeting.)
Total industrial production was little changed, on net, from April to June despite solid increases in the output of the mining sector. Over the first half of the year, manufacturing production rose at a modest pace. Automakers' assembly schedules suggested a sizable increase in light motor vehicle production in the third quarter, and broader indicators of manufacturing production, such as the new orders indexes from national and regional manufacturing surveys, pointed to solid gains in factory output in the near term.
Real PCE rose briskly in the second quarter after a modest gain in the first quarter. Light motor vehicle sales maintained a robust pace in June, and indicators of vehicle demand were mixed but generally favorable. More broadly, recent readings on key factors that influence consumer spending--including gains in employment, real disposable personal income, and households' net worth--continued to be supportive of solid real PCE growth in the near term. Consumer sentiment, as measured by the University of Michigan Surveys of Consumers, remained upbeat in June and July.
Residential investment declined again in the second quarter. Starts for new single-family homes were little changed, on average, in May and June, but starts of multifamily units declined on net. The issuance of building permits for both types of housing was lower in the second quarter than in the first quarter, which suggested that starts might move lower in coming months. Sales of existing homes edged down in May and June, while sales of new homes moved up on balance.
Real private expenditures for business equipment and intellectual property rose at a moderate pace in the second quarter after a strong gain in the first quarter. Nominal shipments of nondefense capital goods excluding aircraft rose in May and June, and forward-looking indicators of business equipment spending--such as the backlog of unfilled capital goods orders, along with upbeat readings on business sentiment from national and regional surveys--continued to point to robust gains in equipment spending in the near term. Real business expenditures for nonresidential structures expanded at a solid pace again in the second quarter. However, the number of crude oil and natural gas rigs in operation--an indicator of business spending for structures in the drilling and mining sector--decreased slightly in recent weeks.
Total real government purchases rose at a faster rate in the second quarter than in the first. Real federal defense and nondefense purchases both increased in the second quarter. Real purchases by state and local governments also moved higher; state and local government payrolls and construction spending by those governments increased in the second quarter.
The nominal U.S. international trade deficit narrowed in May, as exports, led by agricultural products (particularly soybeans) and capital goods, increased strongly and imports increased only modestly. In June, however, advance data suggested that nominal goods exports fell and imports rose. All told, the BEA estimates that net exports made a positive contribution of about 1 percentage point to real GDP growth in the second quarter after a near-zero contribution in the first.
Total U.S. consumer prices, as measured by the PCE price index, increased 2.2 percent over the 12 months ending in June. Core PCE price inflation, which excludes changes in consumer food and energy prices, was 1.9 percent over that same period. The consumer price index (CPI) rose 2.9 percent over the 12 months ending in June, while core CPI inflation was 2.3 percent. Recent readings on survey-based measures of longer-run inflation expectations--including those from the Michigan survey and the Desk's Survey of Primary Dealers and Survey of Market Participants--were little changed on balance.
Incoming data suggested that foreign economic activity expanded at a moderate pace in the second quarter. Monthly indicators pointed to a pickup in the pace of economic activity in most advanced foreign economies (AFEs) following a temporary dip in the first quarter. However, real GDP growth remained moderate in the euro area and appeared to have slowed notably in many emerging market economies (EMEs), especially Mexico, from an unusually strong start to the year. Foreign inflation fell in the second quarter, largely reflecting lower retail energy and food price inflation. Underlying inflation pressures in most foreign economies, especially in some AFEs, remained subdued.
Staff Review of the Financial Situation
Concerns regarding international trade policy weighed on market sentiment at times over the intermeeting period, prompting notable declines in some foreign equity markets but leaving only a modest imprint on domestic asset prices on net. Meanwhile, FOMC communications were viewed by market participants as slightly less accommodative than expected, and domestic economic data releases were seen as mixed. On balance, market-based measures of the expected path of the federal funds rate through the end of 2019 edged up slightly. Yields on medium- and longer-term nominal Treasury securities were little changed. The broad dollar index moved up. Financing conditions for nonfinancial businesses and households remained supportive of economic activity on balance.
Although the reactions of asset prices to FOMC communications during the period were generally modest, market participants reportedly interpreted the June FOMC statement and Summary of Economic Projections (SEP) as somewhat less accommodative than expected. The probability of an increase in the target range for the federal funds rate occurring at the August FOMC meeting, as implied by quotes on federal funds futures contracts, remained close to zero; the probability of an increase at the September FOMC meeting rose to about 90 percent by the end of the intermeeting period. Levels of the federal funds rate at the end of 2019 and 2020 implied by overnight index swap (OIS) rates edged up slightly on net.
The nominal Treasury yield curve flattened somewhat during the intermeeting period. Measures of inflation compensation derived from Treasury Inflation-Protected Securities were little changed on net.
Concerns about international trade disputes led to a slight decline in sentiment toward some domestic risky assets early in the period, but sentiment was buoyed later by positive corporate earnings releases for the second quarter. Broad U.S. equity price indexes displayed mixed results since the June FOMC meeting. Option-implied volatility on the S&P 500 index at the one-month horizon--the VIX--was little changed, on net, and remained only a bit above the very low levels that prevailed before early February. Over the intermeeting period, spreads of yields on nonfinancial corporate bonds over those of comparable-maturity Treasury securities were little changed, on net, for both investment- and speculative-grade firms. These spreads remained low by historical standards.
Short-term funding markets functioned smoothly, and spreads of unsecured rates over comparable-maturity OIS rates continued to narrow during the intermeeting period. After the June FOMC meeting, the EFFR rose around 20 basis points, in line with the increase in the IOER rate, and traded well within the target range throughout the period.
The dollar appreciated against most currencies, with the notable exception of the Mexican peso, which appreciated on some easing of investor concerns around prospective economic policies of the newly elected government. Escalating trade tensions contributed to an unusually sharp depreciation of the Chinese renminbi. Trade tensions also drove foreign equity prices lower, but there was a modest reversal late in the intermeeting period following an agreement between the United States and the European Union to hold off on tariff increases pending further negotiations. On net, equity prices were little changed in the AFEs, while they declined in the EMEs, led largely by a steep drop in China. Outflows from dedicated emerging market funds slowed, and EME sovereign bond spreads narrowed slightly.
On balance, longer-term bond yields in the AFEs declined slightly over the intermeeting period. ECB communications following its June meeting were perceived as more accommodative than expected and led to a noticeable decline in market-based measures of policy rate expectations. The BOJ issued revised forward guidance at its July meeting indicating that it intends to maintain current low short- and long-term interest rates for an extended period. Finally, the Bank of England held its policy rate steady at its June meeting, but U.K. yields declined slightly amid ongoing Brexit-related concerns as well as lower-than-expected inflation data.
Financing conditions for nonfinancial corporations continued to be favorable over the intermeeting period. Gross issuance of corporate bonds and institutional leveraged loans picked up in May and stayed strong in June, with the rise in corporate bond issuance concentrated in the investment-grade segment of the market. Meanwhile, the volume of equity issuance remained robust.
Growth of outstanding commercial and industrial (C&I) loans held by banks was strong, on average, in June. Respondents to the June Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) reported that their institutions had eased standards and terms on C&I loans in the second quarter, most often citing increased competition from other lenders and increased ease of transacting in the secondary market as the reasons for doing so. Although some signs of deterioration emerged over the intermeeting period, the credit quality of nonfinancial corporations continued to be solid overall. The ratio of aggregate debt to assets in this sector stayed near multidecade highs. Gross issuance of municipal bonds in June was robust, continuing to increase from its slow start to the year.
Financing conditions for commercial real estate (CRE) remained accommodative. CRE loans at banks maintained solid growth over the past several quarters, with growth shared across all three major CRE loan categories. On a weighted basis across all major CRE loan categories, respondents to the June SLOOS reported that standards and demand for CRE loans continued to be unchanged, on the whole, over the second quarter. Interest rate spreads on commercial mortgage-backed securities (CMBS) were little changed over the intermeeting period and remained near their post-crisis lows, while issuance of non-agency and agency CMBS maintained a solid pace in the second quarter.
Most borrowers in the residential mortgage market continued to face accommodative financing conditions. For borrowers with low credit scores, credit conditions continued to ease but stayed tight overall. Growth in home-purchase mortgages slowed a bit, and refinancing activity continued to be muted over the past year, with both developments partly reflecting the rise in mortgage rates earlier this year. Relative to the June FOMC meeting, interest rates on 30-year conforming mortgages and yields on agency MBS were little changed.
Financing conditions in consumer credit markets were little changed so far this year, on balance, and remained largely supportive of growth in household spending. Growth in consumer credit picked up in May from the more moderate pace seen earlier this year. Despite rising interest rates, financing rates remained low compared with historical levels, and recent household surveys indicated that consumers' assessments of buying conditions for autos and other expensive durable goods were generally positive. Credit supply conditions also continued to be largely supportive of spending. A moderate net fraction of July SLOOS respondents reported easing standards on auto loans over the previous three months after several quarters in which banks had reported tightening standards. However, a significant net fraction of banks reportedly continued to tighten standards for credit card accounts.
The staff provided its latest report on potential risks to financial stability; the report again characterized the financial vulnerabilities of the U.S. financial system as moderate on balance. This overall assessment incorporated the staff's judgment that vulnerabilities associated with asset valuation pressures continued to be elevated, with no major asset class exhibiting valuations below their historical midpoints. Additionally, the staff judged vulnerabilities from financial-sector leverage and maturity and liquidity transformation to be low, vulnerabilities from household leverage as being in the low-to-moderate range, and vulnerabilities from leverage in the nonfinancial business sector as elevated.
Staff Economic Outlook
In the U.S. economic forecast prepared for this FOMC meeting, the staff continued to project that the economy would expand at an above-trend pace. Real GDP was forecast to increase in the second half of this year at a pace that was just a little slower than in the first half of the year. Over the 2018-20 period, output was projected to rise further above the staff's estimate of potential output, and the unemployment rate was projected to decline further below the staff's estimate of the longer-run natural rate. However, with labor market conditions already tight, the staff continued to assume that the projected decline in the unemployment rate will be attenuated by a greater-than-usual cyclical improvement in the labor force participation rate. Relative to the forecast prepared for the June meeting, the projection for real GDP growth was revised up a little, primarily in response to stronger incoming data on household spending. In addition, the staff continued to anticipate that supply constraints might restrain output growth somewhat in the medium term. The unemployment rate was projected to be a little higher over the next few quarters than in the previous forecast, but it was essentially unrevised thereafter.
The staff forecast for total PCE price inflation in 2018 was revised down a little, mainly because of a slower-than-expected increase in consumer energy prices in the second quarter and a downward revision to the forecast for energy price inflation in the second half of this year. The staff continued to project that total PCE inflation would remain near the Committee's 2 percent objective over the medium term and that core PCE price inflation would run slightly higher than total inflation over that period because of a projected decline in consumer energy prices in 2019 and 2020.
The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The staff saw the risks to the forecasts for real GDP growth and the unemployment rate as balanced. On the upside, household spending and business investment could expand faster over the next few years than the staff projected, supported in part by the tax cuts enacted last year. On the downside, trade policies could move in a direction that would have significant negative effects on economic growth. Another possibility was that recent fiscal policy actions could produce less of a boost to aggregate demand than assumed in the baseline projection, as the current tightness of resource utilization may result in smaller multiplier effects than would be typical at other points in the business cycle. Risks to the inflation projection also were seen as balanced. The upside risk that inflation could increase more than expected in an economy that was projected to move further above its potential was counterbalanced by the downside risk that longer-term inflation expectations may be lower than was assumed in the staff forecast.
Participants' Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants agreed that information received since the FOMC met in June indicated that the labor market had continued to strengthen and that economic activity had been rising at a strong rate. Job gains had been strong, on average, in recent months, and the unemployment rate had stayed low. Household spending and business fixed investment had grown strongly. On a 12-month basis, both overall inflation and core inflation, which excludes changes in food and energy prices, had remained near 2 percent. Indicators of longer-term inflation expectations were little changed, on balance.
Participants generally noted that economic growth in the second quarter had been strong; incoming data indicated considerable momentum in spending by households and businesses. Several participants stressed the possibility that real GDP growth in the second quarter may have been boosted by transitory factors, including an outsized increase in U.S. exports. For the second half of the year, participants generally expected that GDP growth would likely slow from its second-quarter rate but would still exceed that of potential output. Participants noted a number of favorable economic factors that were supporting above-trend GDP growth; these included a strong labor market, stimulative federal tax and spending policies, accommodative financial conditions, and continued high levels of household and business confidence. Participants generally viewed the risks to the economic outlook as roughly balanced.
Reports from business contacts confirmed a robust pace of expansion in several sectors of the economy, including energy, manufacturing, and services. Crude oil production was reported as having grown rapidly. In contrast to other sectors, residential construction activity appeared to have softened somewhat, possibly reflecting declining home affordability, higher mortgage rates, scarcity of available lots in certain cities, and delays in building approvals. However, a couple of participants reported vibrancy in industrial and multifamily construction activity. Business contacts in various sectors had cited labor shortages and other supply constraints as impediments to production. Furthermore, recent tariff increases had put upward pressure on input prices. Business contacts in a few Districts reported that uncertainty regarding trade policy had led to some reductions or delays in their investment spending. Nonetheless, a number of participants indicated that most businesses concerned about trade disputes had not yet cut back their capital expenditures or hiring but might do so if trade tensions were not resolved soon. Several participants observed that the agricultural sector had been adversely affected by significant declines in crop and livestock prices over the intermeeting period. A couple of participants noted that this development likely partly flowed from trade tensions.
Participants agreed that labor market conditions had strengthened further over the intermeeting period. Payrolls had grown strongly in June, and labor market tightness was reflected in recent readings on rates of private-sector job openings and quits and on job-to-job switching by workers. Although the unemployment rate increased slightly in June, this increase was accompanied by an uptick in the labor force participation rate.
Many participants commented on the fact that measures of aggregate nominal wage growth had so far picked up only modestly. Among the factors cited as containing the pickup in wage growth were low trend productivity growth, lags in the response of nominal wage growth to resource pressures, and improvements in the terms of employment that were not recorded in the wage data. Alternatively, the recent pace of nominal wage growth might indicate continued slack in the labor market. However, some participants expected a pickup in aggregate nominal wage growth to occur before long, with a number of participants reporting that wage pressures in their Districts were rising or that firms now exhibited greater willingness to grant wage increases.
Participants noted that both overall inflation and inflation for items other than food and energy remained near 2 percent on a 12-month basis. A few participants expressed increased confidence that the recent return of inflation to near the Committee's longer-term 2 percent objective would be sustained. Several participants commented that increases in the prices of particular goods, such as those induced by the tariff increases, would likely be one source of short-term upward pressure on the inflation rate, although offsetting influences--including the negative effects that trade developments were having on agricultural prices--were also noted. Reports from several Districts suggested that firms had greater scope than in the recent past to raise prices in response to strong demand or increases in input costs, including those associated with tariff increases and recent rises in fuel and freight expenses. Many participants anticipated that, over the medium term, high levels of resource utilization and stable inflation expectations would keep inflation near 2 percent. However, some participants observed that inflation in recent years had shown only a weak connection to measures of resource pressures or indicated that they would like to see further evidence that measures of underlying inflation or readings on inflation expectations were on course to attain levels consistent with sustained achievement of the Committee's symmetric 2 percent inflation objective. Although a few participants observed that the trimmed mean measure of inflation calculated by the Federal Reserve Bank of Dallas was still below 2 percent, a couple noted forecasts that this measure would reach 2 percent by the end of the year. Some participants raised the concern that a prolonged period in which the economy operated beyond potential could give rise to inflationary pressures or to financial imbalances that could eventually trigger an economic downturn.
Participants commented on a number of risks and uncertainties associated with their outlook for economic activity, the labor market, and inflation over the medium term. They generally continued to see fiscal policy and the strengthening of the labor market as supportive of economic growth in the near term. Some noted larger or more persistent positive effects of these factors as an upside risk to the outlook. A few participants indicated, however, that a faster-than-expected fading of the fiscal impetus or a greater-than-anticipated subsequent fiscal tightening constituted a downside risk. In addition, all participants pointed to ongoing trade disagreements and proposed trade measures as an important source of uncertainty and risks. Participants observed that if a large-scale and prolonged dispute over trade policies developed, there would likely be adverse effects on business sentiment, investment spending, and employment. Moreover, wide-ranging tariff increases would also reduce the purchasing power of U.S. households. Further negative effects in such a scenario could include reductions in productivity and disruptions of supply chains. Other downside risks cited included the possibility of a significant weakening in the housing sector, a sharp increase in oil prices, or a severe slowdown in EMEs.
Participants remarked on the extent to which financial conditions remained supportive of economic expansion. Over the intermeeting period, only a small change in overall financial conditions occurred, with modest movements on net in equity prices and in the foreign exchange value of the dollar. The yield curve had flattened further over the intermeeting period.
Participants who commented on financial stability noted that asset valuations remained elevated and corporate borrowing terms remained easy. They also noted that regulatory changes introduced in the past decade had helped to reduce the susceptibility of the financial sector to runs and to strengthen the capital positions of banks and other financial institutions. In discussing the capital positions of large banks, a few participants emphasized that financial stability risks could be reduced if these institutions further boosted their capital cushions while their profits are strong and the economic outlook is favorable; arguments for and against the activation of the countercyclical capital buffer as a means of further strengthening the capital positions of large banks were discussed in this context.
In their consideration of monetary policy, participants discussed the implications of recent economic and financial developments for the economic outlook and the associated risks to that outlook. Participants remarked on recent above-trend growth in real GDP and on indicators of resource utilization. Some commented that consumer spending had been quite strong in the second quarter, confirming their impressions that the first-quarter weakness had been temporary. Several participants also pointed to the continued strength in business fixed investment, although the persistent weakness and the risk of a further slowdown in residential investment were also noted. A few participants suggested there could still be some labor market slack, citing recent increases in labor force participation rates relative to prevailing demographically driven downward trends; the participation rate of prime-age men, in particular, was still below its previous business cycle peak. Other participants judged that labor market conditions were tight, pointing to other data, including job quits and openings rates, and anecdotes from contacts.
Participants generally characterized inflation as running close to the Committee's objective of 2 percent, and most of those who expressed a view indicated that recent readings on inflation had come in close to their expectations. Consistent with their SEP submissions in June, several participants remarked that inflation, measured on a 12-month basis, was likely to move modestly above the Committee's objective for a time. Others pointed to some indicators suggesting that long-term inflation expectations could be below levels consistent with the Committee's 2 percent inflation objective.
Participants generally judged that the current stance of monetary policy remained accommodative, supporting strong labor market conditions and inflation of around 2 percent. Participants agreed that it would be appropriate for the Committee to leave the target range for the federal funds rate unchanged at this meeting.
With regard to the medium term, various participants indicated that information gathered since the Committee met in June had not significantly altered their outlook for the U.S. economy. Many participants suggested that if incoming data continued to support their current economic outlook, it would likely soon be appropriate to take another step in removing policy accommodation. Participants generally expected that further gradual increases in the target range for the federal funds rate would be consistent with a sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term. Many participants reiterated that the actual path for the federal funds rate would ultimately depend on the incoming data and on how those data affect the economic outlook.
Participants discussed the economic forces and risks they saw as providing the rationale for gradual increases in the federal funds rate as well as scenarios that might cause them to depart from this expected path. Among other factors, they pointed to uncertainty about the appropriate level of the federal funds rate over the longer run and to constraints on the provision of monetary accommodation during ELB episodes as reasons for proceeding gradually in the removal of accommodation. Some participants noted that stronger underlying momentum in the economy was an upside risk; most expressed the view that an escalation in international trade disputes was a potentially consequential downside risk for real activity. Some participants suggested that, in the event of a major escalation in trade disputes, the complex nature of trade issues, including the entire range of their effects on output and inflation, presented a challenge in determining the appropriate monetary policy response.
Participants also discussed the possible implications of a flattening in the term structure of market interest rates. Several participants cited statistical evidence for the United States that inversions of the yield curve have often preceded recessions. They suggested that policymakers should pay close attention to the slope of the yield curve in assessing the economic and policy outlook. Other participants emphasized that inferring economic causality from statistical correlations was not appropriate. A number of global factors were seen as contributing to downward pressure on term premiums, including central bank asset purchase programs and the strong worldwide demand for safe assets. In such an environment, an inversion of the yield curve might not have the significance that the historical record would suggest; the signal to be taken from the yield curve needed to be considered in the context of other economic and financial indicators.
A couple of participants commented on issues related to the operating framework for the implementation of monetary policy, including, among other things, the implications of changes in financial market regulations for the demand for reserves and for the size and composition of the Federal Reserve's balance sheet. These participants judged that it would be important for the Committee to resume its discussion of operating frameworks before too long. The Chairman suggested that the Committee would likely resume a discussion of operating frameworks in the fall.
Many participants noted that it would likely be appropriate in the not-too-distant future to revise the Committee's characterization of the stance of monetary policy in its postmeeting statement. They agreed that the statement's language that "the stance of monetary policy remains accommodative" would, at some point fairly soon, no longer be appropriate. Participants noted that the federal funds rate was moving closer to the range of estimates of its neutral level. A number of participants emphasized the considerable uncertainty in estimates of the neutral rate of interest, stemming from sources such as fiscal policy and large-scale asset purchase programs. Against this background, continuing to provide an explicit assessment of the federal funds rate relative to its neutral level could convey a false sense of precision.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the FOMC met in June indicated that the labor market had continued to strengthen and that economic activity had been rising at a strong rate. Job gains had been strong, on average, in recent months, and the unemployment rate had stayed low. Household spending and business fixed investment had grown strongly. On a 12âmonth basis, both overall inflation and inflation for items other than food and energy remained near 2 percent. Indicators of longer-term inflation expectations were little changed, on balance.
Policymakers viewed the recent data as indicating that the outlook for the economy was evolving about as they had expected. Consequently, members expected that further gradual increases in the target range for the federal funds rate would be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term. Members continued to judge that the risks to the economic outlook appeared roughly balanced.
After assessing the incoming data, current conditions, and the outlook for economic activity, the labor market, and inflation, members agreed to maintain the target range for the federal funds rate at 1-3/4 to 2 percent. They noted that the stance of monetary policy remained accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
Members agreed that the timing and size of future adjustments to the target range for the federal funds rate would depend on their assessments of realized and expected economic conditions relative to the Committee's objectives of maximum employment and 2 percent inflation. They reiterated that this assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
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 SOMA in accordance with the following domestic policy directive, to be released at 2:00 p.m.:
"Effective August 2, 2018, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1-3/4 to 2 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.75 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during each calendar month that exceeds $24 billion, and to reinvest in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $16 billion. Small deviations from these amounts for operational reasons are acceptable.
The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."
The vote also encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in June indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Household spending and business fixed investment have grown strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1-3/4 to 2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments."
Voting for this action: Jerome H. Powell, John C. Williams, Thomas I. Barkin, Raphael W. Bostic, Lael Brainard, Esther L. George, Loretta J. Mester, and Randal K. Quarles.
Voting against this action: None.
Ms. George voted as alternate member at this meeting.
Consistent with the Committee's decision to leave the target range for the federal funds rate unchanged, the Board of Governors voted unanimously to leave the interest rates on required and excess reserve balances unchanged at 1.95 percent and voted unanimously to approve establishment of the primary credit rate (discount rate) at the existing level of 2-1/2 percent, effective August 2, 2018.6
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, September 25-26, 2018. The meeting adjourned at 9:45 a.m. on August 1, 2018.
Notation Vote
By notation vote completed on July 3, 2018, the Committee unanimously approved the minutes of the Committee meeting held on June 12-13, 2018.
_____________________________
James A. Clouse
Secretary
1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes. Return to text
2. Attended through the discussion of developments in financial markets and open market operations. Return to text
3. Attended Tuesday session only. Return to text
4. Attended through the discussion of monetary policy options at the effective lower bound. Return to text
5. In the analysis, the staff assumed that the ELB was 12.5 basis points, equal to the midpoint of the target range for the federal funds rate from December 2008 to December 2015. Return to text
6. The second vote of the Board also encompassed approval of the establishment of the interest rates for secondary and seasonal credit under the existing formulas for computing such rates. Return to text |
2018-08-01T00:00:00 | 2018-08-01 | Statement | Information received since the Federal Open Market Committee met in June indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Household spending and business fixed investment have grown strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1-3/4 to 2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Esther L. George; Loretta J. Mester; and Randal K. Quarles.
Implementation Note issued August 1, 2018 |
2018-06-13T00:00:00 | 2018-07-05 | Minute | Minutes of the Federal Open Market Committee
June 12-13, 2018
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, June 12, 2018, at 1:00 p.m. and continued on Wednesday, June 13, 2018, at 9:00 a.m.1
PRESENT:
Jerome H. Powell, Chairman
William C. Dudley, Vice Chairman
Thomas I. Barkin
Raphael W. Bostic
Lael Brainard
Loretta J. Mester
Randal K. Quarles
John C. Williams
James Bullard, Charles L. Evans, Esther L. George, Eric Rosengren, and Michael Strine,2 Alternate Members of the Federal Open Market Committee
Patrick Harker, Robert S. Kaplan, and Neel Kashkari, Presidents of the Federal Reserve Banks of Philadelphia, Dallas, and Minneapolis, respectively
James A. Clouse, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Mark E. Van Der Weide, General Counsel
Michael Held, Deputy General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
David Altig, Kartik B. Athreya, Thomas A. Connors, David E. Lebow, Trevor A. Reeve, Ellis W. Tallman, William Wascher,2 and Beth Anne Wilson, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Ann E. Misback, Secretary, Office of the Secretary, Board of Governors
Matthew J. Eichner,3 Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors; Michael S. Gibson, Director, Division of Supervision and Regulation, Board of Governors; Andreas Lehnert, Director, Division of Financial Stability, Board of Governors
Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board of Governors; Michael T. Kiley, Deputy Director, Division of Financial Stability, Board of Governors
Antulio N. Bomfim, Special Adviser to the Chairman, Office of Board Members, Board of Governors
Joseph W. Gruber and John M. Roberts, Special Advisers to the Board, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Shaghil Ahmed, Senior Associate Director, Division of International Finance, Board of Governors
Ellen E. Meade, Stephen A. Meyer, and Robert J. Tetlow, Senior Advisers, Division of Monetary Affairs, Board of Governors
John J. Stevens and Stacey Tevlin, Associate Directors, Division of Research and Statistics, Board of Governors
Jeffrey D. Walker,3 Deputy Associate Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors; Min Wei, Deputy Associate Director, Division of Monetary Affairs, Board of Governors
Burcu Duygan-Bump, Norman J. Morin, John Sabelhaus, and Paul A. Smith, Assistant Directors, Division of Research and Statistics, Board of Governors; Christopher J. Gust, Assistant Director, Division of Monetary Affairs, Board of Governors
Penelope A. Beattie,2 Assistant to the Secretary, Office of the Secretary, Board of Governors
John Ammer,2 Senior Economic Project Manager, Division of International Finance, Board of Governors
Dan Li, Section Chief, Division of Monetary Affairs, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Martin Bodenstein and Marcel A. Priebsch, Principal Economists, Division of Monetary Affairs, Board of Governors; Logan T. Lewis, Principal Economist, Division of International Finance, Board of Governors; Maria Otoo, Principal Economist, Division of Research and Statistics, Board of Governors
Marcelo Ochoa, Senior Economist, Division of Monetary Affairs, Board of Governors
Achilles Sangster II, Information Management Analyst, Division of Monetary Affairs, Board of Governors
Kenneth C. Montgomery, First Vice President, Federal Reserve Bank of Boston
Jeff Fuhrer, Daniel G. Sullivan, and Christopher J. Waller, Executive Vice Presidents, Federal Reserve Banks of Boston, Chicago, and St. Louis, respectively
Marc Giannoni, Paolo A. Pesenti, and Mark L.J. Wright, Senior Vice Presidents, Federal Reserve Banks of Dallas, New York, and Minneapolis, respectively
Roc Armenter, Vice President, Federal Reserve Bank of Philadelphia
Willem Van Zandweghe, Assistant Vice President, Federal Reserve Bank of Kansas City
Nicolas Petrosky-Nadeau, Senior Research Advisor, Federal Reserve Bank of San Francisco
Developments in Financial Markets and Open Market Operations
The manager of the System Open Market Account (SOMA) provided a summary of developments in domestic and global financial markets over the intermeeting period. Developments in emerging market economies (EMEs) and in Europe were the focus of considerable attention by financial market participants over recent weeks. Investor perceptions of increased economic and political vulnerabilities in several EMEs led to a notable depreciation in EME currencies relative to the dollar. Market participants reported that an unwinding of investor positions had been a factor amplifying these currency moves. In Europe, concerns about the political situation in Italy and its potential economic implications prompted a significant widening in risk spreads on Italian sovereign securities. The share prices of Italian banks and other banks that could be exposed to Italy declined sharply. In domestic financial markets, expectations for the path of the federal funds rate were little changed over the intermeeting period. The manager noted that the release of the minutes of the May FOMC meeting, and particularly the reference to a possible technical adjustment in the interest on excess reserves (IOER) rate relative to the top of the FOMC's target range for the federal funds rate, prompted a small reduction in federal funds futures rates.
The deputy manager followed with a discussion of money markets and open market operations. Rates on Treasury repurchase agreements (repo) had remained elevated in recent weeks, apparently responding, in part, to increased Treasury issuance over recent months. In light of the firmness in repo rates, the volume of operations conducted through the Federal Reserve's overnight reverse repurchase agreement facility remained low. Elevated repo rates may also have contributed to some upward pressure on the effective federal funds rate in recent weeks as lenders in that market shifted some of their investments to earn higher rates available in repo markets. The deputy manager also discussed the current outlook for reinvestment purchases of agency mortgage-backed securities (MBS). Based on current projections, principal payments on the Federal Reserve's holdings of agency MBS would likely be lower than the monthly cap on redemptions that will be in effect beginning in the fall of this year. Consistent with the June 2017 addendum to the Policy Normalization Principles and Plans, reinvestment purchases of agency MBS then are projected to fall to zero from that point onward. However, principal payments on agency MBS are sensitive to changes in various factors, particularly long-term interest rates. As a result, agency MBS principal payments could rise above the monthly redemption cap in some future scenarios and thus require MBS reinvestment purchases. In light of this possibility, the deputy manager described plans for the Desk to conduct small value purchases of agency MBS on a regular basis in order to maintain operational readiness.
By unanimous vote, the Committee ratified the Open Market Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account during the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the June 12-13 meeting indicated that labor market conditions continued to strengthen in recent months, and that real gross domestic product (GDP) appeared to be rising at a solid rate in the first half of the year. Consumer price inflation, as measured by the 12âmonth percentage change in the price index for personal consumption expenditures (PCE), was 2 percent in April. Surveyâbased measures of longer-run inflation expectations were little changed on balance.
Total nonfarm payroll employment expanded at a strong pace, on average, in April and May. The national unemployment rate edged down in both months and was 3.8 percent in May. The unemployment rates for African Americans, Asians, and Hispanics all declined, on net, from March to May; the rate for African Americans was the lowest on record but still noticeably above the rates for other groups. The overall labor force participation rate edged down in April and May but was still at about the same level as a year earlier. The share of workers employed part time for economic reasons was little changed at a level close to that from just before the previous recession. The rate of private-sector job openings rose in March and stayed at that elevated level in April; the rate of quits edged up, on net, over those two months; and initial claims for unemployment insurance benefits continued to be low through early June. Recent readings showed that increases in labor compensation stepped up over the past year. Compensation per hour in the nonfarm business sector increased 2.7 percent over the four quarters ending in the first quarter of this year (compared with 1.9 percent over the same four quarters a year earlier), and average hourly earnings for all employees increased 2.7 percent over the 12 months ending in May (compared with 2.5 percent over the same 12 months a year earlier).
Total industrial production increased at a solid pace in April, but the available indicators for May, particularly production worker hours in manufacturing, indicated that output declined in that month. Automakers' schedules suggested that assemblies of light motor vehicles would increase in the coming months, and broader indicators of manufacturing production, such as the new orders indexes from national and regional manufacturing surveys, continued to point to solid gains in factory output in the near term.
Consumer spending appeared to be increasing briskly in the second quarter after rising at only a modest pace in the first quarter. Real PCE increased at a robust pace in April after a strong gain in March. Although light motor vehicle sales declined in May, indicators of vehicle demand generally remained upbeat. More broadly, recent readings on key factors that influence consumer spending--including gains in employment, real disposable personal income, and households' net worth--continued to be supportive of solid real PCE growth in the near term. In addition, the lower tax withholding resulting from the tax cuts enacted late last year still appeared likely to provide some additional impetus to spending in coming months. Consumer sentiment, as measured by the University of Michigan Surveys of Consumers, remained elevated in May.
Residential investment appeared to be declining further in the second quarter after decreasing in the first quarter. Starts for new single-family homes were unchanged in April from their first-quarter average, but starts of multifamily units declined noticeably. Sales of both new and existing homes decreased in April.
Real private expenditures for business equipment and intellectual property appeared to be rising at a moderate pace in the second quarter after a somewhat faster increase in the first quarter. Nominal shipments of nondefense capital goods excluding aircraft rose in April, and forward-looking indicators of business equipment spending--such as the backlog of unfilled capital goods orders, along with upbeat readings on business sentiment from national and regional surveys--continued to point to robust gains in equipment spending in the near term. Real business expenditures for nonresidential structures appeared to be expanding at a solid pace again in the second quarter, and the number of crude oil and natural gas rigs in operation--an indicator of business spending for structures in the drilling and mining sector--increased, on net, from mid-April through early June.
Nominal federal government spending data for April and May pointed to an increase in real federal purchases in the second quarter. Real state and local government purchases also appeared to be moving up; although nominal construction expenditures by these governments edged down in April, their payrolls rose at a moderate pace, on net, in April and May.
Net exports made a negligible contribution to real GDP growth in the first quarter, with growth of both real exports and real imports slowing from the brisk pace of the fourth quarter of last year. After narrowing in March, the nominal trade deficit narrowed further in April, as exports continued to increase while imports declined slightly, which suggested that net exports might add modestly to real GDP growth in the second quarter.
Total U.S. consumer prices, as measured by the PCE price index, increased 2.0 percent over the 12 months ending in April. Core PCE price inflation, which excludes changes in consumer food and energy prices, was 1.8 percent over that same period. The consumer price index (CPI) rose 2.8 percent over the 12 months ending in May, while core CPI inflation was 2.2 percent. Recent readings on survey-based measures of longer-run inflation expectations--including those from the Michigan survey, the Survey of Professional Forecasters, and the Desk's Survey of Primary Dealers and Survey of Market Participants--were little changed on balance.
Incoming data suggested that foreign economic activity continued to expand at a solid pace. Real GDP growth picked up in the first quarter in several EMEs--including Mexico, China, and much of emerging Asia--al-though recent indicators pointed to some moderation in the pace of activity in most EMEs. By contrast, in the advanced foreign economies (AFEs), real GDP growth slowed in the first quarter, owing partly to temporary factors such as labor strikes in some European countries and bad weather in Japan. More recent indicators pointed to a partial rebound in AFE economic growth in the second quarter. Inflation pressures in the foreign economies generally remained subdued, even though higher oil prices put some upward pressure on headline inflation.
Staff Review of the Financial Situation
During the intermeeting period, global financial markets were buffeted by increased concerns about the outlook for foreign growth and political developments in Italy, but these concerns subsequently eased. On net, Treasury yields were little changed despite significant intraperiod moves, and the dollar appreciated notably as a range of AFE and EME currencies and sovereign bonds came under pressure. However, broad domestic stock price indexes increased, on net, as generally strong corporate earnings reports helped support prices. Meanwhile, financing conditions for nonfinancial businesses and households remained supportive of economic activity on balance.
Over the intermeeting period, macroeconomic data releases signaling moderating growth in some foreign economies, along with downside risks stemming from political developments in Italy and several EMEs, weighed on prices of foreign risk assets. These developments, together with a still-solid economic outlook for the United States, supported an increase in the broad trade-weighted index of the foreign exchange value of the dollar.
The dollar appreciated notably against several EME currencies (primarily those of Argentina, Turkey, Mexico, and Brazil), as the increase in U.S. interest rates since late 2017, along with political developments and other issues, intensified concerns about financial vulnerabilities. EME mutual funds saw slight net outflows, and, on balance, EME sovereign spreads widened and equity prices edged lower. In the AFEs, sovereign spreads in some peripheral European countries widened and European bank shares came under pressure, as investors focused on political developments in Italy. Broad equity indexes in the euro area, with the exception of Italy, ended the period little changed, while those in Canada, the United Kingdom, and Japan edged higher. Market-based measures of expected policy rates were little changed, on balance, and flight-to-safety flows reportedly contributed to declines in German longerâterm sovereign yields.
FOMC communications over the intermeeting period--including the May FOMC statement and the May FOMC meeting minutes--elicited only minor reactions in asset markets. Quotes on federal funds futures contracts suggested that the probability of an increase in the target range for the federal funds rate occurring at the June FOMC meeting inched up further to near certainty. Levels of the federal funds rate at the end of 2019 and 2020 implied by overnight index swap (OIS) rates were little changed on net.
Longer-term nominal Treasury yields ended the period largely unchanged despite notable movements during the intermeeting period. Measures of inflation compensation derived from Treasury Inflation-Protected Securities were also little changed on net.
Broad U.S. equity price indexes increased about 5 percent, on net, since the May FOMC meeting, boosted in part by the stronger-than-expected May Employment Situation report. Stock prices also appeared to have been buoyed by first-quarter earnings reports that generally beat expectations--particularly for the technology sector, which outperformed the broader market. However, the turbulence abroad and, to a lesser degree, mounting concerns about trade policy weighed on equity prices at times. Option-implied volatility on the S&P 500 at the one-month horizon--the VIX--was down somewhat, on net, remaining just a couple of percentage points above the very low levels that prevailed before early February. Over the intermeeting period, spreads of yields on nonfinancial corporate bonds over those of comparable-maturity Treasury securities widened moderately for both investment- and speculative-grade firms. However, these spreads remained low by historical standards.
Over the intermeeting period, short-term funding markets stayed generally stable despite still-elevated spreads between rates on some private money market instruments and OIS rates of similar maturity. While some of the factors contributing to pressures in short-term funding markets had eased recently, the three-month spread between the London interbank offered rate and the OIS rate remained significantly wider than at the start of the year.
Growth of outstanding commercial and industrial loans held by banks appeared to have moderated in May after a strong reading in April. The issuance of institutional leveraged loans was strong in April and May; meanwhile, corporate bond issuance was weak, likely reflecting seasonal patterns. Gross issuance of municipal bonds in April and May was solid, as issuance continued to recover from the slow pace recorded at the start of the year.
Financing conditions for commercial real estate (CRE) remained accommodative. Even so, the growth of CRE loans held by banks ticked down in April and May. Commercial mortgage-backed securities (CMBS) issuance, in general, continued at a robust pace; although issuance softened somewhat in April, partly reflecting seasonal factors, it recovered in May. Spreads on CMBS were little changed over the intermeeting period, remaining near their post-crisis lows.
Residential mortgage financing conditions remained accommodative for most borrowers. For borrowers with low credit scores, conditions stayed tight but continued to ease. Growth in home-purchase mortgages slowed a bit and refinancing activity continued to be muted in recent months, with both developments partly reflecting the rise in mortgage rates earlier this year.
Financing conditions in consumer credit markets were little changed in the first few months of 2018, on balance, and remained largely supportive of growth in household spending. Growth in consumer credit slowed a bit in the first quarter, as seasonally adjusted credit card balances were about flat after having surged in the fourth quarter of last year. Financing conditions for consumers with subprime credit scores continued to tighten, likely contributing to a decline in auto loan extensions to such borrowers.
Staff Economic Outlook
In the U.S. economic forecast prepared for the June FOMC meeting, the staff continued to project that the economy would expand at an above-trend pace. Real GDP appeared to be rising at a much faster pace in the second quarter than in the first, and it was forecast to increase at a solid rate in the second half of this year. Over the 2018-20 period, output was projected to rise further above the staff's estimate of its potential, and the unemployment rate was projected to decline further below the staff's estimate of its longer-run natural rate. Relative to the forecast prepared for the May meeting, the projection for real GDP growth beyond the first half of 2018 was revised down a little in response to a higher assumed path for the exchange value of the dollar. In addition, the staff continued to anticipate that supply constraints might restrain output growth somewhat. With real GDP rising a little less, on balance, over the forecast period, the projected decline in the unemployment rate over the next few years was a touch smaller than in the previous forecast.
The staff forecast for total PCE price inflation from 2018 to 2020 was not revised materially. Total consumer price inflation over the first half of 2018 appeared to be a little lower than in the previous projection, mainly because of slightly softer incoming data on nonmarket prices, but the forecast for the second half of the year was a little higher, reflecting an upward revision to projected consumer energy prices over the next couple of quarters. The staff continued to project that total PCE inflation would remain near the Committee's 2 percent objective over the medium term and that core PCE price inflation would run slightly higher than total inflation over that period because of a projected decline in consumer energy prices in 2019 and 2020.
The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The staff saw the risks to the forecasts for real GDP growth and the unemployment rate as balanced. On the upside, recent fiscal policy changes could lead to a greater expansion in economic activity over the next few years than the staff projected. On the downside, those fiscal policy changes could yield less impetus to the economy than the staff expected if, for example, the marginal propensities to consume for groups most affected by the tax cuts are lower than the staff had assumed. Risks to the inflation projection also were seen as balanced. The upside risk that inflation could increase more than expected in an economy that was projected to move further above its potential was counterbalanced by the downside risk that longer-term inflation expectations may be lower than was assumed in the staff forecast.
Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, members of the Board of Governors and Federal Reserve Bank presidents submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2018 through 2020 and over the longer run, based on their individual assessments of the appropriate path for the federal funds rate. The longer-run projections represented each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These projections and policy assessments are described in the Summary of Economic Projections, which is an addendum to these minutes.
In their discussion of the economic situation and the outlook, meeting participants agreed that information received since the FOMC met in May indicated that the labor market had continued to strengthen and that economic activity had been rising at a solid rate. Job gains had been strong, on average, in recent months, and the unemployment rate had declined. Recent data suggested that growth of household spending had picked up, while business fixed investment had continued to grow strongly. On a 12-month basis, overall inflation and core inflation, which excludes changes in food and energy prices, had both moved close to 2 percent. Indicators of longer-term inflation expectations were little changed, on balance.
Participants viewed recent readings on spending, employment, and inflation as suggesting little change, on balance, in their assessments of the economic outlook. Incoming data suggested that GDP growth strengthened in the second quarter of this year, as growth of consumer spending picked up after slowing earlier in the year. Participants noted a number of favorable economic factors that were supporting above-trend GDP growth; these included a strong labor market, stimulative federal tax and spending policies, accommodative financial conditions, and continued high levels of household and business confidence. They also generally expected that further gradual increases in the target range for the federal funds rate would be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term. Participants generally viewed the risks to the economic outlook as roughly balanced.
Participants reported that business fixed investment had continued to expand at a strong pace in recent months, supported in part by substantial investment growth in the energy sector. Higher oil prices were expected to continue to support investment in that sector, and District contacts in the industry were generally upbeat, though supply constraints for labor and infrastructure were reportedly limiting expansion plans. By contrast, District reports regarding the construction sector were mixed, although here, too, some contacts reported that supply constraints were acting as a drag on activity. Conditions in both the manufacturing and service sectors in several Districts were reportedly strong and were seen as contributing to solid investment gains. However, many District contacts expressed concern about the possible adverse effects of tariffs and other proposed trade restrictions, both domestically and abroad, on future investment activity; contacts in some Districts indicated that plans for capital spending had been scaled back or postponed as a result of uncertainty over trade policy. Contacts in the steel and aluminum industries expected higher prices as a result of the tariffs on these products but had not planned any new investments to increase capacity. Conditions in the agricultural sector reportedly improved somewhat, but contacts were concerned about the effect of potentially higher tariffs on their exports.
Participants agreed that labor market conditions strengthened further over the intermeeting period. Nonfarm payroll employment posted strong gains in recent months, averaging more than 200,000 per month this year. The unemployment rate fell to 3.8 percent in May, below the estimate of each participant who submitted a longer-run projection. Participants pointed to other indicators such as a very high rate of job openings and an elevated quits rate as additional signs that labor market conditions were strong. With economic growth anticipated to remain above trend, participants generally expected the unemployment rate to remain below, or decline further below, their estimates of its longer-run normal rate. Several participants, however, suggested that there may be less tightness in the labor market than implied by the unemployment rate alone, because there was further scope for a strong labor market to continue to draw individuals into the workforce.
Contacts in several Districts reported difficulties finding qualified workers, and, in some cases, firms were coping with labor shortages by increasing salaries and benefits in order to attract or retain workers. Other business contacts facing labor shortages were responding by increasing training for less-qualified workers or by investing in automation. On balance, for the economy overall, recent data on average hourly earnings indicated that wage increases remained moderate. A number of participants noted that, with the unemployment rate expected to remain below estimates of its longer-run normal rate, they anticipated wage inflation to pick up further.
Participants noted that the 12-month changes in both overall and core PCE prices had recently moved close to 2 percent. The recent large increases in consumer energy prices had pushed up total PCE price inflation relative to the core measure, and this divergence was expected to continue in the near term, resulting in a temporary increase in overall inflation above the Committee's 2 percent longer-run objective. In general, participants viewed recent price developments as consistent with their expectation that inflation was on a trajectory to achieve the Committee's symmetric 2 percent objective on a sustained basis, although a number of participants noted that it was premature to conclude that the Committee had achieved that objective. The generally favorable outlook for inflation was buttressed by reports from business contacts in several Districts suggesting some firming of inflationary pressures; for example, many business contacts indicated that they were experiencing rising input costs, and, in some cases, firms appeared to be passing these cost increases through to consumer prices. Although core inflation and the 12-month trimmed mean PCE inflation rate calculated by the Federal Reserve Bank of Dallas remained a little below 2 percent, many participants anticipated that high levels of resource utilization and stable inflation expectations would keep overall inflation near 2 percent over the medium term. In light of inflation having run below the Committee's 2 percent objective for the past several years, a few participants cautioned that measures of longer-run inflation expectations derived from financial market data remained somewhat below levels consistent with the Committee's 2 percent objective. Accordingly, in their view, investors appeared to judge the expected path of inflation as running a bit below 2 percent over the medium run. Some participants raised the concern that a prolonged period in which the economy operated beyond potential could give rise to heightened inflationary pressures or to financial imbalances that could lead eventually to a significant economic downturn.
Participants commented on a number of risks and uncertainties associated with their outlook for economic activity, the labor market, and inflation over the medium term. Most participants noted that uncertainty and risks associated with trade policy had intensified and were concerned that such uncertainty and risks eventually could have negative effects on business sentiment and investment spending. Participants generally continued to see recent fiscal policy changes as supportive of economic growth over the next few years, and a few indicated that fiscal policy posed an upside risk. A few participants raised the concern that fiscal policy is not currently on a sustainable path. Many participants saw potential downside risks to economic growth and inflation associated with political and economic developments in Europe and some EMEs.
Meeting participants also discussed the term structure of interest rates and what a flattening of the yield curve might signal about economic activity going forward. Participants pointed to a number of factors, other than the gradual rise of the federal funds rate, that could contribute to a reduction in the spread between long-term and short-term Treasury yields, including a reduction in investors' estimates of the longer-run neutral real interest rate; lower longer-term inflation expectations; or a lower level of term premiums in recent years relative to historical experience reflecting, in part, central bank asset purchases. Some participants noted that such factors might temper the reliability of the slope of the yield curve as an indicator of future economic activity; however, several others expressed doubt about whether such factors were distorting the information content of the yield curve. A number of participants thought it would be important to continue to monitor the slope of the yield curve, given the historical regularity that an inverted yield curve has indicated an increased risk of recession in the United States. Participants also discussed a staff presentation of an indicator of the likelihood of recession based on the spread between the current level of the federal funds rate and the expected federal funds rate several quarters ahead derived from futures market prices. The staff noted that this measure may be less affected by many of the factors that have contributed to the flattening of the yield curve, such as depressed term premiums at longer horizons. Several participants cautioned that yield curve movements should be interpreted within the broader context of financial conditions and the outlook, and would be only one among many considerations in forming an assessment of appropriate policy.
In their consideration of monetary policy at this meeting, participants generally agreed that the economic expansion was progressing roughly as anticipated, with real economic activity expanding at a solid rate, labor market conditions continuing to strengthen, and inflation near the Committee's objective. Based on their current assessments, almost all participants expressed the view that it would be appropriate for the Committee to continue its gradual approach to policy firming by raising the target range for the federal funds rate 25 basis points at this meeting. These participants agreed that, even after such an increase in the target range, the stance of monetary policy would remain accommodative, supporting strong labor market conditions and a sustained return to 2 percent inflation. One participant remarked that, with inflation having run consistently below 2 percent in recent years and market-based measures of inflation compensation still low, postponing an increase in the target range for the federal funds rate would help push inflation expectations up to levels consistent with the Committee's objective.
With regard to the medium-term outlook for monetary policy, participants generally judged that, with the economy already very strong and inflation expected to run at 2 percent on a sustained basis over the medium term, it would likely be appropriate to continue gradually raising the target range for the federal funds rate to a setting that was at or somewhat above their estimates of its longer-run level by 2019 or 2020. Participants reaffirmed that adjustments to the path for the policy rate would depend on their assessments of the evolution of the economic outlook and risks to the outlook relative to the Committee's statutory objectives.
Participants pointed to various reasons for raising short-term interest rates gradually, including the uncertainty surrounding the level of the federal funds rate in the longer run, the lags with which changes in monetary policy affect the economy, and the potential constraints on adjustments in the target range for the federal funds rate in response to adverse shocks when short-term interest rates are low. In addition, a few participants saw survey- or market-based indicators as suggesting that inflation expectations were not yet firmly anchored at a level consistent with the Committee's objective. A few also noted that a temporary period of inflation modestly above 2 percent could be helpful in anchoring longer-run inflation expectations at a level consistent with the Committee's symmetric objective.
Participants offered their views about how much additional policy firming would likely be required to sustainably achieve the Committee's objectives of maximum employment and 2 percent inflation. Many noted that, if gradual increases in the target range for the federal funds rate continued, the federal funds rate could be at or above their estimates of its neutral level sometime next year. In that regard, participants discussed how the Committee's communications might evolve over coming meetings if the economy progressed about as anticipated; in particular, a number of them noted that it might soon be appropriate to modify the language in the postmeeting statement indicating that "the stance of monetary policy remains accommodative."
Participants supported a plan to implement a technical adjustment to the IOER rate that would place it at a level 5 basis points below the top of the FOMC's target range for the federal funds rate. A few participants suggested that, before too long, the Committee might want to further discuss how it can implement monetary policy most effectively and efficiently when the quantity of reserve balances reaches a level appreciably below that seen recently.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the FOMC met in May indicated that the labor market had continued to strengthen and that economic activity had been rising at a solid rate. Job gains had been strong, on average, in recent months, and the unemployment rate had declined. Recent data suggested that growth of household spending had picked up, while business fixed investment had continued to grow strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy had moved close to 2 percent. Indicators of longer-term inflation expectations were little changed, on balance.
Members viewed the recent data as consistent with a strong economy that was evolving about as they had expected. They judged that continuing along a path of gradual policy firming would balance the risk of moving too quickly, which could leave inflation short of a sustained return to the Committee's symmetric goal, against the risk of moving too slowly, which could lead to a buildup of inflation pressures or material financial imbalances. Consequently, members expected that further gradual increases in the target range for the federal funds rate would be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term. Members continued to judge that the risks to the economic outlook remained roughly balanced.
After assessing current conditions and the outlook for economic activity, the labor market, and inflation, members voted to raise the target range for the federal funds rate to 1-3/4 to 2 percent. They indicated that the stance of monetary policy remained accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
Members agreed that the timing and size of future adjustments to the target range for the federal funds rate would depend upon their assessment of realized and expected economic conditions relative to the Committee's maximum employment objective and symmetric 2 percent inflation objective. They reiterated that this assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
With regard to the postmeeting statement, members favored the removal of the forward-guidance language stating that "the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run." Members noted that, although this forward-guidance language had been useful for communicating the expected path of the federal funds rate during the early stages of policy normalization, this language was no longer appropriate in light of the strong state of the economy and the current expected path for policy. Moreover, the removal of the forward-guidance language and other changes to the statement should streamline and facilitate the Committee's communications. Importantly, the changes were a reflection of the progress toward achieving the Committee's statutory goals and did not reflect a shift in the approach to policy going forward.
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 SOMA in accordance with the following domestic policy directive, to be released at 2:00 p.m.:
"Effective June 14, 2018, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1-3/4 to 2 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.75 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during June that exceeds $18 billion, and to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during June that exceeds $12 billion. Effective in July, the Committee directs the Desk to roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during each calendar month that exceeds $24 billion, and to reinvest in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $16 billion. Small deviations from these amounts for operational reasons are acceptable.
The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."
The vote also encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Job gains have been strong, on average, in recent months, and the unemployment rate has declined. Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-3/4 to 2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments."
Voting for this action: Jerome H. Powell, William C. Dudley, Thomas I. Barkin, Raphael W. Bostic, Lael Brainard, Loretta J. Mester, Randal K. Quarles, and John C. Williams.
Voting against this action: None.
To support the Committee's decision to raise the target range for the federal funds rate, the Board of Governors voted unanimously to raise the interest rates on required and excess reserve balances to 1.95 percent, effective June 14, 2018. The Board of Governors also voted unanimously to approve a 1/4 percentage point increase in the primary credit rate (discount rate) to 2-1/2 percent, effective June 14, 2018.4
Election of Committee Vice Chairman
By unanimous vote, the Committee selected John C. Williams to serve as Vice Chairman, effective on June 18, 2018, until the selection of a successor at the Committee's first regularly scheduled meeting in 2019.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, July 31-August 1, 2018. The meeting adjourned at 10:00 a.m. on June 13, 2018.
Notation Vote
By notation vote completed on May 22, 2018, the Committee unanimously approved the minutes of the Committee meeting held on May 1-2, 2018.
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James A. Clouse
Secretary
1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes. Return to text
2. Attended Tuesday session only. Return to text
3. Attended through the discussion of developments in financial markets and open market operations. Return to text
4. In taking this action, the Board approved requests submitted by the boards of directors of the Federal Reserve Banks of Boston, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. This vote also encompassed approval by the Board of Governors of the establishment of a 2-1/2 percent primary credit rate by the remaining Federal Reserve Bank, effective on the later of June 14, 2018, and the date such Reserve Bank informed the Secretary of the Board of such a request. (Secretary's note: Subsequently, the Federal Reserve Bank of New York was informed by the Secretary of the Board of the Board's approval of their establishment of a primary credit rate of 2-1/2 percent, effective June 14, 2018.) The second vote of the Board also encompassed approval of the establishment of the interest rates for secondary and seasonal credit under the existing formulas for computing such rates. Return to text |
2018-06-13T00:00:00 | 2018-06-13 | Statement | Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Job gains have been strong, on average, in recent months, and the unemployment rate has declined. Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-3/4 to 2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
Voting for the FOMC monetary policy action were Jerome H. Powell, Chairman; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams.
Implementation Note issued June 13, 2018 |
2018-05-02T00:00:00 | 2018-05-02 | Statement | Information received since the Federal Open Market Committee met in March indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Recent data suggest that growth of household spending moderated from its strong fourth-quarter pace, while business fixed investment continued to grow strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong. Inflation on a 12-month basis is expected to run near the Committee's symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1-1/2 to 1-3/4 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
Voting for the FOMC monetary policy action were Jerome H. Powell, Chairman; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams.
Implementation Note issued May 2, 2018 |
2018-05-02T00:00:00 | 2018-05-23 | Minute | Minutes of the Federal Open Market Committee
May 1-2, 2018
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, May 1, 2018, at 1:00 p.m. and continued on Wednesday, May 2, 2018, at 9:00 a.m.1
PRESENT:
Jerome H. Powell, Chairman
William C. Dudley, Vice Chairman
Thomas I. Barkin
Raphael W. Bostic
Lael Brainard
Loretta J. Mester
Randal K. Quarles
John C. Williams
James Bullard, Charles L. Evans, Esther L. George, Eric Rosengren, and Michael Strine, Alternate Members of the Federal Open Market Committee
Patrick Harker, Robert S. Kaplan, and Neel Kashkari, Presidents of the Federal Reserve Banks of Philadelphia, Dallas, and Minneapolis, respectively
James A. Clouse, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Mark E. Van Der Weide, General Counsel
Michael Held, Deputy General Counsel2
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
Kartik B. Athreya, Thomas A. Connors, Mary Daly, Trevor A. Reeve, Ellis W. Tallman, William Wascher, and Beth Anne Wilson, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Matthew J. Eichner,3 Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors; Michael S. Gibson, Director, Division of Supervision and Regulation, Board of Governors; Andreas Lehnert, Director, Division of Financial Stability, Board of Governors
Margie Shanks, Deputy Secretary, Office of the Secretary, Board of Governors
Daniel M. Covitz, Deputy Director, Division of Research and Statistics, Board of Governors; Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board of Governors; Michael T. Kiley, Deputy Director, Division of Financial Stability, Board of Governors
Antulio N. Bomfim, Special Adviser to the Chairman, Office of Board Members, Board of Governors
Joseph W. Gruber and John M. Roberts, Special Advisers to the Board, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Eric M. Engen and Joshua Gallin, Senior Associate Directors, Division of Research and Statistics, Board of Governors
Stephen A. Meyer and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors; Jeremy B. Rudd, Senior Adviser, Division of Research and Statistics, Board of Governors
Jane E. Ihrig and David López-Salido, Associate Directors, Division of Monetary Affairs, Board of Governors
Stephanie R. Aaronson and Norman J. Morin, Assistant Directors, Division of Research and Statistics, Board of Governors; Robert Vigfusson, Assistant Director, Division of International Finance, Board of Governors
Eric C. Engstrom, Adviser, Division of Monetary Affairs, and Adviser, Division of Research and Statistics, Board of Governors
Penelope A. Beattie,4 Assistant to the Secretary, Office of the Secretary, Board of Governors
Dana L. Burnett and Rebecca Zarutskie, Section Chiefs, Division of Monetary Affairs, Board of Governors
Marcelo Rezende, Principal Economist, Division of Monetary Affairs, Board of Governors
Ron Feldman, First Vice President, Federal Reserve Bank of Minneapolis
Michael Dotsey, Geoffrey Tootell, and Christopher J. Waller, Executive Vice Presidents, Federal Reserve Banks of Philadelphia, Boston, and St. Louis, respectively
Spencer Krane, Paula Tkac, and Mark L.J. Wright, Senior Vice Presidents, Federal Reserve Banks of Chicago, Atlanta, and Minneapolis, respectively
George A. Kahn, Vice President, Federal Reserve Bank of Kansas City
Richard K. Crump, Assistant Vice President, Federal Reserve Bank of New York
Anthony Murphy, Senior Economic Policy Advisor, Federal Reserve Bank of Dallas
Developments in Financial Markets and Open Market Operations
The manager of the System Open Market Account (SOMA) provided a summary of domestic and global financial developments over the intermeeting period. Broad measures of financial conditions had tightened somewhat in recent weeks, with U.S. equity prices lower, the foreign exchange value of the dollar moderately higher, and longer-term Treasury yields up a little. Market participants pointed to a range of factors contributing to the decline in stock prices, including concerns about the outlook for trade policy both in the United States and abroad, the potential for increased regulatory oversight of U.S. technology companies, and incoming data suggesting some moderation in global economic growth. The rise in nominal U.S. Treasury yields was associated with an increase in inflation compensation that, in turn, seemed to reflect a firming in inflation data as well as a notable rise in crude oil prices. Judging from federal funds futures quotes, the expected path of the federal funds rate changed relatively little over the intermeeting period. While term LIBOR (London interbank offered rates) had widened relative to comparable-maturity OIS (overnight index swap) rates in recent months, the cost of dollar funding through the foreign exchange swap market had not risen to the same degree. Recent usage of standing U.S. dollar liquidity swap lines had been low, consistent with a view that the recent widening in LIBOR-OIS spreads did not reflect increased funding pressures or rising concerns about the condition of financial institutions.
The manager discussed the role of standing liquidity swap lines in supporting financial stability and recommended that these swap lines be renewed at this meeting following the usual annual schedule. The manager also discussed current projections for principal payments received from mortgage-backed securities (MBS) held in the SOMA. These projections suggested that, under the Committee's plan for balance sheet normalization, reinvestments of MBS principal would likely cease later this year, although the timing is uncertain.
The deputy manager followed with a briefing focused on recent developments in the federal funds market, noting that the effective federal funds rate had increased in recent weeks and had moved toward the top of the target range for the federal funds rate. In large part, this development seemed to reflect a firming in rates on repurchase agreements (repos) that, in turn, had resulted from an increase in Treasury bill issuance and the associated higher demands for repo financing by dealers and others. Higher rates had reportedly made repos a more attractive alternative investment for major lenders in the federal funds market, thus reducing the availability of funding in that market and putting some upward pressure on the federal funds rate. While some of the recent pressure on the federal funds rate could be expected to fade over coming weeks as the market adjusts to higher levels of Treasury bills, the gradual normalization of the Federal Reserve's balance sheet and the accompanying decline in reserves was anticipated to continue putting some upward pressure on the federal funds rate relative to the interest on excess reserves (IOER) rate.
The deputy manager then discussed the possibility of a small technical realignment of the IOER rate relative to the top of the target range for the federal funds rate. Since the target range was established in December 2008, the IOER rate has been set at the top of the target range to help keep the effective federal funds rate within the range. Lately the spread of the IOER rate over the effective federal funds rate had narrowed to only 5 basis points. A technical adjustment of the IOER rate to a level 5 basis points below the top of the target range could keep the effective federal funds rate well within the target range. This could be accomplished by implementing a 20 basis point increase in the IOER rate at a time when the Committee raised the target range for the federal funds rate by 25 basis points. Alternatively, the IOER rate could be lowered 5 basis points at a meeting in which the Committee left the target range for the federal funds rate unchanged.
In their discussion of this issue, participants generally agreed that it could become appropriate to make a small technical adjustment in the Federal Reserve's approach to implementing monetary policy by setting the IOER rate modestly below the top of the target range for the federal funds rate. Such an adjustment would be consistent with the Committee's statement in the Policy Normalization Principles and Plans that it would be prepared to adjust the details of the approach to policy implementation during the period of normalization in light of economic and financial developments. Many participants judged that it would be useful to make such a technical adjustment sooner rather than later. Participants generally agreed that it would be desirable to make that adjustment at a time when the FOMC decided to increase the target range for the federal funds rate; that timing would simplify FOMC communications and emphasize that the IOER rate is a helpful tool for implementing the FOMC's policy decisions but does not, in itself, convey the stance of policy. While additional technical adjustments in the IOER rate could become necessary over time, these were not expected to be frequent. A number of participants also suggested that, before too long, the Committee might want to further discuss how it can implement monetary policy most effectively and efficiently when the quantity of reserve balances reaches a level appreciably below that seen in recent years.
The Committee voted unanimously to renew the reciprocal currency arrangements with the Bank of Canada and the Bank of Mexico; these arrangements are associated with the Federal Reserve's participation in the North American Framework Agreement of 1994. In addition, the Committee voted unanimously to renew the dollar and foreign currency liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank. The votes to renew the Federal Reserve's participation in these standing arrangements are taken annually at the April or May FOMC meeting.
By unanimous vote, the Committee ratified the Open Market Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account during the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the May 1-2 meeting indicated that labor market conditions continued to strengthen in the first quarter, while real gross domestic product (GDP) rose at a moderate pace. Consumer price inflation, as measured by the 12âmonth percentage change in the price index for personal consumption expenditures (PCE), was 2 percent in March. Survey-based measures of longer-run inflation expectations were, on balance, little changed.
Total nonfarm payroll employment rose less in March than in the previous two months, but the increase for the first quarter as a whole was solid. The labor force participation rate edged down in March but moved up a little, on net, in the first quarter. The national unemployment rate remained at 4.1 percent for a sixth consecutive month. Similarly, the unemployment rates for African Americans, Asians, and Hispanics were roughly flat, on balance, in recent months. The share of workers employed part time for economic reasons was little changed at a rate close to that prevailing before the previous recession. The rate of private-sector job openings stayed at an elevated level in February, the rate of quits remained high, and initial claims for unemployment insurance benefits continued to be low through mid-April. Recent readings showed that increases in labor compensation stepped up modestly over the past year. The employment cost index for private workers rose 2.8 percent over the 12 months ending in March, and average hourly earnings for all employees increased 2.7 percent over that period. Both increases were larger than those reported for the 12 months ending in March 2017.
Total industrial production increased in March and rose at a solid pace for the first quarter as a whole, with gains in the output of manufacturers, mines, and utilities. Automakers' schedules suggested that assemblies of light motor vehicles would edge down in the second quarter from the average pace in the first quarter, but broader indicators of manufacturing production, such as the new orders indexes from national and regional manufacturing surveys, continued to point to further gains in factory output in the near term.
Consumer expenditures rose at a modest pace in the first quarter following a strong gain in the preceding quarter. Monthly data pointed to some improvement toward the end of the quarter, as real PCE moved up in March after declining in January and February. However, the recent movements might have partly reflected the effects of a delay in many federal tax refunds, which could have shifted some consumer spending from February to March. Light motor vehicle sales stepped down in the first quarter after a strong fourth-quarter pace that was partly boosted by replacement sales following the fall hurricanes; sales declined in April, but indicators of vehicle demand remained upbeat. More broadly, key factors that influence consumer spending--including gains in employment and real disposable personal income, along with households' elevated net worth--should continue to support solid real PCE growth in the near term. In addition, the lower tax withholding resulting from the tax cuts enacted late last year was likely to provide some impetus to spending in coming months. Consumer sentiment, as measured by the University of Michigan Surveys of Consumers, remained elevated in April.
Real residential investment was unchanged in the first quarter after a strong increase in the fourth quarter. Starts for new single-family homes decreased in March, but the average pace in the first quarter was little changed from the fourth quarter. In contrast, starts of multifamily units moved up in March after contracting in February, and they were higher in the first quarter than in the fourth. Sales of both new and existing homes increased in February and March.
Real private expenditures for business equipment and intellectual property increased at a moderate pace in the first quarter after rising briskly in the second half of last year. Nominal shipments of nondefense capital goods excluding aircraft edged down in March. However, forward-looking indicators of business equipment spending--such as the backlog of unfilled capital goods orders, along with upbeat readings on business sentiment from national and regional surveys--continued to point to robust gains in equipment spending in the near term. Real business expenditures for nonresidential structures rose at a robust pace in the first quarter, and the number of crude oil and natural gas rigs in operation--an indicator of business spending for structures in the drilling and mining sector--continued to move up through mid-April.
Total real government purchases rose at a slower rate in the first quarter than in the fourth quarter. Real federal purchases increased in the first quarter, with gains in both defense and nondefense spending. Real purchases by state and local governments also moved higher; state and local government payrolls were unchanged in the first quarter, but nominal construction spending by these governments rose somewhat.
The nominal U.S. international trade deficit widened in February as imports rose briskly, outpacing the increase in exports. Preliminary data on trade in goods suggested that the trade deficit narrowed sharply in March, with exports continuing to grow robustly but imports retracing earlier gains. The Bureau of Economic Analysis estimated that the change in real net exports added slightly to growth of real GDP in the first quarter.
Total U.S. consumer prices, as measured by the PCE price index, increased 2 percent over the 12 months ending in March. Core PCE price inflation, which excludes changes in consumer food and energy prices, was 1.9 percent over that same period. The consumer price index (CPI) rose 2.4 percent over the 12 months ending in March, while core CPI inflation was 2.1 percent. Recent readings on survey-based measures of longer-run inflation expectations--including those from the Michigan survey, the Survey of Professional Forecasters, and the Desk's Survey of Primary Dealers and Survey of Market Participants--were little changed on balance.
Incoming data suggested that foreign economic activity continued to expand at a solid pace. Real GDP growth picked up in the first quarter in several emerging market economies (EMEs), including Mexico, China, and some other parts of emerging Asia. However, incoming data in a number of advanced foreign economies (AFEs)--in particular, real GDP in the United Kingdom--showed somewhat slower growth than market participants were expecting, partly because of transitory factors such as severe weather. Overall, inflation in most AFEs and EMEs continued to be subdued, increasing in the AFEs in the first quarter on higher energy prices but stepping down some in the EMEs, partly reflecting lower food prices in some Asian economies.
Staff Review of the Financial Situation
Early in the intermeeting period, uncertainty over trade policy and negative news about the technology sector reportedly contributed to lower prices for risky assets, but these concerns subsequently seemed to recede amid stronger-than-expected corporate earnings reports. Equity prices declined, nominal Treasury yields increased modestly, and market-based measures of inflation compensation ticked up on net. Meanwhile, financing conditions for nonfinancial businesses and households largely remained supportive of spending.
FOMC communications over the intermeeting period were generally viewed by market participants as reflecting an upbeat outlook for economic growth and as consistent with a continued gradual removal of monetary policy accommodation. The FOMC's decision to raise the target range for the federal funds rate 25 basis points at the March meeting was widely anticipated. Market reaction to the release of the March FOMC minutes later in the intermeeting period was minimal. The probability of an increase in the target range for the federal funds rate occurring at the May FOMC meeting, as implied by quotes on federal funds futures contracts, remained close to zero; the probability of an increase at the June FOMC meeting rose to about 90 percent by the end of the intermeeting period. Expected levels of the federal funds rate at the end of 2019 and 2020 implied by OIS rates rose modestly.
The nominal Treasury yield curve continued to flatten over the intermeeting period, with yields on 2-year and 10-year Treasury securities up 17 basis points and 7 basis points, respectively. Measures of inflation compensation derived from Treasury Inflation-Protected Securities increased 4 basis points and 7 basis points at the 5- and 5-to-10-year horizons, respectively, against a backdrop of rising oil prices. Option-implied measures of volatility of longer-term interest rates continued to decline over the intermeeting period after their marked increase earlier this year.
The S&P 500 index decreased over the period on net. Equity prices declined early in the intermeeting period, reportedly in response to trade tensions between the United States and China as well as negative news about the technology sector. However, equity prices subsequently retraced some of the earlier declines as concerns about trade policy seemed to ease and corporate earnings reports for the first quarter of 2018 generally came in stronger than expected. Option-implied volatility on the S&P 500 index at the one-month horizon--the VIX--declined but remained at elevated levels relative to 2017, ending the period at approximately 15 percent. On net, spreads of yields of investment-grade corporate bonds over comparableâmaturity Treasury securities widened a bit, while spreads for speculativeâgrade corporate bonds were unchanged.
Conditions in short-term funding markets remained generally stable over the intermeeting period. Spreads on term money market instruments relative to comparable-maturity OIS rates were still larger than usual in some segments of the money market. Reflecting the FOMC's policy action in March, yields on a broad set of money market instruments moved about 25 basis points higher. Bill yields also stayed high relative to OIS rates as cumulative Treasury bill supply remained elevated. Money market dynamics over quarter-end were muted relative to previous quarter-ends.
Foreign equity markets were mixed over the intermeeting period, with investors attuned to developments related to U.S. and Chinese trade policies and to news about the U.S. technology sector. Broad Japanese and European equity indexes outperformed their U.S. counterparts, ending the period somewhat higher. Market-based measures of policy expectations and longerâterm yields were little changed in the euro area and Japan but declined modestly in the United Kingdom on weaker-than-expected economic data. Longer-term yields in Canada moved up moderately amid notably higher oil prices. In EMEs, sovereign bond spreads edged up; capital continued to flow into EME mutual funds, although at a slower pace lately.
On net, the broad nominal dollar index appreciated moderately over the intermeeting period. In the early part of the period, the index depreciated slightly, as relatively positive news about the current round of NAFTA (North American Free Trade Agreement) negotiations led to appreciation of the Mexican peso and Canadian dollar, two currencies with large weights in the index. Later in the period, there was a broadâbased appreciation of the dollar against most currencies as U.S. yields increased relative to those in AFEs and as the Mexican peso declined amid uncertainty associated with the upcoming presidential elections.
Growth in banks' commercial and industrial (C&I) loans strengthened in March and the first half of April following relatively weak growth in January and February. Respondents to the April Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) reported that their institutions had eased standards and terms on C&I loans in the first quarter, most often citing increased competition from other lenders as the reason for doing so. Gross issuance of corporate bonds and leveraged loans was strong in March, and equity issuance was robust. The credit quality of nonfinancial corporations was stable over the intermeeting period, and the ratio of aggregate debt to assets remained near multidecade highs.
Commercial real estate (CRE) financing conditions remained accommodative over the intermeeting period. CRE loan growth at banks strengthened in March but edged down in the first half of April. Spreads on commercial mortgage-backed securities (CMBS) were little changed over the intermeeting period and remained near their post-crisis lows. CMBS issuance continued to be strong in March but slowed somewhat in April. Respondents to the April SLOOS reported easing standards on nonfarm nonresidential loans and tightening standards on multifamily loans, whereas standards on construction and land development loans were little changed in the first quarter. Meanwhile, respondents indicated weaker demand for loans across these three CRE loan categories.
Financing conditions in the residential mortgage market remained accommodative for most borrowers in March and April. For borrowers with low credit scores, conditions continued to ease, but credit remained relatively tight and the volume of mortgage loans extended to this group remained low. Banks responding to the April SLOOS reported weaker loan demand across most residential real estate (RRE) loan categories, while standards were reportedly about unchanged for most RRE loan types in the first quarter.
Consumer credit growth moderated in March and the first half of April. Respondents to the April SLOOS reported that standards and terms on auto and credit card loans tightened, and that demand for these loans weakened in the first quarter. On balance, credit remained readily available to prime-rated borrowers, but tight for subprime borrowers, over the intermeeting period.
The staff provided its latest report on potential risks to financial stability; the report again characterized the financial vulnerabilities of the U.S. financial system as moderate on balance. This overall assessment incorporated the staff's judgment that vulnerabilities associated with asset valuation pressures, while having come down a little in recent months, nonetheless continued to be elevated. The staff judged vulnerabilities from financial-sector leverage and maturity and liquidity transformation to be low, vulnerabilities from household leverage as being in the low-to-moderate range, and vulnerabilities from leverage in the nonfinancial business sector as elevated. The staff also characterized overall vulnerabilities to foreign financial stability as moderate while highlighting specific issues in some foreign economies, including--depending on the country--elevated asset valuation pressures, high private or sovereign debt burdens, and political uncertainties.
Staff Economic Outlook
The staff projection for U.S. economic activity prepared for the May FOMC meeting continued to suggest that the economy was expanding at an above-trend pace. Real GDP growth, which slowed in the first quarter, was expected to pick up in the second quarter and to outpace potential output growth through 2020. The unemployment rate was projected to decline further over the next few years and to continue to run below the staff's estimate of its longer-run natural rate over this period. Relative to the forecast prepared for the March meeting, the projection for real GDP growth in 2018 was revised down a little, primarily in response to incoming consumer spending data that were somewhat softer than the staff had expected. Beyond 2018, the projection for GDP growth was essentially unrevised. With real GDP rising a little less, on balance, over the forecast period, the projected decline in the unemployment rate over the next few years was also a touch smaller than in the previous forecast.
The near-term projection for consumer price inflation was revised up slightly in response to incoming data on prices. Beyond the near term, the forecast for inflation was a bit lower than in the previous projection, reflecting the slightly higher unemployment rate in the new forecast. The rates of both total and core PCE price inflation were projected to be faster in 2018 than in 2017. The staff projected that total PCE inflation would be near the Committee's 2 percent objective over the next several years. Total PCE inflation was expected to run slightly below core inflation in 2019 and 2020 because of a projected decline in energy prices.
The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The staff saw the risks to the forecasts for real GDP growth and the unemployment rate as balanced. On the upside, recent fiscal policy changes could lead to a greater expansion in economic activity over the next few years than the staff projected. On the downside, those fiscal policy changes could yield less impetus to the economy than the staff expected if the economy was already operating above its potential level and resource utilization continued to tighten, as the staff projected. Risks to the inflation projection also were seen as balanced. An upside risk was that inflation could increase more than expected in an economy that was projected to move further above its potential. Downside risks included the possibilities that longer-term inflation expectations may be lower than was assumed or that the run of low core inflation readings last year could prove to be more persistent than the staff expected.
Participants' Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants agreed that information received since the FOMC met in March indicated that the labor market had continued to strengthen and that economic activity had been rising at a moderate rate. Job gains had been strong, on average, in recent months, and the unemployment rate had stayed low. Recent data suggested that growth of household spending had moderated from its strong fourthâquarter pace, while business fixed investment had continued to grow strongly. On a 12âmonth basis, both overall inflation and inflation for items other than food and energy had moved close to 2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed, on balance.
Participants viewed recent readings on spending, employment, and inflation as suggesting little change, on balance, in their assessments of the economic outlook. Real GDP growth slowed somewhat less in the first quarter than anticipated at the time of the March meeting, and participants expected that the moderation in the growth of consumer spending early in the year would prove temporary. They noted a number of economic fundamentals were currently supporting continued above-trend economic growth; these included a strong labor market, federal tax and spending policies, high levels of household and business confidence, favorable financial conditions, and strong economic growth abroad. Participants generally expected that further gradual increases in the target range for the federal funds rate would be consistent with solid expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term. Participants generally viewed the risks to the economic outlook to be roughly balanced.
Participants generally reported that their business contacts were optimistic about the economic outlook. However, in a number of Districts, contacts expressed concern about the possible adverse effects of tariffs and trade restrictions, including the potential for postponing or pulling back on capital spending. Labor markets were generally strong, and contacts in a number of Districts reported shortages of workers in specific industries or occupations. In some cases, labor shortages were contributing to upward pressure on wages. In many Districts, business contacts experienced rising costs of nonlabor inputs, particularly trucking, rail, and shipping rates and prices of steel, aluminum, lumber, and petroleum-based commodities. Reports on the ability of firms to pass through higher costs to customers varied across Districts. Activity in the energy sector remained strong, and crude oil production was expected to continue to expand in response to rising global demand. In contrast, in agricultural areas, low crop prices continued to weigh on farm income. It was noted that the potential for higher Chinese tariffs on key agricultural products could, in the longer run, hurt U.S. competitiveness.
Participants generally agreed that labor market conditions strengthened further during the first quarter of the year. Nonfarm payroll employment posted strong gains, averaging 200,000 per month. The unemployment rate was unchanged, but at a level below most estimates of its longer-run normal rate. Both the overall labor force participation rate and the employment-to-population ratio moved up. The first-quarter data from the employment cost index indicated that the strength in the labor market was showing through to a gradual pickup in wage increases, although the signal from other wage measures was less clear. Many participants commented that overall wage pressures were still moderate or were strong only in industries and occupations experiencing very tight labor supply; several of them noted that recent wage developments provided little evidence of general overheating in the labor market. With economic growth anticipated to remain above trend, participants generally expected the unemployment rate to remain below, or to decline further below, their estimates of its longerârun normal rate. Several participants also saw scope for a strong labor market to continue to draw individuals into the workforce. However, a few others questioned whether tight labor markets would have a lasting positive effect on labor force participation.
The 12-month changes in overall and core PCE prices moved up in March, to 2 percent and 1.9 percent, respectively. Most participants viewed the recent firming in inflation as providing some reassurance that inflation was on a trajectory to achieve the Committee's symmetric 2 percent objective on a sustained basis. In particular, the recent readings appeared to support the view that the downside surprises last year were largely transitory. Some participants noted that inflation was likely to modestly overshoot 2 percent for a time. However, several participants suggested that the underlying trend in inflation had changed little, noting that some of the recent increase in inflation may have represented transitory price changes in some categories of health care and financial services, or that various measures of underlying inflation, such as the 12-month trimmed mean PCE inflation rate from the Federal Reserve Bank of Dallas, remained relatively stable at levels below 2 percent. In discussing the outlook for inflation, many participants emphasized that, after an extended period of low inflation, the Committee's longer-run policy objective was to return inflation to its symmetric 2 percent goal on a sustained basis. Many saw tight resource utilization, the pickup in wage increases and nonlabor input costs, and stable inflation expectations as supporting their projections that inflation would remain near 2 percent over the medium term. But a few cautioned that, although market-based measures of inflation compensation had moved up over recent months, in their view these measures, as well as some survey-based measures, remained at levels somewhat below those that would be consistent with an expectation of sustained 2 percent inflation as measured by the PCE price index.
Participants commented on a number of risks and uncertainties associated with their expectations for economic activity, the labor market, and inflation over the medium term. Some participants saw a risk that, as resource utilization continued to tighten, supply constraints could develop that would intensify upward wage and price pressures, or that financial imbalances could emerge, which could eventually erode the sustainability of the economic expansion. Alternatively, some participants thought that a strengthening labor market could bring a further increase in labor supply, allowing the unemployment rate to decline further with less upward pressure on wages and prices. Another area of uncertainty was the outlook for fiscal and trade policies. Several participants continued to note the challenge of assessing the timing and magnitude of the effects of recent fiscal policy changes on household and business spending and on labor supply over the next several years. In addition, they saw the trajectory of fiscal policy thereafter as difficult to forecast. With regard to trade policies, a number of participants viewed the range of possible outcomes for economic activity and inflation to be particularly wide, depending on what actions were taken by the United States and how U.S trading partners responded. And some participants observed that while these policies were being debated and negotiations continued, the uncertainty surrounding trade issues could damp business sentiment and spending. In their discussion of the outlook for inflation, a few participants also noted the risk that, if global oil prices remained high or moved higher, U.S. inflation would be boosted by the direct effects and pass-through of higher energy costs.
Financial conditions tightened somewhat over the intermeeting period but remained accommodative overall. The foreign exchange value of the dollar rose modestly, but this move retraced only a bit of the depreciation of the dollar since its 2016 peak. With their decline over the intermeeting period, equity prices were about unchanged, on net, since the beginning of the year but were still near their historical highs. Longerâterm Treasury yields rose, but somewhat less than shorter-term yields, and the yield curve flattened somewhat further.
In commenting on the staff's assessment of financial stability, a couple of participants noted that after the bout of financial market volatility in early February, the use of investment strategies predicated on a low-volatility environment may have become less prevalent, and that some investors may have become more cautious. However, asset valuations across a range of markets and leverage in the nonfinancial corporate sector remained elevated relative to historical norms, leaving some borrowers vulnerable to unexpected negative shocks. With regard to the ability of the financial system to absorb such shocks, several participants commented that regulatory reforms since the crisis had contributed to appreciably stronger capital and liquidity positions in the financial sector. In this context, a few participants emphasized the need to build additional resilience in the financial sector at this point in the economic expansion.
In their consideration of monetary policy over the near term, participants discussed the implications of recent economic and financial developments for the outlook for economic growth, labor market conditions, and inflation and, in turn, for the appropriate path of the federal funds rate. All participants expressed the view that it would be appropriate for the Committee to leave the target range for the federal funds rate unchanged at the May meeting. Participants concurred that information received during the intermeeting period had not materially altered their assessment of the outlook for the economy. Participants commented that above-trend growth in real GDP in recent quarters, together with somewhat higher recent inflation readings, had increased their confidence that inflation on a 12-month basis would continue to run near the Committee's longer-run 2 percent symmetric objective. That said, it was noted that it was premature to conclude that inflation would remain at levels around 2 percent, especially after several years in which inflation had persistently run below the Committee's 2 percent objective. In light of subdued inflation over recent years, a few participants observed that adjustments in the stance of policy should take account of the possibility that longer-term inflation expectations have drifted a bit below levels consistent with the Committee's 2 percent inflation objective. Most participants judged that if incoming information broadly confirmed their current economic outlook, it would likely soon be appropriate for the Committee to take another step in removing policy accommodation. Overall, participants agreed that the current stance of monetary policy remained accommodative, supporting strong labor market conditions and a return to 2 percent inflation on a sustained basis.
With regard to the medium-term outlook for monetary policy, all participants reaffirmed that adjustments to the path for the policy rate would depend on their assessments of the evolution of the economic outlook and risks to the outlook relative to the Committee's statutory objectives. Participants generally agreed with the assessment that continuing to raise the target range for the federal funds rate gradually would likely be appropriate if the economy evolves about as expected. These participants commented that this gradual approach was most likely to be conducive to maintaining strong labor market conditions and achieving the symmetric 2 percent inflation objective on a sustained basis without resulting in conditions that would eventually require an abrupt policy tightening. A few participants commented that recent news on inflation, against a background of continued prospects for a solid pace of economic growth, supported the view that inflation on a 12-month basis would likely move slightly above the Committee's 2 percent objective for a time. It was also noted that a temporary period of inflation modestly above 2 percent would be consistent with the Committee's symmetric inflation objective and could be helpful in anchoring longer-run inflation expectations at a level consistent with that objective.
Meeting participants also discussed the recent flatter profile of the term structure of interest rates. Participants pointed to a number of factors contributing to the flattening of the yield curve, including the expected gradual rise of the federal funds rate, the downward pressure on term premiums from the Federal Reserve's still-large balance sheet as well as asset purchase programs by other central banks, and a reduction in investors' estimates of the longer-run neutral real interest rate. A few participants noted that such factors could make the slope of the yield curve a less reliable signal of future economic activity. However, several participants thought that it would be important to continue to monitor the slope of the yield curve, emphasizing the historical regularity that an inverted yield curve has indicated an increased risk of recession.
Participants commented on how the Committee's communications in its postmeeting statement might need to be revised in coming meetings if the economy evolved broadly as expected. A few participants noted that if increases in the target range for the federal funds rate continued, the federal funds rate could be at or above their estimates of its longer-run normal level before too long. In addition, a few observed that the neutral level of the federal funds rate might currently be lower than their estimates of its longer-run level. In light of this, some participants noted it might soon be appropriate to revise the forward-guidance language in the statement indicating that the "federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run" or to modify the language stating that "the stance of monetary policy remains accommodative." Participants expressed a range of views on the amount of further policy firming that would likely be required over the medium term to achieve the Committee's goals. Participants indicated that the Committee, in making policy decisions over the next few years, should conduct policy with the aim of keeping inflation near its longer-run symmetric objective while sustaining the economic expansion and a strong labor market. Participants agreed that the actual path of the federal funds rate would depend on the economic outlook as informed by incoming information.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the Committee met in March indicated that the labor market had continued to strengthen and that economic activity had been rising at a moderate rate. Job gains had been strong, on average, in recent months, and the unemployment rate had stayed low. Recent data suggested that growth of household spending had moderated from its strong fourth-quarter pace, while business fixed investment continued to grow strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy had moved close to 2 percent. In particular, in March the 12-month percent increase in PCE prices was equal to the Committee's longer-run objective of 2 percent, while the measure excluding food and energy prices was only slightly below 2 percent. Market-based measures of inflation compensation remained low, and survey-based measures of longer-term inflation expectations were little changed, on balance.
All members viewed the recent data as indicating that the outlook for the economy had changed little since the previous meeting. In addition, financial conditions, although somewhat tighter than at the time of the March FOMC meeting, had stayed accommodative overall, while fiscal policy was likely to provide sizable impetus to the economy over the next few years. Consequently, members expected that, with further gradual adjustments to the stance of monetary policy, economic activity would expand at a moderate pace in the medium term and labor market conditions would remain strong. Members agreed that inflation on a 12-month basis is expected to run near the Committee's symmetric 2 percent objective over the medium term. Members judged that the risks to the economic outlook appeared to be roughly balanced.
After assessing current conditions and the outlook for economic activity, the labor market, and inflation, members agreed to maintain the target range for the federal funds rate at 1-1/2 to 1-3/4 percent. They noted that the stance of monetary policy remained accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
Members agreed that the timing and size of future adjustments to the target range for the federal funds rate would depend on their assessments of realized and expected economic conditions relative to the Committee's objectives of maximum employment and 2 percent inflation. They reiterated that this assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Members also agreed that they would carefully monitor actual and expected developments in inflation in relation to the Committee's symmetric inflation goal. Members expected that economic conditions would evolve in a manner that would warrant further gradual increases in the federal funds rate. Members agreed that the federal funds rate was likely to remain, for some time, below levels that they expected to prevail in the longer run. However, they noted that the actual path of the federal funds rate would depend on the economic outlook as informed by incoming data.
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 SOMA in accordance with the following domestic policy directive, to be released at 2:00 p.m.:
"Effective May 3, 2018, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1-1/2 to 1-3/4 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.50 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during each calendar month that exceeds $18 billion, and to reinvest in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $12 billion. Small deviations from these amounts for operational reasons are acceptable.
The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."
The vote also encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in March indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Recent data suggest that growth of household spending moderated from its strong fourth-quarter pace, while business fixed investment continued to grow strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong. Inflation on a 12-month basis is expected to run near the Committee's symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1-1/2 to 1-3/4 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data."
Voting for this action: Jerome H. Powell, William C. Dudley, Thomas I. Barkin, Raphael W. Bostic, Lael Brainard, Loretta J. Mester, Randal K. Quarles, and John C. Williams.
Voting against this action: None.
Consistent with the Committee's decision to leave the target range for the federal funds rate unchanged, the Board of Governors voted unanimously to leave the interest rates on required and excess reserve balances unchanged at 1-3/4 percent and voted unanimously to approve establishment of the primary credit rate (discount rate) at the existing level of 2-1/4 percent.5
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, June 12-13, 2018. The meeting adjourned at 10:00 a.m. on May 2, 2018.
Notation Vote
By notation vote completed on April 10, 2018, the Committee unanimously approved the minutes of the Committee meeting held on March 20-21, 2018.
_____________________________
James A. Clouse
Secretary
1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes. Return to text
2. Attended Tuesday session only. Return to text
3. Attended through the discussion of developments in financial markets and open market operations. Return to text
4. Attended through the discussion on financial stability issues. Return to text
5. The second vote of the Board also encompassed approval of the establishment of the interest rates for secondary and seasonal credit under the existing formulas for computing such rates. Return to text |
2018-03-21T00:00:00 | 2018-04-11 | Minute | Minutes of the Federal Open Market Committee
March 20-21, 2018
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, March 20, 2018, at 1:00 p.m. and continued on Wednesday, March 21, 2018, at 9:00 a.m.1
PRESENT:
Jerome H. Powell, Chairman
William C. Dudley, Vice Chairman
Thomas I. Barkin
Raphael W. Bostic
Lael Brainard
Loretta J. Mester
Randal K. Quarles
John C. Williams
James Bullard, Charles L. Evans, Esther L. George, Eric Rosengren, and Michael Strine,2 Alternate Members of the Federal Open Market Committee
Patrick Harker, Robert S. Kaplan, and Neel Kashkari, Presidents of the Federal Reserve Banks of Philadelphia, Dallas, and Minneapolis, respectively
James A. Clouse, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Mark E. Van Der Weide, General Counsel
Michael Held, Deputy General Counsel
Thomas Laubach, Economist
David W. Wilcox, Economist
David Altig, Kartik B. Athreya, Thomas A. Connors, Trevor A. Reeve, Ellis W. Tallman, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Ann E. Misback, Secretary, Office of the Secretary, Board of Governors
Matthew J. Eichner,3 Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors; Michael S. Gibson, Director, Division of Supervision and Regulation, Board of Governors; Andreas Lehnert, Director, Division of Financial Stability, Board of Governors
Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board of Governors; Michael T. Kiley, Deputy Director, Division of Financial Stability, Board of Governors
Antulio N. Bomfim, Special Adviser to the Chairman, Office of Board Members, Board of Governors
Joseph W. Gruber and John M. Roberts,2 Special Advisers to the Board, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Shaghil Ahmed, Brian M. Doyle, and Christopher J. Erceg, Senior Associate Directors, Division of International Finance, Board of Governors; Eric M. Engen and Diana Hancock, Senior Associate Directors, Division of Research and Statistics, Board of Governors
Ellen E. Meade, Stephen A. Meyer, Edward Nelson, and Robert J. Tetlow, Senior Advisers, Division of Monetary Affairs, Board of Governors
Stacey Tevlin, Associate Director, Division of Research and Statistics, Board of Governors
Glenn Follette and Karen M. Pence,2 Assistant Directors, Division of Research and Statistics, Board of Governors
Eric C. Engstrom, Adviser, Division of Monetary Affairs, and Adviser, Division of Research and Statistics, Board of Governors
Penelope A. Beattie,2 Assistant to the Secretary, Office of the Secretary, Board of Governors
Etienne Gagnon, Section Chief, Division of Monetary Affairs, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Kurt F. Lewis, Principal Economist, Division of Monetary Affairs, Board of Governors
Anna Orlik, Senior Economist, Division of Monetary Affairs, Board of Governors
Valerie Hinojosa, Information Manager, Division of Monetary Affairs, Board of Governors
Meredith Black, First Vice President, Federal Reserve Bank of Dallas
Michael Dotsey, Glenn D. Rudebusch, and Daniel G. Sullivan, Executive Vice Presidents, Federal Reserve Banks of Philadelphia, San Francisco, and Chicago, respectively
Marc Giannoni, Luke Woodward, and Mark L.J. Wright, Senior Vice Presidents, Federal Reserve Banks of Dallas, Kansas City, and Minneapolis, respectively
David Andolfatto, Jonathan P. McCarthy, Giovanni Olivei, and Jonathan L. Willis, Vice Presidents, Federal Reserve Banks of St. Louis, New York, Boston, and Kansas City, respectively
Developments in Financial Markets and Open Market Operations
The deputy manager of the System Open Market Account (SOMA) provided a summary of developments in domestic and global financial markets over the intermeeting period; she also reported on open market operations and related issues. Financial markets experienced a notable bout of volatility early in the intermeeting period; volatility was particularly pronounced in equity markets. Market participants pointed to incoming economic data released in early February--particularly data on average hourly earnings--as raising concerns about the prospects for higher inflation and higher interest rates. These concerns reportedly contributed to a steep decline in equity prices and an associated rise in measures of volatility. Some reports suggested that the increase in volatility was amplified by the unwinding of trading positions based on various types of volatility trading strategies. Measures of equity market volatility declined over subsequent weeks but remained above levels that prevailed earlier in the year, and stock prices finished lower, on net, over the intermeeting period. Interest rates rose modestly over the period. Respondents to the Open Market Desk's surveys of primary dealers and market participants suggested that revisions in investors' views regarding the fiscal outlook were an important factor boosting yields and contributing to a slightly steeper expected trajectory of the federal funds rate. The deputy manager noted that a rapid and sizable increase in Treasury bill issuance over recent weeks had put upward pressure on money market yields over the period. Three-month Treasury bill yields moved up significantly and those increases passed through to rates on other short-term instruments such as three-month Eurodollar deposits and commercial paper. The spread of market rates on overnight repurchase agreements over the offering rate at the Federal Reserve's overnight reverse repurchase (ON RRP) facility widened, and take-up at the facility fell to quite low levels as a result. Rates on overnight federal funds and Eurodollar transactions edged higher relative to the interest rate on excess reserves. The Desk continued to execute the FOMC's balance sheet normalization plan initiated in October of last year.
By unanimous vote, the Committee ratified the Open Market Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account during the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the March 20-21 meeting indicated that labor market conditions continued to strengthen through February and suggested that real gross domestic product (GDP) was rising at a moderate pace in the first quarter. Consumer price inflation, as measured by the 12âmonth percentage change in the price index for personal consumption expenditures (PCE), remained below 2 percent in January. Surveyâbased measures of longer-run inflation expectations were little changed on balance.
Gains in total nonfarm payroll employment were strong over the two months ending in February. The labor force participation rate held steady in January and then stepped up markedly in February, with the participation rates for prime-age (defined as ages 25 to 54) women and men moving up on net. The national unemployment rate remained at 4.1 percent. Similarly, the unemployment rates for African Americans, Asians, and Hispanics were roughly flat, on balance, in recent months. The share of workers employed part time for economic reasons edged up but remained close to its pre-recession levels. The rates of private-sector job openings and quits increased slightly, on net, over the two months ending in January, and the four-week moving average of initial claims for unemployment insurance benefits continued to be low in early March. Recent readings showed that increases in labor compensation remained modest. Compensation per hour in the nonfarm business sector advanced 2-3/4 percent over the four quarters of last year, and average hourly earnings for all employees rose 2-1/2 percent over the 12 months ending in February.
Total industrial production expanded, on net, in January and February, with gains in both manufacturing and mining. Automakers' schedules indicated that assemblies of light motor vehicles would likely edge down in coming months. However, broader indicators of manufacturing production, such as the new orders indexes from national and regional manufacturing surveys, pointed to further solid increases in factory output in the near term.
Consumer expenditures appeared likely to rise at a modest pace in the first quarter following a strong gain in the preceding quarter. Real PCE edged down in January, and the components of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimate of PCE rose somewhat in February while the pace of light motor vehicle sales declined slightly. However, household spending was probably held back somewhat in February because of a delay in many federal tax refunds, and the subsequent delivery of those refunds would likely contribute to an increase in consumer spending in March. Moreover, the lower tax withholding resulting from the tax cuts enacted late last year, which was beginning to show through in consumers' paychecks, would likely provide some impetus to spending in coming months. More broadly, recent readings on key factors that influence consumer spending--including gains in employment and real disposable personal income, along with households' elevated net worth--continued to be supportive of solid real PCE growth in the near term. In addition, consumer sentiment in early March, as measured by the University of Michigan Surveys of Consumers, was at its highest level since 2004.
Real residential investment looked to be slowing in the first quarter after rising briskly in the fourth quarter. Starts of new single-family homes increased in January and February, although building permit issuance moved down somewhat. Starts of multifamily units jumped in January but fell back in February. Sales of both new and existing homes declined in January.
Growth in real private expenditures for business equipment and intellectual property appeared to be moderating in the first quarter after increasing at a solid pace in the preceding quarter. Nominal shipments of nondefense capital goods excluding aircraft edged down in January. However, recent forward-looking indicators of business equipment spending--such as the backlog of unfilled capital goods orders, along with upbeat readings on business sentiment from national and regional surveys--pointed to further solid gains in equipment spending in the near term. Firms' nominal spending for nonresidential structures outside of the drilling and mining sector declined in January. In contrast, the number of crude oil and natural gas rigs in operation--an indicator of business spending for structures in the drilling and mining sector--continued to move up through mid-March.
Total real government purchases seemed to be flattening out, on balance, in the first quarter after rising solidly in the fourth quarter. Nominal defense spending in January and February was consistent with a decline in real federal purchases. In contrast, real purchases by state and local governments looked to be rising, as the payrolls of these governments increased in January and February and nominal state and local construction spending advanced somewhat in January.
The change in net exports was a significant drag on real GDP growth in the fourth quarter of 2017, as imports grew rapidly. The nominal U.S. international trade deficit widened in January; exports declined, led by lower exports of capital goods and industrial supplies, while imports were about flat. The slowing of real import growth following the rapid increase in the fourth quarter suggested that the drag on real GDP growth from net exports would lessen in the first quarter.
Total U.S. consumer prices, as measured by the PCE price index, increased 1-3/4 percent over the 12 months ending in January. Core PCE price inflation, which excludes changes in consumer food and energy prices, was 1-1/2 percent over that same period. The consumer price index (CPI) rose 2-1/4 percent over the 12 months ending in February, while core CPI inflation was 1-3/4 percent. Recent readings on survey-based measures of longer-run inflation expectations--including those from the Michigan survey, the Survey of Professional Forecasters, and the Desk's Survey of Primary Dealers and Survey of Market Participants--were little changed on balance.
Foreign economic activity expanded at a moderate pace in the fourth quarter. Real GDP growth picked up in Mexico but slowed a bit in some advanced foreign economies (AFEs) and in emerging Asia. Recent indicators pointed to solid economic growth abroad in the first quarter of this year. Inflation abroad continued to be boosted by the pass-through to consumer prices of past increases in oil prices. However, excluding food and energy prices, inflation remained subdued in many foreign economies, including the euro area and Japan.
Staff Review of the Financial Situation
Financial markets were turbulent over the intermeeting period, and market volatility increased notably. On net, U.S. equity prices declined, corporate bond spreads widened, and nominal Treasury yields rose.
Broad equity price indexes decreased over the intermeeting period. Market participants pointed to a larger-than-expected increase in average hourly earnings in the January employment report as a factor triggering increased investor concerns about inflation and the associated pace of interest rate increases. Those concerns appeared to induce a substantial decline in equity prices. The decline may have been exacerbated by broader concerns about the level of stock market valuations. On February 5, the VIX--an index of option-implied volatility for one-month returns on the S&P 500 index--rose to its highest level since 2015, reportedly driven in part by the unwinding of investment strategies designed to profit from low volatility. Subsequently, equity prices recovered about half of their decline, and the VIX partially retraced its earlier increase.
Monetary policy communications over the intermeeting period--including the January FOMC statement, the minutes of the January FOMC meeting, and the Chairman's semiannual testimony to the Congress--were generally viewed by market participants as signaling a somewhat stronger economic outlook and thus reinforced expectations for further gradual increases in the target range for the federal funds rate. The probability of the next rate hike occurring at the March FOMC meeting, as implied by quotes on federal funds futures contracts, increased to near certainty. Conditional on a March rate hike, the market-implied probability of another increase in the federal funds rate target range at the June FOMC meeting edged up to just above 70 percent. Expectations for the federal funds rate at the end of 2019 and 2020, derived from overnight index swap (OIS) quotes, moved up somewhat since late January.
On net, the nominal Treasury yield curve shifted up and flattened a bit. Monetary policy communications, higher-than-expected domestic price data, and expectations for increases in the supply of Treasury securities following the federal budget agreement in early February contributed to the increase in Treasury yields. Measures of inflation compensation derived from Treasury Inflation-Protected Securities were little changed on net. Option-implied volatility on longer-term rates rose notably following the jump in equity market volatility on February 5 but mostly retraced that increase by the end of the intermeeting period. On balance, spreads on investment- and speculative-grade corporate bond yields over comparable-maturity Treasury yields widened but remained near the lower end of their historical ranges.
In short-term funding markets, increased issuance of Treasury bills lifted Treasury bill yields above comparable-maturity OIS rates for the first time in almost a decade. The rise in bill yields was a factor that pushed up money market rates and widened the spreads of certificates of deposit and term London interbank offered rates relative to OIS rates. The upward pressure on money market rates also showed up in slight increases in the effective federal funds rate and the overnight bank funding rate relative to the interest rate on excess reserves. The rise in market rates on overnight repurchase agreements relative to the offering rate on the Federal Reserve's ON RRP facility resulted in low levels of take-up at the facility. Reductions in the size of the Federal Reserve's balance sheet continued as scheduled without a notable effect on markets.
Despite the recent volatility in some financial markets, financing conditions for nonfinancial corporations and households remained accommodative over the intermeeting period and continued to support further expansion of economic activity. Gross issuance of investment- and speculative-grade bonds was slightly lower than usual in January and February, while gross issuance of institutional leveraged loans stayed strong. The provision of bank-intermediated credit to businesses slowed further, likely reflecting weak loan demand rather than tight supply. Small business owners continued to report accommodative credit supply conditions but also weak demand for credit. Credit conditions in municipal bond markets remained accommodative.
In commercial real estate markets, loan growth at banks slowed further in January and February. Financing conditions in commercial mortgage-backed securities (CMBS) markets remained accommodative, as issuance was robust (relative to the usual seasonal slowdown) and CMBS spreads continued to be at low levels. Financing conditions in the residential mortgage market remained accommodative for most borrowers, though credit conditions stayed tight for borrowers with low credit scores or with hard-to-document incomes. Mortgage rates moved up, on net, over the period, along with the rise in other long-term rates.
Consumer credit grew at a solid pace in January following a rapid expansion in the fourth quarter. Aggregate credit card balances continued to expand steadily in January. Nonetheless, for subprime borrowers, conditions remained tight, with credit limits and balances still low by historical standards. Auto lending continued to grow at a moderate pace in recent months; although underwriting standards in the subprime segment continued to tighten, there were few signs of a significant restriction in credit supply for auto loans.
Since the January FOMC meeting, foreign equity prices moved notably lower, on net, and generally declined more in the AFEs than in the United States. Longer-term yields on sovereign debt in AFEs either decreased moderately or ended the period little changed, in contrast to the increase in U.S. Treasury yields. Weaker-than-expected economic data weighed on market-based measures of expected policy rate paths and on longer-term yields in Canada and in the euro area. Communications from the Bank of Canada also seemed to contribute to the decline in Canadian yields. In the United Kingdom, longer-term yields were little changed, on net, although the market-based path of expected policy rates moved up moderately in response to Bank of England communications. In emerging market economies (EMEs), sovereign yield spreads widened modestly, and flows into EME mutual funds were volatile over the period.
The broad nominal dollar index appreciated moderately over the period, largely reflecting an outsized depreciation of the Canadian dollar and a massive devaluation of the Venezuelan bolivar. (The Venezuelan government devalued the official Venezuelan exchange rate by more than 99 percent against the dollar, bringing the official rate closer to its black market value.) Lower oil prices, weaker-than-expected economic data, and uncertainty over U.S. trade policy likely contributed to the weakness in the Canadian dollar. In contrast, the Japanese yen appreciated against the dollar, in part supported by safe-haven demand. Late in the intermeeting period, the British pound was boosted by news of a preliminary agreement between U.K. and European Union authorities regarding the transition period of the Brexit process, but the pound still ended the intermeeting period modestly weaker against the dollar.
Staff Economic Outlook
The staff projection for U.S. economic activity prepared for the March FOMC meeting was somewhat stronger, on balance, than the forecast at the time of the January meeting. The near-term forecast for real GDP growth was revised down a little; the incoming spending data were a bit softer than the staff had expected, and the staff judged that the softness was not associated with residual seasonality in the data. However, the slowing in the pace of spending in the first quarter was expected to be transitory, and the medium-term projection for GDP growth was revised up modestly, largely reflecting the expected boost to GDP from the federal budget agreement enacted in February. Real GDP was projected to increase at a faster pace than potential output through 2020. The unemployment rate was projected to decline further over the next few years and to continue to run below the staff's estimate of its longer-run natural rate over this period.
The projection for inflation over the medium term was revised up a bit, reflecting the slightly tighter resource utilization in the new forecast. The rates of both total and core PCE price inflation were projected to be faster in 2018 than in 2017. The staff projected that inflation would reach the Committee's 2 percent objective in 2019.
The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The staff saw the risks to the forecasts for real GDP growth and the unemployment rate as balanced. On the upside, recent fiscal policy changes could lead to a greater expansion in economic activity over the next few years than the staff projected. On the downside, those fiscal policy changes could yield less impetus to the economy than the staff expected if the economy was already operating above its potential level and resource utilization continued to tighten, as the staff projected. Risks to the inflation projection also were seen as balanced. An upside risk was that inflation could increase more than expected in an economy that was projected to move further above its potential. Downside risks included the possibilities that longer-term inflation expectations may have edged lower or that the run of low core inflation readings last year could prove to be more persistent than the staff expected.
Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, members of the Board of Governors and Federal Reserve Bank presidents submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2018 through 2020 and over the longer run, based on their individual assessments of the appropriate path for the federal funds rate. The longer-run projections represented each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These projections and policy assessments are described in the Summary of Economic Projections (SEP), which is an addendum to these minutes.
In their discussion of economic conditions and the outlook, meeting participants agreed that information received since the FOMC met in January indicated that economic activity had been rising at a moderate rate and that the labor market had continued to strengthen. Job gains had been strong in recent months, and the unemployment rate had stayed low. On a 12-month basis, both overall inflation and inflation for items other than food and energy continued to run below 2 percent. Market-based measures of inflation compensation had increased in recent months but remained low; survey-based measures of longer-term inflation expectations were little changed, on balance.
Participants noted incoming data suggesting some slowing in the rate of growth of household spending and business fixed investment after strong fourth-quarter readings. However, they expected that the first-quarter softness would be transitory, pointing to a variety of factors, including delayed payment of some personal tax refunds, residual seasonality in the data, and more generally to strong economic fundamentals. Among the fundamentals that participants cited were high levels of consumer and business sentiment, supportive financial conditions, improved economic conditions abroad, and recent changes in fiscal policy. Participants generally saw the news on spending and the labor market over the past few quarters as being consistent with continued above-trend growth and a further strengthening in labor markets. Participants expected that, with further gradual increases in the federal funds rate, economic activity would expand at a solid rate during the remainder of this year and a moderate pace in the medium term, and that labor market conditions would remain strong. Inflation on a 12-month basis was expected to move up in coming months and to stabilize around the Committee's 2 percent objective over the medium term. Several participants noted that the 12-month PCE price inflation rate would likely shift upward when the March data are released because the effects of the outsized decline in the prices of cell phone service plans in March of last year will drop out of that calculation. Near-term risks to the economic outlook appeared to be roughly balanced, but participants agreed that it would be important to continue to monitor inflation developments closely.
Many participants reported considerable optimism among the business contacts in their Districts, consistent with a firming in business expenditures. Respondents to District surveys in both the manufacturing and service sectors were generally upbeat about the economic outlook. In some Districts, reports from business contacts or evidence from surveys pointed to continuing shortages of workers in segments of the labor market. Activity in the energy sector continued to expand, with contacts suggesting that further increases were likely, provided that sufficient labor resources were forthcoming. In contrast, contacts in the agricultural sector reported that farm income continued to experience downward pressure due to low crop prices.
A number of participants reported concern among their business contacts about the possible ramifications of the recent imposition of tariffs on imported steel and aluminum. Participants did not see the steel and aluminum tariffs, by themselves, as likely to have a significant effect on the national economic outlook, but a strong majority of participants viewed the prospect of retaliatory trade actions by other countries, as well as other issues and uncertainties associated with trade policies, as downside risks for the U.S. economy. Contacts in the agricultural sector reported feeling particularly vulnerable to retaliation.
Tax changes enacted late last year and the recent federal budget agreement, taken together, were expected to provide a significant boost to output over the next few years. However, participants generally regarded the magnitude and timing of the economic effects of the fiscal policy changes as uncertain, partly because there have been few historical examples of expansionary fiscal policy being implemented when the economy was operating at a high level of resource utilization. A number of participants also suggested that uncertainty about whether all elements of the tax cuts would be made permanent, or about the implications of higher budget deficits for fiscal sustainability and real interest rates, represented sources of downside risk to the economic outlook. A few participants noted that the changes in tax policy could boost the level of potential output.
Most participants described labor market conditions as strong, noting that payroll gains had remained well above the pace regarded as consistent with absorbing new labor force entrants over time, the unemployment rate had stayed low, job openings had been high, or that initial claims for unemployment insurance benefits had been low. Many participants observed that the labor force participation rate had been higher recently than they had expected, helping to keep the unemployment rate flat over the past few months despite strong payroll gains. The firmness in the overall participation rate--relative to its demographically driven downward trend--and the rising participation rate of prime-age adults were regarded as signs of continued strengthening in labor market conditions. A few participants thought that these favorable developments could continue for a time, whereas others expressed doubts. A few participants warned against inferring too much from comparisons of the current low level of the unemployment rate with historical benchmarks, arguing that the much higher levels of education of today's workforce--and the lower average unemployment rate of more highly educated workers than less educated workers--suggested that the U.S. economy might be able to sustain lower unemployment rates than was the case in the 1950s or 1960s.
In some Districts, reports from business contacts or evidence from surveys pointed to a pickup in wages, particularly for unskilled or entry-level workers. However, business contacts or national surveys led a few participants to conclude that some businesses facing labor shortages were changing job requirements so that they matched more closely the skills of available workers, increasing training, or offering more flexible work arrangements, rather than increasing wages in a broad-based fashion. Regarding wage growth at the national level, several participants noted a modest increase, but most still described the pace of wage gains as moderate; a few participants cited this fact as suggesting that there was room for the labor market to strengthen somewhat further.
In some Districts, surveys or business contacts reported increases in nonwage costs, particularly in the cost of materials, and in a few Districts, contacts reported passing on some of those costs in the form of higher prices. Contacts in a few Districts suggested that widely known, observable cost increases--such as those associated with rising commodity prices--would be more likely to be accepted and passed through to final goods prices than would less observable costs such as wage increases. A few participants argued that either an absence of pricing power among at least some firms--perhaps stemming from globalization and technological innovations, including ones that facilitate price comparisons--or the ability of firms to find ways to cut costs of production has been damping inflationary pressures. Many participants stated that recent readings from indicators on inflation and inflation expectations increased their confidence that inflation would rise to the Committee's 2 percent objective in coming months and then stabilize around that level; others suggested that downside risks to inflation were subsiding. In contrast, a few participants cautioned that, despite increases in market-based measures of inflation compensation in recent months and the stabilization of some survey measures of inflation expectations, the levels of these indicators remained too low to be consistent with the Committee's 2 percent inflation objective.
In their discussion of developments in financial markets, some participants observed that financial conditions remained accommodative despite the rise in market volatility and repricing of assets that had occurred in February. Many participants reported that their contacts had taken the previous month's turbulence in stride, although a few participants suggested that financial developments over the intermeeting period highlighted some downside risks associated with still-high valuations for equities or from market volatility more generally. A few participants expressed concern that a lengthy period in which the economy operates beyond potential and financial conditions remain highly accommodative could, over time, pose risks to financial stability.
In their consideration of monetary policy, participants discussed the implications of recent economic and financial developments for the appropriate path of the federal funds rate. All participants agreed that the outlook for the economy beyond the current quarter had strengthened in recent months. In addition, all participants expected inflation on a 12-month basis to move up in coming months. This expectation partly reflected the arithmetic effect of the soft readings on inflation in early 2017 dropping out of the calculation; it was noted that the increase in the inflation rate arising from this source was widely expected and, by itself, would not justify a change in the projected path for the federal funds rate. Most participants commented that the stronger economic outlook and the somewhat higher inflation readings in recent months had increased the likelihood of progress toward the Committee's 2 percent inflation objective. A few participants suggested that a modest inflation overshoot might help push up longer-term inflation expectations and anchor them at a level consistent with the Committee's 2 percent inflation objective. A number of participants offered their views on the potential benefits and costs associated with an economy operating well above potential for a prolonged period while inflation remained low. On the one hand, the associated tightness in the labor market might help speed the return of inflation to the Committee's 2 percent goal and induce a further increase in labor force participation; on the other hand, an overheated economy could result in significant inflation pressures or lead to financial instability.
Based on their current assessments, almost all participants expressed the view that it would be appropriate for the Committee to raise the target range for the federal funds rate 25 basis points at this meeting. These participants agreed that, even after such an increase in the target range, the stance of monetary policy would remain accommodative, supporting strong labor market conditions and a sustained return to 2 percent inflation. A couple of participants pointed to possible benefits of postponing an increase in the target range for the federal funds rate until a subsequent meeting; these participants suggested that waiting for additional data to provide more evidence of a sustained return of the 12-month inflation rate to 2 percent might more clearly demonstrate the data dependence of the Committee's decisions and its resolve to achieve the price-stability component of its dual mandate.
With regard to the medium-term outlook for monetary policy, all participants saw some further firming of the stance of monetary policy as likely to be warranted. Almost all participants agreed that it remained appropriate to follow a gradual approach to raising the target range for the federal funds rate. Several participants commented that this gradual approach was most likely to be conducive to maintaining strong labor market conditions and returning inflation to 2 percent on a sustained basis without resulting in conditions that would eventually require an abrupt policy tightening. A number of participants indicated that the stronger outlook for economic activity, along with their increased confidence that inflation would return to 2 percent over the medium term, implied that the appropriate path for the federal funds rate over the next few years would likely be slightly steeper than they had previously expected. Participants agreed that the longer-run normal federal funds rate was likely lower than in the past, in part because of secular forces that had put downward pressure on real interest rates. Several participants expressed the judgment that it would likely become appropriate at some point for the Committee to set the federal funds rate above its longer-run normal value for a time. Some participants suggested that, at some point, it might become necessary to revise statement language to acknowledge that, in pursuit of the Committee's statutory mandate and consistent with the median of participants' policy rate projections in the SEP, monetary policy eventually would likely gradually move from an accommodative stance to being a neutral or restraining factor for economic activity. However, participants expressed a range of views on the amount of policy tightening that would likely be required over the medium term to achieve the Committee's goals. Participants agreed that the actual path of the federal funds rate would depend on the economic outlook as informed by incoming data.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the Committee met in January indicated that the labor market had continued to strengthen and that economic activity had been rising at a moderate rate. Job gains had been strong in recent months, and the unemployment rate had stayed low. Recent data suggested that growth rates of household spending and business fixed investment had moderated from their strong fourth-quarter readings. On a 12-month basis, both overall inflation and inflation for items other than food and energy had continued to run below 2 percent. Market-based measures of inflation compensation had increased in recent months but remained low; survey-based measures of longer-term inflation expectations were little changed, on balance.
All members viewed the recent data and other developments bearing on real economic activity as suggesting that the outlook for the economy beyond the current quarter had strengthened in recent months. In addition, notwithstanding increased market volatility over the intermeeting period, financial conditions had stayed accommodative, and developments since the January meeting had indicated that fiscal policy was likely to provide greater impetus to the economy over the next few years than members had previously thought. Consequently, members expected that, with further gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace in the medium term, and labor market conditions would remain strong. Members generally continued to judge the risks to the economic outlook as remaining roughly balanced.
Most members noted that recent readings on inflation, along with the strengthening of the economic outlook, provided support for the view that inflation on a 12-month basis would likely move up in coming months and stabilize around the Committee's 2 percent objective over the medium term. Members agreed to continue to monitor inflation developments closely.
After assessing current conditions and the outlook for economic activity, the labor market, and inflation, members voted to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent. They indicated that the stance of monetary policy remained accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
Members agreed that the timing and size of future adjustments to the target range for the federal funds rate would depend on their assessments of realized and expected economic conditions relative to the Committee's objectives of maximum employment and 2 percent inflation. They reiterated that this assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Members also agreed that they would carefully monitor actual and expected developments in inflation in relation to the Committee's symmetric inflation goal. Members expected that economic conditions would evolve in a manner that would warrant further gradual increases in the federal funds rate. They judged that raising the target range gradually would balance the risks to the outlook for inflation and unemployment and was most likely to support continued economic expansion. Members agreed that the strengthening in the economic outlook in recent months increased the likelihood that a gradual upward trajectory of the federal funds rate would be appropriate. Members continued to anticipate that the federal funds rate would likely remain, for some time, below levels that were expected to prevail in the longer run. Nonetheless, they again stated that the actual path for the federal funds rate would depend on the economic outlook as informed by incoming data.
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 SOMA in accordance with the following domestic policy directive, to be released at 2:00 p.m.:
"Effective March 22, 2018, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1-1/2 to 1-3/4 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.50 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during March that exceeds $12 billion, and to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during March that exceeds $8 billion. Effective in April, the Committee directs the Desk to roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during each calendar month that exceeds $18 billion, and to reinvest in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $12 billion. Small deviations from these amounts for operational reasons are acceptable.
The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."
The vote also encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in January indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong in recent months, and the unemployment rate has stayed low. Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The economic outlook has strengthened in recent months. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong. Inflation on a 12-month basis is expected to move up in coming months and to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data."
Voting for this action: Jerome H. Powell, William C. Dudley, Thomas I. Barkin, Raphael W. Bostic, Lael Brainard, Loretta J. Mester, Randal K. Quarles, and John C. Williams.
Voting against this action: None.
To support the Committee's decision to raise the target range for the federal funds rate, the Board of Governors voted unanimously to raise the interest rates on required and excess reserve balances 1/4 percentage point, to 1-3/4 percent, effective March 22, 2018. The Board of Governors also voted unanimously to approve a 1/4 percentage point increase in the primary credit rate (discount rate) to 2-1/4 percent, effective March 22, 2018.4
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, May 1-2, 2018. The meeting adjourned at 9:55 a.m. on March 21, 2018.
Notation Vote
By notation vote completed on February 20, 2018, the Committee unanimously approved the minutes of the Committee meeting held on January 30-31, 2018.
_____________________________
James A. Clouse
Secretary
1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes. Return to text
2. Attended Tuesday session only. Return to text
3. Attended through the discussion of developments in financial markets and open market operations. Return to text
4. In taking this action, the Board approved requests submitted by the boards of directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, St. Louis, Kansas City, Dallas, and San Francisco. This vote also encompassed approval by the Board of Governors of the establishment of a 2-1/4 percent primary credit rate by the remaining Federal Reserve Banks, effective on the later of March 22, 2018, and the date such Reserve Banks informed the Secretary of the Board of such a request. (Secretary's note: Subsequently, the Federal Reserve Banks of Chicago and Minneapolis were informed by the Secretary of the Board of the Board's approval of their establishment of a primary credit rate of 2-1/4 percent, effective March 22, 2018.) The second vote of the Board also encompassed approval of the establishment of the interest rates for secondary and seasonal credit under the existing formulas for computing such rates. Return to text |
2018-03-21T00:00:00 | 2018-03-21 | Statement | Information received since the Federal Open Market Committee met in January indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong in recent months, and the unemployment rate has stayed low. Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The economic outlook has strengthened in recent months. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong. Inflation on a 12-month basis is expected to move up in coming months and to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
Voting for the FOMC monetary policy action were Jerome H. Powell, Chairman; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams.
Implementation Note issued March 21, 2018 |
2018-01-31T00:00:00 | 2018-02-21 | Minute | Minutes of the Federal Open Market Committee
January 30-31, 2018
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, January 30, 2018, at 10:00 a.m. and continued on Wednesday, January 31, 2018, at 9:00 a.m.1
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Thomas I. Barkin
Raphael W. Bostic
Lael Brainard
Loretta J. Mester
Jerome H. Powell
Randal K. Quarles
John C. Williams
James Bullard, Charles L. Evans, Esther L. George, Michael Strine, and Eric Rosengren, Alternate Members of the Federal Open Market Committee
Patrick Harker, Robert S. Kaplan, and Neel Kashkari, Presidents of the Federal Reserve Banks of Philadelphia, Dallas, and Minneapolis, respectively
James A. Clouse, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Mark E. Van Der Weide, General Counsel
Michael Held, Deputy General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
David Altig, Kartik B. Athreya, Thomas A. Connors, Mary Daly, David E. Lebow, Trevor A. Reeve, Argia M. Sbordone, Ellis W. Tallman, William Wascher, and Beth Anne Wilson, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Ann E. Misback, Secretary, Office of the Secretary, Board of Governors
Matthew J. Eichner,2 Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors; Andreas Lehnert, Director, Division of Financial Stability, Board of Governors
Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board of Governors; Maryann F. Hunter, Deputy Director, Division of Supervision and Regulation, Board of Governors
David Reifschneider and John M. Roberts, Special Advisers to the Board, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Joseph W. Gruber, Senior Associate Director, Division of International Finance, Board of Governors; Michael G. Palumbo, Senior Associate Director, Division of Research and Statistics, Board of Governors
Antulio N. Bomfim, Ellen E. Meade, Stephen A. Meyer, Edward Nelson, and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors; Jeremy B. Rudd, Senior Adviser, Division of Research and Statistics, Board of Governors
William F. Bassett, Associate Director, Division of Financial Stability, Board of Governors
Andrew Figura, Assistant Director, Division of Research and Statistics, Board of Governors; Jason Wu, Assistant Director, Division of Monetary Affairs, Board of Governors
Penelope A. Beattie,3 Assistant to the Secretary, Office of the Secretary, Board of Governors
Dana L. Burnett and Michele Cavallo, Section Chiefs, Division of Monetary Affairs, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Andrea Ajello, Kurt F. Lewis, and Bernd Schlusche, Principal Economists, Division of Monetary Affairs, Board of Governors; Ekaterina Peneva and Daniel J. Vine, Principal Economists, Division of Research and Statistics, Board of Governors
Camille Bryan, Lead Financial Analyst, Division of International Finance, Board of Governors
Ellen J. Bromagen, First Vice President, Federal Reserve Bank of Chicago
Jeff Fuhrer and Daniel G. Sullivan, Executive Vice Presidents, Federal Reserve Banks of Boston and Chicago, respectively
Todd E. Clark,3 Evan F. Koenig, Keith Sill, and Mark L.J. Wright, Senior Vice Presidents, Federal Reserve Banks of Cleveland, Dallas, Philadelphia, and Minneapolis, respectively
Carlos Garriga and Jonathan L. Willis, Vice Presidents, Federal Reserve Banks of St. Louis and Kansas City, respectively
Annual Organizational Matters4
In the agenda for this meeting, it was reported that advices of the election of the following members and alternate members of the Federal Open Market Committee for a term beginning January 30, 2018, had been received and that these individuals had executed their oaths of office.
The elected members and alternate members were as follows:
William C. Dudley, President of the Federal Reserve Bank of New York, with Michael Strine, First Vice President of the Federal Reserve Bank of New York, as alternate
Thomas I. Barkin, President of the Federal Reserve Bank of Richmond, with Eric Rosengren, President of the Federal Reserve Bank of Boston, as alternate
Loretta J. Mester, President of the Federal Reserve Bank of Cleveland, with Charles L. Evans, President of the Federal Reserve Bank of Chicago, as alternate
Raphael W. Bostic, President of the Federal Reserve Bank of Atlanta, with James Bullard, President of the Federal Reserve Bank of St. Louis, as alternate
John C. Williams, President of the Federal Reserve Bank of San Francisco, with Esther L. George, President of the Federal Reserve Bank of Kansas City, as alternate
By unanimous vote, the Committee selected Janet L. Yellen to serve as Chairman through February 2, 2018, and Jerome H. Powell to serve as Chairman, effective February 3, 2018, until the selection of his successor at the first regularly scheduled meeting of the Committee in 2019.
By unanimous vote, the following officers of the Committee were selected to serve until the selection of their successors at the first regularly scheduled meeting of the Committee in 2019:
William C. Dudley
Vice Chairman
James A. Clouse
Secretary
Matthew M. Luecke
Deputy Secretary
David W. Skidmore
Assistant Secretary
Michelle A. Smith
Assistant Secretary
Mark E. Van Der Weide
General Counsel
Michael Held
Deputy General Counsel
Richard M. Ashton
Assistant General Counsel
Steven B. Kamin
Economist
Thomas Laubach
Economist
David W. Wilcox
Economist
David Altig
Kartik B. Athreya
Thomas A. Connors
Mary Daly
David E. Lebow
Trevor A. Reeve
Argia M. Sbordone
Ellis W. Tallman
William Wascher
Beth Anne Wilson
Associate Economists
By unanimous vote, the Federal Reserve Bank of New York was selected to execute transactions for the System Open Market Account (SOMA).
By unanimous vote, the Committee selected Simon Potter and Lorie K. Logan to serve at the pleasure of the Committee as manager and deputy manager of the SOMA, respectively, on the understanding that these selections were subject to their being satisfactory to the Federal Reserve Bank of New York.
Secretary's note: Advice subsequently was received that the manager and deputy manager selections indicated above were satisfactory to the Federal Reserve Bank of New York.
By unanimous vote, the Authorization for Domestic Open Market Operations was approved with revisions to incorporate transactions of securities lending into the existing operational readiness testing provision and to improve the document's readability. The Guidelines for the Conduct of System Open Market Operations in Federal-Agency Issues remained suspended.
AUTHORIZATION FOR DOMESTIC OPEN MARKET OPERATIONS
(As amended effective January 30, 2018)
OPEN MARKET TRANSACTIONS
1. The Federal Open Market Committee (the "Committee") authorizes and directs the Federal Reserve Bank selected by the Committee to execute open market transactions (the "Selected Bank"), to the extent necessary to carry out the most recent domestic policy directive adopted by the Committee:
A. To buy or sell in the open market securities that are direct obligations of, or fully guaranteed as to principal and interest by, the United States, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, that are eligible for purchase or sale under Section 14(b) of the Federal Reserve Act ("Eligible Securities") for the System Open Market Account ("SOMA"):
i. As an outright operation with securities dealers and foreign and international accounts maintained at the Selected Bank: on a same-day or deferred delivery basis (including such transactions as are commonly referred to as dollar rolls and coupon swaps) at market prices; or
ii. As a temporary operation: on a same-day or deferred delivery basis, to purchase such Eligible Securities subject to an agreement to resell ("repo transactions") or to sell such Eligible Securities subject to an agreement to repurchase ("reverse repo transactions") for a term of 65 business days or less, at rates that, unless otherwise authorized by the Committee, are determined by competitive bidding, after applying reasonable limitations on the volume of agreements with individual counterparties;
B. To allow Eligible Securities in the SOMA to mature without replacement;
C. To exchange, at market prices, in connection with a Treasury auction, maturing Eligible Securities in the SOMA with the Treasury, in the case of Eligible Securities that are direct obligations of the United States or that are fully guaranteed as to principal and interest by the United States; and
D. To exchange, at market prices, maturing Eligible Securities in the SOMA with an agency of the United States, in the case of Eligible Securities that are direct obligations of that agency or that are fully guaranteed as to principal and interest by that agency.
SECURITIES LENDING
2. In order to ensure the effective conduct of open market operations, the Committee authorizes the Selected Bank to operate a program to lend Eligible Securities held in the SOMA to dealers on an overnight basis (except that the Selected Bank may lend Eligible Securities for longer than an overnight term to accommodate weekend, holiday, and similar trading conventions).
A. Such securities lending must be:
i. At rates determined by competitive bidding;
ii. At a minimum lending fee consistent with the objectives of the program;
iii. Subject to reasonable limitations on the total amount of a specific issue of Eligible Securities that may be auctioned; and
iv. Subject to reasonable limitations on the amount of Eligible Securities that each borrower may borrow.
B. The Selected Bank may:
i. Reject bids that, as determined in its sole discretion, could facilitate a bidder's ability to control a single issue;
ii. Accept Treasury securities or cash as collateral for any loan of securities authorized in this paragraph 2; and
iii. Accept agency securities as collateral only for a loan of agency securities authorized in this paragraph 2.
OPERATIONAL READINESS TESTING
3. The Committee authorizes the Selected Bank to undertake transactions of the type described in paragraphs 1 and 2 from time to time for the purpose of testing operational readiness, subject to the following limitations:
A. All transactions authorized in this paragraph 3 shall be conducted with prior notice to the Committee;
B. The aggregate par value of the transactions authorized in this paragraph 3 that are of the type described in paragraph 1.A.i shall not exceed $5 billion per calendar year; and
C. The outstanding amount of the transactions described in paragraphs 1.A.ii and 2 shall not exceed $5 billion at any given time.
TRANSACTIONS WITH CUSTOMER ACCOUNTS
4. In order to ensure the effective conduct of open market operations, while assisting in the provision of short-term investments or other authorized services for foreign central bank and international accounts maintained at a Federal Reserve Bank (the "Foreign Accounts") and accounts maintained at a Federal Reserve Bank as fiscal agent of the United States pursuant to section 15 of the Federal Reserve Act (together with the Foreign Accounts, the "Customer Accounts"), the Committee authorizes the following when undertaken on terms comparable to those available in the open market:
A. The Selected Bank, for the SOMA, to undertake reverse repo transactions in Eligible Securities held in the SOMA with the Customer Accounts for a term of 65 business days or less; and
B. Any Federal Reserve Bank that maintains Customer Accounts, for any such Customer Account, when appropriate and subject to all other necessary authorization and approvals, to:
i. Undertake repo transactions in Eligible Securities with dealers with a corresponding reverse repo transaction in such Eligible Securities with the Customer Accounts; and
ii. Undertake intra-day repo transactions in Eligible Securities with Foreign Accounts.
Transactions undertaken with Customer Accounts under the provisions of this paragraph 4 may provide for a service fee when appropriate. Transactions undertaken with Customer Accounts are also subject to the authorization or approval of other entities, including the Board of Governors of the Federal Reserve System and, when involving accounts maintained at a Federal Reserve Bank as fiscal agent of the United States, the United States Department of the Treasury.
ADDITIONAL MATTERS
5. The Committee authorizes the Chairman of the Committee, in fostering the Committee's objectives during any period between meetings of the Committee, to instruct the Selected Bank to act on behalf of the Committee to:
A. Adjust somewhat in exceptional circumstances the stance of monetary policy and to take actions that may result in material changes in the composition and size of the assets in the SOMA; or
B. Undertake transactions with respect to Eligible Securities in order to appropriately address temporary disruptions of an operational or highly unusual nature in U.S. dollar funding markets.
Any such adjustment described in subparagraph A of this paragraph 5 shall be made in the context of the Committee's discussion and decision about the stance of policy at its most recent meeting and the Committee's long-run objectives to foster maximum employment and price stability, and shall be based on economic, financial, and monetary developments since the most recent meeting of the Committee. The Chairman, whenever feasible, will consult with the Committee before making any instruction under this paragraph 5.
The Committee voted unanimously to reaffirm without revision the Authorization for Foreign Currency Operations and the Foreign Currency Directive as shown below.
AUTHORIZATION FOR FOREIGN CURRENCY OPERATIONS
(As reaffirmed effective January 30, 2018)
IN GENERAL
1. The Federal Open Market Committee (the "Committee") authorizes the Federal Reserve Bank selected by the Committee (the "Selected Bank") to execute open market transactions for the System Open Market Account as provided in this Authorization, to the extent necessary to carry out any foreign currency directive of the Committee:
A. To purchase and sell foreign currencies (also known as cable transfers) at home and abroad in the open market, including with the United States Treasury, with foreign monetary authorities, with the Bank for International Settlements, and with other entities in the open market. This authorization to purchase and sell foreign currencies encompasses purchases and sales through standalone spot or forward transactions and through foreign exchange swap transactions. For purposes of this Authorization, foreign exchange swap transactions are: swap transactions with the United States Treasury (also known as warehousing transactions), swap transactions with other central banks under reciprocal currency arrangements, swap transactions with other central banks under standing dollar liquidity and foreign currency liquidity swap arrangements, and swap transactions with other entities in the open market.
B. To hold balances of, and to have outstanding forward contracts to receive or to deliver, foreign currencies.
2. All transactions in foreign currencies undertaken pursuant to paragraph 1 above shall, unless otherwise authorized by the Committee, be conducted:
A. In a manner consistent with the obligations regarding exchange arrangements under Article IV of the Articles of Agreement of the International Monetary Fund (IMF).1
B. In close and continuous cooperation and consultation, as appropriate, with the United States Treasury.
C. In consultation, as appropriate, with foreign monetary authorities, foreign central banks, and international monetary institutions.
D. At prevailing market rates.
STANDALONE SPOT AND FORWARD TRANSACTIONS
3. For any operation that involves standalone spot or forward transactions in foreign currencies:
A. Approval of such operation is required as follows:
i. The Committee must direct the Selected Bank in advance to execute the operation if it would result in the overall volume of standalone spot and forward transactions in foreign currencies, as defined in paragraph 3.C of this Authorization, exceeding $5 billion since the close of the most recent regular meeting of the Committee. The Foreign Currency Subcommittee (the "Subcommittee") must direct the Selected Bank in advance to execute the operation if the Subcommittee believes that consultation with the Committee is not feasible in the time available.
ii. The Committee authorizes the Subcommittee to direct the Selected Bank in advance to execute the operation if it would result in the overall volume of standalone spot and forward transactions in foreign currencies, as defined in paragraph 3.C of this Authorization, totaling $5 billion or less since the close of the most recent regular meeting of the Committee.
B. Such an operation also shall be:
i. Generally directed at countering disorderly market conditions; or
ii. Undertaken to adjust System balances in light of probable future needs for currencies; or
iii. Conducted for such other purposes as may be determined by the Committee.
C. For purposes of this Authorization, the overall volume of standalone spot and forward transactions in foreign currencies is defined as the sum (disregarding signs) of the dollar values of individual foreign currencies purchased and sold, valued at the time of the transaction.
WAREHOUSING
4. The Committee authorizes the Selected Bank, with the prior approval of the Subcommittee and at the request of the United States Treasury, to conduct swap transactions with the United States Exchange Stabilization Fund established by section 10 of the Gold Reserve Act of 1934 under agreements in which the Selected Bank purchases foreign currencies from the Exchange Stabilization Fund and the Exchange Stabilization Fund repurchases the foreign currencies from the Selected Bank at a later date (such purchases and sales also known as warehousing).
RECIPROCAL CURRENCY ARRANGEMENTS, AND STANDING DOLLAR AND FOREIGN CURRENCY LIQUIDITY SWAPS
5. The Committee authorizes the Selected Bank to maintain reciprocal currency arrangements established under the North American Framework Agreement, standing dollar liquidity swap arrangements, and standing foreign currency liquidity swap arrangements as provided in this Authorization and to the extent necessary to carry out any foreign currency directive of the Committee.
A. For reciprocal currency arrangements all drawings must be approved in advance by the Committee (or by the Subcommittee, if the Subcommittee believes that consultation with the Committee is not feasible in the time available).
B. For standing dollar liquidity swap arrangements all drawings must be approved in advance by the Chairman. The Chairman may approve a schedule of potential drawings, and may delegate to the manager, System Open Market Account, the authority to approve individual drawings that occur according to the schedule approved by the Chairman.
C. For standing foreign currency liquidity swap arrangements all drawings must be approved in advance by the Committee (or by the Subcommittee, if the Subcommittee believes that consultation with the Committee is not feasible in the time available).
D. Operations involving standing dollar liquidity swap arrangements and standing foreign currency liquidity swap arrangements shall generally be directed at countering strains in financial markets in the United States or abroad, or reducing the risk that they could emerge, so as to mitigate their effects on economic and financial conditions in the United States.
E. For reciprocal currency arrangements, standing dollar liquidity swap arrangements, and standing foreign currency liquidity swap arrangements:
i. All arrangements are subject to annual review and approval by the Committee;
ii. Any new arrangements must be approved by the Committee; and
iii. Any changes in the terms of existing arrangements must be approved in advance by the Chairman. The Chairman shall keep the Committee informed of any changes in terms, and the terms shall be consistent with principles discussed with and guidance provided by the Committee.
OTHER OPERATIONS IN FOREIGN CURRENCIES
6. Any other operations in foreign currencies for which governance is not otherwise specified in this Authorization (such as foreign exchange swap transactions with private-sector counterparties) must be authorized and directed in advance by the Committee.
FOREIGN CURRENCY HOLDINGS
7. The Committee authorizes the Selected Bank to hold foreign currencies for the System Open Market Account in accounts maintained at foreign central banks, the Bank for International Settlements, and such other foreign institutions as approved by the Board of Governors under Section 214.5 of Regulation N, to the extent necessary to carry out any foreign currency directive of the Committee.
A. The Selected Bank shall manage all holdings of foreign currencies for the System Open Market Account:
i. Primarily, to ensure sufficient liquidity to enable the Selected Bank to conduct foreign currency operations as directed by the Committee;
ii. Secondarily, to maintain a high degree of safety;
ii. Subject to paragraphs 7.A.i and 7.A.ii, to provide the highest rate of return possible in each currency; and
iv. To achieve such other objectives as may be authorized by the Committee.
B. The Selected Bank may manage such foreign currency holdings by:
i. Purchasing and selling obligations of, or fully guaranteed as to principal and interest by, a foreign government or agency thereof ("Permitted Foreign Securities") through outright purchases and sales;
ii. Purchasing Permitted Foreign Securities under agreements for repurchase of such Permitted Foreign Securities and selling such securities under agreements for the resale of such securities; and
iii. Managing balances in various time and other deposit accounts at foreign institutions approved by the Board of Governors under Regulation N.
C. The Subcommittee, in consultation with the Committee, may provide additional instructions to the Selected Bank regarding holdings of foreign currencies.
ADDITIONAL MATTERS
8. The Committee authorizes the Chairman:
A. With the prior approval of the Committee, to enter into any needed agreement or understanding with the Secretary of the United States Treasury about the division of responsibility for foreign currency operations between the System and the United States Treasury;
B. To advise the Secretary of the United States Treasury concerning System foreign currency operations, and to consult with the Secretary on policy matters relating to foreign currency operations;
C. To designate Federal Reserve System persons authorized to communicate with the United States Treasury concerning System Open Market Account foreign currency operations; and
D. From time to time, to transmit appropriate reports and information to the National Advisory Council on International Monetary and Financial Policies.
9. The Committee authorizes the Selected Bank to undertake transactions of the type described in this Authorization, and foreign exchange and investment transactions that it may be otherwise authorized to undertake, from time to time for the purpose of testing operational readiness. The aggregate amount of such transactions shall not exceed $2.5 billion per calendar year. These transactions shall be conducted with prior notice to the Committee.
10. All Federal Reserve banks shall participate in the foreign currency operations for System Open Market Account in accordance with paragraph 3G(1) of the Board of Governors' Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks dated January 1, 1944.
11. Any authority of the Subcommittee pursuant to this Authorization may be exercised by the Chairman if the Chairman believes that consultation with the Subcommittee is not feasible in the time available. The Chairman shall promptly report to the Subcommittee any action approved by the Chairman pursuant to this paragraph.
12. The Committee authorizes the Chairman, in exceptional circumstances where it would not be feasible to convene the Committee, to foster the Committee's objectives by instructing the Selected Bank to engage in foreign currency operations not otherwise authorized pursuant to this Authorization. Any such action shall be made in the context of the Committee's discussion and decisions regarding foreign currency operations. The Chairman, whenever feasible, will consult with the Committee before making any instruction under this paragraph.
FOREIGN CURRENCY DIRECTIVE
(As reaffirmed effective January 30, 2018)
1. The Committee directs the Federal Reserve Bank selected by the Committee (the "Selected Bank") to execute open market transactions, for the System Open Market Account, in accordance with the provisions of the Authorization for Foreign Currency Operations (the "Authorization") and subject to the limits in this Directive.
2. The Committee directs the Selected Bank to execute warehousing transactions, if so requested by the United States Treasury and if approved by the Foreign Currency Subcommittee (the "Subcommittee"), subject to the limitation that the outstanding balance of United States dollars provided to the United States Treasury as a result of these transactions not at any time exceed $5 billion.
3. The Committee directs the Selected Bank to maintain, for the System Open Market Account:
A. Reciprocal currency arrangements with the following foreign central banks:
Foreign central bank
Maximum amount
(millions of dollars or equivalent)
Bank of Canada
2,000
Bank of Mexico
3,000
B. Standing dollar liquidity swap arrangements with the following foreign central banks:
Bank of Canada
Bank of England
Bank of Japan
European Central Bank
Swiss National Bank
C. Standing foreign currency liquidity swap arrangements with the following foreign central banks:
Bank of Canada
Bank of England
Bank of Japan
European Central Bank
Swiss National Bank
4. The Committee directs the Selected Bank to hold and to invest foreign currencies in the portfolio in accordance with the provisions of paragraph 7 of the Authorization.
5. The Committee directs the Selected Bank to report to the Committee, at each regular meeting of the Committee, on transactions undertaken pursuant to paragraphs 1 and 6 of the Authorization. The Selected Bank is also directed to provide quarterly reports to the Committee regarding the management of the foreign currency holdings pursuant to paragraph 7 of the Authorization.
6. The Committee directs the Selected Bank to conduct testing of transactions for the purpose of operational readiness in accordance with the provisions of paragraph 9 of the Authorization.
By unanimous vote, the Committee revised its Program for Security of FOMC Information with a set of technical changes to update references to other documents.
In the Committee's annual reconsideration of the Statement on Longer-Run Goals and Monetary Policy Strategy, participants agreed that only a minor revision was required at this meeting, which was to update the reference to the median of FOMC participants' estimates of the longer-run normal rate of unemployment from 4.8 percent to 4.6 percent. All participants supported the statement with the revision, and the Committee voted unanimously to approve the updated statement.
STATEMENT ON LONGER-RUN GOALS AND MONETARY POLICY STRATEGY
(As amended effective January 30, 2018)
The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.
Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee's policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee's goals.
The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. The Committee would be concerned if inflation were running persistently above or below this objective. Communicating this symmetric inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances. The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants' estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC's Summary of Economic Projections. For example, in the most recent projections, the median of FOMC participants' estimates of the longer-run normal rate of unemployment was 4.6 percent.
In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate.
The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January.
Developments in Financial Markets and Open Market Operations
The manager of the System Open Market Account (SOMA) provided a summary of developments in domestic and global financial markets over the intermeeting period. Financial conditions eased further over recent weeks with market participants pointing to increasing appetites for risk and perceptions of diminished downside risks as factors buoying market sentiment. In this environment, yields on safe assets such as U.S. Treasury securities moved up some while corporate risk spreads narrowed and equity prices recorded further significant gains. Breakeven measures of inflation compensation derived from Treasury Inflation Protected Securities (TIPS) moved up but remained low. Survey measures of longer-term inflation expectations showed little change. Judging from interest rate futures, the expected path of the federal funds rate shifted up over the period but continued to imply a gradual expected pace of policy firming. The deputy manager followed with a discussion of recent developments in money markets and FOMC operations. Year-end pressures were evident in the market for foreign exchange basis swaps, but conditions returned to normal early in 2018. Yields on Treasury bills maturing in early March were elevated, reflecting investors' concerns about the possibility that a failure to raise the federal debt ceiling could affect the timing of principal payments for these securities. The Open Market Desk continued to execute reinvestment operations for Treasury and agency securities in the SOMA in accordance with the procedure specified in the Committee's directive to the Desk. The deputy manager also reported on the volume of overnight reverse repurchase agreement operations over the intermeeting period and discussed the Desk's plans for small-value operational tests of various types of open market operations over the coming year.
By unanimous vote, the Committee ratified the Open Market Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account during the intermeeting period.
Inflation Analysis and Forecasting
The staff presented three briefings on inflation analysis and forecasting. The presentations reviewed a number of commonly used structural and reduced-form models. These included structural models in which the rate of inflation is linked importantly to measures of resource slack and a measure of expected inflation relevant for wage and price setting--so-called Phillips curve specifications--as well as statistical models in which inflation is primarily determined by a time-varying inflation trend or longer-run inflation expectations. The briefings noted several factors beyond those captured in the models that appeared to have put downward pressure on prices in recent years. These included structural changes in price setting for some items, such as medical care, and the effects of idiosyncratic price shocks, such as the unusual drop in prices of wireless telephone services in 2017. The staff found little compelling evidence for the possible influence of other factors such as a more competitive pricing environment or a change in the markup of prices over unit labor costs. Overall, for the set of models presented, the prediction errors in recent years were larger than those observed during the 2001-07 period but were consistent with historical norms and, in most models, did not appear to be biased.
The staff presentations considered two key channels by which monetary policy influences inflation--the response of inflation to changes in resource utilization and the role of inflation expectations, or trend inflation, in the price-setting process. In part because inflation was importantly influenced by a number of short-lived factors, the effects of current and expected resource utilization gaps on inflation were not easy to discern empirically. Estimates of the strength of those effects had diminished noticeably in recent years. The briefings highlighted a number of other challenges associated with estimating the strength and timing of the linkage between resource utilization and inflation, including the reliability of and changes over time in estimates of the natural rate of unemployment and potential output and the ability to adequately account for supply shocks. In addition, some research suggested that the relationship between resource utilization and inflation may be nonlinear, with the response of inflation increasing as rates of utilization rise to very high levels.
With regard to inflation expectations, two of the briefings presented findings that the longer-run trend in inflation, absent cyclical disturbances or transitory fluctuations, had been stable in recent years at a little below 2 percent. The briefings reported that the average forecasting performance of models employing either statistical estimates of inflation trends or survey-based measures of inflation expectations as proxies for inflation expectations appeared comparable, even though different versions of such models could yield very different forecasts at any given point in time. Moreover, although survey-based measures of longer-run inflation expectations tended to move in parallel with estimated inflation trends, the empirical research provided no clear guidance on how to construct a measure of inflation expectations that would be the most useful for inflation forecasting. The staff noted that although reduced-form models in which inflation tends to revert toward longer-run inflation trends described the data reasonably well, those models offered little guidance to policymakers on how to conduct policy so as to achieve their desired outcome for inflation.
Following the staff presentations, participants discussed how the inflation frameworks reviewed in the briefings informed their views on inflation and monetary policy. Almost all participants who commented agreed that a Phillips curve-type of inflation framework remained useful as one of their tools for understanding inflation dynamics and informing their decisions on monetary policy. Policymakers pointed to a number of possible reasons for the difficulty in estimating the link between resource utilization and inflation in recent years. These reasons included an extended period of low and stable inflation in the United States and other advanced economies during which the effects of resource utilization on inflation became harder to identify, the shortcomings of commonly used measures of resource gaps, the effects of transitory changes in relative prices, and structural factors that had made business pricing more competitive or prices more flexible over time. It was noted that research focusing on inflation across U.S. states or metropolitan areas continued to find a significant relationship between price or wage inflation and measures of resource gaps. A couple of participants questioned the usefulness of a Phillips curve-type framework for policymaking, citing the limited ability of such frameworks to capture the relationship between economic activity and inflation.
Participants generally agreed that inflation expectations played a fundamental role in understanding and forecasting inflation, with stable inflation expectations providing an important anchor for the rate of inflation over the longer run. Participants acknowledged that the causes of movements in short- and longer-run inflation expectations, including the role of monetary policy, were imperfectly understood. They commented that various proxies for inflation expectations--readings from household and business surveys or from economic forecasters, estimates derived from market prices, or estimated trends--were imperfect measures of actual inflation expectations, which are unobservable. That said, participants emphasized the critical need for the FOMC to maintain a credible longer-run inflation objective and to clearly communicate the Committee's commitment to achieving that objective. Several participants indicated that they viewed the available evidence as suggesting that longer-run inflation expectations remained well anchored; one cited recent research finding that inflation expectations had become better anchored following the Committee's adoption of a numerical inflation target. However, a few saw low levels of inflation over recent years as reflecting, in part, slippage in longer-run inflation expectations below the Committee's 2 percent objective. In that regard, a number of participants noted the importance of continuing to emphasize that the Committee's 2 percent inflation objective is symmetric. A couple of participants suggested that the Committee might consider expressing its objective as a range rather than a point estimate. A few other participants suggested that the FOMC could begin to examine whether adopting a monetary policy framework in which the Committee would strive to make up for past deviations of inflation from target might address the challenge of achieving and maintaining inflation expectations consistent with the Committee's inflation objective, particularly in an environment in which the neutral rate of interest appeared likely to remain low.
Staff Review of the Economic Situation
The information reviewed for the January 30-31 meeting indicated that labor market conditions continued to strengthen through December and that real gross domestic product (GDP) expanded at about a 2-1/2 percent pace in the fourth quarter of last year. Growth of real final domestic purchases by households and businesses, generally a good indicator of the economy's underlying momentum, was solid. Consumer price inflation, as measured by the 12-month percentage change in the price index for personal consumption expenditures (PCE), remained below 2 percent in December. Survey-based measures of longer-run inflation expectations were little changed on balance.
Total nonfarm payroll employment increased solidly in December, and the national unemployment rate remained at 4.1 percent. The unemployment rates for Hispanics, for Asians, and for African Americans were lower than earlier in the year and close to the levels seen just before the most recent recession. The national labor force participation rate held steady in December; relative to the declining trend suggested by an aging population, this sideways movement in the participation rate represented a further strengthening in labor market conditions. The participation rate for prime-age (defined as ages 25 to 54) men edged up in December, while the rate for prime-age women declined slightly. The share of workers who were employed part time for economic reasons was little changed in December and was close to its pre-recession level. The rates of private-sector job openings and quits were little changed in November, and the four-week moving average of initial claims for unemployment insurance benefits continued to be at a low level in mid-January. Recent readings showed that gains in hourly labor compensation remained modest. Both the employment cost index for private-sector workers and average hourly earnings for all employees rose about 2-1/2 percent over the 12 months ending in December.
Total industrial production increased over the two months ending in December, with broad-based gains in manufacturing, mining, and utilities output. Automakers' schedules indicated that assemblies of light motor vehicles would likely move up over the coming months. Broader indicators of manufacturing production, such as the new orders indexes from national and regional manufacturing surveys, pointed to further solid increases in factory output in the near term.
Real PCE increased strongly in the fourth quarter. Recent readings on key factors that influence consumer spending--including gains in employment, real disposable personal income, and households' net worth--continued to be supportive of further solid growth of real PCE in the near term. Consumer sentiment in early January, as measured by the University of Michigan Surveys of Consumers, remained upbeat.
Real residential investment rose briskly in the fourth quarter after having declined in the previous two quarters. Both starts and issuance of building permits for new single-family homes increased in the fourth quarter as a whole, and starts for multifamily units also moved up. Moreover, sales of both new and existing homes rose in the fourth quarter.
Real private expenditures for business equipment and intellectual property increased at a solid pace in the fourth quarter. Recent indicators of business equipment spending--such as rising new orders of nondefense capital goods excluding aircraft and upbeat readings on business sentiment from national and regional surveys--pointed to further gains in equipment spending in the near term. Firms' real spending for nonresidential structures rose modestly in the fourth quarter, as an increase in outlays for drilling and mining structures was largely offset by a decline in expenditures for other business structures. The number of crude oil and natural gas rigs in operation--an indicator of spending for structures in the drilling and mining sector--continued to edge up through late January.
Total real government purchases rose modestly in the fourth quarter. Increased federal government purchases mostly reflected a rise in defense spending, and the gains in purchases by state and local governments were led by an increase in construction spending in this sector.
The nominal U.S. international trade deficit widened further in November after widening sharply in October. Exports of goods and services picked up in November, while imports, particularly of consumer goods, increased robustly. Available data for goods trade in December suggested that import growth again outpaced export growth. All told, real net exports were estimated to be a substantial drag on real GDP growth in the fourth quarter.
Total U.S. consumer prices, as measured by the PCE price index, increased about 1-3/4 percent over the 12 months ending in December. Core PCE price inflation, which excludes changes in consumer food and energy prices, was 1-1/2 percent over that same period. The consumer price index (CPI) rose around 2 percent over the same period, while core CPI inflation was 1-3/4 percent. Recent readings on survey-based measures of longer-run inflation expectations--including those from the Michigan survey and the Desk's Survey of Primary Dealers and Survey of Market Participants--were little changed on balance.
Incoming data suggested that economic activity abroad continued to expand at a solid pace and that this expansion was broad based across countries. In the advanced foreign economies (AFEs), real GDP in the euro area and the United Kingdom expanded at a moderate pace in the fourth quarter. In the emerging market economies (EMEs), Mexico's economy rebounded after being held back by natural disasters in the third quarter. Economic growth remained solid in China but cooled off a bit in some emerging Asian economies after a very strong third-quarter performance. Inflation in both AFEs and EMEs picked up significantly in the fourth quarter, largely reflecting a boost from rising oil prices. Inflation excluding food and energy prices remained well below central bank targets in several economies, including the euro area and Japan.
Staff Review of the Financial Situation
Domestic financial market conditions eased considerably further over the intermeeting period. A strengthening outlook for economic growth in the United States and abroad, along with recently enacted tax legislation, appeared to boost investor sentiment. U.S. equity prices, Treasury yields, and market-based measures of inflation compensation rose, and spreads of yields on investment- and speculative-grade nonfinancial corporate bonds over those for comparable-maturity Treasury securities narrowed further. In addition, the dollar depreciated broadly amid strong foreign economic data and monetary policy communications by some foreign central banks that investors reportedly viewed as less accommodative than expected.
FOMC communications over the intermeeting period were generally characterized by market participants as consistent with their expectations for continued gradual removal of monetary policy accommodation. The Committee's decision to raise the target range for the federal funds rate at the December meeting was widely expected, and the probability of an increase in the target range for the federal funds rate occurring at the January meeting, as implied by quotes on federal funds futures contracts, remained essentially zero. Over the intermeeting period, the futures-implied probability of policy firming at the March meeting rose to about 85 percent; respondents to the Desk's Survey of Primary Dealers and Survey of Market Participants assigned, on average, similarly high odds to a rate increase at the March meeting. Levels of the federal funds rate at the end of 2018 and 2019 implied by overnight index swap rates moved up moderately.
The nominal Treasury yield curve shifted up over the intermeeting period amid an improved outlook for domestic and foreign economic growth. Yields on both 2- and 10-year Treasury securities moved up about 30 basis points. Measures of inflation compensation based on TIPS fell in response to the soft reading on core inflation in the November CPI release but subsequently moved up against the backdrop of an improving global growth outlook, higher commodity prices, depreciation of the dollar, and the stronger-than-expected reading on core inflation in the December CPI release. On net, inflation compensation moved up at both the 5-year and the 5-to-10-year horizons, and both measures returned to levels seen in early 2017 before the string of generally weaker-than-expected inflation readings.
Broad equity price indexes rose substantially over the intermeeting period, with investors pointing to a stronger global economic outlook and the supportive effect of the recently enacted tax legislation on risk sentiment. The VIX, an index of option-implied volatility for one-month returns on the S&P 500 index, increased but remained low by historical standards. Spreads of both investment- and speculative-grade corporate bond yields over comparable-maturity Treasury yields declined slightly and remained well below their historical averages.
The FOMC's decision at its December meeting to raise the target range for the federal funds rate was transmitted smoothly to money market rates. The effective federal funds rate held steady at a level near the middle of the target range except at year-end. While borrowing costs moved up briefly in offshore dollar funding markets over year-end, conditions in money markets were reported to be orderly. In line with recent year-end experiences, rates and volumes in the federal funds and Eurodollar markets declined, while in secured markets, rates on Treasury repurchase agreements increased. After year-end, pressures in money markets abated quickly and rates and volumes returned to recent ranges.
The broad nominal dollar index declined nearly 4 percent relative to its value at the time of the December FOMC meeting; the decline was most pronounced against AFE currencies, but the dollar depreciated notably against most EME currencies as well. EME equity prices registered substantial gains, in part supported by a significant rise in commodity prices; emerging market bond spreads narrowed moderately, and flows into EME equity and bond funds strengthened substantially.
Market-based measures of policy expectations and longer-term sovereign yields moved up in most AFEs. The Bank of Canada raised its policy rate at its January meeting, largely in response to better-than-expected economic data. The Bank of England, the Bank of Japan, and the European Central Bank (ECB) left their monetary policy stances unchanged, as expected. Nonetheless, the ECB president's optimistic assessment of the euro-area economy at the press conference following the January meeting was interpreted by market participants as a signal that monetary policy would be less accommodative than expected. Following those remarks, the euro appreciated notably against the dollar and core euro-area sovereign yields moved higher. That said, market-based measures of policy expectations continued to indicate that investors anticipate a gradual pace of monetary policy normalization in the euro area.
Financing conditions for nonfinancial businesses and households remained generally accommodative over the intermeeting period and continued to be supportive of economic activity. Respondents to the January Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) reported easing standards and narrowing loan spreads for large and middle-market firms and attributed this easing to more aggressive competition from other bank or nonbank lenders. Net debt financing by investment-grade nonfinancial corporations turned negative in December, but the weakness appeared to reflect a softening in the demand for credit, possibly related to the anticipation of higher after-tax cash flows and repatriation of foreign earnings. In contrast, gross issuance of speculative-grade bonds and institutional leveraged loans remained strong. Credit market conditions for small businesses remained relatively accommodative despite sluggish credit growth among these firms. Credit conditions in municipal bond markets also remained accommodative.
In commercial real estate (CRE) markets, growth of loans held by banks slowed further in the fourth quarter, though CRE loans held by small banks and some types of CRE loans held by large banks--construction and land development loans in particular--expanded at a more robust pace. Financing conditions in the commercial mortgage-backed securities (CMBS) market remained accommodative as issuance continued at a robust pace and spreads on CMBS remained near their lowest levels since the financial crisis. Credit conditions in the residential mortgage market remained accommodative for most borrowers, though credit standards remained tight for borrowers with low credit scores or hard-to-document incomes. Mortgage rates increased in tandem with rates on longer-term Treasury securities but remained quite low by historical standards.
Conditions in consumer credit markets remained largely supportive of economic activity. Consumer credit increased notably in November, exceeding the more moderate volume of borrowing observed earlier in the year. Revolving credit expanded in November, while nonrevolving credit grew robustly, mainly driven by expansion in student and other consumer loans. In contrast, growth of auto lending slowed in recent months, consistent with the weakening demand for such loans in the fourth quarter as reported in the January SLOOS. For subprime borrowers, conditions remained tight, particularly in the market for credit cards and auto loans.
The staff provided its latest report on the potential risks to financial stability; the report continued to characterize the financial vulnerabilities of the U.S. financial system as moderate on balance. This overall assessment incorporated the staff's judgment that vulnerabilities associated with asset valuation pressures continued to be elevated; asset valuation pressures apparently reflected, in part, a broad-based appetite for risk among investors. The staff judged that vulnerabilities from leverage in the nonfinancial sector appeared to remain moderate, while vulnerabilities stemming from financial-sector leverage and from maturity and liquidity transformation continued to be viewed as low.
Staff Economic Outlook
The U.S. economic projection prepared by the staff for the January FOMC meeting was stronger than the staff forecast at the time of the December meeting. Real GDP was estimated to have risen in the fourth quarter of last year by somewhat more than the staff had previously expected, as gains in both household and business spending were larger than anticipated. Beyond 2017, the forecast for real GDP growth was revised up, reflecting a reassessment of the recently enacted tax cuts, along with higher projected paths for equity prices and foreign economic growth and a lower assumed path for the foreign exchange value of the dollar. Real GDP was projected to increase at a somewhat faster pace than potential output through 2020; the staff continued to assume that the recently enacted tax cuts would boost real GDP growth moderately over the medium term. The unemployment rate was projected to decline further over the next few years and to continue to run well below the staff's estimate of its longer-run natural rate over this period.
Estimates of total and core PCE price inflation for 2017 were in line with the staff's previous forecast. The projection for inflation over the medium term was revised up slightly, primarily reflecting tighter resource utilization in the January forecast. Total PCE price inflation in 2018 was projected to be somewhat faster than in 2017 despite a slower projected pace of increases in consumer energy prices; core PCE prices were forecast to rise notably faster in 2018, importantly reflecting both the expected waning of transitory factors that held down 12-month measures of inflation in 2017 as well as the projected further tightening in resource utilization. The staff projected that core inflation would reach 2 percent in 2019 and that total inflation would be at the Committee's 2 percent objective in 2020.
The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. On the one hand, many indicators of uncertainty about the macroeconomic outlook remained subdued; on the other hand, considerable uncertainty remained about a number of federal government policies relevant for the economic outlook. The staff saw the risks to the forecasts for real GDP growth and the unemployment rate as balanced. The risks to the projection for inflation also were seen as balanced. Downside risks included the possibilities that longer-term inflation expectations may have edged lower or that the run of soft core inflation readings this year could prove to be more persistent than the staff expected. These downside risks were seen as essentially counterbalanced by the upside risk that inflation could increase more than expected in an economy that was projected to move further above its potential.
Participants' Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants agreed that information received since the FOMC met in December indicated that the labor market continued to strengthen and that economic activity expanded at a solid rate. Gains in employment, household spending, and business fixed investment were solid, and the unemployment rate stayed low. On a 12-month basis, both overall inflation and inflation for items other than food and energy continued to run below 2 percent. Market-based measures of inflation compensation increased in recent months but remained low; survey-based measures of longer-term inflation expectations were little changed, on balance.
Participants generally saw incoming information on economic activity and the labor market as consistent with continued above-trend economic growth and a further strengthening in labor market conditions, with the recent solid gains in household and business spending indicating substantial underlying economic momentum. They pointed to accommodative financial conditions, the recently enacted tax legislation, and an improved global economic outlook as factors likely to support economic growth over coming quarters. Participants expected that with further gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would remain strong. Near-term risks to the economic outlook appeared roughly balanced. Inflation on a 12-month basis was expected to move up this year and to stabilize around the Committee's 2 percent objective over the medium term. However, participants judged that it was important to continue to monitor inflation developments closely.
Participants expected the recent solid growth in consumer spending to continue, supported by further gains in employment and income, increased household wealth resulting from higher asset prices, and high levels of consumer confidence. It was noted that spending on durable goods to replace those damaged during the hurricanes in September may have provided a temporary boost to consumer spending. In connection with solid growth in consumer spending, a couple of participants noted that the household saving rate had declined to its lowest level since 2005, likely driven by buoyant consumer sentiment or expectations that the rise in household wealth would be sustained.
Participants characterized their business contacts as generally upbeat about the economy; their contacts cited the recent tax cuts and notable improvements in the global economic outlook as positive factors. Manufacturers in a number of Districts had responded to increased orders by boosting production. Against a backdrop of higher energy prices and increased global demand for crude oil, a couple of participants revised up their forecasts for energy production in their respective Districts. Businesses in a number of Districts reported plans to further increase investment in coming quarters in order to expand capacity. Even so, several participants expressed considerable uncertainty about the degree to which changes to corporate taxes would support business investment and capacity expansion; according to these participants, firms may be only just beginning to determine how they might allocate their tax savings among investment, worker compensation, mergers and acquisitions, returns to shareholders, or other uses.
The labor market had strengthened further in recent months, as indicated by continued solid payroll gains, a small increase in average hours worked, and a labor force participation rate that had held steady despite the longer-run declining trend implied by an aging population. Many participants reported that labor market conditions were tight in their Districts, evidenced by low unemployment rates, difficulties for employers in filling open positions or retaining workers, or some signs of upward pressure on wages. The unemployment rate, at 4.1 percent, had remained near the lowest level seen in the past 20 years. It was noted that other labor market indicators--such as the U-6 measure of unemployment or the share of involuntary part-time employment--had returned to their pre-recession levels. A few participants judged that while the labor market was close to full employment, some margins of slack remained; these participants pointed to the employment-to-population ratio or the labor force participation rate for prime-age workers, which remained below pre-recession levels, as well as the absence to date of clear signs of a pickup in aggregate wage growth.
During their discussion of labor market conditions, participants expressed a range of views about recent wage developments. While some participants heard more reports of wage pressures from their business contacts over the intermeeting period, participants generally noted few signs of a broad-based pickup in wage growth in available data. With regard to how firms might use part of their tax savings to boost compensation, a few participants suggested that such a boost could be in the form of onetime bonuses or variable pay rather than a permanent increase in wage structures. It was noted that the pace of wage gains might not increase appreciably if productivity growth remains low. That said, a number of participants judged that the continued tightening in labor markets was likely to translate into faster wage increases at some point.
In their discussion of inflation developments, many participants noted that inflation data in recent months had generally pointed to a gradual rise in inflation, as the 12-month core PCE price inflation rose to 1.5 percent in December, up 0.2 percentage point from the low recorded in the summer. Meanwhile, total PCE price inflation was 1.7 percent over the same 12-month period. Participants anticipated that inflation would continue to gradually rise as resource utilization tightened further and as wage pressures became more apparent; several expected that declines in the foreign exchange value of the dollar in recent months would also likely help return inflation to 2 percent over the medium term. Business contacts in a few Districts reported that they had begun to have some more ability to raise prices to cover higher input costs. That said, a few participants posited that the recently enacted corporate tax cuts might lead firms to cut prices in order to remain competitive or to gain market share, which could result in a transitory drag on inflation.
With regard to inflation expectations, available readings from surveys had been steady and TIPS-based measures of inflation compensation had moved up, although they remained low. Many participants thought that inflation expectations remained well anchored and would support the gradual return of inflation to the Committee's 2 percent objective over the medium term. However, a few other participants pointed to the record of inflation consistently running below the Committee's 2 percent objective over recent years and expressed the concern that longer-run inflation expectations may have slipped below levels consistent with that objective.
Many participants noted that financial conditions had eased significantly over the intermeeting period; these participants generally viewed the economic effects of the decline in the dollar and the rise in equity prices as more than offsetting the effects of the increase in nominal Treasury yields. One participant reported that financial market contacts did not see the relatively flat slope of the yield curve as signaling an increased risk of recession. A few others judged that it would be important to continue to monitor the effects of policy firming on the slope of the yield curve, noting the strong association between past yield curve inversions and recessions.
Regulatory actions and improved risk management in recent years had put the financial system in a better position to withstand adverse shocks, such as a substantial decline in asset prices, than in the past. However, amid elevated asset valuations and an increased use of debt by nonfinancial corporations, several participants cautioned that imbalances in financial markets may begin to emerge as the economy continued to operate above potential. In this environment, increased use of leverage by nonbank financial institutions might be difficult to detect in a timely manner. It was also noted that the Committee should regularly reassess risks to the financial system and their implications for the economic outlook in light of the potential for changes in regulatory policies over time.
In their consideration of monetary policy, participants discussed the implications of recent economic and financial developments for the outlook for economic growth, labor market conditions, and inflation and, in turn, for the appropriate path of the federal funds rate. Participants agreed that a gradual approach to raising the target range for the federal funds rate remained appropriate and reaffirmed that adjustments to the policy path would depend on their assessments of how the economic outlook and risks to the outlook were evolving relative to the Committee's policy objectives. While participants continued to expect economic activity to expand at a moderate pace over the medium term, they anticipated that the rate of economic growth in 2018 would exceed their estimates of its sustainable longer-run pace and that labor market conditions would strengthen further. A number of participants indicated that they had marked up their forecasts for economic growth in the near term relative to those made for the December meeting in light of the strength of recent data on economic activity in the United States and abroad, continued accommodative financial conditions, and information suggesting that the effects of recently enacted tax changes--while still uncertain--might be somewhat larger in the near term than previously thought. Several others suggested that the upside risks to the near-term outlook for economic activity may have increased. A majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate.
Almost all participants continued to anticipate that inflation would move up to the Committee's 2 percent objective over the medium term as economic growth remained above trend and the labor market stayed strong; several commented that recent developments had increased their confidence in the outlook for further progress toward the Committee's 2 percent inflation objective. A couple noted that a step-up in the pace of economic growth could tighten labor market conditions even more than they currently anticipated, posing risks to inflation and financial stability associated with substantially overshooting full employment. However, some participants saw an appreciable risk that inflation would continue to fall short of the Committee's objective. These participants saw little solid evidence that the strength of economic activity and the labor market was showing through to significant wage or inflation pressures. They judged that the Committee could afford to be patient in deciding whether to increase the target range for the federal funds rate in order to support further strengthening of the labor market and allow participants to assess whether incoming information on inflation showed that it was solidly on a track toward the Committee's objective.
Some participants also commented on the likely evolution of the neutral federal funds rate. By most estimates, the neutral level of the federal funds rate had been very low in recent years, but it was expected to rise slowly over time toward its longer-run level. However, the outlook for the neutral rate was uncertain and would depend on the interplay of a number of forces. For example, the neutral rate, which appeared to have fallen sharply during the Global Financial Crisis when financial headwinds had restrained demand, might move up more than anticipated as the global economy strengthened. Alternatively, the longer-run level of the neutral rate might remain low in the absence of fundamental shifts in trends in productivity, demographics, or the demand for safe assets.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the Committee met in December indicated that the labor market had continued to strengthen and that economic activity had been rising at a solid rate. Gains in employment, household spending, and business fixed investment had been solid, and the unemployment rate had stayed low. On a 12-month basis, both overall inflation and inflation for items other than food and energy had continued to run below 2 percent. Market-based measures of inflation compensation had increased in recent months but remained low; survey-based measures of longer-term inflation expectations were little changed, on balance.
Members expected that, with further gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would remain strong. In their discussion of the economic outlook, most members viewed the recent data bearing on real economic activity as suggesting a modestly stronger near-term outlook than they had anticipated at their meeting in December. In addition, financial conditions had remained accommodative, and the details of the tax legislation suggested that its effects on consumer and business spending--while still uncertain--might be a bit greater in the near term than they had previously thought. Although several saw increased upside risks to the near-term outlook for economic activity, members generally continued to judge the risks to that outlook as remaining roughly balanced.
Most members noted that recent information on inflation along with prospects for a continued solid pace of economic activity provided support for the view that inflation on a 12-month basis would likely move up in 2018 and stabilize around the Committee's 2 percent objective over the medium term. However, a couple of members expressed concern about the outlook for inflation, seeing little evidence of a meaningful improvement in the underlying trend in inflation, measures of inflation expectations, or wage growth. Several members commented that they saw both upside and downside risks to the inflation outlook, and members agreed to continue to monitor inflation developments closely.
After assessing current conditions and the outlook for economic activity, the labor market, and inflation, members voted to maintain the target range for the federal funds rate at 1-1/4 to 1-1/2 percent. They indicated that the stance of monetary policy remained accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
Members agreed that the timing and size of future adjustments to the target range for the federal funds rate would depend on their assessments of realized and expected economic conditions relative to the Committee's objectives of maximum employment and 2 percent inflation. They reiterated that this assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Members also agreed to carefully monitor actual and expected inflation developments relative to the Committee's symmetric inflation goal. Members expected that economic conditions would evolve in a manner that would warrant further gradual increases in the federal funds rate. They judged that a gradual approach to raising the target range would sustain the economic expansion and balance the risks to the outlook for inflation and unemployment. Members agreed that the strengthening in the near-term economic outlook increased the likelihood that a gradual upward trajectory of the federal funds rate would be appropriate. They therefore agreed to update the characterization of their expectation for the evolution of the federal funds rate in the postmeeting statement to point to "further gradual increases" while maintaining the target range at the current meeting. Members continued to anticipate that the federal funds rate would likely remain, for some time, below levels that were expected to prevail in the longer run. Nonetheless, they again stated that the actual path for the federal funds rate would depend on the economic outlook as informed by the incoming data.
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 SOMA in accordance with the following domestic policy directive, to be released at 2:00 p.m.:
"Effective February 1, 2018, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1-1/4 to 1-1/2 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.25 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during each calendar month that exceeds $12 billion, and to reinvest in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $8 billion. Small deviations from these amounts for operational reasons are acceptable.
The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."
The vote also encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Gains in employment, household spending, and business fixed investment have been solid, and the unemployment rate has stayed low. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong. Inflation on a 12-month basis is expected to move up this year and to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1-1/4 to 1-1/2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data."
Voting for this action: Janet L. Yellen, William C. Dudley, Thomas I. Barkin, Raphael W. Bostic, Lael Brainard, Loretta J. Mester, Jerome H. Powell, Randal K. Quarles, and John C. Williams.
Voting against this action: None.
Consistent with the Committee's decision to leave the target range for the federal funds rate unchanged, the Board of Governors voted unanimously to leave the interest rates on required and excess reserve balances unchanged at 1-1/2 percent and voted unanimously to approve establishment of the primary credit rate (discount rate) at the existing level of 2 percent.5
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, March 20-21, 2018. The meeting adjourned at 10:50 a.m. on January 31, 2018.
Notation Vote
By notation vote completed on January 2, 2018, the Committee unanimously approved the minutes of the Committee meeting held on December 12-13, 2017.
_____________________________
James A. Clouse
Secretary
1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes. Return to text
2. Attended through the discussion of developments in financial markets and open market operations. Return to text
3. Attended Tuesday session only. Return to text
4. Committee organizational documents are available at www.federalreserve.gov/monetarypolicy/rules_authorizations.htm. Return to text
5. The second vote of the Board also encompassed approval of the establishment of the interest rates for secondary and seasonal credit under the existing formulas for computing such rates. Return to text
1. In general, as specified in Article IV, each member of the IMF undertakes to collaborate with the IMF and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates. These obligations include seeking to direct the member's economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability. These obligations also include avoiding manipulating exchange rates or the international monetary system in such a way that would impede effective balance of payments adjustment or to give an unfair competitive advantage over other members. Return to text |
2018-01-31T00:00:00 | 2018-01-31 | Statement | Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Gains in employment, household spending, and business fixed investment have been solid, and the unemployment rate has stayed low. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong. Inflation on a 12âmonth basis is expected to move up this year and to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1-1/4 to 1â1/2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
Voting for the FOMC monetary policy action were Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Jerome H. Powell; Randal K. Quarles; and John C. Williams.
Implementation Note issued January 31, 2018 |
2017-12-13T00:00:00 | 2018-01-03 | Minute | Minutes of the Federal Open Market Committee
December 12-13, 2017
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, December 12, 2017, at 1:00 p.m. and continued on Wednesday, December 13, 2017, at 9:00 a.m.1
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
Charles L. Evans
Patrick Harker
Robert S. Kaplan
Neel Kashkari
Jerome H. Powell
Randal K. Quarles
Raphael W. Bostic, Loretta J. Mester, Mark L. Mullinix, Michael Strine, and John C. Williams, Alternate Members of the Federal Open Market Committee
James Bullard, Esther L. George, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively
James A. Clouse, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Mark E. Van Der Weide, General Counsel
Michael Held, Deputy General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
Thomas A. Connors, Michael Dotsey, Eric M. Engen, Evan F. Koenig, Daniel G. Sullivan, William Wascher, and Beth Anne Wilson, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Ann E. Misback, Secretary, Office of the Secretary, Board of Governors
Matthew J. Eichner,2 Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors; Andreas Lehnert, Director, Division of Financial Stability, Board of Governors
Jennifer Burns, Deputy Director, Division of Supervision and Regulation, Board of Governors; Rochelle M. Edge and Stephen A. Meyer, Deputy Directors, Division of Monetary Affairs, Board of Governors; Michael T. Kiley, Deputy Director, Division of Financial Stability, Board of Governors
Trevor A. Reeve, Senior Special Adviser to the Chair, Office of Board Members, Board of Governors
Joseph W. Gruber, David Reifschneider, and John M. Roberts, Special Advisers to the Board, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Antulio N. Bomfim, Edward Nelson, Ellen E. Meade, and Robert J. Tetlow, Senior Advisers, Division of Monetary Affairs, Board of Governors
Shaghil Ahmed, Associate Director, Division of International Finance, Board of Governors; Elizabeth Kiser, John J. Stevens, and Stacey Tevlin, Associate Directors, Division of Research and Statistics, Board of Governors; David López-Salido, Associate Director, Division of Monetary Affairs, Board of Governors
Norman J. Morin and Shane M. Sherlund, Assistant Directors, Division of Research and Statistics, Board of Governors
Eric C. Engstrom, Adviser, Division of Monetary Affairs, and Adviser, Division of Research and Statistics, Board of Governors
Penelope A. Beattie,3 Assistant to the Secretary, Office of the Secretary, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Cynthia L. Doniger, Senior Economist, Division of Monetary Affairs, Board of Governors
Randall A. Williams, Senior Information Manager, Division of Monetary Affairs, Board of Governors
Kelly J. Dubbert, First Vice President, Federal Reserve Bank of Kansas City
David Altig, Kartik B. Athreya, Mary Daly, Beverly Hirtle, Geoffrey Tootell, and Christopher J. Waller, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Richmond, San Francisco, New York, Boston, and St. Louis, respectively
Todd E. Clark and Marc Giannoni, Senior Vice Presidents, Federal Reserve Banks of Cleveland and Dallas, respectively
Jonathan L. Willis, Vice President, Federal Reserve Bank of Kansas City
Benjamin Malin, Senior Research Economist, Federal Reserve Bank of Minneapolis
Developments in Financial Markets and Open Market Operations
The manager of the System Open Market Account (SOMA) reported on developments in domestic and international financial markets over the intermeeting period. Equity prices moved higher over the period, with market participants pointing to the likely passage of tax reform legislation as an important factor contributing to the rise. The narrowing of the spread between long- and short-term Treasury yields over recent months had been a focus of market attention. Market participants cited a range of factors as contributing to this narrowing, including the gradual firming in the stance of monetary policy as well as an increasing expectation among investors that the Treasury Department would issue substantial volumes of shorter-term securities in meeting its financing needs over coming years.
The deputy manager discussed open market operations over the period. Take-up at the System's overnight reverse repurchase (ON RRP) agreement facility dropped to relatively low levels over the period. In part, the decline appeared to reflect an increase in yields on alternative investments; Treasury bill yields, for example, had moved higher over recent weeks as the Treasury boosted net issuance of Treasury bills. The Open Market Desk continued to execute reinvestment operations for Treasury and agency securities in the SOMA in accordance with the procedure specified in the Committee's directive to the Desk. The deputy manager also provided an update on plans for the Federal Reserve Bank of New York, in conjunction with the Treasury's Office of Financial Research, to begin publishing reference interest rates for repurchase agreements involving Treasury securities by the middle of next year.
By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account during the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the December 12-13 meeting indicated that labor market conditions continued to strengthen through November and suggested that real gross domestic product (GDP) was rising at a solid pace in the second half of 2017. Total consumer price inflation, as measured by the 12-month percentage change in the price index for personal consumption expenditures (PCE), remained below 2 percent in October and was lower than early in the year. Survey-based measures of longer-run inflation expectations were little changed on balance.
Total nonfarm payroll employment increased strongly in October and November, likely reflecting in part a rebound from the negative effects of the hurricanes in September. The national unemployment rate declined to 4.1 percent in October and remained at that level in November. The unemployment rates for Hispanics, for Asians, and for whites were lower in November than two months earlier, while the rate for African Americans was a little higher; the unemployment rates for each of these groups were close to the levels seen just before the most recent recession. The national labor force participation rate was lower in November than it had been in September but remained in the range seen over the past several years. The share of workers employed part time for economic reasons declined in October and was about unchanged in November. The rates of private-sector job openings and quits were little changed at relatively high levels in September and October, and the four-week moving average of initial claims for unemployment insurance benefits continued to be at a low level in early December. Recent readings showed that wage gains remained modest. Compensation per hour in the nonfarm business sector increased 1 percent over the four quarters ending in the third quarter, and average hourly earnings for all employees rose 2-1/2 percent over the 12 months ending in November.
Total industrial production increased briskly in October, boosted in part by a continued return to more-normal operations that reflected the waning of the negative effects of recent hurricanes in the previous two months. Automakers' schedules indicated that light motor vehicle assemblies would likely move up in the coming months. Broader indicators of manufacturing production, such as the new orders indexes from national and regional manufacturing surveys, pointed to further increases in factory output in the near term.
Real PCE increased modestly in October after expanding strongly in September. The pace of light motor vehicle sales slowed in November from the elevated rate in the preceding two months but continued to be above levels seen earlier in the year. Recent readings on key factors that influence consumer spending--including gains in employment, real disposable personal income, and households' net worth--continued to be supportive of moderate real PCE growth in the fourth quarter. Consumer sentiment in early December, as measured by the University of Michigan Surveys of Consumers, remained at a high level.
Recent information on housing activity suggested that real residential investment spending was edging up in the fourth quarter after declining in the previous two quarters. Both starts and building permit issuance for new single-family homes increased somewhat in October, and starts for multifamily units moved up considerably. Sales of both new and existing homes rose moderately in October.
Real private expenditures for business equipment and intellectual property appeared to be rising further in the fourth quarter. Nominal shipments of nondefense capital goods excluding aircraft increased in October, and new orders of these goods continued to exceed shipments, which pointed to further gains in shipments in the near term. In addition, readings on business sentiment remained upbeat. Firms' nominal spending for nonresidential structures excluding drilling and mining rose in October, and the number of oil and gas rigs in operation--an indicator of spending for structures in the drilling and mining sector--started to edge up in late November after declining earlier in the fourth quarter.
Total real government purchases looked to be rising in the fourth quarter. Nominal defense expenditures in October and November pointed to a flattening in real federal government purchases. However, real purchases by state and local governments appeared to be moving up, as these governments expanded their payrolls modestly over the two months ending in November and their nominal construction spending increased in October.
The nominal U.S. international trade deficit widened slightly in September and sharply in October. Exports picked up in September, led by exports of industrial supplies, but were flat in October. Imports grew significantly in both months, reflecting strength in most categories, although imports of automobiles declined. The available trade data suggested that the change in real net exports would make a neutral contribution to real U.S. GDP growth in the fourth quarter.
Total U.S. consumer prices, as measured by the PCE price index, increased slightly more than 1-1/2 percent over the 12 months ending in October. Core PCE price inflation, which excludes changes in consumer food and energy prices, was nearly 1-1/2 percent over that same period. The consumer price index (CPI) rose 2-1/4 percent over the 12 months ending in November, while core CPI inflation was 1-3/4 percent. Recent readings on survey-based measures of longer-run inflation expectations--including those from the Michigan survey, the Survey of Professional Forecasters, and the Desk's Survey of Primary Dealers and Survey of Market Participants--were little changed on balance.
Economic activity expanded at a solid pace in most foreign economies in the third quarter. In several advanced foreign economies (AFEs), economic growth slowed but remained firm. Economic activity in the emerging market economies (EMEs) continued to grow briskly for the most part, especially in Asia. However, the Mexican economy contracted in the third quarter, as hurricanes and earthquakes disrupted economic activity. Despite a boost from recent increases in oil prices, inflation remained relatively subdued in most AFEs and moderate in EMEs.
Staff Review of the Financial Situation
Movements in domestic financial asset prices over the intermeeting period reflected slightly stronger-than-expected economic data releases, announcements related to Treasury debt issuance, and an increase in the perceived probability that the Congress would enact tax legislation. On net, the Treasury yield curve flattened, U.S. equity prices moved up, and the foreign exchange value of the dollar was little changed. Financing conditions for businesses and households remained broadly supportive of continued growth in household spending and business investment.
Federal Reserve communications and economic data releases over the intermeeting period were characterized by market participants as reinforcing perceptions of a likely increase in the target range for the federal funds rate at the December meeting. The probability of an increase as implied by quotes on federal funds futures contracts edged up to around 95 percent, roughly consistent with the average probability indicated by responses to the Desk's surveys of primary dealers and market participants in December.
The nominal Treasury yield curve flattened over the intermeeting period, as short-dated Treasury yields rose and the 10-year Treasury yield moved up only slightly. Market participants pointed to the November 1 release of the Treasury's quarterly financing statement and accompanying analysis by the Treasury Borrowing Advisory Committee that highlighted some advantages of increasing issuance of relatively short-dated Treasury securities as factors contributing to the flattening of the yield curve over the period. Measures of inflation compensation based on Treasury Inflation-Protected Securities were little changed, on net, over the intermeeting period. Option-adjusted spreads of yields on current-coupon mortgage-backed securities (MBS) over Treasury yields also were little changed. Overall, market participants did not attribute any price changes in Treasury and agency MBS markets to the implementation of reductions in reinvestments of the SOMA portfolio.
Broad equity price indexes rose over the intermeeting period, likely reflecting in part investors' perceptions of increased odds for the passage of federal tax legislation and an associated potential boost to corporate earnings. One-month-ahead option-implied volatility on the S&P 500 index--the VIX--was little changed, on net, at levels close to historical lows. Spreads on both investment- and speculative-grade corporate bond yields over comparable-maturity Treasury yields were about flat on net.
Conditions in short-term funding markets remained stable over the intermeeting period. The effective federal funds rate held steady, and rates and volumes in other overnight markets were little changed. Take-up of ON RRPs declined notably as Treasury bill supply continued to increase, and short-dated bill yields rose to levels significantly above the ON RRP offering rate. On December 11, the Treasury declared a debt issuance suspension period to keep outstanding federal debt below the debt ceiling and began to use extraordinary measures to allow continued financing of government operations.
Financing conditions for large nonfinancial corporations continued to be accommodative on balance. Gross issuance of corporate bonds and gross equity issuance remained robust. Institutional leveraged loan issuance in November was brisk. Growth of bank-intermediated credit to nonfinancial firms, however, was tepid. On balance, the credit quality of nonfinancial corporations was little changed over the intermeeting period and appeared to remain solid. Financing conditions for small businesses also appeared to have remained favorable. In municipal bond markets, gross issuance was strong and credit quality remained stable.
In commercial real estate (CRE) markets, spreads of commercial mortgage-backed securities (CMBS) yields over comparable-maturity Treasury yields remained near the lower end of the range seen since the financial crisis, and delinquency rates on loans in CMBS pools continued to decrease. The growth of CRE loans held by the largest banks continued to slow, while CRE loan growth at smaller banks remained strong overall and even picked up a bit in October.
In the residential mortgage market, although credit standards had loosened gradually for borrowers with low credit scores, they continued to be tight for borrowers with low credit scores and hard-to-document incomes. Mortgage credit remained readily available for borrowers with strong credit scores. Similarly, consumer credit remained readily available to borrowers with strong credit histories, but conditions for subprime borrowers stayed tight in credit card markets and continued to tighten for auto loans. Issuance of asset-backed securities (ABS) funding consumer loans was robust in recent months, and ABS spreads were about unchanged over the intermeeting period.
On balance, the broad index of the foreign exchange value of the dollar was little changed, longer-term sovereign bond yields in AFEs declined modestly, and most foreign equity indexes moved lower over the intermeeting period. The euro appreciated modestly against the U.S. dollar, in part because of strong economic data for the euro area early in the intermeeting period. The British pound was somewhat volatile amid Brexit-related developments, and the Mexican peso fluctuated on news about negotiations associated with the North American Free Trade Agreement, but both currencies ended the period little changed. Following missed interest payments on its sovereign bonds, Venezuela was assigned selective default status by two credit rating agencies in early November, which precipitated a "credit event" ruling by the International Swaps and Derivatives Association. However, developments related to Venezuela generated little spillover to global financial markets.
Staff Economic Outlook
The U.S. economic projection prepared by the staff for the December FOMC meeting was generally comparable with the staff's previous forecast. Real GDP was forecast to have increased at a solid pace in the second half of 2017. Beyond 2017, the forecast for real GDP growth was revised up modestly, reflecting the staff's updated assumption that the reduction in federal income taxes expected to begin next year would be larger than assumed in the previous projection. The staff projected that real GDP would increase at a modestly faster pace than potential output through 2019. The unemployment rate was projected to decline further over the next few years and to continue running below the staff's slightly downward-revised estimate of the longer-run natural rate over this period.
The staff's forecast for total PCE price inflation was revised up a little for 2017, as somewhat higher forecasts for core PCE prices and for consumer energy prices were offset only partially by a lower forecast for consumer food prices. Total PCE price inflation in 2018 was projected to be about the same as in 2017, despite projected declines in consumer energy prices; core PCE prices were forecast to rise faster in 2018, reflecting the expected waning of transitory factors that held down those prices in 2017. Beyond 2018, the inflation forecast was little changed from the previous projection. The staff projected that inflation would be very close to the Committee's 2 percent objective in 2019 and at that objective in 2020.
The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. On the one hand, many indicators of uncertainty about the macroeconomic outlook continued to be subdued; on the other hand, considerable uncertainty remained about a number of federal government policies relevant for the economic outlook. The staff saw the risks to the forecasts for real GDP growth and the unemployment rate as balanced. The risks to the projection for inflation also were seen as balanced. Downside risks to inflation included the possibility that longer-term inflation expectations may move lower or that the run of soft core inflation readings this year could prove to be more persistent than the staff expected. These downside risks were seen as essentially counterbalanced by the upside risk that inflation could increase more than expected in an economy that was projected to move further above its potential.
Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, members of the Board of Governors and Federal Reserve Bank presidents submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2017 through 2020 and over the longer run, based on their individual assessments of the appropriate path for the federal funds rate.4 The longer-run projections represented each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These projections and policy assessments are described in the Summary of Economic Projections (SEP), which is an addendum to these minutes.
In their discussion of economic conditions and the outlook, meeting participants agreed that information received since the FOMC met in November indicated that economic activity had been rising at a solid rate and that the labor market had continued to strengthen. Averaging through fluctuations associated with the recent hurricanes, job gains had been solid and the unemployment rate had declined further. Household spending had been expanding at a moderate rate, and growth in business fixed investment had picked up in recent quarters. On a 12-month basis, both overall inflation and inflation for items other than food and energy had declined this year and were running below 2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed, on balance.
Real economic activity appeared to be growing at a solid pace, buttressed by gains in consumer and business spending, supportive financial conditions, and an improving global economy. Participants judged that hurricane-related disruptions and rebuilding had affected economic activity, employment, and inflation in recent months but had not materially altered the outlook for the national economy. They saw the incoming information on spending and the labor market as consistent with continued above-trend growth and a further strengthening in labor market conditions. Consequently, participants continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would remain strong. Inflation on a 12-month basis was expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appeared to be roughly balanced, but participants agreed that it would be important to continue to monitor inflation developments closely.
Participants expected moderate growth in consumer spending in the near term, underpinned by ongoing strength in the labor market, further improvements in households' net worth, and buoyant consumer sentiment. Business contacts in a few Districts reported strong pre-holiday sales. Many participants expected the proposed cuts in personal taxes to provide some boost to consumer spending. A few participants noted that expectations of tax reform may have already raised consumer spending somewhat to the extent that those expectations had spurred increases in asset valuations and household net worth. A number of participants expressed uncertainty about the magnitude of the effects of tax reform on consumer spending.
District contacts were optimistic, and their reports were generally consistent with continued steady growth in business spending. Reports from District contacts about both the manufacturing and service sectors were generally positive. In contrast, reports on housing and nonresidential construction were mixed. Activity in the energy sector continued to firm, with transportation bottlenecks and residual effects of the hurricanes putting some upward pressure on gasoline prices. In the agricultural sector, farm income was under downward pressure due to low crop prices, and contacts expressed concern about the effects of the possible renegotiation of trade agreements on exports.
Many participants judged that the proposed changes in business taxes, if enacted, would likely provide a modest boost to capital spending, although the magnitude of the effects was uncertain. The resulting increase in the capital stock could contribute to positive supply-side effects, including an expansion of potential output over the next few years. However, some business contacts and respondents to business surveys suggested that firms were cautious about expanding capital spending in response to the proposed tax changes or noted that the increase in cash flow that would result from corporate tax cuts was more likely to be used for mergers and acquisitions or for debt reduction and stock buybacks.
Labor market conditions continued to strengthen in recent months, with the unemployment rate declining further and payroll gains well above a pace consistent with maintaining a stable unemployment rate over time. Other indicators, such as consumer and business surveys of job availability and job openings, also pointed to a further tightening in labor market conditions. A couple of participants noted that broad improvements in labor market conditions over the past several years were evident across demographic groups. In several Districts, reports from business contacts or evidence from surveys pointed to some difficulty in finding qualified workers; in some cases, labor shortages were making it hard to fill customer demand or expand business. A few participants noted that a reduction in personal tax rates could potentially increase labor supply, but the magnitude of such effects was quite uncertain.
Against the backdrop of the continued strengthening in labor market conditions, participants discussed recent wage developments. Overall, the pace of wage increases had generally been modest and in line with inflation and productivity growth. In some Districts, reports from business contacts or evidence from surveys pointed to a pickup in wage gains, particularly for unskilled or entry-level workers. In a couple of regions, businesses facing tight labor market conditions were said to be offering more flexible work arrangements or taking advantage of technology to use employees more efficiently, rather than raising wages. A few participants judged that the tightness in labor markets was likely to translate into an acceleration in wages; however, another observed that the absence of broad-based upward wage pressures suggested that there might be scope for further improvement in labor market conditions.
PCE price inflation over the 12 months ending in October, at 1.6 percent, continued to run below the Committee's longer-run objective of 2 percent; core PCE price inflation for items other than consumer food and energy prices was only 1.4 percent over the same period. It was noted that recent readings on monthly inflation had edged up, and a couple of participants observed that core inflation on a year-over-year basis appeared to be stabilizing. Many indicated that they expected cyclical pressures associated with a tightening labor market to show through to higher inflation over the medium term. These participants generally judged that much of the softness in core inflation this year reflected transitory factors and that inflation would begin to rise as the influence of these factors waned. However, one of them noted that secular trends, such as technological innovation or globalization, could be affecting competition and business pricing, and muting inflationary pressures. With core inflation readings having moved down this year and remaining well below 2 percent, some participants observed that there was a possibility that inflation might stay below the objective for longer than they currently expected. Several of them expressed concern that persistently weak inflation may have led to a decline in longer-term inflation expectations; they pointed to low market-based measures of inflation compensation, declines in some survey measures of inflation expectations, or evidence from statistical models suggesting that the underlying trend in inflation had fallen in recent years. A few participants, however, noted that measures of inflation expectations had remained broadly stable this year despite the low readings on inflation and judged that this stability should support the return of inflation to the Committee's 2 percent objective.
With regard to financial markets, some participants observed that financial conditions remained accommodative, citing a range of indicators including low interest rates, narrow credit spreads, high equity values, a lower dollar, and some evidence of easier terms for lending to risky borrowers. In light of elevated asset valuations and low financial market volatility, a couple of participants expressed concern that the persistence of highly accommodative financial conditions could, over time, pose risks to financial stability. Participants also noted that term premiums on longer-term nominal Treasury securities remained low. A number of factors were seen as possibly contributing to the low levels of term premiums, including large holdings of longer-term assets by major central banks, persistently low global inflation, and substantial global demand for assets with long durations.
Meeting participants also discussed the recent narrowing of the gap between the yields on long- and short-maturity nominal Treasury securities, which had resulted in a flatter profile of the term structure of interest rates. Among the factors contributing to the flattening, participants pointed to recent increases in the target range for the federal funds rate, reductions in investors' estimates of the longer-run neutral real interest rate, lower longer-term inflation expectations, and lower term premiums. They generally agreed that the current degree of flatness of the yield curve was not unusual by historical standards. However, several participants thought that it would be important to continue to monitor the slope of the yield curve. Some expressed concern that a possible future inversion of the yield curve, with short-term yields rising above those on longer-term Treasury securities, could portend an economic slowdown, noting that inversions have preceded recessions over the past several decades, or that a protracted yield curve inversion could adversely affect the financial condition of banks and other financial institutions and pose risks to financial stability. A couple of other participants viewed the flattening of the yield curve as an expected consequence of increases in the Committee's target range for the federal funds rate, and judged that a yield curve inversion under such circumstances would not necessarily foreshadow or cause an economic downturn. It was also noted that contacts in the financial sector generally did not express concern about the recent flattening of the term structure.
In their discussion of monetary policy, participants saw the outlook for economic activity and the labor market as having remained strong or having strengthened since their previous meeting, in part reflecting a modest boost from the expected passage of the tax legislation under consideration. Regarding inflation, participants generally viewed the medium-term outlook as little changed, and a majority commented that they continued to expect inflation to gradually return to the Committee's 2 percent longer-run objective. A few participants again noted that transitory factors had likely held down inflation earlier this year. However, several participants observed that survey-based measures of inflation expectations or market-based measures of inflation compensation remained low, or that other persistent factors may be holding down inflation, which would present challenges for the Committee in promoting a return of inflation to 2 percent over the medium term.
Based on their current assessments, almost all participants expressed the view that it would be appropriate for the Committee to raise the target range for the federal funds rate 25 basis points at this meeting. These participants agreed that, even after an increase in the target range at this meeting, the stance of monetary policy would remain accommodative, supporting strong labor market conditions and a sustained return to 2 percent inflation. A couple of participants did not believe it was appropriate to raise the target range for the federal funds rate at this meeting; these participants suggested that the Committee should maintain the target range at 1 to 1-1/4 percent until the actual rate of inflation had moved further toward the Committee's 2 percent longer-run objective or inflation expectations had increased. They judged that leaving the target range at its current level would better support an increase in inflation expectations and thereby increase the likelihood that inflation will rise to 2 percent.
Regarding the determination of the appropriate timing and size of future adjustments to the target range for the federal funds rate, participants reaffirmed the need to continue to assess realized and expected economic conditions. Most participants reiterated their support for continuing a gradual approach to raising the target range, noting that this approach helped to balance risks to the outlook for economic activity and inflation. Participants discussed several risks that, if realized, could necessitate a steeper path of increases in the target range; these risks included the possibility that inflation pressures could build unduly if output expanded well beyond its maximum sustainable level, perhaps owing to fiscal stimulus or accommodative financial market conditions. Participants also discussed risks that could lead to a flatter trajectory for the federal funds rate in the medium term, including a failure of actual or expected inflation to move up to the Committee's 2 percent objective. While participants generally saw the risks to the economic outlook as roughly balanced, they agreed that inflation developments should be monitored closely. A few participants indicated that they were not comfortable with the degree of additional policy tightening through the end of 2018 implied by the median projections for the federal funds rate in the December SEP. They expressed concern that such a path of increases in the policy rate, while gradual, might prove inconsistent with a sustained return of inflation to 2 percent, or that the level of the federal funds rate might already be near its current neutral value. A few other participants mentioned that they saw as appropriate a pace of additional policy tightening through the end of 2018 that was somewhat faster than that implied by the December SEP median forecast. They noted that financial conditions had not materially tightened since the removal of monetary policy accommodation began, that continued low interest rates risked financial instability in the future, or that the labor market was increasingly tight. A couple of participants noted the need to continue to monitor and evaluate the effects of balance sheet normalization on long-term interest rates and economic performance.
Due to the persistent shortfall of inflation from the Committee's 2 percent objective, or the risk that monetary policy could again become constrained by the zero lower bound, a few participants suggested that further study of potential alternative frameworks for the conduct of monetary policy such as price-level targeting or nominal GDP targeting could be useful.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the Committee met in November indicated that the labor market had continued to strengthen and that economic activity had been rising at a solid rate. Averaging through hurricane-related fluctuations, job gains had been solid, and the unemployment rate had declined further. Household spending had been expanding at a moderate rate, and growth in business fixed investment had picked up in recent quarters. On a 12-month basis, both overall inflation and inflation for items other than food and energy had declined for the year to date and were running below 2 percent. Market-based measures of inflation compensation had remained low; survey-based measures of longer-term inflation expectations had changed little, on balance.
Members acknowledged that hurricane-related disruptions and rebuilding had affected economic activity, employment, and inflation in recent months but had not materially altered the outlook for the national economy. They continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would remain strong. Members expected inflation on a 12-month basis to remain somewhat below 2 percent in the near term. They also expected inflation to stabilize around the Committee's 2 percent objective over the medium term, but a couple of members expressed concern about whether inflation would return to 2 percent on a sustained basis in the medium term if the Committee increased the target range for the federal funds rate at the pace that is implied by the medians of the projections from the December SEP. Members saw the near-term risks to the economic outlook as roughly balanced, but they agreed to monitor inflation developments closely.
After assessing current conditions and the outlook for economic activity, the labor market, and inflation, nearly all members agreed to raise the target range for the federal funds rate to 1-1/4 to 1-1/2 percent. These members noted that the stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation. Two members preferred to leave the target range at 1 to 1-1/4 percent, suggesting that the Committee should wait to raise the target range until inflation moves up closer to 2 percent on a sustained basis or inflation expectations increase.
Members agreed that the timing and size of future adjustments to the target range for the federal funds rate would depend on their assessments of realized and expected economic conditions relative to the Committee's objectives of maximum employment and 2 percent inflation. They noted that their assessments would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Members agreed that their assessments would also take into account actual and expected inflation developments relative to the Committee's symmetric inflation goal. Almost all members reaffirmed their expectation that economic conditions would evolve in a manner that would warrant gradual increases in the federal funds rate, and that the federal funds rate would be likely to remain, for some time, below levels that were expected to prevail in the longer run. Nonetheless, members reiterated that the actual path of the federal funds rate would depend on the economic outlook as informed by incoming data.
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 SOMA in accordance with the following domestic policy directive, to be released at 2:00 p.m.:
"Effective December 14, 2017, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1-1/4 to 1-1/2 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.25 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during December that exceeds $6 billion, and to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during December that exceeds $4 billion. Effective in January, the Committee directs the Desk to roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during each calendar month that exceeds $12 billion, and to reinvest in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $8 billion. Small deviations from these amounts for operational reasons are acceptable.
The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."
The vote also encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Averaging through hurricane-related fluctuations, job gains have been solid, and the unemployment rate declined further. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. On a 12-month basis, both overall inflation and inflation for items other than food and energy have declined this year and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Hurricane-related disruptions and rebuilding have affected economic activity, employment, and inflation in recent months but have not materially altered the outlook for the national economy. Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/4 to 1-1/2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data."
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Patrick Harker, Robert S. Kaplan, Jerome H. Powell, and Randal K. Quarles.
Voting against this action: Charles L. Evans and Neel Kashkari.
Messrs. Evans and Kashkari dissented because they preferred to maintain the existing target range for the federal funds rate at this meeting.
In Mr. Evans's view, with inflation continuing to run substantially below 2 percent and measures of inflation expectations lower than he believed to be consistent with a symmetric 2 percent inflation objective, it was important to pause in the process of policy normalization. Leaving the target range at 1 to 1-1/4 percent for a time would better support an increase in inflation expectations, increase the likelihood that inflation will rise to 2 percent and perhaps modestly beyond, and thus provide more support for the symmetry of the Committee's inflation objective. Such a pause also would better allow the Committee time to assess the degree to which earlier soft readings on inflation were transitory or more persistent.
In Mr. Kashkari's view, while employment growth remained strong, wage growth had not picked up and inflation remained notably below the Committee's 2 percent target. In addition, the yield curve had flattened as long-term rates had not moved higher even though the Committee raised the federal funds rate target range. He was concerned that the flattening yield curve was partly due to falling longer-term inflation expectations or a lower neutral real rate of interest. He preferred to wait for inflation to move closer to 2 percent on a sustained basis or for inflation expectations to move up before further raising the target range for the federal funds rate.
To support the Committee's decision to raise the target range for the federal funds rate, the Board of Governors voted unanimously to raise the interest rates on required and excess reserve balances 1/4 percentage point, to 1-1/2 percent, effective December 14, 2017. The Board of Governors also voted unanimously to approve a 1/4 percentage point increase in the primary credit rate (discount rate) to 2 percent, effective December 14, 2017.5
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, January 30-31, 2018. The meeting adjourned at 10:15 a.m. on December 13, 2017.
Notation Vote
By notation vote completed on November 21, 2017, the Committee unanimously approved the minutes of the Committee meeting held on October 31-November 1, 2017.
_____________________________
James A. Clouse
Secretary
1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes. Return to text
2. Attended through the discussion of developments in financial markets and open market operations. Return to text
3. Attended Tuesday session only. Return to text
4. The incoming president of the Federal Reserve Bank of Richmond is scheduled to assume office on January 1, 2018; First Vice President Mark L. Mullinix submitted economic projections for this meeting. One participant did not submit longer-run projections for real output growth, the unemployment rate, or the federal funds rate. Return to text
5. In taking this action, the Board approved requests submitted by the boards of directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Kansas City, Dallas, and San Francisco. This vote also encompassed approval by the Board of Governors of the establishment of a 2 percent primary credit rate by the remaining Federal Reserve Banks, effective on the later of December 14, 2017, and the date such Reserve Banks informed the Secretary of the Board of such a request. (Secretary's note: Subsequently, the Federal Reserve Banks of Chicago, St. Louis, and Minneapolis were informed by the Secretary of the Board of the Board's approval of their establishment of a primary credit rate of 2 percent, effective December 14, 2017.) The second vote of the Board also encompassed approval of the establishment of the interest rates for secondary and seasonal credit under the existing formulas for computing such rates. Return to text |
2017-12-13T00:00:00 | 2017-12-13 | Statement | Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Averaging through hurricane-related fluctuations, job gains have been solid, and the unemployment rate declined further. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. On a 12-month basis, both overall inflation and inflation for items other than food and energy have declined this year and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Hurricane-related disruptions and rebuilding have affected economic activity, employment, and inflation in recent months but have not materially altered the outlook for the national economy. Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong. Inflation on a 12âmonth basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/4 to 1â1/2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
Voting for the FOMC monetary policy action were Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Patrick Harker; Robert S. Kaplan; Jerome H. Powell; and Randal K. Quarles. Voting against the action were Charles L. Evans and Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate.
Implementation Note issued December 13, 2017 |
2017-11-01T00:00:00 | 2017-11-01 | Statement | Information received since the Federal Open Market Committee met in September indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate despite hurricane-related disruptions. Although the hurricanes caused a drop in payroll employment in September, the unemployment rate declined further. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. Gasoline prices rose in the aftermath of the hurricanes, boosting overall inflation in September; however, inflation for items other than food and energy remained soft. On a 12-month basis, both inflation measures have declined this year and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Hurricane-related disruptions and rebuilding will continue to affect economic activity, employment, and inflation in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term. Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The balance sheet normalization program initiated in October 2017 is proceeding.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Jerome H. Powell; and Randal K. Quarles.
Implementation Note issued November 1, 2017 |
2017-11-01T00:00:00 | 2017-11-22 | Minute | Minutes of the Federal Open Market Committee
October 31-November 1, 2017
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, October 31, 2017, at 1:30 p.m. and continued on Wednesday, November 1, 2017, at 9:00 a.m.1
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
Charles L. Evans
Patrick Harker
Robert S. Kaplan
Neel Kashkari
Jerome H. Powell
Randal K. Quarles
Raphael W. Bostic, Loretta J. Mester, Mark L. Mullinix, and John C. Williams, Alternate Members of the Federal Open Market Committee
James Bullard, Esther L. George, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively
Brian F. Madigan, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Mark E. Van Der Weide, General Counsel
Michael Held, Deputy General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
James A. Clouse, Thomas A. Connors, Daniel G. Sullivan, William Wascher, Beth Anne Wilson, and Mark L.J. Wright, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Ann E. Misback, Secretary, Office of the Secretary, Board of Governors
Matthew J. Eichner,2 Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors; Michael S. Gibson, Director, Division of Supervision and Regulation, Board of Governors; Andreas Lehnert, Director, Division of Financial Stability, Board of Governors
Daniel M. Covitz, Deputy Director, Division of Research and Statistics, Board of Governors; Rochelle M. Edge and Stephen A. Meyer, Deputy Directors, Division of Monetary Affairs, Board of Governors
Trevor A. Reeve, Senior Special Adviser to the Chair, Office of Board Members, Board of Governors
John M. Roberts, Special Adviser to the Board, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
David E. Lebow, Senior Associate Director, Division of Research and Statistics, Board of Governors
Antulio N. Bomfim and Ellen E. Meade, Senior Advisers, Division of Monetary Affairs, Board of Governors
Shaghil Ahmed and Joseph W. Gruber, Associate Directors, Division of International Finance, Board of Governors; David López-Salido, Associate Director, Division of Monetary Affairs, Board of Governors
Stephanie R. Aaronson, Burcu Duygan-Bump, and Glenn Follette, Assistant Directors, Division of Research and Statistics, Board of Governors; Christopher J. Gust, Assistant Director, Division of Monetary Affairs, Board of Governors
Penelope A. Beattie,3 Assistant to the Secretary, Office of the Secretary, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Youngsuk Yook, Principal Economist, Division of Research and Statistics, Board of Governors
Jonathan E. Goldberg, Senior Economist, Division of Monetary Affairs, Board of Governors
Randall A. Williams, Senior Information Manager, Division of Monetary Affairs, Board of Governors
James Narron, First Vice President, Federal Reserve Bank of Philadelphia
David Altig, Kartik B. Athreya, Mary Daly, Jeff Fuhrer, Ellis W. Tallman, and Christopher J. Waller, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Richmond, San Francisco, Boston, Cleveland, and St. Louis, respectively
Marc Giannoni and Paolo A. Pesenti, Senior Vice Presidents, Federal Reserve Banks of Dallas and New York, respectively
Sarah K. Bell, Satyajit Chatterjee, and Jonathan L. Willis, Vice Presidents, Federal Reserve Banks of New York, Philadelphia, and Kansas City, respectively
Selection of Committee Officer
By unanimous vote, the Committee selected James A. Clouse to serve as secretary, effective on November 26, 2017. This selection is effective until the selection of a successor at the Committee's first regularly scheduled meeting in 2018.
Developments in Financial Markets and Open Market Operations
The manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets since the September FOMC meeting. Broad equity price indexes extended earlier increases, yields on longer-term Treasury securities rose, yield spreads on corporate bonds declined, and the foreign exchange value of the dollar increased. Money market interest rates suggested that market participants did not anticipate a change in the Committee's target range for the federal funds rate at this meeting but saw a high probability of a 25 basis point increase at the Committee's December meeting.
The deputy manager followed with a briefing on money market developments and open market operations. Over the intermeeting period, federal funds continued to trade near the center of the FOMC's target range except on quarter-end. Implementation of the Committee's balance sheet normalization program, which began in October, had proceeded smoothly so far. Take-up at the System's overnight reverse repurchase agreement facility averaged slightly more than in the previous period. A rebalancing of the SOMA's holdings of euro reserves, which reflected instructions provided by the Foreign Currency Subcommittee in September, was completed in October.
By unanimous vote, the Committee ratified the Open Market Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account during the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the October 31-November 1 meeting indicated that labor market conditions generally continued to strengthen and that real gross domestic product (GDP) expanded at a solid pace in the third quarter despite hurricane-related disruptions. Although the effects of the recent hurricanes led to a reported decline in payroll employment in September, the unemployment rate decreased further. Retail gasoline prices jumped in the aftermath of the hurricanes, but total consumer price inflation, as measured by the 12âmonth percentage change in the price index for personal consumption expenditures (PCE), remained below 2 percent in September and was lower than early in the year. Surveyâbased measures of longer-run inflation expectations were little changed on balance.
Total nonfarm payroll employment was reported to have decreased in September, consistent with a substantial increase in the number of people who reported themselves as being absent from work due to bad weather and with payroll declines in the hurricane-affected states of Texas and Florida. However, the national unemployment rate moved down to 4.2 percent in September, and the labor force participation rate rose. The unemployment rates for African Americans, for Hispanics, and for whites were lower in September than around the start of the year, while the rate for Asians was roughly flat this year; the unemployment rates for each of these groups were close to the levels seen just before the most recent recession. The overall share of workers employed part time for economic reasons edged down in September, and the rates of private-sector job openings and quits were unchanged in August. The four-week moving average of initial claims for unemployment insurance benefits moved back down to a low level by late October after rising in September following the hurricanes. Recent readings showed a modest pickup in growth of labor compensation. The employment cost index for private workers increased 2-1/2 percent over the 12 months ending in September, a little faster than in the 12-month period ending a year earlier. Increases in average hourly earnings for all employees stepped up to a rate of almost 3 percent over the 12 months ending in September; however, a portion of that acceleration possibly reflected a hurricane-related reduction in the number of lower-wage workers reported as having been paid during the reference week in September.
Total industrial production (IP) increased somewhat in September, reflecting output gains in manufacturing, in mining, and in utilities; the effects of the hurricanes appeared to hold IP down less in September than in August. Automakers' schedules indicated that light motor vehicle assemblies would increase in the fourth quarter. Broader indicators of manufacturing production, such as the new orders indexes from national and regional manufacturing surveys, pointed to an expansion in factory output in the near term.
Real PCE growth slowed in the third quarter, likely reflecting in part temporary effects of the hurricanes. Recent readings on key factors that influence consumer spending--including gains in real disposable personal income and households' net worth--remained supportive of solid increases in real PCE in the near term. Consumer sentiment in October, as measured by the University of Michigan Surveys of Consumers, was at its highest level since before the most recent recession.
Real residential investment declined further in the third quarter. Starts of both new single-family homes and multifamily units moved down in September. However, building permit issuance for new single-family homes--which tends to be a good indicator of the underlying trend in construction of such homes--edged up in September. Sales of new homes increased notably over the two months ending in September, although sales of existing homes decreased somewhat over that period.
Real private expenditures for business equipment and intellectual property continued to rise at a brisk pace in the third quarter. Nominal orders and shipments of nondefense capital goods excluding aircraft rose further over the two months ending in September, and readings on business sentiment remained upbeat. In contrast, real investment spending for nonresidential structures declined in the third quarter, as a further increase in the drilling and mining sector was more than offset by a decline in other sectors, particularly manufacturing.
Total real government purchases were about flat in the third quarter. Real federal purchases rose somewhat, mostly reflecting increased defense expenditures. In contrast, real purchases by state and local governments declined a little, as construction spending by these governments fell.
The nominal U.S. international trade deficit narrowed in August, as exports rose and imports fell. Export growth was driven by higher exports of capital goods and consumer goods, while the import decline was led by lower imports of industrial supplies and capital goods. Advance estimates for September suggested that goods imports grew more than exports, pointing to a widening of the monthly trade deficit. Despite this widening, net exports were reported to have contributed positively to real GDP growth for the third quarter as a whole.
Total U.S. consumer prices, as measured by the PCE price index, increased a bit more than 1-1/2 percent over the 12 months ending in September. Core PCE price inflation, which excludes changes in consumer food and energy prices, was about 1-1/4 percent over that same period. Retail gasoline prices moved up sharply following the hurricanes and put upward pressure on total PCE prices in August and September; gasoline prices subsequently moved down somewhat through late October. The consumer price index (CPI) rose 2-1/4 percent over the 12 months ending in September, while core CPI inflation was 1-3/4 percent. Recent readings on survey-based measures of longer-run inflation expectations--including those from the Michigan survey, the Blue Chip Economic Indicators, and the Desk's Survey of Primary Dealers and Survey of Market Participants--were little changed on balance.
Foreign economic activity continued to expand at a solid pace. Incoming data suggested that in most advanced foreign economies (AFEs), economic growth slowed in the third quarter but remained firm. Economic activity in the emerging market economies (EMEs) also continued to grow briskly for the most part, especially in Asia. The Mexican economy, however, contracted in the third quarter, in part because hurricanes and earthquakes disrupted economic activity. Headline inflation in the AFEs generally remained subdued, but U.K. inflation stayed above the Bank of England's 2 percent target. Low inflation persisted in most EMEs as well, although rising food prices continued to put upward pressure on inflation in Mexico.
Staff Review of the Financial Situation
Movements in domestic financial asset prices over the intermeeting period reflected FOMC communications that were read as slightly less accommodative than expected, economic data releases that were generally better than anticipated, and market perceptions that U.S. tax reform was becoming more likely. On net, Treasury yields increased modestly, U.S. equity prices moved up, and the dollar appreciated. There was no discernible reaction in financial markets to the widely anticipated announcement of the FOMC's change to its balance sheet policy. Meanwhile, domestic financing conditions generally remained accommodative. Corporate bond spreads narrowed modestly, and corporations continued to tap credit markets at a solid pace. Credit also remained readily available to households, except for higher-risk borrowers in some markets.
FOMC communications over the intermeeting period were reportedly viewed by investors as slightly less accommodative than expected. The Committee's decisions at the September FOMC meeting to leave the target range for the federal funds rate unchanged and to announce the start of its balance sheet normalization program in October had been widely anticipated by the public. However, market participants noted that the medians of projections for the federal funds rate in the September Summary of Economic Projections (SEP) were unchanged, whereas some investors had expected slight downward revisions. In addition, market commentaries observed that, despite low inflation readings in recent months, the characterization of the inflation outlook in the September policy statement was little changed and the SEP showed only modest downward revisions to FOMC participants' near-term inflation projections. Communications by FOMC participants were also seen as reinforcing expectations for continued gradual removal of policy accommodation. The probability of an increase in the target range for the federal funds rate occurring at the OctoberâNovember meeting, as implied by quotes on federal funds futures contracts, remained essentially zero; the probability of an increase at the December meeting rose to about 85 percent by the end of the intermeeting period. Levels of the federal funds rate at the end of 2018 and 2019 implied by overnight index swap rates moved up moderately.
The nominal Treasury yield curve shifted up and flattened somewhat over the intermeeting period. Yields increased following the September FOMC meeting and in response to news regarding proposals for tax reform. They also rose, on net, following domestic economic data releases, which generally came in above investors' expectations. Option-adjusted spreads on current-coupon mortgage-backed securities (MBS) over Treasury yields were little changed. The FOMC's September announcement that it would begin implementing in October its plan for normalizing the Federal Reserve's balance sheet was widely anticipated and appeared to have had little effect on either Treasury yields or MBS spreads. Near-term measures of option-implied volatility on 10-year swap rates remained near historically low levels. Measures of inflation compensation based on Treasury Inflation-Protected Securities declined somewhat following the slightly lower-than-expected September CPI data but were little changed on net.
Broad equity price indexes rose notably, reportedly reflecting in part investors' perceptions that tax reform was becoming more likely. One-month-ahead option-implied volatility on the S&P 500 index--the VIX--remained near historically low levels. Spreads of yields on both investment- and speculative-grade corporate bonds over comparable-maturity Treasury securities narrowed modestly.
Conditions in short-term funding markets remained stable over the intermeeting period. The effective federal funds rate held steady, and rates and volumes in other unsecured and secured overnight and term funding markets continued to be stable aside from quarter-end. At the end of September, changes in money market rates and volumes were short lived and in line with previous quarter-ends.
Financing conditions for large nonfinancial firms remained accommodative. In September, the pace of gross equity issuance was about in line with that observed in recent months, gross issuance of corporate bonds dipped somewhat but stayed high by historical standards, and originations of institutional leveraged loans that raised new funds were robust. The credit performance of bonds issued by, and loans extended to, nonfinancial corporations also remained strong over the intermeeting period. Meanwhile, growth of banks' commercial and industrial (C&I) loans continued to be sluggish, although it picked up a bit in the third quarter. Responses to the October Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) suggested that lackluster demand among banks' business customers was a key factor in this subdued growth. The survey also reported a notable increase in the share of banks that narrowed loan spreads for C&I loans over the previous three months, with many respondents citing more aggressive competition from other bank or nonbank lenders as an important reason for doing so.
Financing flows for commercial real estate (CRE) were more robust in the commercial mortgage-backed securities (CMBS) market than from banks in the third quarter. Issuance of CMBS continued to be robust and in line with last year's pace. Spreads on lower-rated CMBS over Treasury securities widened slightly over the intermeeting period but remained near the lower end of the range seen since the financial crisis. Delinquency rates on loans in CMBS pools continued to decline in September. Meanwhile, CRE loan growth at banks slowed, especially for nonfarm nonresidential loans. In the October SLOOS, banks reported that demand for CRE loans weakened, on net, over the third quarter and that lending standards continued to be somewhat tight.
Credit conditions in the residential mortgage market stayed accommodative in the third quarter for most borrowers. However, credit standards continued to be tight for borrowers with low credit scores or hard-to- document incomes. The October SLOOS suggested that the recent slowdown in mortgage originations for home purchases was partly attributable to weaker demand.
Consumer credit continued to expand at a moderate pace in the third quarter. However, the October SLOOS indicated that banks continued to tighten their credit policies for auto and credit card loans. Credit bureau data on loan originations and credit limits suggested that this tightening was most pronounced in the subprime segment of the market.
The broad index of the foreign exchange value of the dollar rose nearly 3 percent over the intermeeting period amid the rise in U.S. interest rates, market expectations that U.S. tax reform was becoming more likely, and foreign central bank actions and communications. The Canadian dollar depreciated significantly over the period and Canadian yields declined as the Bank of Canada left its policy rate unchanged and comments by the bank's governor were interpreted as more accommodative than expected. The euro also depreciated, despite the European Central Bank's (ECB's) announcement of a step-down in asset purchases next year, reflecting slight declines in investors' expectations for ECB policy rates and in German long-term sovereign yields. EME currencies generally depreciated as well, most notably the Turkish lira and the Mexican peso, the latter of which was held down in part by uncertainty about negotiations on the North American Free Trade Agreement. Most foreign equity indexes increased. In Japan, equity indexes rose notably in advance of parliamentary elections that resulted in a strong victory for Prime Minister Abe's ruling coalition, a development seen by market participants as signaling a continuation of stimulative economic policies.
The staff provided its latest report on vulnerabilities of the U.S. financial system. The staff continued to judge that the overall vulnerabilities were moderate: Asset valuation pressures across markets were judged to have increased slightly, on balance, since the previous assessment in July and to have remained elevated; leverage in the nonfinancial sector stayed moderate; and, in the financial sector, leverage and vulnerabilities from maturity and liquidity transformation continued to be low. In addition, the staff assessed overall vulnerabilities to foreign financial stability as moderate. The staff highlighted specific vulnerabilities in some foreign economies, including--depending on the country--still-weak banks, heavy indebtedness in the corporate or household sector or both, rising property prices, overhangs of sovereign debt, and significant susceptibility to various political developments.
Staff Economic Outlook
The U.S. economic projection prepared by the staff for this FOMC meeting was broadly similar to the previous forecast. Real GDP was expected to rise at a solid pace in the fourth quarter of this year, boosted in part by a rebound in spending and production after the negative effects of the hurricanes in the third quarter. Payroll employment was also expected to rebound during the fourth quarter. Beyond 2017, the forecast for real GDP growth was essentially unrevised. In particular, the staff continued to project that real GDP would expand at a modestly faster pace than potential output through 2019. The unemployment rate was projected to decline gradually over the next couple of years and to continue running below the staff's estimate of its longer-run natural rate over this period.
The staff's forecast for total PCE price inflation was little changed for 2017, as a somewhat higher forecast for consumer energy prices was mostly offset by a slightly lower forecast for core PCE prices. Although total PCE price inflation was forecast to be about the same in 2017 as it was last year, core PCE price inflation was anticipated to be a little lower than in 2016, and consumer food and energy price inflation was expected to be a little higher. Total PCE price inflation was projected to pick up in 2018, as most of the softness in core PCE price inflation this year was expected to be transitory. However, the staff's forecasts for core inflation and, thus, for total inflation were revised down slightly for next year, reflecting the judgment that a bit of the unexplained weakness in core inflation this year may carry over into next year. Beyond 2018, the inflation forecast was unchanged from the previous projection. The staff continued to project that inflation would reach the Committee's 2 percent objective in 2019.
The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. On the one hand, many indicators of uncertainty about the macroeconomic outlook continued to be subdued; on the other hand, considerable uncertainty remained about a number of federal government policies. The staff saw the risks to the forecasts for real GDP growth and the unemployment rate as balanced. The risks to the projection for inflation also were seen as balanced. Downside risks included the possibilities that longer-term inflation expectations may have edged lower or that the run of soft readings on core inflation this year could prove to be more persistent than the staff expected. These downside risks were seen as essentially counterbalanced by the upside risk that inflation could increase more than expected in an economy that was projected to move further above its longer-run potential.
Participants' Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants agreed that information received since the FOMC met in September indicated that the labor market had continued to strengthen and that economic activity had been rising at a solid rate despite hurricane-related disruptions. Although the hurricanes depressed payroll employment in September, the unemployment rate, which was less affected by the storms, declined further. Household spending had been expanding at a moderate rate, and growth in business fixed investment had picked up in recent quarters. Gasoline prices rose in the aftermath of the hurricanes, boosting overall inflation in September; however, inflation for items other than food and energy remained soft. On a 12-month basis, both inflation measures had declined this year and were running below 2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed, on balance.
Participants acknowledged that hurricane-related disruptions and rebuilding would continue to affect economic activity in the near term, and they noted that, in October, wildfires in California had displaced many households. Past experience, however, suggested that the economic effects of the hurricanes and other natural disasters would be mostly temporary and unlikely to materially alter the course of the national economy over the medium term. Participants saw the incoming information on spending and the labor market as consistent with continued above-trend economic growth and a further strengthening in labor market conditions, although the hurricanes, in particular, made it more difficult than usual to interpret some of this information. They continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would strengthen somewhat further. Inflation on a 12âmonth basis was expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appeared to be roughly balanced, but participants agreed that it would be important to continue to monitor inflation developments closely.
Participants expected solid growth in consumer spending in the near term, supported by ongoing strength in the labor market, improved household balance sheets, and a high level of consumer sentiment. Robust gains in consumer spending in September were viewed as consistent with that outlook. Light motor vehicle sales had rebounded in September, and District contacts generally expected sales to remain strong in the near term, boosted in part by demand to replace vehicles destroyed by the hurricanes.
Reports on business spending from District contacts were generally upbeat. Participants anticipated appreciable increases in business fixed investment. Improved demand from abroad, rising business profits, and the substitution of capital for labor in response to tightening labor markets were viewed as factors supporting growth in investment. Several participants reported that business contacts appeared to be more confident about the economic outlook and thus more inclined to undertake capital expansion plans. In that context, it was noted that the expansion in business fixed investment could be given additional impetus if legislation involving tax reductions was enacted; a few participants judged that the prospects for significant tax cuts had risen recently. Some firms, especially those operating in industries in which technological advances were spurring competition, were reportedly planning to expand capacity through mergers and acquisitions rather than through investment in new plant and equipment.
Reports from District contacts about both manufacturing and services were generally positive. District contacts in regions affected by the hurricanes reported that the disruptions to production and sales were mostly short lived, including in the energy sector where drilling and refining outages were temporary. However, some homebuilders were reporting shortages of certain building materials in the aftermath of the hurricanes. Farm incomes in some regions were said to remain under downward pressure because of declining crop and livestock prices.
Participants judged that increases in nonfarm payroll employment, apart from the temporary effects of the hurricanes, remained well above the pace likely to be sustainable in the longer run and that labor market conditions had strengthened further in recent months. Changes in payrolls, as measured by the establishment survey, had been temporarily depressed by the storms in September but were expected to bounce back in later months. Data from the household survey, which generally were viewed as not materially affected by the hurricanes, indicated that the unemployment rate ticked down to 4.2 percent in September, falling further below participants' estimates of its longer-run normal level. Participants also cited other indicators suggesting that labor market conditions continued to strengthen, including increases in the labor force participation rates of both prime-age and all individuals. Reports from some Districts pointed to difficulty attracting and retaining labor, but anecdotal information from other Districts suggested that workers with the requisite skills remained reasonably available. Many participants judged that the economy was operating at or above full employment and anticipated that the labor market would tighten somewhat further in the near term, as GDP was expected to grow at a pace exceeding that of potential output.
Participants discussed wage developments in light of the continued strengthening in labor market conditions. A few participants interpreted recent data on aggregate wage and labor compensation as indicating some firming in wage growth; a few others, however, judged wage growth to have been little changed over the past year. Overall, wage increases were generally seen as modest. A couple of participants expressed the view that, when the rate of labor productivity growth was taken into account, the pace of recent wage gains was consistent with an economy operating near full employment. Reports from District contacts indicated that some businesses facing tight labor markets found it more effective to expand their workforces by using a variety of nonpecuniary means, including offering greater job flexibility and training, rather than by increasing wages. Other District contacts, however, reported some increased wage pressure as a result of tightening labor market conditions.
Gasoline prices rose in the aftermath of the hurricanes, boosting overall inflation in September. Still, on a 12âmonth basis, PCE price inflation in September, at 1.6 percent, remained below the Committee's longer-run objective; core PCE price inflation, which excludes consumer food and energy prices, was only 1.3 percent. Many participants judged that much of the recent softness in core inflation reflected temporary or idiosyncratic factors and that inflation would begin to rise once the influence of these factors began to wane. Most participants continued to think that the cyclical pressures associated with a tightening labor market were likely to show through to higher inflation over the medium term.
With core inflation readings continuing to surprise on the downside, however, many participants observed that there was some likelihood that inflation might remain below 2 percent for longer than they currently expected, and they discussed possible reasons for the recent shortfall. Several participants pointed to a diminished responsiveness of inflation to resource utilization, to the possibility that the degree of labor market tightness was less than currently estimated, or to lags in the response of inflation to greater resource utilization as plausible explanations for the continued soft readings on inflation. A few noted that secular influences, such as the effect of technological innovation in disrupting existing business models, were likely offsetting cyclical upward pressure on inflation and contributing to below-target inflation.
In discussing the implications of these developments, several participants expressed concern that the persistently weak inflation data could lead to a decline in longer-term inflation expectations or may have done so already; they pointed to low market-based measures of inflation compensation, declines in some survey measures of inflation expectations, or evidence from statistical models suggesting that the underlying trend in inflation had fallen in recent years. In addition, the possibility was raised that monetary policy actions or communications over the past couple of years, while inflation was below the Committee's 2 percent objective, may have contributed to a decline in longer-run inflation expectations below a level consistent with that objective. Some other participants, however, noted that measures of inflation expectations had remained stable this year despite the low readings on inflation and judged that this stability should support the return of inflation to the Committee's objective.
In their comments regarding financial markets, participants generally judged that financial conditions remained accommodative despite the recent increases in the exchange value of the dollar and Treasury yields. In light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a potential buildup of financial imbalances. They worried that a sharp reversal in asset prices could have damaging effects on the economy. It was noted, however, that elevated asset prices could be partly explained by a low neutral rate of interest. It was also observed that regulatory changes had contributed to an appreciable strengthening of capital and liquidity positions in the financial sector over recent years, increasing the resilience of the financial system to potential reversals in valuations.
A few participants mentioned the limited reaction in financial markets to the announcement and initial implementation of the Committee's plan for gradually reducing the Federal Reserve's securities holdings. It was noted that, consistent with that limited response, market participants had characterized the Committee's communications regarding the balance sheet normalization program as clear and effective.
In their discussion of monetary policy, all participants thought that it would be appropriate to maintain the current target range for the federal funds rate at this meeting. Nearly all participants reaffirmed the view that a gradual approach to increasing the target range was likely to promote the Committee's objectives of maximum employment and price stability. Participants commented on several factors that informed their assessments of the appropriate path of the federal funds rate. Several participants noted that the neutral level of the federal funds rate appeared to be quite low by historical standards. Most saw the outlook for economic activity and the labor market as little changed since the September meeting, and participants expected increasing tightness in the labor market to put only gradual upward pressure on inflation. Still, with an accommodative stance of policy, most participants continued to anticipate that inflation would stabilize around the Committee's 2 percent objective over the medium term.
Many participants observed, however, that continued low readings on inflation, which had occurred even as the labor market tightened, might reflect not only transitory factors, but also the influence of developments that could prove more persistent. A number of these participants were worried that a decline in longer-term inflation expectations would make it more challenging for the Committee to promote a return of inflation to 2 percent over the medium term. These participants' concerns were sharpened by the apparently weak responsiveness of inflation to resource utilization and the low level of the neutral interest rate, and such considerations suggested that the removal of policy accommodation should be quite gradual. In contrast, some other participants were concerned about upside risks to inflation in an environment in which the economy had reached full employment and the labor market was projected to tighten further, or about still very accommodative financial conditions. They cautioned that waiting too long to remove accommodation, or removing accommodation too slowly, could result in a substantial overshoot of the maximum sustainable level of employment that would likely be costly to reverse or could lead to increased risks to financial stability. A few of these participants emphasized that the lags in the response of inflation to tightening resource utilization implied that there could be increasing upside risks to inflation as the labor market tightened further.
Participants agreed that they would continue to monitor closely and assess incoming data before making any further adjustment to the target range for the federal funds rate. Consistent with their expectation that a gradual removal of monetary policy accommodation would be appropriate, many participants thought that another increase in the target range for the federal funds rate was likely to be warranted in the near term if incoming information left the medium-term outlook broadly unchanged. Several participants indicated that their decision about whether to increase the target range in the near term would depend importantly on whether the upcoming economic data boosted their confidence that inflation was headed toward the Committee's objective. A few other participants thought that additional policy firming should be deferred until incoming information confirmed that inflation was clearly on a path toward the Committee's symmetric 2 percent objective. A few participants cautioned that further increases in the target range for the federal funds rate while inflation remained persistently below 2 percent could unduly depress inflation expectations or lead the public to question the Committee's commitment to its longer-run inflation objective.
In view of the persistent shortfall of inflation from the Committee's 2 percent objective and questions about whether longer-term inflation expectations were consistent with achievement of that objective, a couple of participants discussed the possibility that potential alternative frameworks for the conduct of monetary policy could be helpful in fulfilling the Committee's statutory mandate. One question, for example, was whether a framework that generally sought to keep the price level close to a gradually rising path--rather than the current approach in which the Committee does not seek to make up for past deviations of inflation from the 2 percent goal--might be more effective in fostering the Committee's objectives if the neutral level of the federal funds rate remains low.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the Committee met in September indicated that the labor market had continued to strengthen and that economic activity had been rising at a solid rate despite hurricane-related disruptions. Although the hurricanes depressed payroll employment in September, the unemployment rate declined further. Household spending had been expanding at a moderate rate, and growth in business fixed investment had picked up in recent quarters. Gasoline prices rose in the aftermath of the hurricanes, boosting overall inflation in September; however, inflation for items other than food and energy remained soft. On a 12-month basis, both inflation measures had declined this year and were running below 2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed, on balance.
Members acknowledged that hurricane-related disruptions and rebuilding would continue to affect economic activity, employment, and inflation in the near term. They noted, however, that past experience suggested that the storm-related disruptions were unlikely to materially alter the course of the national economy over the medium term. Consequently, the Committee continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace, and labor market conditions would strengthen somewhat further. Inflation on a 12-month basis was expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term. Members saw the near-term risks to the economic outlook as roughly balanced, but, in light of their concern about the ongoing softness in inflation, they agreed to continue to monitor inflation developments closely.
After assessing current conditions and the outlook for economic activity, the labor market, and inflation, members decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. They noted that the stance of monetary policy remained accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
Members agreed that the timing and size of future adjustments to the target range for the federal funds rate would depend on their assessments of realized and expected economic conditions relative to the Committee's objectives of maximum employment and 2 percent inflation. They noted that their assessments would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Members reaffirmed their expectation that economic conditions would evolve in a manner that would warrant gradual increases in the federal funds rate, and that the federal funds rate was likely to remain, for some time, below levels that are expected to prevail in the longer run. Nonetheless, they reiterated that the actual path of the federal funds rate would depend on the economic outlook as informed by incoming data. In particular, members noted that they would carefully monitor actual and expected inflation developments relative to the Committee's symmetric inflation goal. Some members expressed concerns about the outlook for inflation expectations and inflation; they emphasized that, in considering the timing of further adjustments in the federal funds rate, they would be evaluating incoming information to assess the likelihood that recent low readings on inflation were transitory and that inflation was on a trajectory consistent with achieving the Committee's 2 percent objective over the medium term. Several other members, however, were reasonably confident that the economy and inflation would evolve in coming months such that an additional firming would likely be appropriate in the near term.
With the balance sheet normalization program under way and with the balance sheet not anticipated to be used to adjust the stance of monetary policy in response to incoming information in the years ahead, members generally agreed that the statement following this meeting needed to contain only a brief reference to the program and that subsequent statements might not need to mention the program. Balance sheet normalization was expected to proceed gradually, following the plan described in the Addendum to the Policy Normalization Principles and Plans that the Committee released in June.
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 SOMA in accordance with the following domestic policy directive, to be released at 2:00 p.m.:
"Effective November 2, 2017, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1 to 1-1/4 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.00 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during each calendar month that exceeds $6 billion, and to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $4 billion. Small deviations from these amounts for operational reasons are acceptable.
The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."
The vote also encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in September indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate despite hurricane-related disruptions. Although the hurricanes caused a drop in payroll employment in September, the unemployment rate declined further. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. Gasoline prices rose in the aftermath of the hurricanes, boosting overall inflation in September; however, inflation for items other than food and energy remained soft. On a 12-month basis, both inflation measures have declined this year and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Hurricane-related disruptions and rebuilding will continue to affect economic activity, employment, and inflation in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term. Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The balance sheet normalization program initiated in October 2017 is proceeding."
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Charles L. Evans, Patrick Harker, Robert S. Kaplan, Neel Kashkari, Jerome H. Powell, and Randal K. Quarles.
Voting against this action: None.
Consistent with the Committee's decision to leave the target range for the federal funds rate unchanged, the Board of Governors voted unanimously to leave the interest rates on required and excess reserve balances unchanged at 1-1/4 percent and voted unanimously to approve establishment of the primary credit rate (discount rate) at the existing level of 1-3/4 percent.4
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, December 12-13, 2017. The meeting adjourned at 10:30 a.m. on November 1, 2017.
Notation Vote
By notation vote completed on October 10, 2017, the Committee unanimously approved the minutes of the Committee meeting held on September 19-20, 2017.
_____________________________
Brian F. Madigan
Secretary
1.The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes. Return to text
2. Attended through the discussion of developments in financial markets and open market operations. Return to text
3. Attended Tuesday session only. Return to text
4. The second vote of the Board also encompassed approval of the establishment of the interest rates for secondary and seasonal credit under the existing formulas for computing such rates. Return to text |
2017-09-20T00:00:00 | 2017-09-20 | Statement | Information received since the Federal Open Market Committee met in July indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have remained solid in recent months, and the unemployment rate has stayed low. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined this year and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship. Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term. Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Higher prices for gasoline and some other items in the aftermath of the hurricanes will likely boost inflation temporarily; apart from that effect, inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
In October, the Committee will initiate the balance sheet normalization program described in the June 2017 Addendum to the Committee's Policy Normalization Principles and Plans.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Jerome H. Powell.
Implementation Note issued September 20, 2017 |
2017-09-20T00:00:00 | 2017-10-11 | Minute | Minutes of the Federal Open Market Committee
September 19-20, 2017
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, September 19, 2017, at 1:00 p.m. and continued on Wednesday, September 20, 2017, at 9:00 a.m.1
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
Charles L. Evans
Stanley Fischer
Patrick Harker
Robert S. Kaplan
Neel Kashkari
Jerome H. Powell
Raphael W. Bostic, Loretta J. Mester, Mark L. Mullinix, and John C. Williams, Alternate Members of the Federal Open Market Committee
James Bullard, Esther L. George, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively
Brian F. Madigan, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Mark E. Van Der Weide, General Counsel
Michael Held, Deputy General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
James A. Clouse, Thomas A. Connors, Evan F. Koenig, William Wascher, Beth Anne Wilson, and Mark L.J. Wright, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Ann E. Misback, Secretary, Office of the Secretary, Board of Governors
Matthew J. Eichner,2 Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors; Michael S. Gibson, Director, Division of Supervision and Regulation, Board of Governors; Andreas Lehnert, Director, Division of Financial Stability, Board of Governors
Michael T. Kiley, Deputy Director, Division of Financial Stability, Board of Governors; Stephen A. Meyer, Deputy Director, Division of Monetary Affairs, Board of Governors
Trevor A. Reeve, Senior Special Adviser to the Chair, Office of Board Members, Board of Governors
David Bowman, Joseph W. Gruber, David Reifschneider, and John M. Roberts, Special Advisers to the Board, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
David E. Lebow and Michael G. Palumbo, Senior Associate Directors, Division of Research and Statistics, Board of Governors
Antulio N. Bomfim, Edward Nelson, and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors
Jane E. Ihrig, Associate Director, Division of Monetary Affairs, Board of Governors; John J. Stevens and Stacey Tevlin, Associate Directors, Division of Research and Statistics, Board of Governors
Steven A. Sharpe, Deputy Associate Director, Division of Research and Statistics, Board of Governors; Min Wei, Deputy Associate Director, Division of Monetary Affairs, Board of Governors
Penelope A. Beattie,3 Assistant to the Secretary, Office of the Secretary, Board of Governors
Michiel De Pooter, Section Chief, Division of Monetary Affairs, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Martin Bodenstein, Principal Economist, Division of Monetary Affairs, Board of Governors
Randall A. Williams, Information Manager, Division of Monetary Affairs, Board of Governors
Mark A. Gould, First Vice President, Federal Reserve Bank of San Francisco
David Altig, Kartik B. Athreya, Glenn D. Rudebusch, and Geoffrey Tootell, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Richmond, San Francisco, and Boston, respectively
Spencer Krane and Keith Sill, Senior Vice Presidents, Federal Reserve Banks of Chicago and Philadelphia, respectively
David C. Wheelock and Jonathan L. Willis, Vice Presidents, Federal Reserve Banks of St. Louis and Kansas City, respectively
Stefano M. Eusepi, Assistant Vice President, Federal Reserve Bank of New York
Edward S. Prescott, Senior Professional Economist, Federal Reserve Bank of Cleveland
Proposed Changes to Rules Regarding Availability of Information
The Committee unanimously voted to further amend its Rules Regarding Availability of Information (Rules) in order to incorporate input received during the public commenting process that followed the December 2016 publication in the Federal Register of an earlier version of the Rules.4 The amendment approved at this meeting indicated that if, in the course of processing a Freedom of Information Act request, "an adverse determination is upheld on appeal, in whole or in part," the requester will be informed "of the availability of dispute resolution services from the Office of Government Information Services as a nonexclusive alternative to litigation." This notice will be provided in addition to the ongoing practice of informing the requester of the right to seek judicial review.
Secretary's note: The amended Rules adopted at this meeting were published in the Federal Register as a final rule on October 2, 2017, and will go into effect 30 days following publication.
Developments in Financial Markets and Open Market Operations
The manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets over the period since the July FOMC meeting. Yields on longer-term Treasury securities had fallen modestly, the foreign exchange value of the dollar had declined, and broad equity price indexes had increased. Survey responses suggested that the vast majority of market participants expected the FOMC to announce a change in SOMA reinvestment policy at this meeting and that nearly all market participants anticipated that the FOMC would also leave the target range for the federal funds rate unchanged.
The deputy manager followed with a report on developments in money markets and open market operations over the intermeeting period. The effective federal funds rate remained near the center of the FOMC's target range except on month-ends. Take-up at the System's overnight reverse repurchase agreement facility averaged somewhat less than in the previous period. The deputy manager provided updates on developments with respect to reference interest rates and on small-value tests of open market operations, which are conducted routinely to promote operational readiness. The deputy manager also summarized the results of the staff's annual review of foreign reserves investment and its recommendations to the Foreign Currency Subcommittee for key parameters for foreign reserves investment for the forthcoming year, and the deputy manager noted that the Subcommittee would welcome any input from the Committee regarding those parameters.
Secretary's note: On September 27, 2017, the Foreign Currency Subcommittee provided to the Federal Reserve Bank selected to conduct open market operations instructions that incorporated the staff recommendations for key parameters for foreign reserves investment.
Finally, the manager reviewed details of the operational approach that the Open Market Desk planned to follow if the Committee decided at this meeting to initiate the proposal for SOMA reinvestment policy described in the Committee's June 2017 Addendum to the Policy Normalization Principles and Plans.
By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account during the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the September 19-20 meeting showed that labor market conditions continued to strengthen in July and August and that real gross domestic product (GDP) appeared to be rising at a moderate pace in the third quarter before the landfall of Hurricanes Harvey and Irma. Only limited data pertaining to the economic effects of these hurricanes were available at the time of the meeting, but it appeared likely that the negative effects would restrain national economic activity only in the near term.5 Total consumer price inflation, as measured by the 12âmonth change in the price index for personal consumption expenditures (PCE), continued to run below 2 percent in July and was lower than at the start of the year. Surveyâbased measures of longer-run inflation expectations were little changed on balance.
Total nonfarm payroll employment rose solidly in July and August, with strong gains in private-sector jobs and declines in government employment. The unemployment rate dipped to 4.3 percent in July and edged back up to 4.4 percent in August. The unemployment rates for African Americans, for Hispanics, and for whites were lower, on average, in recent months than around the start of the year, whereas the unemployment rate for Asians was a little higher. The overall labor force participation rate edged up in July and was unchanged in August, and the share of workers employed part time for economic reasons was little changed on net. The rate of private-sector job openings increased in June and July, the hiring rate ticked up, and the quits rate edged down. Initial claims for unemployment insurance benefits jumped in early September from a very low level, and the Department of Labor noted that Hurricane Harvey had an effect on claims. Changes in measures of labor compensation were mixed. Compensation per hour rose just 1-1/4 percent over the four quarters ending in the second quarter of 2017 (partly reflecting a significant downward revision to compensation per hour in the second half of 2016), the employment cost index for private workers increased 2-1/2 percent over the 12 months ending in June, and average hourly earnings for all employees rose 2-1/2 percent over the 12 months ending in August.
Total industrial production (IP) increased for a sixth consecutive month in July but then declined sharply in August. The decrease in August largely reflected the temporary effects of Hurricane Harvey on drilling, servicing, and extraction activity for oil and natural gas and on output in several manufacturing industries that are concentrated in the Gulf Coast region, including petroleum refining, organic chemicals, and plastics materials and resins. Production disruptions from Hurricane Harvey continued into September, and the effects of Hurricane Irma were anticipated to hold down IP in that month as well. Even so, anecdotal reports from the hurricane-affected regions, as well as daily data on capacity outages in selected Gulf Coast industries, indicated that production had already started to recover. Meanwhile, automakers' assembly schedules suggested that motor vehicle production would move up, on balance, over the remainder of the year despite a somewhat elevated level of dealers' inventories and a slowing in the pace of vehicle sales in recent months. Broader indicators of manufacturing production, such as the new orders indexes from national and regional manufacturing surveys, continued to point to moderate gains in factory output over the near term.
Several pieces of information suggested that real PCE was likely increasing at a slower rate in the third quarter than in the second. First, the components of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimate of PCE declined in August and were revised down in June and July. Second, the pace of light motor vehicle sales moved lower, on net, in July and August. Third, Hurricanes Harvey and Irma appeared likely to temporarily reduce consumer spending. However, recent readings on key factors that influence consumer spending--including continued gains in employment, real disposable personal income, and households' net worth--remained supportive of solid growth in real PCE. Consumer sentiment, as measured by the University of Michigan Surveys of Consumers, was upbeat through early September.
Recent information on housing activity suggested that real residential investment spending was decreasing in the third quarter after declining in the second quarter. Starts for new single-family homes edged down, on net, in July and August, and starts for multifamily units moved lower in both months. Building permit issuance for new single-family homes--which tends to be a good indicator of the underlying trend in construction--declined in July and August. Sales of both new and existing homes decreased in July.
Real private expenditures for business equipment and intellectual property appeared to be increasing at a solid rate in the third quarter. Nominal orders and shipments of nondefense capital goods excluding aircraft rose over the two months ending in July, and readings on business sentiment remained upbeat. In contrast, investment in nonresidential structures was poised to decline in the third quarter. Firms' nominal spending for nonresidential structures excluding drilling and mining fell sharply in June and July, and the number of oil and gas rigs in operation, an indicator of spending for structures in the drilling and mining sector, leveled out in the past couple of months after increasing steadily for the past year.
Total real government purchases looked to be roughly flat, on balance, in the third quarter. Nominal outlays for defense in July and August pointed to a small increase in real federal government purchases in the third quarter. However, payrolls for state and local governments declined in July and August, and nominal construction spending by these governments decreased in July.
The nominal U.S. international trade deficit narrowed substantially in June and was about unchanged in July. After increasing in June, exports retraced a bit of this gain in July, with lower exports of consumer goods, automotive products, and services. Imports decreased a little in both months. The available data suggested that net exports contributed positively to real GDP growth in the third quarter.
Total U.S. consumer prices, as measured by the PCE price index, increased nearly 1-1/2 percent over the 12 months ending in July. Core PCE price inflation, which excludes consumer food and energy prices, also was about 1-1/2 percent over that same period. Over the 12 months ending in August, the consumer price index (CPI) increased almost 2 percent, while core CPI inflation was 1-3/4 percent. Retail gasoline prices moved up sharply following the landfall of Hurricane Harvey and appeared likely to put temporary upward pressure on the 12-month change in total PCE prices. The median of inflation expectations over the next 5 to 10 years from the Michigan survey edged back up in the preliminary reading for September, and the median expectation for PCE price inflation over the next 10 years from the Survey of Professional Forecasters edged down. The medians of longer-run inflation expectations from the Desk's Survey of Primary Dealers and Survey of Market Participants were relatively little changed in September.
Foreign economic activity continued to expand at a solid pace. Economic growth picked up in the advanced foreign economies (AFEs) in the second quarter, especially in Canada, and incoming indicators suggested that growth slowed in the third quarter but remained firm. Recent indicators from the emerging market economies (EMEs) also pointed to continued strong economic growth, notwithstanding some slowing in the rate of expansion of activity in China. Headline inflation in most AFEs remained subdued, held down in part by falling retail energy prices, but data through August suggested that the drag from energy prices was diminishing. Inflation also remained low in most EMEs, although food prices continued to put upward pressure on inflation in Mexico.
Staff Review of the Financial Situation
Domestic financial market conditions remained generally accommodative over the intermeeting period. U.S. equity prices increased, longer-term Treasury yields declined, and the dollar depreciated. Investors' interpretations of FOMC communications, market perceptions of a reduced likelihood of U.S. fiscal policy changes, and heightened geopolitical risks all reportedly placed downward pressure on longer-term yields. At the same time, financing conditions for households and nonfinancial businesses continued to provide support for growth in spending and investment.
FOMC communications over the intermeeting period reportedly were interpreted as indicating a somewhat slower pace of increases in the target range for the federal funds rate than previously expected. Market participants were attentive to the Committee's assessment of recent below-expectations inflation data and the acknowledgment in the July FOMC minutes that inflation might continue to run below the Committee's 2 percent objective for longer than anticipated. Investors also took note of the Committee's guidance in the July FOMC statement that it expected to begin implementing its balance sheet normalization program relatively soon. By the end of the intermeeting period, market participants appeared nearly certain that the Committee would announce the implementation of its balance sheet normalization plan at the September meeting. The probability of an increase in the target range for the federal funds rate occurring at either the September or the November meeting, as implied by quotes on federal funds futures contracts, fell to essentially zero, while the probability of a 25 basis point increase by the end of the year stood near 50 percent and was little changed since the July meeting. Quotes on overnight index swaps (OIS) pointed to a slight flattening of the expected path of the federal funds rate through 2020, with a staff model attributing most of the declines in OIS rates to lower expected rates.
Yields on intermediate- and longer-term nominal Treasury securities decreased modestly over the intermeeting period. Treasury yields fell following the July FOMC meeting, reflecting the response of investors to the postmeeting statement, and then dropped further amid rising geopolitical tensions related to North Korea and market perceptions of reduced prospects for enactment of a fiscal stimulus program. Economic data releases appeared to have little net effect on Treasury yields over most of the period. A staff term structure model attributed about half of the decline in the 10-year Treasury yield to a decrease in the average expected future short-term rate and the remaining half to a lower term premium. Measures of inflation compensation over the next 5 years rose modestly, on net, partly in response to the release of higher-than-expected CPI data for August, while inflation compensation 5 to 10 years ahead was little changed.
Broad U.S. equity price indexes increased over the intermeeting period. One-month-ahead option-implied volatility of the S&P 500 index--the VIX--remained at historically low levels despite brief spikes associated with increased investor concerns about geopolitical tensions and political uncertainties. Over the intermeeting period, spreads of yields on investment- and speculative-grade nonfinancial corporate bonds over those on comparable-maturity Treasury securities widened a bit.
Short-dated Treasury bill yields were elevated for a time, reflecting concerns about potential delays in raising the federal debt limit. However, following news of an agreement to extend the debt ceiling by three months, rates on Treasury bills maturing in October retraced their entire increase from early in the intermeeting period. Conditions in other domestic short-term funding markets were stable. Yields on a broad set of money market instruments remained in the ranges observed since the FOMC increased the target range for the federal funds rate in June. Daily take-up at the System's overnight reverse repurchase agreement facility ran somewhat lower than in the previous intermeeting period.
Since the July FOMC meeting, asset price movements in global financial markets were driven by geopolitical tensions in the Korean peninsula, improving economic prospects abroad, communications from AFE central banks, and changes in prospects for fiscal policy legislation in the United States. The broad index of the foreign exchange value of the dollar decreased 1-1/2 percent; the decline was widespread, led by the strengthening of the euro and the Chinese renminbi. The Canadian dollar appreciated following a rate hike by the Bank of Canada at its September meeting that came sooner than market participants expected. Similarly, sterling appreciated after the Bank of England signaled a potential rate hike in the coming months. Against this backdrop, longer-term yields rose slightly in Canada and the United Kingdom. In contrast, longer-term German yields declined moderately, despite better-than-expected economic data releases for the euro area, as market expectations shifted toward a more gradual withdrawal of stimulus by the European Central Bank (ECB) even though the ECB kept its policy stance unchanged.
Despite generally better-than-expected earnings releases, AFE equity prices were mixed over the period, with bank stocks underperforming broader indexes. Outside South Korea, most emerging market asset prices were little affected by the recent escalation of geopolitical concerns. Net flows to emerging market mutual funds briefly turned negative in early August, but they quickly returned to near the high levels seen since early this year. Yield spreads on EME sovereign bonds edged down.
Financing conditions for U.S. nonfinancial businesses continued to be accommodative. Issuance of corporate debt and equity was strong in July and August. Gross issuance of institutional leveraged loans continued its robust pace in June but slowed notably in July, as is typical during the summer. Meanwhile, the growth of commercial and industrial (C&I) loans on banks' books ticked up in July and August compared with its pace over the first half of the year; however, C&I loan growth from the fourth quarter of last year through August remained significantly lower than over recent years.
Gross issuance of municipal bonds was strong in August, and spreads of yields on municipal bonds over those on comparable-maturity Treasury securities increased a bit over the intermeeting period. The credit quality of state and local governments improved overall, as the number of ratings upgrades notably outpaced the number of downgrades in August.
The growth of commercial real estate (CRE) loans on banks' books continued to moderate in July and August, reflecting a slowdown in lending both for nonfarm nonresidential units and for construction and land development; nonetheless, CRE financing appeared to remain broadly available. Issuance of commercial mortgage-backed securities (CMBS) so far this year was similar to that in the same period a year earlier. Spreads on CMBS over Treasury securities narrowed a little over the intermeeting period and were near the bottom of their ranges of the past several years. Delinquency rates on loans in CMBS pools declined slightly but remained elevated for loans that were originated before the financial crisis.
Interest rates on 30-year fixed-rate residential mortgages moved lower over the intermeeting period, in line with comparable-maturity Treasury yields. Growth in mortgage lending for home purchases picked up in July and August compared with its pace over the second quarter. However, credit conditions remained tight for borrowers with low credit scores or hard-to-document incomes.
Consumer credit continued to be readily available for most borrowers, and overall loan balances rose at a moderate pace in the second quarter, reflecting further expansions in credit card, auto, and student loan balances. Issuance of asset-backed securities remained robust over the year to date and outpaced that of the previous year, providing support for consumer lending. However, standards and terms on auto and credit card loans were tighter for subprime borrowers, likely in response to rising delinquencies on such loans. Subprime auto loan balances have declined so far this year, partly reflecting the tighter lending standards, and the average credit score of all borrowers who obtained an auto loan in the second quarter remained near the upper end of its range of the past few years.
Staff Economic Outlook
The U.S. economic projection prepared by the staff for the September FOMC meeting was broadly similar to the previous forecast. Real GDP was expected to rise at a solid pace, on net, in the second half of the year, and by a little more than previously projected, reflecting data on spending that were stronger than expected on balance. The short-term disruptions to spending and production associated with Hurricanes Harvey and Irma were expected to reduce real GDP growth in the third quarter and to boost it in the fourth quarter as production returned to its pre-hurricane path and as a portion of the lost spending was made up. The hurricanes were also expected to depress payroll employment in September, with a reversal over the next few months. Beyond 2017, the forecast for real GDP growth was little revised. In particular, the staff continued to project that real GDP would expand at a modestly faster pace than potential output through 2019. The unemployment rate was projected to decline gradually over the next couple of years and to continue running below the staff's estimate of its longer-run natural rate over this period. Because of continued subdued inflation readings and, given real GDP growth, a larger-than-expected decline in the unemployment rate over much of the past year, the staff revised down slightly its estimate of the longer-run natural rate of unemployment in this projection.
The staff's forecast for consumer price inflation, as measured by the change in the PCE price index, was revised up somewhat for 2017 in response to hurricane-related effects on gasoline prices. The near-term forecast for core PCE price inflation was essentially unrevised. Total PCE price inflation this year was expected to run at the same pace as last year, with a slower increase in core PCE prices offset by a slightly larger increase in energy prices and an upturn in the prices for food and non-energy imports. Beyond 2017, the inflation forecast was little revised from the previous projection. The staff continued to project that inflation would edge higher in the next couple of years and that it would reach the Committee's longer-run objective in 2019.
The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. On the one hand, many financial market indicators of uncertainty remained subdued, and the uncertainty associated with the foreign outlook still appeared to be less than last year; on the other hand, uncertainty about the direction of some economic policies was judged to have remained elevated. The staff saw the risks to the forecasts for real GDP growth and the unemployment rate as balanced. The risks to the projection for inflation were also seen as balanced. Downside risks included the possibilities that longer-term inflation expectations may have edged down or that the recent run of soft inflation readings could prove to be more persistent than the staff expected. These downside risks were seen as essentially counterbalanced by the upside risk that inflation could increase more than expected in an economy that was projected to continue operating above its longer-run potential.
Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, members of the Board of Governors and Federal Reserve Bank presidents submitted their projections of the most likely outcomes for real output growth, the unemployment rate, and inflation for each year from 2017 through 2020 and over the longer run, based on their individual assessments of the appropriate path for the federal funds rate.6 The longer-run projections represented each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These projections and policy assessments are described in the Summary of Economic Projections, which is an addendum to these minutes.
In their discussion of the economic situation and the outlook, meeting participants agreed that information received over the intermeeting period indicated that the labor market had continued to strengthen and that economic activity had been rising moderately so far this year. Job gains had remained solid in recent months, and the unemployment rate had stayed low. Household spending had been expanding at a moderate rate, and growth in business fixed investment had picked up in recent quarters. On a 12-month basis, overall inflation and the measure excluding food and energy prices had declined this year and were running below 2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed on balance.
Participants acknowledged that Hurricanes Harvey, Irma, and Maria would affect economic activity in the near term. They expected growth of real GDP in the third quarter to be held down by the severe disruptions caused by the storms but to rebound beginning in the fourth quarter as rebuilding got under way and economic activity in the affected areas resumed. Similarly, employment would be temporarily depressed by the hurricanes, but, abstracting from those effects, employment gains were anticipated to remain solid, and the unemployment rate was expected to decline a bit further by year-end.
Based on the estimated effects of past major hurricanes that made landfall in the United States, participants judged that the recent storms were unlikely to materially alter the course of the national economy over the medium term. Moreover, they generally viewed the information on spending, production, and labor market activity that became available over the intermeeting period, which was mostly not affected by the hurricanes, as suggesting little change in the outlook for economic growth and the labor market over the medium term. Consequently, they continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would strengthen somewhat further. In the aftermath of the hurricanes, higher prices for gasoline and some other items were likely to boost inflation temporarily. Apart from that effect, inflation on a 12-month basis was expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appeared roughly balanced, but participants agreed to continue to monitor inflation developments closely.
Consumer spending had been expanding at a moderate rate through the summer, and reports on retail activity from participants' contacts were generally positive. Participants expected some fluctuations in consumer spending to result from the hurricanes, but they generally judged that consumption growth would continue to be supported by still-solid fundamental determinants of household spending, including the income generated by the ongoing strength in the labor market, improved household balance sheets, and high levels of consumer confidence. Sales of autos and light trucks had softened over the summer, leading producers to slow production to address a buildup of inventories, but a couple of participants noted that automakers expected to see a temporary increase in demand as households and businesses replaced vehicles damaged during the storms.
Incoming data on business spending showed that equipment investment had picked up during 2017 after having been weak during much of 2016. Shipments and orders of nondefense capital goods had been on a steady uptrend over the first eight months of 2017. A number of participants reported that their business contacts appeared to have become more confident about the economic outlook, and it was noted that the National Federation of Independent Business reported that greater optimism among small businesses had contributed to a sharp increase in the proportion of small firms planning increases in their capital expenditures. A couple of participants commented that competitive pressures and tight labor markets were increasing the incentives for businesses to substitute capital for labor or to invest in information technology. In contrast, reports on the strength of nonresidential construction were mixed. And in energy-producing regions, the count of drilling rigs in operation had begun to level off before the onset of Hurricane Harvey.
Participants generally indicated that, before the recent hurricanes, business activity in their Districts was expanding at a moderate pace. Although industrial production in areas affected by the storms was estimated to have declined in August, a number of participants from other areas reported further solid gains in manufacturing activity in their Districts. Participants from the regions affected by the hurricanes reported that businesses in their Districts anticipated that the disruptions to business and sales would be relatively short lived. In the energy sector, Hurricane Harvey had shut down drilling and refining activity, but by the time of the meeting, these operations had substantially resumed. And many business contacts in the affected areas reported that they expected their operations to return to normal before the end of the year. Farming in some parts of the country had been affected by drought, and income in the agricultural sector was under downward pressure because of low crop prices.
Overall, the available information suggested that, although the storms would likely affect the quarterly pattern of changes in real GDP at least through the second half of the year, economic activity would continue to expand at a moderate rate over the medium term, supported by further gains in consumer spending and the pickup in business investment. In addition, improving global economic conditions and the depreciation of the dollar in recent months were anticipated to result in a modest positive contribution to domestic economic activity from net exports. In contrast, most participants had not assumed enactment of a fiscal stimulus package in their economic projections or had marked down the expected magnitude of any stimulus.
Labor market conditions strengthened further in recent months. The increases in nonfarm payroll employment in July and August remained well above the pace likely to be sustainable in the longer run. Although the unemployment rate was little changed from March to August, it remained below participants' estimates of its longer-run normal level. Other indicators suggested that labor market conditions had continued to tighten over recent quarters. The labor force participation rate had been moving sideways despite factors, such as demographic changes, that were contributing to a declining longer-run trend. In addition, the number of individuals working part time for economic reasons, as a share of household employment, had moved lower. The job openings rate, the quits rate, households' assessments of job availability, and the labor market conditions index prepared by the Federal Reserve Bank of Kansas City had returned to pre-recession levels. However, some participants still saw room for further increases in labor utilization, with a couple of them noting that the employment-to-population ratio and the participation rate for prime-age workers had not fully recovered to pre-recession levels.
Against the backdrop of the continued strengthening in labor market conditions, participants discussed recent wage developments. Increases in most aggregate measures of hourly wages and labor compensation remained subdued, and several participants commented that the absence of broad-based upward wage pressures suggested that the sustainable rate of unemployment might be lower than they currently estimated. Other factors that may have been contributing to the subdued pace of wage increases reported in the national data included low productivity growth, changes in the composition of the workforce, and competitive pressure on employers to hold down their costs. However, reports from business contacts in several Districts indicated that employers in labor markets in which demand was high or in which workers in some occupations were in short supply were raising wages noticeably to compete for workers and limit turnover. It was noted that the expected increase in demand for skilled construction workers for reconstruction in hurricane-affected areas would likely exacerbate existing shortages. Most participants expected wage increases to pick up over time as the labor market strengthened further; a couple of participants cautioned that a broader acceleration in wages may already have begun, consistent with already-tight labor market conditions.
Based on the available data, PCE price inflation over the 12 months ending in August was estimated to be about 1-1/2 percent, remaining below the Committee's longer-run objective. In their review of the recent data and the outlook for inflation, participants discussed a number of factors that could be contributing to the low readings on consumer prices this year and weighed the extent to which those factors might be transitory or could prove more persistent. Many participants continued to believe that the cyclical pressures associated with a tightening labor market or an economy operating above its potential were likely to show through to higher inflation over the medium term. In addition, many judged that at least part of the softening in inflation this year was the result of idiosyncratic or one-time factors, and, thus, their effects were likely to fade over time. However, other developments, such as the effects of earlier changes to government health-care programs that had been holding down health-care costs, might continue to do so for some time. Some participants discussed the possibility that secular trends, such as the influence of technological innovations on competition and business pricing, also might have been muting inflationary pressures and could be intensifying. It was noted that other advanced economies were also experiencing low inflation, which might suggest that common global factors could be contributing to persistence of below-target inflation in the United States and abroad. Several participants commented on the importance of longer-run inflation expectations to the outlook for a return of inflation to 2 percent. A number of indicators of inflation expectations, including survey statistics and estimates derived from financial market data, were generally viewed as indicating that longer-run inflation expectations remained reasonably stable, although a few participants saw some of these measures as low or slipping.
Participants raised a number of important considerations about the implications of persistently low inflation for the path of the federal funds rate over the medium run. Several expressed concern that the persistence of low rates of inflation might imply that the underlying trend was running below 2 percent, risking a decline in inflation expectations. If so, the appropriate policy path should take into account the need to bolster inflation expectations in order to ensure that inflation returned to 2 percent and to prevent erosion in the credibility of the Committee's objective. It was also noted that the persistence of low inflation might result in the federal funds rate staying uncomfortably close to its effective lower bound. However, a few others pointed out the need to consider the lags in the response of inflation to tightening resource utilization and, thus, increasing upside risks to inflation as the labor market tightened further.
On balance, participants continued to forecast that PCE price inflation would stabilize around the Committee's 2 percent objective over the medium term. However, several noted that in preparing their projections for this meeting, they had taken on board the likelihood that convergence to the Committee's symmetric 2 percent inflation objective might take somewhat longer than they anticipated earlier. Participants generally agreed it would be important to monitor inflation developments closely. Several of them noted that interpreting the next few inflation reports would likely be complicated by the temporary run-up in energy costs and in the prices of other items affected by storm-related disruptions and rebuilding.
In financial markets, longer-term interest rates and the foreign exchange value of the dollar declined over the intermeeting period, and equity prices increased. It was noted that U.S. financial conditions recently appeared to be responding as much or more to economic and financial news from abroad as to domestic developments. Many participants viewed accommodative financial conditions, which had prevailed even as the Committee raised the federal funds rate, as likely to provide support for the economic expansion. However, a couple of those participants expressed concern that the persistence of highly accommodative financial conditions could, over time, pose risks to financial stability. In contrast, a few participants cautioned that these financial market conditions might not deliver much impetus to aggregate demand if they instead reflected a more pessimistic assessment of prospects for longer-run economic growth and, accordingly, a view that the longer-run neutral rate of interest in the United States would remain low.
In their discussion of monetary policy, all participants agreed that the economy had evolved broadly as they had anticipated at the time of the June meeting and that the incoming data had not materially altered the medium-term economic outlook. Consistent with those assessments, participants saw it as appropriate, at this meeting, to announce implementation of the plan for reducing the Federal Reserve's securities holdings that the Committee released in June. Many underscored that the reduction in securities holdings would be gradual and that financial market participants appeared to have a clear understanding of the Committee's planned approach for a gradual normalization of the size of the Federal Reserve's balance sheet. Consequently, participants generally expected that any reaction in financial markets to the start of balance sheet normalization would likely be limited.
With the medium-term outlook little changed, inflation below 2 percent, and the neutral rate of interest estimated to be quite low, all participants thought it would be appropriate for the Committee to maintain the current target range for the federal funds rate at this meeting, and nearly all supported again indicating in the postmeeting statement that a gradual approach to increasing the federal funds rate will likely be warranted. Nevertheless, many participants expressed concern that the low inflation readings this year might reflect not only transitory factors, but also the influence of developments that could prove more persistent, and it was noted that some patience in removing policy accommodation while assessing trends in inflation was warranted. A few of these participants thought that no further increases in the federal funds rate were called for in the near term or that the upward trajectory of the federal funds rate might appropriately be quite shallow. Some other participants, however, were more worried about upside risks to inflation arising from a labor market that had already reached full employment and was projected to tighten further. Their concerns were heightened by the apparent easing in financial conditions that had developed since the Committee's policy normalization process was initiated in December 2015. These participants cautioned that an unduly slow pace in removing policy accommodation could result in an overshoot of the Committee's inflation objective in the medium term that would likely be costly to reverse or could lead to an intensification of financial stability risks or to other imbalances that might prove difficult to unwind.
Consistent with the expectation that a gradual rise in the federal funds rate would be appropriate, many participants thought that another increase in the target range later this year was likely to be warranted if the medium-term outlook remained broadly unchanged. Several others noted that, in light of the uncertainty around their outlook for inflation, their decision on whether to take such a policy action would depend importantly on whether the economic data in coming months increased their confidence that inflation was moving up toward the Committee's objective. A few participants thought that additional increases in the federal funds rate should be deferred until incoming information confirmed that the low readings on inflation this year were not likely to persist and that inflation was clearly on a path toward the Committee's symmetric 2 percent objective over the medium term. All agreed that they would closely monitor and assess incoming data before making any further adjustment to the federal funds rate.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the Committee met in July indicated that the labor market had continued to strengthen and that economic activity had been rising moderately so far this year. Job gains had remained solid in recent months, and the unemployment rate had stayed low. Household spending had been expanding at a moderate rate, and growth in business fixed investment had picked up in recent quarters. On a 12-month basis, overall inflation and the measure excluding food and energy prices had declined this year and were running below 2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed on balance.
Members noted that Hurricanes Harvey, Irma, and Maria had devastated many communities, inflicting severe hardship. Members judged that storm-related disruptions and rebuilding would affect economic activity in the near term, but past experience suggested that the hurricanes were unlikely to materially alter the course of the national economy over the medium term. Consequently, the Committee continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace, and labor market conditions would strengthen somewhat further. Higher prices for gasoline and some other items in the aftermath of the hurricanes would likely boost inflation temporarily; apart from that effect, inflation on a 12-month basis was expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term. Members saw near-term risks to the economic outlook as roughly balanced, but they agreed to continue to monitor inflation developments closely.
After assessing current conditions and the outlook for economic activity, the labor market, and inflation, members decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. They noted that the stance of monetary policy remained accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
Members agreed that the timing and size of future adjustments to the target range for the federal funds rate would depend on their assessment of realized and expected economic conditions relative to the Committee's objectives of maximum employment and 2 percent inflation. They expected that economic conditions would evolve in a manner that would warrant gradual increases in the federal funds rate and that the federal funds rate was likely to remain, for some time, below levels that were expected to prevail in the longer run. Members also again stated that the actual path of the federal funds rate would depend on the economic outlook as informed by incoming data. In particular, they reaffirmed that they would carefully monitor actual and expected inflation developments relative to the Committee's symmetric inflation goal. Some members emphasized that, in considering the timing of further adjustments in the federal funds rate, they would be evaluating incoming information to assess the likelihood that recent low readings on inflation were transitory and that inflation was again on a trajectory consistent with achieving the Committee's 2 percent objective over the medium term.
Members agreed that, in October, the Committee would initiate the balance sheet normalization program described in the June 2017 Addendum to the Policy Normalization Principles and Plans. Several members observed that, in part because financial market participants appeared to have a clear understanding of the Committee's plan for gradually reducing the Federal Reserve's securities holdings, any reaction in financial markets to the announcement and implementation of the program would likely be limited.
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 SOMA in accordance with the following domestic policy directive, to be released at 2:00 p.m.:
"Effective September 21, 2017, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1 to 1-1/4 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.00 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over at auction Treasury securities maturing during September, and to continue reinvesting in agency mortgage-backed securities the principal payments received through September from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities.
Effective in October 2017, the Committee directs the Desk to roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during each calendar month that exceeds $6 billion, and to reinvest in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $4 billion. Small deviations from these amounts for operational reasons are acceptable.
The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."
The vote also encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in July indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have remained solid in recent months, and the unemployment rate has stayed low. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined this year and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship. Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term. Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Higher prices for gasoline and some other items in the aftermath of the hurricanes will likely boost inflation temporarily; apart from that effect, inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
In October, the Committee will initiate the balance sheet normalization program described in the June 2017 Addendum to the Committee's Policy Normalization Principles and Plans."
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Charles L. Evans, Stanley Fischer, Patrick Harker, Robert S. Kaplan, Neel Kashkari, and Jerome H. Powell.
Voting against this action: None.
Consistent with the Committee's decision to leave the target range for the federal funds rate unchanged, the Board of Governors voted unanimously to leave the interest rates on required and excess reserve balances unchanged at 1-1/4 percent and voted unanimously to approve establishment of the primary credit rate (discount rate) at the existing level of 1-3/4 percent.7
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, October 31-November 1, 2017. The meeting adjourned at 10:05 a.m. on September 20, 2017.
Notation Vote
By notation vote completed on August 15, 2017, the Committee unanimously approved the minutes of the Committee meeting held on July 25-26, 2017.
_____________________________
Brian F. Madigan
Secretary
1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes. Return to text
2. Attended the discussions of the proposed changes to Rules Regarding Availability of Information and developments in financial markets and open market operations. Return to text
3. Attended Tuesday session only. Return to text
4. In compliance with the FOIA Improvement Act of 2016, the earlier version of the Rules was published in the Federal Register as an interim final rule on December 27, 2016. Return to text
5. The background materials prepared by the staff for this meeting were completed before the full effects of Hurricane Maria were evident. Return to text
6. Four members of the Board of Governors, the same number as in June 2017, were in office at the time of the September 2017 meeting. The office of the president of the Federal Reserve Bank of Richmond was vacant at the time of both FOMC meetings; First Vice President Mark L. Mullinix submitted economic projections. One participant did not submit longer-run projections for real output growth, the unemployment rate, or the federal funds rate. Return to text
7. The second vote of the Board also encompassed approval of the establishment of the interest rates for secondary and seasonal credit under the existing formulas for computing such rates. Return to text |
2017-07-26T00:00:00 | 2017-07-26 | Statement | Information received since the Federal Open Market Committee met in June indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending and business fixed investment have continued to expand. On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
For the time being, the Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated; this program is described in the June 2017 Addendum to the Committee's Policy Normalization Principles and Plans.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Jerome H. Powell.
Implementation Note issued July 26, 2017 |
2017-07-26T00:00:00 | 2017-08-16 | Minute | Minutes of the Federal Open Market Committee
July 25-26, 2017
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, July 25, 2017, at 1:00 p.m. and continued on Wednesday, July 26, 2017, at 9:00 a.m.1
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
Charles L. Evans
Stanley Fischer
Patrick Harker
Robert S. Kaplan
Neel Kashkari
Jerome H. Powell
Raphael W. Bostic, Loretta J. Mester, Mark L. Mullinix, Michael Strine, and John C. Williams, Alternate Members of the Federal Open Market Committee
James Bullard, Esther L. George, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively
Brian F. Madigan, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Scott G. Alvarez, General Counsel
Michael Held, Deputy General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
James A. Clouse, Thomas A. Connors, Michael Dotsey, Eric M. Engen, Evan F. Koenig, Beth Anne Wilson, and Mark L.J. Wright, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Ann E. Misback,2 Secretary, Office of the Secretary, Board of Governors
Michael S. Gibson, Director, Division of Supervision and Regulation, Board of Governors; Andreas Lehnert, Director, Division of Financial Stability, Board of Governors
Margie Shanks,3 Deputy Secretary, Office of the Secretary, Board of Governors
Stephen A. Meyer, Deputy Director, Division of Monetary Affairs, Board of Governors; Mark E. Van Der Weide, Deputy Director, Division of Supervision and Regulation, Board of Governors
Trevor A. Reeve, Senior Special Adviser to the Chair, Office of Board Members, Board of Governors
Joseph W. Gruber, David Reifschneider, and John M. Roberts, Special Advisers to the Board, Office of Board Members, Board of Governors
Linda Robertson,2 Assistant to the Board, Office of Board Members, Board of Governors
Joshua Gallin and David E. Lebow, Senior Associate Directors, Division of Research and Statistics, Board of Governors; Fabio M. Natalucci, Senior Associate Director, Division of Monetary Affairs, Board of Governors
Antulio N. Bomfim, Ellen E. Meade, Edward Nelson, Robert J. Tetlow, and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors; Jeremy B. Rudd, Senior Adviser, Division of Research and Statistics, Board of Governors
Stephanie R. Aaronson and Glenn Follette, Assistant Directors, Division of Research and Statistics, Board of Governors; Elizabeth Klee, Assistant Director, Division of Monetary Affairs, Board of Governors
Penelope A. Beattie,2 Assistant to the Secretary, Office of the Secretary, Board of Governors
Dana L. Burnett, Section Chief, Division of Monetary Affairs, Board of Governors
John Kandrac, Senior Economist, Division of Monetary Affairs, Board of Governors
Mark Libell,3 Assistant Congressional Liaison, Office of Board Members, Board of Governors
Gregory L. Stefani, First Vice President, Federal Reserve Bank of Cleveland
David Altig, Kartik B. Athreya, Beverly Hirtle, Glenn D. Rudebusch, Ellis W. Tallman, and Christopher J. Waller, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Richmond, New York, San Francisco, Cleveland, and St. Louis, respectively
Daniel Aaronson, Joe Peek, and Jonathan L. Willis, Vice Presidents, Federal Reserve Banks of Chicago, Boston, and Kansas City, respectively
Selection of Committee Officer
By unanimous vote, the Committee selected Mark E. Van Der Weide to serve as general counsel, effective at the time he becomes the Board of Governors' general counsel, until the selection of his successor at the first regularly scheduled meeting of the Committee in 2018.
Developments in Financial Markets and Open Market Operations
The manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets over the period since the June FOMC meeting. The intermeeting period was relatively uneventful. Bond yields in advanced economies increased moderately, in part reflecting evolving market perceptions of prospects for foreign monetary policies. U.S. bond yields rose to a smaller degree, and the value of the dollar on foreign exchange markets decreased. Implied volatility in fixed-income markets remained low. Equity prices rose further, with notable advances in indexes for emerging markets.
The increase in the FOMC's target range for the federal funds rate at the June meeting was reflected in other money market interest rates, and the effective federal funds rate was near the middle of the new target range over the intermeeting period except on quarter-end. Take-up at the System's overnight reverse repurchase agreement facility averaged about $200 billion. Conditions in foreign exchange swap markets were fairly stable, and demand at central bank dollar auctions was relatively low. The manager also reported on small-value tests of open market operations, which are conducted routinely to promote operational readiness.
Market expectations for the path of the federal funds rate were little changed. Survey evidence suggested that most market participants now anticipated that the FOMC would announce at its September meeting a date for implementation of a change in reinvestment policy, although a couple of survey respondents expressed the view that the timing could be affected by developments regarding the federal debt ceiling. The survey results also suggested that, while views were somewhat dispersed, respondents typically expected effects on bond yields and spreads on mortgage-backed securities from the change in reinvestment policy to be modest.
By unanimous vote, the Committee ratified the Open Market Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account during the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the July 25-26 meeting showed that labor market conditions continued to strengthen in June and that real gross domestic product (GDP) likely expanded at a faster pace in the second quarter than in the first quarter. The 12-month change in overall consumer prices, as measured by the price index for personal consumption expenditures (PCE), slowed again in May; both total consumer price inflation and core inflation, which excludes consumer food and energy prices, were running below 2 percent. Data from the consumer and producer price indexes for June suggested that both total and core PCE price inflation (on a 12-month change basis) remained at a pace similar to that seen in the previous month. Surveyâbased measures of longer-run inflation expectations were little changed on balance.
Total nonfarm payroll employment expanded solidly in June, and the average monthly pace of private-sector job gains over the first half of the year was essentially the same as last year. The unemployment rate edged up to 4.4 percent in June; the unemployment rates for African Americans and for Hispanics declined slightly but remained above the unemployment rates for Asians and for whites. In addition, the median length of time that unemployed African Americans had been out of work exceeded the comparable figures for whites and for Hispanics, a pattern that has prevailed for at least the past two decades. The overall labor force participation rate edged up in June, and the share of workers employed part time for economic reasons rose a bit. The rate of private-sector job openings decreased in May after having risen for a couple of months, while the quits rate and the hiring rate both increased. The four-week moving average of initial claims for unemployment insurance benefits remained at a very low level through midâJuly. Average hourly earnings for all employees increased 2-1/2 percent over the 12 months ending in June, about the same as over the comparable period a year earlier but a little slower than the rate of increase in late 2016.
Total industrial production rose moderately, on balance, in May and June, as an increase in the output of mines and utilities more than offset a net decline in manufacturing production. Automakers' assembly schedules indicated that motor vehicle production would edge down again in the third quarter, likely reflecting a somewhat elevated level of dealers' inventories and a slowing in the pace of vehicle sales last quarter. However, broader indicators of manufacturing production, such as the new orders indexes from national and regional manufacturing surveys, pointed to moderate gains in factory output over the near term.
Real PCE appeared to have rebounded in the second quarter after increasing only modestly in the first quarter. Much of the rebound looked to have been concentrated in spending on energy services and energy goods, which was held down by unseasonably warm weather earlier in the year. The components of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimate of PCE declined in June but rose, on net, in the second quarter. Light motor vehicle sales edged down further in June. However, recent readings on key factors that influence consumer spending--including continued gains in employment, real disposable personal income, and households' net worth--pointed to solid growth in total real PCE in the near term. Consumer sentiment, as measured by the University of Michigan Surveys of Consumers, remained upbeat despite having moved down in early July.
Residential investment seemed to have declined in the second quarter. Starts of both new single-family homes and multifamily units rose in June but still decreased for the second quarter as a whole. The issuance of building permits for both types of housing was lower in the second quarter than in the first quarter. Sales of existing homes decreased, on net, in May and June, and new home sales in May partly reversed the previous month's decline.
Real private expenditures for business equipment and intellectual property appeared to have increased moderately in the second quarter after a solid gain in the first quarter. Nominal shipments of nondefense capital goods excluding aircraft rose again in May, and new orders of these goods continued to exceed shipments, pointing to further gains in shipments in the near term. In addition, indicators of business sentiment remained upbeat. Investment in nonresidential structures appeared to have risen at a markedly slower pace in the second quarter than in the first. Firms' nominal spending for nonresidential structures excluding drilling and mining declined further in May, and the number of oil and gas rigs in operation, an indicator of spending for structures in the drilling and mining sector, leveled out in recent weeks after increasing steadily for the past year.
Nominal outlays for defense through June pointed to an increase in real federal government purchases in the second quarter. However, real purchases by state and local governments appeared to have declined. Payrolls for state and local governments expanded during the second quarter, but nominal construction spending by these governments decreased, on net, in April and May.
The nominal U.S. international trade deficit narrowed in May, with an increase in exports and a small decline in imports. Export growth was led by consumer goods, automotive products, and services. The import decline was driven by consumer goods and automotive products. The available data suggested that net exports were a slight drag on real GDP growth in the second quarter.
Total U.S. consumer prices, as measured by the PCE price index, increased 1-1/2 percent over the 12 months ending in May. Core PCE price inflation was also 1-1/2 percent over that same period. Over the 12 months ending in June, the consumer price index (CPI) rose 1-1/2 percent, while core CPI inflation was 1-3/4 percent. The median of inflation expectations over the next 5 to 10 years from the Michigan survey edged up both in June and in the preliminary reading for July. Other measures of longerârun inflation expectations were generally little changed, on balance, in recent months, although those from the Desk's Survey of Primary Dealers and Survey of Market Participants had ticked down recently.
Incoming data suggested that economic growth continued to firm abroad, especially among advanced foreign economies (AFEs). The pickup in advanced-economy demand also contributed to relatively strong growth in China and emerging Asia, but growth in Latin America remained relatively weak, partly reflecting tight monetary and fiscal policies. Despite the stronger momentum of economic activity in the AFEs, headline inflation declined sharply in the second quarter, largely reflecting lower retail energy prices, and core inflation stayed subdued in many AFEs. Although inflation was also low in most emerging market economies (EMEs), it remained elevated in Mexico because of rising food inflation and earlier peso depreciation.
Staff Review of the Financial Situation
Domestic financial market conditions remained generally accommodative over the intermeeting period. U.S. equity prices rose, longer-term Treasury yields increased slightly, and the dollar depreciated. The Committee's decision to raise the target range for the federal funds rate to 1 to 1-1/4 percent at the June meeting was widely anticipated in financial markets, and market participants reportedly viewed FOMC communications as largely in line with expectations. Financing conditions for nonfinancial businesses and households generally remained supportive of growth in spending.
FOMC communications over the intermeeting period were viewed as broadly in line with investors' expectations that the Committee would continue to remove policy accommodation at a gradual pace. Market participants generally interpreted the information on reinvestment policy provided in June in the Committee's postmeeting statement and its Addendum to the Policy Normalization Principles and Plans as consistent with their expectation that a change to reinvestment policy was likely to occur this year. Market participants also took note of the summary in the June minutes of the Committee's discussion of the progress toward the Committee's 2 percent longer-run inflation objective and the extent to which recent softness in price data reflected idiosyncratic factors. Overnight index swap rates pointed to little change in the expected path of the federal funds rate on net.
Yields on intermediate- and longer-term nominal Treasury securities increased slightly over the intermeeting period. Although yields fell following the publication of lower-than-expected CPI data, yields were boosted by comments from foreign central bank officials that investors read as pointing to less accommodative monetary policies abroad than previously expected. Measures of inflation compensation based on Treasury Inflation-Protected Securities ticked up since the June FOMC meeting. Despite their intermeeting period gains, longer-term real and nominal Treasury yields remained very low by historical standards, apparently weighed down by accommodative monetary policies abroad and possibly by declines in the long-term neutral real interest rate over recent years.
Broad U.S. equity price indexes rose. Oneâmonth-ahead option-implied volatility of the S&P 500 index--the VIX--remained at historically low levels. Spreads of yields on investment- and speculative-grade nonfinancial corporate bonds over comparable-maturity Treasury securities narrowed a bit on net.
Conditions in short-term funding markets were stable over the intermeeting period. Reflecting the FOMC's policy action in June, yields on a broad set of money market instruments moved about 25 basis points higher. However, over much of the period, the net increase in rates on shorter-dated Treasury bills was smaller, reportedly reflecting a reduction in Treasury bill supply.
Financing for large nonfinancial firms remained readily available, although debt issuance moderated. Gross issuance of corporate bonds stepped down in June from a strong pace in May, while issuance of institutional leveraged loans continued to be robust. Commercial and industrial lending by banks remained quite weak in the second quarter. Responses from the July Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) indicated that depressed demand was largely responsible, and that banks' lending standards were little changed in recent months. The most cited reason for the lackluster loan demand was subdued investment spending by nonfinancial businesses, but banks also reported that some borrowers had shifted to other sources of external financing or to internally generated funds.
Financing conditions for commercial real estate (CRE) remained accommodative, although the growth of CRE loans on banks' books slowed somewhat. Respondents to the July SLOOS reported tightening credit standards for these loans. SLOOS respondents also reported that standards on CRE loans were tight relative to their historical range, and that, on net, demand for CRE loans weakened in recent months. The pace of issuance of commercial mortgage-backed securities (CMBS) through the first half of the year was similar to that seen last year. Delinquency rates on loans in CMBS pools originated before the financial crisis continued to increase.
Financing conditions in the residential mortgage market were little changed, and flows of new credit continued at a moderate pace. However, growth of mortgage loans on banks' books slowed somewhat in the first half of this year. SLOOS respondents, on net, reported that standards on most residential mortgage loan categories eased slightly.
Consumer credit continued to grow on a year-over-year basis, but the expansion of credit card and auto loan balances appeared to slow from the rapid pace that was evident through the end of last year. In the July SLOOS, banks reported having tightened standards and widened spreads for credit card and auto loans on net. Standards for the subprime segments of these loan types were particularly tight compared with their historical ranges. Reflecting in part continued tightening of lending standards, consumer loan growth at banks moderated further in the second quarter; however, that weakness was partially offset by more robust lending by credit unions.
Since the June FOMC meeting, the broad dollar depreciated 2 percent, weakening more against AFE currencies than against EME currencies. The dollar's depreciation was driven in part by policy communications from the central banks of several AFEs that market participants viewed as less accommodative than expected as well as by weaker-than-expected CPI data in the United States. The Bank of Canada raised its policy rate in July. Sovereign yields increased notably in Canada, Germany, and the United Kingdom. Changes in foreign equity indexes were mixed over the intermeeting period: European equities edged lower, Japanese equities were little changed, and EME equities increased. European peripheral sovereign bond spreads narrowed over the period, reflecting in part positive sentiment related to the outcomes of the French parliamentary election, Greek debt negotiations, and bank resolutions in Italy. EME sovereign spreads were little changed on net.
The staff provided its latest report on potential risks to financial stability, indicating that it continued to judge the vulnerabilities of the U.S financial system as moderate on balance. This overall assessment incorporated the staff's judgment that, since the April assessment, vulnerabilities associated with asset valuation pressures had edged up from notable to elevated, as asset prices remained high or climbed further, risk spreads narrowed, and expected and actual volatility remained muted in a range of financial markets. However, the staff continued to view vulnerabilities stemming from financial leverage as well as maturity and liquidity transformation as low, and vulnerabilities from leverage in the nonfinancial sector appeared to remain moderate.
Staff Economic Outlook
The U.S. economic projection prepared by the staff for the July FOMC meeting was broadly similar to the previous forecast. In particular, real GDP growth, which was modest in the first quarter, was still expected to have stepped up to a solid pace in the second quarter and to maintain roughly the same rate of increase in the second half of the year. In this projection, the staff scaled back its assumptions regarding the magnitude and duration of fiscal policy expansion in the coming years. However, the effect of this change on the projection for real GDP over the next couple of years was largely offset by lower assumed paths for the exchange value of the dollar and for longer-term interest rates. Thus, as in the June projection, the staff projected that real GDP would expand at a modestly faster pace than potential output in 2017 through 2019. The unemployment rate was projected to decline gradually over the next couple of years and to continue running below the staff's estimate of its longer-run natural rate over this period.
The staff's forecast for consumer price inflation, as measured by the change in the PCE price index, was revised down slightly for 2017 in response to weaker-than-expected incoming data for inflation. As a result, inflation this year was expected to be similar in magnitude to last year, with an upturn in the prices for food and non-energy imports offset by a slower increase in core PCE prices and weaker energy prices. Beyond 2017, the forecast was little revised from the previous projection, as the recent weakness in inflation was viewed as transitory. The staff continued to project that inflation would increase in the next couple of years and that it would be close to the Committee's longer-run objective in 2018 and at 2 percent in 2019.
The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. On the one hand, many financial market indicators of uncertainty remained subdued, and the uncertainty associated with the foreign outlook still appeared to be less than late last year; on the other hand, uncertainty about the direction of some economic policies was judged to have remained elevated. The staff saw the risks to the forecasts for real GDP growth and the unemployment rate as balanced. The risks to the projection for inflation also were seen as balanced. Downside risks included the possibilities that longer-term inflation expectations may have edged down, that the dollar could appreciate substantially, or that the recent run of soft inflation readings could prove to be more persistent than the staff expected. These downside risks were seen as essentially counterbalanced by the upside risk that inflation could increase more than expected in an economy that was projected to continue operating above its longer-run potential.
Participants' Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants agreed that information received over the intermeeting period indicated that the labor market had continued to strengthen and that economic activity had been rising moderately so far this year. Job gains had been solid, on average, since the beginning of the year, and the unemployment rate had declined, on net, over the same period. Household spending and business fixed investment had continued to expand. On a 12âmonth basis, both overall inflation and the measure excluding food and energy prices had declined and were running below 2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed on balance.
Participants generally saw the incoming information on spending and labor market indicators as consistent, overall, with their expectations and indicated that their views of the outlook for economic growth and the labor market were little changed, on balance, since the June FOMC meeting. Participants continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would strengthen somewhat further. In light of continued low recent readings on inflation, participants expected that inflation on a 12-month basis would remain somewhat below 2 percent in the near term. However, most participants judged that inflation would stabilize around the Committee's 2 percent objective over the medium term.
Data received over the intermeeting period reinforced earlier indications that real GDP growth had turned up after having been slow in the first quarter of this year. As anticipated, growth in household spending appeared to have been stronger in the second quarter after its first-quarter weakness. Reports from District contacts on consumer spending were generally positive. However, sales of motor vehicles had softened, and automakers were reportedly adjusting production and assessing whether the underlying demand for automobiles had declined. Participants noted that the fundamentals underpinning consumption growth, including increases in payrolls, remained solid. However, the weakness in retail sales in June offered a note of caution.
Reports from District contacts on both manufacturing and services were also generally consistent with moderate growth in economic activity overall. Construction-sector contacts were generally upbeat. Reports on the energy sector indicated that activity was continuing to expand, albeit more slowly than previously; survey evidence suggested that oil drilling remained profitable in some locations at current oil prices. The agricultural sector remained weak, and some regions were experiencing drought conditions. A couple of participants had received indications from contacts that business investment spending in their Districts might strengthen.
Nevertheless, several participants noted that uncertainty about the course of federal government policy, including in the areas of fiscal policy, trade, and health care, was tending to weigh down firms' spending and hiring plans. In addition, a few participants suggested that the likelihood of near-term enactment of a fiscal stimulus program had declined further or that the fiscal stimulus likely would be smaller than they previously expected. It was also observed that the budgets of some state and local governments were under strain, limiting growth in their expenditures. In contrast, the prospects for U.S. exports had been boosted by a brighter international economic outlook.
Participants noted that labor market conditions had strengthened further over the intermeeting period. The unemployment rate rose slightly to 4.4 percent in June but remained low by historical standards. Payroll gains picked up substantially in June. In addition, the employment-to-population ratio increased. Participants observed that the unemployment rate was likely close to or below its longer-run normal rate and could decline further if, as expected, growth in output remained somewhat in excess of the potential growth rate. A few participants expressed concerns about the possibility of substantially overshooting full employment, with one citing past difficulties in achieving a soft landing. District contacts confirmed tightness in the labor market but relayed little evidence of wage pressures, although some firms were reportedly attempting to attract workers with a variety of nonwage benefits. The absence of sizable wage pressures also seemed to be confirmed by most aggregate wage measures. However, a few participants suggested that, in a tight labor market, measured aggregate wage growth was being held down by compositional changes in employment associated with the hiring of less experienced workers at lower wages than those of established workers. In addition, a number of participants suggested that the rate of increase in nominal wages was not low in relation to the rate of productivity growth and the modest rate of inflation.
Participants discussed the softness in inflation in recent months. Many participants noted that much of the recent decline in inflation had probably reflected idiosyncratic factors. Nonetheless, PCE price inflation on a 12âmonth basis would likely continue to be held down over the second half of the year by the effects of those factors, and the monthly readings might be depressed by possible residual seasonality in measured PCE inflation. Still, most participants indicated that they expected inflation to pick up over the next couple of years from its current low level and to stabilize around the Committee's 2 percent objective over the medium term. Many participants, however, saw some likelihood that inflation might remain below 2 percent for longer than they currently expected, and several indicated that the risks to the inflation outlook could be tilted to the downside. Participants agreed that a fall in longer-term inflation expectations would be undesirable, but they differed in their assessments of whether inflation expectations were well anchored. One participant pointed to the stability of a number of measures of inflation expectations in recent months, but a few others suggested that continuing low inflation expectations may have been a factor putting downward pressure on inflation or that inflation expectations might need to be bolstered in order to ensure their consistency with the Committee's longer-term inflation objective.
A number of participants noted that much of the analysis of inflation used in policymaking rested on a framework in which, for a given rate of expected inflation, the degree of upward pressures on prices and wages rose as aggregate demand for goods and services and employment of resources increased above long-run sustainable levels. A few participants cited evidence suggesting that this framework was not particularly useful in forecasting inflation. However, most participants thought that the framework remained valid, notwithstanding the recent absence of a pickup in inflation in the face of a tightening labor market and real GDP growth in excess of their estimates of its potential rate. Participants discussed possible reasons for the coexistence of low inflation and low unemployment. These included a diminished responsiveness of prices to resource pressures, a lower natural rate of unemployment, the possibility that slack may be better measured by labor market indicators other than unemployment, lags in the reaction of nominal wage growth and inflation to labor market tightening, and restraints on pricing power from global developments and from innovations to business models spurred by advances in technology. A couple of participants argued that the response of inflation to resource utilization could become stronger if output and employment appreciably overshot their full employment levels, although other participants pointed out that this hypothesized nonlinear response had little empirical support.
In assessing recent developments in financial market conditions, participants referred to the continued low level of longer-term interest rates, in particular those on U.S Treasury securities. The level of such yields appeared to reflect both low expected future short-term interest rates and depressed term premiums. Asset purchases by foreign central banks and the Federal Reserve's securities holdings were also likely contributing to currently low term premiums, although the exact size of these contributions was uncertain. A number of participants pointed to potential concerns about low longer-term interest rates, including the possibility that inflation expectations were too low, that yields could rise abruptly, or that low yields were inducing investors to take on excessive risk in a search for higher returns.
Several participants noted that the further increases in equity prices, together with continued low longer-term interest rates, had led to an easing of financial conditions. However, different assessments were expressed about the implications of this development for the outlook for aggregate demand and, consequently, appropriate monetary policy. According to one view, the easing of financial conditions meant that the economic effects of the Committee's actions in gradually removing policy accommodation had been largely offset by other factors influencing financial markets, and that a tighter monetary policy than otherwise was warranted. According to another view, recent rises in equity prices might be part of a broad-based adjustment of asset prices to changes in longer-term financial conditions, importantly including a lower neutral real interest rate, and, therefore, the recent equity price increases might not provide much additional impetus to aggregate spending on goods and services.
Participants also considered equity valuations in their discussion of financial stability. A couple of participants noted that favorable macroeconomic factors provided backing for current equity valuations; in addition, as recent equity price increases did not seem to stem importantly from greater use of leverage by investors, these increases might not pose appreciable risks to financial stability. Several participants observed that the banking system was well capitalized and had ample liquidity, reducing the risk of financial instability. It was noted that financial stability assessments were based on current capital levels within the banking sector, and that such assessments would likely be adjusted should these measures of loss-absorbing capacity change. Participants underscored the need to monitor financial institutions for shifts in behavior--such as an erosion of lending standards or increased reliance on unstable sources of funding--that could lead to subsequent problems. In addition, participants judged that it was important to look for signs that either declining market volatility or heavy concentration by investors in particular assets might create financial imbalances. A couple of participants expressed concern that smaller banks could be assuming significant risks in efforts to expand their CRE lending. Furthermore, a couple of participants saw, as possible sources of financial instability, the pace of increase in real estate prices in the multifamily segment and the pattern of the lending and borrowing activities of certain government-sponsored enterprises.
Participants agreed that the regulatory and supervisory tools developed since the financial crisis had played an important role in fostering financial stability. Changes in regulation had likely helped in making the banking system more resilient to major shocks, in promoting more prudent balance sheet management strategies on the part of nonbank financial institutions, and in reducing the degree to which variations in lending to the private sector intensify cycles in output and in asset prices. Participants agreed that it would not be desirable for the current regulatory framework to be changed in ways that allowed a reemergence of the types of risky practices that contributed to the crisis.
In their discussion of monetary policy, participants reaffirmed their view that a gradual approach to removing policy accommodation was likely to remain appropriate to promote the Committee's objectives of maximum employment and 2 percent inflation. Participants commented on a number of factors that would influence their ongoing assessments of the appropriate path for the federal funds rate. Most saw the outlook for economic activity and the labor market as little changed from their earlier projections and continued to anticipate that inflation would stabilize around the Committee's 2 percent objective over the medium term. However, some participants expressed concern about the recent decline in inflation, which had occurred even as resource utilization had tightened, and noted their increased uncertainty about the outlook for inflation. They observed that the Committee could afford to be patient under current circumstances in deciding when to increase the federal funds rate further and argued against additional adjustments until incoming information confirmed that the recent low readings on inflation were not likely to persist and that inflation was more clearly on a path toward the Committee's symmetric 2 percent objective over the medium term. In contrast, some other participants were more worried about risks arising from a labor market that had already reached full employment and was projected to tighten further or from the easing in financial conditions that had developed since the Committee's policy normalization process was initiated in December 2015. They cautioned that a delay in gradually removing policy accommodation could result in an overshooting of the Committee's inflation objective that would likely be costly to reverse, or that a delay could lead to an intensification of financial stability risks or to other imbalances that might prove difficult to unwind. One participant stressed that the risks both to the Committee's inflation objective and to financial stability would require careful monitoring. This participant expressed the view that a gradual approach to removing policy accommodation would likely strike the appropriate balance between promoting the Committee's inflation and full employment objectives and mitigating financial stability concerns.
A number of participants also commented that the appropriate pace of normalization of the federal funds rate would depend on how financial conditions evolved and on the implications of those developments for the pace of economic activity. Among the considerations mentioned were the extent of current downward pressure on longer-term yields arising from the Federal Reserve's asset holdings and how this pressure would diminish over time as balance sheet normalization proceeded, the strength and degree of persistence of other domestic and global factors that had contributed to the easing of financial conditions and elevated asset prices, and whether and how much the neutral rate of interest would rise as the economy continued to expand.
Participants also discussed the appropriate time to implement the plan for reducing the Federal Reserve's securities holdings that was announced in June in the Committee's postmeeting statement and its Addendum to the Policy Normalization Principles and Plans. Participants generally agreed that, in light of their current assessment of economic conditions and the outlook, it was appropriate to signal that implementation of the program likely would begin relatively soon, absent significant adverse developments in the economy or in financial markets. Many noted that the program was expected to contribute only modestly to the reduction in policy accommodation. Several reiterated that, once the program was under way, further adjustments to the stance of monetary policy in response to economic developments would be centered on changes in the target range for the federal funds rate. Although several participants were prepared to announce a starting date for the program at the current meeting, most preferred to defer that decision until an upcoming meeting while accumulating additional information on the economic outlook and developments potentially affecting financial markets.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the Committee met in June indicated that the labor market had continued to strengthen and that economic activity had been rising moderately so far this year. Job gains had been solid, on average, since the beginning of the year, and the unemployment rate had declined. Household spending and business fixed investment had continued to expand.
On a 12âmonth basis, overall inflation and the measure excluding food and energy prices had declined and were running below 2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed on balance.
With respect to the economic outlook and its implications for monetary policy, members continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace, and labor market conditions would strengthen somewhat further. Inflation on a 12âmonth basis was expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term. Members saw the near-term risks to the economic outlook as roughly balanced, but, in light of their concern about the recent slowing in inflation, they agreed to continue to monitor inflation developments closely.
After assessing current conditions and the outlook for economic activity, the labor market, and inflation, members decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. They noted that the stance of monetary policy remained accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
Members agreed that the timing and size of future adjustments to the target range for the federal funds rate would depend on their assessment of realized and expected economic conditions relative to the Committee's objectives of maximum employment and 2 percent inflation. They expected that economic conditions would evolve in a manner that would warrant gradual increases in the federal funds rate, and that the federal funds rate was likely to remain, for some time, below levels that are expected to prevail in the longer run. They also again stated that the actual path of the federal funds rate would depend on the economic outlook as informed by incoming data. In particular, they reaffirmed that they would carefully monitor actual and expected inflation developments relative to the Committee's symmetric inflation goal. Some members stressed the importance of underscoring the Committee's commitment to its inflation objective. These members emphasized that, in considering the timing of further adjustments in the federal funds rate, they would be evaluating incoming information to assess the likelihood that recent low readings on inflation were transitory and that inflation was again on a trajectory consistent with achieving the Committee's 2 percent objective over the medium term.
Members agreed that, at this meeting, the Committee should further clarify the time at which it expected to begin its program for reducing its securities holdings in a gradual and predictable manner. They updated the postmeeting statement to indicate that while the Committee was, for the time being, maintaining its existing reinvestment policy, it intended to begin implementing the balance sheet normalization program relatively soon, provided that the economy evolved broadly as anticipated. Several members observed that, in part because of the Committee's various communications regarding the change, any reaction in financial markets to such a change would likely be limited.
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 SOMA in accordance with the following domestic policy directive, to be released at 2:00 p.m.:
"Effective July 27, 2017, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1 to 1-1/4 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.00 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."
The vote also encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in June indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending and business fixed investment have continued to expand. On a 12âmonth basis, overall inflation and the measure excluding food and energy prices have declined and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12âmonth basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
For the time being, the Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated; this program is described in the June 2017 Addendum to the Committee's Policy Normalization Principles and Plans."
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Charles L. Evans, Stanley Fischer, Patrick Harker, Robert S. Kaplan, Neel Kashkari, and Jerome H. Powell.
Voting against this action: None.
Consistent with the Committee's decision to leave the target range for the federal funds rate unchanged, the Board of Governors voted unanimously to leave the interest rates on required and excess reserve balances unchanged at 1-1/4 percent and voted unanimously to approve establishment of the primary credit rate (discount rate) at the existing level of 1-3/4 percent.4
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, September 19-20, 2017. The meeting adjourned at 10:00 a.m. on July 26, 2017.
Notation Vote
By notation vote completed on July 3, 2017, the Committee unanimously approved the minutes of the Committee meeting held on June 13-14, 2017.
_____________________________
Brian F. Madigan
Secretary
1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes. Return to text
2. Attended Tuesday session only. Return to text
3. Attended Wednesday session only. Return to text
4. The second vote of the Board also encompassed approval of the establishment of the interest rates for secondary and seasonal credit under the existing formulas for computing such rates. Return to text |
2017-06-14T00:00:00 | 2017-06-14 | Statement | Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending has picked up in recent months, and business fixed investment has continued to expand. On a 12-month basis, inflation has declined recently and, like the measure excluding food and energy prices, is running somewhat below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated. This program, which would gradually reduce the Federal Reserve's securities holdings by decreasing reinvestment of principal payments from those securities, is described in the accompanying addendum to the Committee's Policy Normalization Principles and Plans.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; and Jerome H. Powell. Voting against the action was Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate.
Implementation Note issued June 14, 2017 |
2017-06-14T00:00:00 | 2017-07-05 | Minute | Minutes of the Federal Open Market Committee
June 13-14, 2017
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, June 13, 2017, at 1:00 p.m. and continued on Wednesday, June 14, 2017, at 9:00 a.m.1
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
Charles L. Evans
Stanley Fischer
Patrick Harker
Robert S. Kaplan
Neel Kashkari
Jerome H. Powell
Raphael W. Bostic, Loretta J. Mester, Mark L. Mullinix, Michael Strine, and John C. Williams, Alternate Members of the Federal Open Market Committee
James Bullard, Esther L. George, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively
Brian F. Madigan, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Michael Held, Deputy General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
Beth Anne Wilson, James A. Clouse, Thomas A. Connors, Eric M. Engen, Evan F. Koenig, Jonathan P. McCarthy, William Wascher, and Mark L.J. Wright, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Ann E. Misback, Secretary, Office of the Secretary, Board of Governors
Matthew J. Eichner,2 Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors; Michael S. Gibson, Director, Division of Supervision and Regulation, Board of Governors
Michael T. Kiley, Deputy Director, Division of Financial Stability, Board of Governors; Stephen A. Meyer, Deputy Director, Division of Monetary Affairs, Board of Governors
William B. English, Senior Special Adviser to the Board, Office of Board Members, Board of Governors
Trevor A. Reeve, Senior Special Adviser to the Chair, Office of Board Members, Board of Governors
David Bowman, Joseph W. Gruber, David Reifschneider, and John M. Roberts, Special Advisers to the Board, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Christopher J. Erceg, Senior Associate Director, Division of International Finance, Board of Governors; Joshua Gallin, Senior Associate Director, Division of Research and Statistics, Board of Governors; Gretchen C. Weinbach,2 Senior Associate Director, Division of Monetary Affairs, Board of Governors
Antulio N. Bomfim, Ellen E. Meade, and Edward Nelson, Senior Advisers, Division of Monetary Affairs, Board of Governors; Jeremy B. Rudd, Senior Adviser, Division of Research and Statistics, Board of Governors
Rochelle M. Edge, Associate Director, Division of Financial Stability, Board of Governors; Jane E. Ihrig, Associate Director, Division of Monetary Affairs, Board of Governors; Stacey Tevlin, Associate Director, Division of Research and Statistics, Board of Governors
Min Wei, Deputy Associate Director, Division of Monetary Affairs, Board of Governors
Christopher J. Gust, Assistant Director, Division of Monetary Affairs, Board of Governors; Norman J. Morin and Karen M. Pence, Assistant Directors, Division of Research and Statistics, Board of Governors
Don Kim, Adviser, Division of Monetary Affairs, Board of Governors
Penelope A. Beattie, Assistant to the Secretary, Office of the Secretary, Board of Governors
Giovanni Favara and Rebecca Zarutskie, Section Chiefs, Division of Monetary Affairs, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Kimberly Bayard, Group Manager, Division of Research and Statistics, Board of Governors
Stephen Lin, Principal Economist, Division of International Finance, Board of Governors; Lubomir Petrasek, Principal Economist, Division of Monetary Affairs, Board of Governors
Achilles Sangster II, Information Management Analyst, Division of Monetary Affairs, Board of Governors
Marie Gooding, First Vice President, Federal Reserve Bank of Atlanta
David Altig, Kartik B. Athreya, Mary Daly, Jeff Fuhrer, and Christopher J. Waller, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Richmond, San Francisco, Boston, and St. Louis, respectively
Spencer Krane and Ellis W. Tallman, Senior Vice Presidents, Federal Reserve Banks of Chicago and Cleveland, respectively
Roc Armenter and Kathryn B. Chen,3 Vice Presidents, Federal Reserve Banks of Philadelphia and New York, respectively
Andrew T. Foerster, Senior Economist, Federal Reserve Bank of Kansas City
Selection of Committee Officer
By unanimous vote, the Committee selected Mark L.J. Wright to serve as Associate Economist, effective June 13, 2017, until the selection of his successor at the first regularly scheduled meeting of the Committee in 2018.
Developments in Financial Markets and Open Market Operations
The manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets over the period since the May FOMC meeting. Yields on Treasury securities and the foreign exchange value of the dollar had declined modestly, while equity prices had continued to rise, contributing to a further easing of financial conditions according to some measures. Moreover, realized and implied volatility in financial markets remained low. Meanwhile, inflation compensation edged lower. Survey results and market pricing suggested that market participants saw a high probability of an increase in the FOMC's target range for the federal funds rate at this meeting.
The deputy manager reviewed survey results on market expectations for SOMA reinvestment policy and for the evolution of the System's balance sheet over coming years. The deputy manager also commented on money market developments. Over the intermeeting period, the federal funds rate remained well within the FOMC's target range, and take-up at the System's overnight reverse repurchase agreement facility was little changed from the previous period. The spread between the three-month London interbank offered rate and the overnight index swap (OIS) rate had narrowed markedly in recent months after rising noticeably in advance of the implementation of money market fund reform in the fall of 2016. The deputy manager also summarized details of the operational approach that the Open Market Desk planned to follow if the Committee adopted the proposal for SOMA reinvestment policy to be considered at this meeting.
By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account during the intermeeting period.
System Open Market Account Reinvestment Policy
The Chair observed that, starting with the March 2017 FOMC meeting, Committee participants had been discussing approaches to reducing the Federal Reserve's securities holdings in a gradual and predictable manner. She noted that participants appeared to have reached a consensus on an approach that involved specifying caps on the monthly amount of principal payments from securities holdings that would not be reinvested; these caps would rise over the period of a year, after which they would remain constant. Given this consensus, the Chair proposed that participants approve the plan and that it be published as an addendum to the Committee's Policy Normalization Principles and Plans; the addendum would be released at the conclusion of this meeting so as to inform the public well in advance of implementing the reinvestment policy. It was anticipated that when the Committee determined that economic conditions warranted implementation of the program, that step would be communicated through the Committee's postmeeting statement. Participants unanimously supported the proposal.
POLICY NORMALIZATION PRINCIPLES AND PLANS
(Addendum adopted June 13, 2017)
All participants agreed to augment the Committee's Policy Normalization Principles and Plans by providing the following additional details regarding the approach the FOMC intends to use to reduce the Federal Reserve's holdings of Treasury and agency securities once normalization of the level of the federal funds rate is well under way.1
The Committee intends to gradually reduce the Federal Reserve's securities holdings by decreasing its reinvestment of the principal payments it receives from securities held in the System Open Market Account. Specifically, such payments will be reinvested only to the extent that they exceed gradually rising caps.
For payments of principal that the Federal Reserve receives from maturing Treasury securities, the Committee anticipates that the cap will be $6 billion per month initially and will increase in steps of $6 billion at three-month intervals over 12 months until it reaches $30 billion per month.
For payments of principal that the Federal Reserve receives from its holdings of agency debt and mortgage-backed securities, the Committee anticipates that the cap will be $4 billion per month initially and will increase in steps of $4 billion at three-month intervals over 12 months until it reaches $20 billion per month.
The Committee also anticipates that the caps will remain in place once they reach their respective maximums so that the Federal Reserve's securities holdings will continue to decline in a gradual and predictable manner until the Committee judges that the Federal Reserve is holding no more securities than necessary to implement monetary policy efficiently and effectively.
Gradually reducing the Federal Reserve's securities holdings will result in a declining supply of reserve balances. The Committee currently anticipates reducing the quantity of reserve balances, over time, to a level appreciably below that seen in recent years but larger than before the financial crisis; the level will reflect the banking system's demand for reserve balances and the Committee's decisions about how to implement monetary policy most efficiently and effectively in the future. The Committee expects to learn more about the underlying demand for reserves during the process of balance sheet normalization.
The Committee affirms that changing the target range for the federal funds rate is its primary means of adjusting the stance of monetary policy. However, the Committee would be prepared to resume reinvestment of principal payments received on securities held by the Federal Reserve if a material deterioration in the economic outlook were to warrant a sizable reduction in the Committee's target for the federal funds rate. Moreover, the Committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate.
1. The Committee's Policy Normalization Principles and Plans were adopted on September 16, 2014, and are available at www.federalreserve.gov/monetarypolicy/files/FOMC_PolicyNormalization.pdf. On March 18, 2015, the Committee adopted an addendum to the Policy Normalization Principles and Plans, which is available at www.federalreserve.gov/monetarypolicy/files/FOMC_PolicyNormalization.20150318.pdf. Return to text
Staff Review of the Economic Situation
The information reviewed for the June 13-14 meeting showed that labor market conditions continued to strengthen in recent months and suggested that real gross domestic product (GDP) was expanding at a faster pace in the second quarter than in the first quarter. The 12-month change in overall consumer prices, as measured by the price index for personal consumption expenditures (PCE), slowed a bit further in April; total consumer price inflation and core inflation, which excludes consumer food and energy prices, were both running somewhat below 2 percent. Survey-based measures of longer-run inflation expectations were little changed on balance.
Total nonfarm payroll employment expanded further in April and May, and the average pace of job gains over the first five months of the year was solid. The unemployment rate moved down to 4.3 percent in May; the unemployment rates for African Americans and for Hispanics stepped down but remained above the unemployment rates for Asians and for whites. The overall labor force participation rate declined somewhat, and the share of workers employed part time for economic reasons decreased a little. The rate of private-sector job openings increased in March and April, while the quits rate was little changed and the hiring rate moved down. The four-week moving average of initial claims for unemployment insurance benefits remained at a very low level through early June. Measures of labor compensation continued to rise at moderate rates. Compensation per hour in the nonfarm business sector increased 2-1/4 percent over the four quarters ending in the first quarter, a bit slower than over the same period a year earlier. Average hourly earnings for all employees increased 2-1/2 percent over the 12 months ending in May, about the same as over the comparable period a year earlier.
Total industrial production rose considerably in April, reflecting gains in manufacturing, mining, and utilities output. Automakers' assembly schedules suggested that motor vehicle production would slow in subsequent months, but broader indicators of manufacturing production, such as the new orders indexes from national and regional manufacturing surveys, pointed to modest gains in factory output over the near term.
Real PCE rose solidly in April after increasing only modestly in the first quarter. Light motor vehicle sales picked up in April but then moved down somewhat in May. The components of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimate of PCE were flat in May, but estimated increases in these components of sales for the previous two months were revised up. In addition, recent readings on key factors that influence consumer spending pointed to further solid growth in total real PCE in the near term, including continued gains in employment, real disposable personal income, and households' net worth. Moreover, consumer sentiment, as measured by the University of Michigan Surveys of Consumers, remained upbeat in May.
Residential investment appeared to be slowing after increasing briskly in the first quarter. The first-quarter strength may have reflected housing activity shifting earlier in response to unseasonably warm weather last quarter, to an anticipation of higher future interest rates, or to both. Starts of new single-family homes edged up in April, but the issuance of building permits for these homes declined somewhat. Meanwhile, starts of multifamily units fell. Moreover, sales of both new and existing homes decreased in April.
Real private expenditures for business equipment and intellectual property seemed to be increasing further after rising at a solid pace in the first quarter. Both nominal shipments and new orders of nondefense capital goods excluding aircraft rose in April, and new orders continued to exceed shipments, pointing to further gains in shipments in the near term. In addition, indicators of business sentiment were upbeat in recent months. Although firms' nominal spending for nonresidential structures excluding drilling and mining declined in April, the number of oil and gas rigs in operation, an indicator of spending for structures in the drilling and mining sector, continued to rise through early June.
Nominal federal government spending data for April and May pointed to essentially flat real federal purchases in the second quarter. Real state and local government purchases appeared to be moving down, as state and local government payrolls declined, on net, in April and May, and nominal construction expenditures by these governments decreased in April.
The nominal U.S. international trade deficit widened slightly in March, with a small decline in exports and a small increase in imports. The March data, together with revised estimates for earlier months, indicated that real exports grew briskly in the first quarter and at a faster pace than in the second half of 2016. Real imports also increased in the first quarter but at a slower pace than in the second half of 2016. In April, the nominal trade deficit widened, as imports picked up while exports declined slightly. Net exports were estimated to have made a small positive contribution to real GDP growth in the first quarter. However, the April trade data suggested that net exports might be a slight drag on real GDP growth in the second quarter.
Total U.S. consumer prices, as measured by the PCE price index, increased 1-3/4 percent over the 12 months ending in April. Core PCE price inflation was 1-1/2 percent over those same 12 months. Over the 12 months ending in May, the consumer price index (CPI) rose a little less than 2 percent, while core CPI inflation was 1-3/4 percent. The median of inflation expectations over the next 5 to 10 years from the Michigan survey was unchanged in May, and the median expectation for PCE price inflation over the next 10 years from the Survey of Professional Forecasters also held steady in the second quarter. Likewise, the medians of longer-run inflation expectations from the Desk's Survey of Primary Dealers and Survey of Market Participants were essentially unchanged in June.
The economic expansions in Canada and the euro area as well as in China and many other emerging market economies (EMEs) continued to firm in the first quarter. In contrast, economic growth in the United Kingdom slowed sharply. Recent indicators suggested that real GDP growth in most foreign economies remained solid in the second quarter. Headline inflation across the advanced foreign economies (AFEs) generally appeared to moderate from the pace registered over the first quarter, as the effects of earlier increases in energy prices started to fade; core inflation continued to be subdued in many AFEs. Among the EMEs, inflation in China rose while inflation in Latin America fell. In Mexico, the effects of fuel price hikes in January and the pass-through from earlier currency depreciation to prices started to wane, but inflation remained above the central bank's target.
Staff Review of the Financial Situation
Domestic financial market conditions remained generally accommodative over the intermeeting period. U.S. equity prices increased over the period, longer-term Treasury yields declined, and the dollar depreciated. A decline in the perceived likelihood of a significant fiscal expansion and the below-expectations reading on the April CPI reportedly contributed to lower yields on longer-tenor Treasury securities. Market participants' perceptions of an improved global economic outlook appeared to provide some support to prices of risk assets.
FOMC communications over the intermeeting period were viewed as broadly in line with investors' expectations that the Committee would continue to remove policy accommodation at a gradual pace. Market participants interpreted the May FOMC statement and the meeting minutes as indicating that the Committee had not materially changed its economic outlook. In response to the discussion of SOMA reinvestment policy in the minutes, a number of market participants reportedly pulled forward their expectations for the most likely timing of a change to the Committee's reinvestment policy, a shift that was evident in the responses to the Desk's Survey of Primary Dealers and Survey of Market Participants. However, investors also reportedly viewed the Committee's planning as mitigating the risk that the process of reducing the size of the Federal Reserve's balance sheet would lead to outsized movements in interest rates or have adverse effects on market functioning.
The probability of an increase in the target range for the federal funds rate occurring at the June meeting, as implied by quotes on federal funds futures contracts, rose to a high level. However, the expected federal funds rate from late 2018 to the end of 2020 implied by OIS quotes declined slightly. Immediately following the May FOMC meeting, nominal Treasury yields rose at short and intermediate maturities, reportedly reflecting the response of investors to a passage in the postmeeting statement indicating the Committee's view that the slowing in real GDP growth during the first quarter was likely to be transitory. Later in the intermeeting period, yields declined in reaction to the release of weaker-than-expected April CPI data and the somewhat disappointing May employment report. On balance, the Treasury yield curve flattened, with short-term yields rising modestly and the 10-year yield declining. Both 5-year and 5-to-10-year-forward TIPS-based inflation compensation declined, in part reflecting the below-expectations inflation data.
Broad U.S. equity price indexes increased. One-month-ahead option-implied volatility on the S&P 500 index--the VIX--was little changed, on net, and remained near the lower end of its historical range.
Conditions in short-term funding markets were stable over the intermeeting period. Yields on a broad set of money market instruments remained in the ranges observed since the FOMC increased the target range for the federal funds rate in March. Term OIS rates rose as expectations firmed for an increase in the federal funds rate target at this meeting.
Financing conditions for nonfinancial businesses continued to be accommodative. Commercial and industrial loans outstanding increased in April and May after being weak in the first quarter, although the growth of these loans remained well below the pace seen a year ago. Issuance of both corporate debt and equity was strong. Gross issuance of institutional leveraged loans was solid in April and May, although it receded from the near-record levels seen over the previous two months.
Commercial real estate (CRE) loans on banks' books grew robustly in April and May, with nonfarm nonresidential loans leading the expansion. However, recent CRE loan growth was a bit slower than that during the first quarter, in part reflecting a slowdown in lending for both construction and multifamily units. Issuance of commercial mortgage-backed securities (CMBS) through the first five months of this year was similar to the issuance over the same period a year earlier. While delinquency rates on CRE loans held by banks edged down further in the first quarter, the delinquency rates on loans in CMBS pools continued to increase. The rise in CMBS delinquency rates was mostly confined to loans that were originated during the period of weak underwriting before the financial crisis. The increase in those delinquencies had generally been expected by market participants and was not anticipated to have a material effect on credit availability or market conditions.
Residential mortgage rates declined slightly, in line with yields on longer-term Treasury and mortgage-backed securities, but remained elevated relative to the third quarter of 2016. Despite the higher level of mortgage rates, growth in mortgage lending for home purchases remained near the upper end of its recent range during the first quarter. Delinquency rates on residential mortgage loans continued to edge down amid robust house price growth and still-tight lending standards for households with low credit scores and hard-to-document incomes.
Financing conditions in consumer credit markets remained generally accommodative, although some indicators pointed to modest reductions in credit availability in recent months. Tighter conditions for credit card borrowing were especially apparent within the subprime segment, where there had been some further deterioration of credit performance. On a year-over-year basis, overall credit card balances continued to grow in April at a robust rate, although the pace had moderated a bit from that of 2016.
Growth in auto loans remained solid through the first quarter. Overall delinquency rates on auto loans continued to be relatively low, but the delinquency rate among subprime borrowers remained elevated, reflecting easier lending standards in 2015 and 2016. Recent evidence suggested that these lending standards had tightened; the credit rating of the average borrower had trended higher, and new extensions of subprime auto loans had declined.
Over the period since the May FOMC meeting, foreign financial markets were influenced by incoming economic data and by political developments both abroad and in the United States. Most AFE and EME equity indexes edged higher, supported by robust first-quarter earnings reports and generally positive data releases overseas. The broad U.S. dollar depreciated about 1-3/4 percent over the intermeeting period, weakening against both AFE and EME currencies. In particular, the dollar depreciated against the Canadian dollar following communications by the Bank of Canada suggesting that the removal of policy accommodation could occur sooner than previously expected by market participants. The dollar also depreciated against the euro, which was supported by the results of the French presidential election and by stronger-than-expected macroeconomic releases. Those data releases prompted the European Central Bank at its June 8 meeting to change its assessment of risks to the economic outlook from "tilted to the downside" to "balanced." U.S. developments, including mixed economic data reports, also weighed on the dollar. In contrast, the dollar strengthened against sterling following the U.K. parliamentary election. Changes in longer-dated AFE sovereign bond yields were mixed, while shorter-dated yields moved slightly higher. EME sovereign spreads were little changed, while flows into EME mutual funds remained robust. However, Brazilian sovereign spreads widened and the Brazilian real depreciated notably amid increased political uncertainty.
Staff Economic Outlook
In the U.S. economic projection prepared by the staff for the June FOMC meeting, real GDP growth was forecast to step up to a solid pace in the second quarter following its weak reading in the first quarter, primarily reflecting faster real PCE growth. On balance, the incoming data on aggregate spending were a little stronger than the staff had expected, and the forecast of real GDP growth for the current year was a bit higher than in the previous projection. Beyond this year, the projection for real GDP growth was essentially unchanged. The staff continued to project that real GDP would expand at a modestly faster pace than potential output in 2017 through 2019, supported in part by the staff's maintained assumption that fiscal policy would become more expansionary in the coming years. The unemployment rate was projected to decline gradually over the next couple of years and to continue running below the staff's estimate of its longer-run natural rate over this period.
The staff's forecast for consumer price inflation, as measured by the change in the PCE price index, was revised down slightly for 2017 because of the weaker-than-expected incoming data for inflation. However, the projection was little changed thereafter, as the recent weakness in inflation was viewed as transitory. Inflation was still expected to be somewhat higher this year than last year, largely reflecting an upturn in the prices for food and non-energy imports. The staff projected that inflation would increase further in the next couple of years, and that it would be close to the Committee's longer-run objective in 2018 and at 2 percent in 2019.
The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. Many financial market indicators of uncertainty were subdued, and the uncertainty associated with the foreign outlook appeared to have subsided further, on balance, since late last year; these developments were judged as counterweights to elevated measures of economic policy uncertainty. The staff saw the risks to the forecasts for real GDP and the unemployment rate as balanced; the staff's assessment was that the downside risks associated with monetary policy not being well positioned to respond to adverse shocks had diminished since its previous forecast. The risks to the projection for inflation also were seen as roughly balanced. The downside risks from the possibility that longer-term inflation expectations may have edged down or that the dollar could appreciate substantially were seen as essentially counterbalanced by the upside risk that inflation could increase more than expected in an economy that was projected to continue operating above its longer-run potential.
Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, members of the Board of Governors and Federal Reserve Bank presidents submitted their projections of the most likely outcomes for real output growth, the unemployment rate, and inflation for each year from 2017 through 2019 and over the longer run, based on their individual assessments of the appropriate path for the federal funds rate.4 The longer-run projections represented each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy.5 These projections and policy assessments are described in the Summary of Economic Projections (SEP), which is an addendum to these minutes.
In their discussion of the economic situation and the outlook, meeting participants agreed that the information received over the intermeeting period indicated that the labor market had continued to strengthen and that economic activity had been rising moderately, on average, so far this year. Job gains had moderated since the beginning of the year but had remained solid, on average, and the unemployment rate had declined. Household spending had picked up in recent months, and business fixed investment had continued to expand. Inflation measured on a 12-month basis had declined recently and, like the measure excluding food and energy prices, had been running somewhat below 2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed on balance.
Participants generally saw the incoming information on spending and labor market indicators as consistent, overall, with their expectations and indicated that their views of the outlook for economic growth and the labor market had changed only slightly since the May FOMC meeting. As anticipated, growth in consumer spending seemed to have bounced back from a weak first quarter, and participants continued to expect that, with further gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would strengthen somewhat further. In light of surprisingly low recent readings on inflation, participants expected that inflation on a 12-month basis would remain somewhat below 2 percent in the near term. However, participants judged that inflation would stabilize around the Committee's 2 percent objective over the medium term.
Growth in consumer spending appeared to be rebounding after slowing in the first quarter of this year. Participants generally continued to expect that ongoing job gains, rising household income and wealth, and improved household balance sheets would support moderate growth in household spending over the medium term. However, District contacts reported that automobile sales had slowed recently; some contacts expected sales to slow further, while others believed that sales were leveling out.
Participants generally agreed that business fixed investment had continued to expand in recent months, supported in particular by a rebound in the energy sector. District contacts suggested that an expansion in oil production capacity was likely to continue in the near term, though the longer-term outlook was more uncertain. Conditions in the manufacturing sector in several Districts were reportedly strong, but activity in a couple of them had slowed in recent months from a high level, and some contacts in the automobile industry reported declines in production that they expected to continue in the near term. District reports regarding the service sector were generally positive. In contrast, contacts in a couple of Districts indicated that conditions in the agricultural sector remained weak. Contacts in many Districts remained optimistic about business prospects, which were supported in part by improving global conditions. However, this optimism appeared to have recently abated somewhat, partly because contacts viewed the likelihood of significant fiscal stimulus as having diminished. Contacts at some large firms indicated that they had curtailed their capital spending, in part because of uncertainty about changes in fiscal and other government policies; some contacts at smaller firms, however, indicated that their capital spending plans had not been appreciably affected by news about government policy. Reports regarding housing construction from District contacts were mixed.
Labor market conditions continued to strengthen in recent months. The unemployment rate fell from 4.5 percent in March to 4.3 percent in May and was below levels that participants judged likely to be normal over the longer run. Monthly increases in nonfarm payrolls averaged 160,000 since the beginning of the year, down from 187,000 per month in 2016 but still well above estimates of the pace necessary to absorb new entrants in the labor force. A few participants interpreted this slowing in payroll growth as an expected development that reflected a tight labor market. Other labor market indicators, such as the number of job openings and broader measures of unemployment, were also seen as consistent with labor market conditions having strengthened in recent months. Moreover, contacts in several Districts reported shortages of workers in selected occupations and in some cases indicated that firms were significantly increasing salaries and benefits in order to attract or keep workers. However, other contacts reported only modest wage gains, and participants observed that measures of labor compensation for the overall economy continued to rise only moderately despite strengthening labor market conditions. A couple of participants saw the restrained increases in labor compensation as consistent with the low productivity growth and moderate inflation experienced in recent years. In light of the recent behavior of labor compensation and consumer prices as well as demographic trends, a number of participants lowered their estimate of the longer-run normal level of the unemployment rate.
Recent readings on headline and core PCE price inflation had come in lower than participants had expected. On a 12-month basis, headline PCE price inflation was running somewhat below the Committee's 2 percent objective in April, partly because of factors that appeared to be transitory. Core PCE price inflation--which historically has been a more useful predictor of future inflation, although it, too, can be affected by transitory factors--moved down from 1.8 percent in March to 1.5 percent in April. In addition, CPI inflation in May came in lower than expected. Most participants viewed the recent softness in these price data as largely reflecting idiosyncratic factors, including sharp declines in prices of wireless telephone services and prescription drugs, and expected these developments to have little bearing on inflation over the medium run. Participants continued to expect that, as the effects of transitory factors waned and labor market conditions strengthened further, inflation would stabilize around the Committee's 2 percent objective over the medium term. Several participants suggested that recent increases in import prices were consistent with this expectation. However, several participants expressed concern that progress toward the Committee's 2 percent longer-run inflation objective might have slowed and that the recent softness in inflation might persist. Such persistence might occur in part because upward pressure on inflation from resource utilization may be limited, as the relationship between these two variables appeared to be weaker than in previous decades. However, a couple of other participants raised the concern that a tighter relationship between inflation and resource utilization could reemerge if the unemployment rate ran significantly below its longer-run normal level, which could result in inflation running persistently above the Committee's 2 percent objective.
Overall, participants continued to see the near-term risks to the economic outlook as roughly balanced. Participants again noted the uncertainty regarding the possible enactment, timing, and nature of changes to fiscal and other government policies and saw both upside and downside risks to the economic outlook associated with such changes. A number of participants, pointing to improved prospects for foreign economic growth, viewed the downside risks to the U.S. economic outlook stemming from international developments as having receded further over the intermeeting period. With regard to the outlook for inflation, some participants emphasized downside risks, particularly in light of the recent low readings on inflation along with measures of inflation compensation and some survey measures of inflation expectations that were still low. However, a couple of participants expressed concern that a substantial undershooting of the longer-run normal rate of unemployment could pose an appreciable upside risk to inflation or give rise to macroeconomic or financial imbalances that eventually could lead to a significant economic downturn. Participants agreed that the Committee should continue to monitor inflation developments closely.
In their discussion of recent developments in financial markets, participants observed that, over the intermeeting period, equity prices rose, longer-term interest rates declined, and volatility in financial markets was generally low. They also noted that, according to some measures, financial conditions had eased even as the Committee reduced policy accommodation and market participants continued to expect further steps to tighten monetary policy. Participants discussed possible reasons why financial conditions had not tightened. Corporate earnings growth had been robust; nevertheless, in the assessment of a few participants, equity prices were high when judged against standard valuation measures. Longer-term Treasury yields had declined since earlier in the year and remained low. Participants offered various explanations for low bond yields, including the prospect of sluggish longer-term economic growth as well as the elevated level of the Federal Reserve's longer-term asset holdings. Some participants suggested that increased risk tolerance among investors might be contributing to elevated asset prices more broadly; a few participants expressed concern that subdued market volatility, coupled with a low equity premium, could lead to a buildup of risks to financial stability.
In their discussion of monetary policy, participants generally saw the outlook for economic activity and the medium-term outlook for inflation as little changed and viewed a continued gradual removal of monetary policy accommodation as being appropriate. Based on this assessment, almost all participants expressed the view that it would be appropriate for the Committee to raise the target range for the federal funds rate 25 basis points at this meeting. These participants agreed that, even after an increase in the target range for the federal funds rate at this meeting, the stance of monetary policy would remain accommodative, supporting additional strengthening in labor market conditions and a sustained return to 2 percent inflation. A few participants also judged that the case for a policy rate increase at this meeting was strengthened by the easing, by some measures, in overall financial conditions over the previous six months. One participant did not believe it was appropriate to raise the federal funds rate target range at this meeting; this participant suggested that the Committee should maintain the target range for the federal funds rate at 3/4 to 1 percent until the inflation rate was actually moving toward the Committee's 2 percent longer-run objective.
Participants noted that, with the process of normalization of the level of the federal funds rate continuing, it would likely become appropriate this year for the Committee to announce and implement a specific timetable for its program of reducing reinvestment of the Federal Reserve's securities holdings. It was observed that the ensuing reduction in securities holdings would be gradual and would follow an extended period of Committee communications on balance sheet normalization policy, including the information that would be released at the conclusion of this meeting. Consequently, the effect on financial market conditions of the eventual announcement of the beginning of the Federal Reserve's balance sheet normalization was expected to be limited.
Participants expressed a range of views about the appropriate timing of a change in reinvestment policy. Several preferred to announce a start to the process within a couple of months; in support of this approach, it was noted that the Committee's communications had helped prepare the public for such a step. However, some others emphasized that deferring the decision until later in the year would permit additional time to assess the outlook for economic activity and inflation. A few of these participants also suggested that a near-term change to reinvestment policy could be misinterpreted as signifying that the Committee had shifted toward a less gradual approach to overall policy normalization.
Several participants indicated that the reduction in policy accommodation arising from the commencement of balance sheet normalization was one basis for believing that, if economic conditions evolved broadly as anticipated, the target range for the federal funds rate would follow a less steep path than it otherwise would. However, some other participants suggested that they did not see the balance sheet normalization program as a factor likely to figure heavily in decisions about the target range for the federal funds rate. A few of these participants judged that the degree of additional policy firming that would result from the balance sheet normalization program was modest.
Participants generally reiterated their support for continuing a gradual approach to raising the federal funds rate. Several participants expressed confidence that a series of further increases in the federal funds rate in coming years, along the lines implied by the medians of the projections for the federal funds rate in the June SEP, would contribute to a stabilization, over the medium term, of the inflation rate around the Committee's 2 percent objective, especially as this tightening of monetary policy would affect the economy only with a lag and would start from a point at which policy was still accommodative. However, a few participants who supported an increase in the target range at the present meeting indicated that they were less comfortable with the degree of additional policy tightening through the end of 2018 implied by the June SEP median federal funds rate projections. These participants expressed concern that such a path of increases in the policy rate, while gradual, might prove inconsistent with a sustained return of inflation to 2 percent.
Several participants endorsed a policy approach, such as that embedded in many participants' projections, in which the unemployment rate would undershoot their current estimates of the longer-term normal rate for a sustained period. They noted that the longer-run normal rate of unemployment is difficult to measure and that recent evidence suggested resource pressures generated only modest responses of nominal wage growth and inflation. Against this backdrop, possible benefits cited by policymakers of a period of tight labor markets included a further rise in nominal wage growth that would bolster inflation expectations and help push the inflation rate closer to the Committee's 2 percent longer-run goal, as well as a stimulus to labor market participation and business fixed investment. It was also suggested that the symmetry of the Committee's inflation goal might be underscored if inflation modestly exceeded 2 percent for a time, as such an outcome would follow a long period in which inflation had undershot the 2 percent longer-term objective. Several participants expressed concern that a substantial and sustained unemployment undershooting might make the economy more likely to experience financial instability or could lead to a sharp rise in inflation that would require a rapid policy tightening that, in turn, could raise the risk of an economic downturn. However, other participants noted that if a sharp rise in inflation or inflation expectations did occur, the Committee could readily respond using conventional monetary policy tools. With regard to financial stability, one participant emphasized the importance of remaining vigilant about financial developments but observed that previous episodes of elevated financial imbalances and low unemployment had limited relevance for the present situation, as the current system of financial regulation was likely more robust than that prevailing before the financial crisis.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the Federal Open Market Committee met in May indicated that the labor market had continued to strengthen and that economic activity had been rising moderately so far this year. Job gains had moderated but had been solid, on average, since the beginning of the year, and the unemployment rate had declined. Household spending had picked up in recent months, and business fixed investment had continued to expand.
Inflation on a 12-month basis had declined recently and was running somewhat below 2 percent. The measure of inflation excluding food and energy prices was likewise running somewhat below 2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations had changed little on balance.
With respect to the economic outlook and its implications for monetary policy, members continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace, and labor market conditions would strengthen somewhat further. Inflation on a 12-month basis was expected to remain somewhat below 2 percent in the near term, but almost all members expected it to stabilize around 2 percent over the medium term, although they were monitoring inflation developments closely. Members continued to judge that there was significant uncertainty about the effects of possible changes in fiscal and other government policies but that near-term risks to the economic outlook appeared roughly balanced, especially as risks related to foreign economic and financial developments had diminished.
After assessing current conditions and the outlook for economic activity, the labor market, and inflation, all but one member agreed to raise the target range for the federal funds rate to 1 to 1-1/4 percent. They noted that the stance of monetary policy remained accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
Members agreed that, in determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee would assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Members also agreed that they would carefully monitor actual and expected developments in inflation in relation to the Committee's symmetric inflation goal. They expected that economic conditions would evolve in a manner that would warrant gradual increases in the federal funds rate, and they agreed that the federal funds rate was likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate would depend on the economic outlook as informed by incoming data.
The Committee also decided to maintain its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee expected to begin implementing a balance sheet normalization program in 2017, provided that the economy evolves broadly as anticipated. This program, which would gradually reduce the Federal Reserve's securities holdings by decreasing reinvestment of principal payments from those securities, was described in an addendum to the Committee's Policy Normalization Principles and Plans to be released after this meeting.
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 SOMA in accordance with the following domestic policy directive, to be released at 2:00 p.m.:
"Effective June 15, 2017, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1 to 1-1/4 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.00 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."
The vote also encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending has picked up in recent months, and business fixed investment has continued to expand. On a 12-month basis, inflation has declined recently and, like the measure excluding food and energy prices, is running somewhat below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated. This program, which would gradually reduce the Federal Reserve's securities holdings by decreasing reinvestment of principal payments from those securities, is described in the accompanying addendum to the Committee's Policy Normalization Principles and Plans."
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Charles L. Evans, Stanley Fischer, Patrick Harker, Robert S. Kaplan, and Jerome H. Powell.
Voting against this action: Neel Kashkari.
Mr. Kashkari dissented because he preferred to maintain the existing target range for the federal funds rate at this meeting. In his view, recent data, while suggesting that the labor market had improved further, had increased doubts about achievement of the Committee's 2 percent longer-run inflation objective and thus had not provided a compelling basis on which to firm monetary policy at this meeting. He preferred to await additional evidence that the recent decline in inflation was temporary and that inflation was moving toward the Committee's symmetric 2 percent inflation objective. He was concerned that raising the federal funds rate target range too soon increased the likelihood that inflation expectations would decline and that inflation would continue to run below 2 percent.
To support the Committee's decision to raise the target range for the federal funds rate, the Board of Governors voted unanimously to raise the interest rates on required and excess reserve balances 1/4 percentage point, to 1-1/4 percent, effective June 15, 2017. The Board of Governors also voted unanimously to approve a 1/4 percentage point increase in the primary credit rate (discount rate) to 1-3/4 percent, effective June 15, 2017.6
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, July 25-26, 2017. The meeting adjourned at 10:35 a.m. on June 14, 2017.
Notation Vote
By notation vote completed on May 23, 2017, the Committee unanimously approved the minutes of the Committee meeting held on May 2-3, 2017.
_____________________________
Brian F. Madigan
Secretary
1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes. Return to text
2. Attended through the discussion of System Open Market Account reinvestment policy. Return to text
3. Attended through the staff report on the economic and financial situation. Return to text
4. Four members of the Board of Governors, one fewer than in March 2017, were in office at the time of the June 2017 meeting and submitted economic projections. The office of the president of the Federal Reserve Bank of Richmond was vacant at the time of this FOMC meeting; First Vice President Mark L. Mullinix submitted economic projections. Return to text
5. One participant did not submit longer-run projections for real output growth, the unemployment rate, or the federal funds rate. Return to text
6. In taking this action, the Board approved requests submitted by the boards of directors of the Federal Reserve Banks of Boston, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Kansas City, Dallas, and San Francisco. This vote also encompassed approval by the Board of Governors of the establishment of a 1-3/4 percent primary credit rate by the remaining Federal Reserve Banks, effective on the later of June 15, 2017, and the date such Reserve Banks informed the Secretary of the Board of such a request. (Secretary's note: Subsequently, the Federal Reserve Banks of New York, St. Louis, and Minneapolis were informed by the Secretary of the Board of the Board's approval of their establishment of a primary credit rate of 1-3/4 percent, effective June 15, 2017.) The second vote of the Board also encompassed approval of the establishment of the interest rates for secondary and seasonal credit under the existing formulas for computing such rates. Return to text |
2017-05-03T00:00:00 | 2017-05-24 | Minute | Minutes of the Federal Open Market Committee
May 2-3, 2017
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, May 2, 2017, at 1:00 p.m. and continued on Wednesday, May 3, 2017, at 9:00 a.m.1
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
Charles L. Evans
Stanley Fischer
Patrick Harker
Robert S. Kaplan
Neel Kashkari
Jerome H. Powell
Marie Gooding, Loretta J. Mester, Mark L. Mullinix, Michael Strine, and John C. Williams, Alternate Members of the Federal Open Market Committee
James Bullard, Esther L. George, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively
Brian F. Madigan, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Michael Held,2 Deputy General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
James A. Clouse, Thomas A. Connors, Michael Dotsey, Evan F. Koenig, Daniel G. Sullivan, William Wascher, and Beth Anne Wilson, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Ann E. Misback, Secretary, Office of the Secretary, Board of Governors
Matthew J. Eichner,3 Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors; Michael S. Gibson, Director, Division of Supervision and Regulation, Board of Governors; Andreas Lehnert, Director, Division of Financial Stability, Board of Governors
Stephen A. Meyer, Deputy Director, Division of Monetary Affairs, Board of Governors
Trevor A. Reeve, Senior Special Adviser to the Chair, Office of Board Members, Board of Governors
Joseph W. Gruber, David Reifschneider, and John M. Roberts, Special Advisers to the Board, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Christopher J. Erceg, Senior Associate Director, Division of International Finance, Board of Governors; Diana Hancock and David E. Lebow, Senior Associate Directors, Division of Research and Statistics, Board of Governors; Gretchen C. Weinbach, Senior Associate Director, Division of Monetary Affairs, Board of Governors
Antulio N. Bomfim, Ellen E. Meade, Edward Nelson, and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors
Rochelle M. Edge, Associate Director, Division of Financial Stability, Board of Governors; Jane E. Ihrig4 and David López-Salido, Associate Directors, Division of Monetary Affairs, Board of Governors; John J. Stevens, Associate Director, Division of Research and Statistics, Board of Governors
Glenn Follette, Assistant Director, Division of Research and Statistics, Board of Governors
Patrick E. McCabe, Adviser, Division of Research and Statistics, Board of Governors
Penelope A. Beattie,2 Assistant to the Secretary, Office of the Secretary, Board of Governors
Dana L. Burnett, Michele Cavallo,5 and Dan Li, Section Chiefs, Division of Monetary Affairs, Board of Governors
Benjamin K. Johannsen, Senior Economist, Division of Monetary Affairs, Board of Governors
Arsenios Skaperdas,5 Economist, Division of Monetary Affairs, Board of Governors
Ellen J. Bromagen, First Vice President, Federal Reserve Bank of Chicago
David Altig, Kartik B. Athreya, Geoffrey Tootell, and Christopher J. Waller, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Richmond, Boston, and St. Louis, respectively
Troy Davig, Julie Ann Remache,4 and Nathaniel Wuerffel,5 Senior Vice Presidents, Federal Reserve Banks of Kansas City, New York, and New York, respectively
Todd E. Clark, Terry Fitzgerald, and Òscar Jordà, Vice Presidents, Federal Reserve Banks of Cleveland, Minneapolis, and San Francisco, respectively
Rania Perry,5 Assistant Vice President, Federal Reserve Bank of New York
David Lucca, Research Officer, Federal Reserve Bank of New York
Developments in Financial Markets and Open Market Operations
The manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets over the period since the March FOMC meeting. Yields on U.S. Treasury securities declined, and the broad index of the foreign exchange value of the dollar fell modestly. These changes reportedly reflected revisions to investors' expectations for fiscal and other economic policies; some increase in geopolitical tensions; economic and inflation indicators that, on balance, were weaker than anticipated; and monetary policy communications. In response to political developments abroad, spreads on some European sovereign debt securities narrowed noticeably. Measures of implied volatility in equity markets declined, on net, to levels that were historically very low. Market pricing and survey evidence indicated that investors anticipated no change in the target range for the federal funds rate at this meeting but saw a substantial probability of an increase at the June FOMC meeting; market expectations for the path of the federal funds rate further ahead fell somewhat. Federal funds continued to trade well within the FOMC's target range. Reinvestment of principal payments from Treasury and mortgage-backed securities held in the SOMA proceeded smoothly. The manager updated the Committee on various small-value tests of System operations.
The manager also briefed the Committee on developments regarding certain reference interest rates. Changes in the practices of some domestic and foreign banks for booking certain types of liabilities, as well as the effects of recent changes in the regulation of money market funds, had resulted in a reduction in the volume of Eurodollar transactions reported on the Federal Reserve's Report of Selected Money Market Rates (FR 2420). The staff was in the process of analyzing possible revisions to the report that would guard against a further erosion of reported transactions and support the robustness of the overnight bank funding rate calculated by the Federal Reserve Bank of New York. Such revisions might be implemented in conjunction with the periodic renewal of authorization for the report, which is expected to be completed by the third quarter of 2018. The manager also noted that aspects of plans to publish reference interest rates for market repurchase agreements (repos) were being modified to incorporate a newly available source of data on cleared bilateral repo transactions; the modifications were expected to extend the time frame for publication of the new rates by several months.
The Committee voted unanimously to renew the reciprocal currency arrangements with the Bank of Canada and the Bank of Mexico; these arrangements are associated with the Federal Reserve's participation in the North American Framework Agreement of 1994. In addition, the Committee voted unanimously to renew the dollar and foreign currency liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank. The votes to renew the Federal Reserve's participation in these standing arrangements are taken annually at the April or May FOMC meeting.
By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account during the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the May 2-3 meeting indicated that the labor market strengthened further in March but that growth of real gross domestic product (GDP) slowed in the first quarter, with the slowing likely reflecting transitory factors. The 12-month change in overall consumer prices was close to the Committee's longer-run objective of 2 percent in recent months; excluding food and energy, consumer prices declined in March, and the 12-month change in core consumer prices remained somewhat below 2 percent. Survey-based measures of inflation expectations were little changed on balance.
Total nonfarm payroll employment rose in March, but the gain was smaller than in recent months, likely reflecting both warmer-than-usual temperatures in February that probably caused some hiring to be moved forward and a major winter storm in the Northeast in March that probably held down hiring somewhat; nevertheless, the increase in employment for the first quarter as a whole was solid. The unemployment rate decreased to 4.5 percent in March, and the labor force participation rate was unchanged. The share of workers employed part time for economic reasons declined. The rates of private- sector job openings, hiring, and quits were all little changed in January and February. The four-week moving average of initial claims for unemployment insurance benefits remained at a very low level through mid-April. Measures of labor compensation accelerated modestly. The employment cost index for private workers increased 2-1/4 percent over the 12 months ending in March, and average hourly earnings for all employees increased 2-3/4 percent over the same period; both increases were somewhat larger than those over the 12 months ending in March 2016.
The average unemployment rate for whites in the first quarter of this year was 1/2 percentage point lower than its annual average for 2015, while the unemployment rates for Hispanics and for African Americans were about 1 percentage point and 1-3/4 percentage points lower, respectively. The larger improvements in the rates for Hispanics and for African Americans mirrored the larger increases in those rates during the most recent recession. As of the first quarter, the unemployment rates for African Americans and for Hispanics remained above the rate for whites both overall and for people with similar educational backgrounds. Unemployment rates for Asians remained below those for whites.
Total industrial production rose in February and March, primarily reflecting a further expansion of mining output as well as a net increase in the output of utilities. Manufacturing production declined in March after advancing in each of the previous six months; about half of the decline in March was due to a decrease in the output of motor vehicles and parts. Automakers' assembly schedules suggested that motor vehicle production would increase in the second quarter despite somewhat elevated levels of vehicle inventories. Broader indicators of manufacturing production, such as the new orders indexes from national and regional manufacturing surveys, pointed to modest gains in factory output over the near term.
Real personal consumption expenditures (PCE) rose only modestly in the first quarter, although monthly data indicated some improvement late in the quarter. Indeed, after declining in January and February, real PCE increased in March, partly reflecting a rebound in spending on energy services, which had been held down by unseasonably warm weather through February, as well as an increase in outlays for a variety of consumer goods. Motor vehicle sales picked up in April after declining in March, although sales remained somewhat below their average pace in the first quarter and noticeably below the high levels seen in the fourth quarter. Recent readings on key factors that influence consumer spending pointed to solid growth in real PCE in coming quarters, including further gains in employment, real disposable personal income, and households' net worth. Moreover, consumer sentiment, as measured by the University of Michigan Surveys of Consumers, remained upbeat in March and April.
Residential investment increased at a brisk pace in the first quarter. Starts for both new single-family homes and multifamily units moved up, and issuance of building permits for new single-family homes--which tends to be a reliable indicator of the underlying trend in residential construction--also rose. Sales of both new and existing homes in the first quarter were above their levels in the previous quarter.
Real private expenditures for business equipment and intellectual property increased at a solid pace in the first quarter after a moderate gain in the fourth quarter. Nominal shipments and new orders of nondefense capital goods excluding aircraft both rose over the three months ending in March, and the level of new orders remained higher than that of shipments, pointing to further near-term gains in shipments. In addition, indicators of business sentiment were upbeat in recent months. Real business expenditures for nonresidential structures increased briskly in the first quarter, and the number of oil and gas rigs in operation, an indicator of spending for structures in the drilling and mining sector, continued to rise through mid-April. Business inventory investment slowed sharply last quarter and held down real GDP growth significantly.
Real federal purchases declined in the first quarter, as defense expenditures decreased and nondefense spending rose at a slower pace than in the final quarter of 2016. Real state and local government purchases also declined in the first quarter, with a sharp decrease in real construction spending by these governments more than offsetting a modest expansion in state and local government payrolls.
The U.S. international trade deficit narrowed in February. Exports rose and imports fell sharply, with imports of automotive products and consumer goods declining after robust increases in January. Preliminary data on trade in goods suggested that the trade deficit was about unchanged in March. The Bureau of Economic Analysis estimated that real net exports added slightly to growth of real GDP in the first quarter.
Total U.S. consumer prices, as measured by the PCE price index, increased 1-3/4 percent over the 12 months ending in March. Core PCE price inflation, which excludes changes in food and energy prices, was about 1-1/2 percent over those same 12 months. Over the 12 months ending in March, total consumer prices as measured by the consumer price index (CPI) rose 2-1/2 percent, while core CPI inflation was 2 percent. On a month-over-month basis, both the PCE price index and the CPI decreased in March, partly reflecting declines in some categories of prices that appeared unlikely to be repeated. The median of longer-run inflation expectations from the Michigan survey edged down a bit, on balance, in recent months, while the medians from the Desk's Survey of Primary Dealers and Survey of Market Participants were little changed.
Foreign real GDP growth appeared to have strengthened in the first quarter after slowing somewhat in the fourth quarter. In the advanced foreign economies (AFEs), indicators for the first quarter pointed to faster economic growth in Canada and solid growth in the euro area and Japan. By contrast, real GDP growth in the United Kingdom slowed significantly. More recent indicators were consistent with moderate economic growth in most AFEs. In the emerging market economies (EMEs), growth picked up in China and some Asian economies in the first quarter but slowed moderately in Mexico. Recent data also suggested that economic activity improved in parts of South America, most notably in Brazil where positive growth likely resumed in the first quarter. Inflation in the AFEs continued to rise, largely because of the pass-through of earlier increases in crude oil prices into retail energy prices. In the EMEs, inflation fell in China in the first quarter, reflecting a sharp drop in food prices, but was pushed up in Mexico by fuel price hikes and pass-through from past currency depreciation.
Staff Review of the Financial Situation
Domestic financial market conditions remained generally accommodative over the intermeeting period. Prices of risky assets increased a bit on net, Treasury yields declined, and the dollar depreciated. The decline in Treasury yields reportedly was driven in part by investor expectations of a somewhat slower pace of policy rate increases following FOMC communications after the March meeting and some waning of investor optimism about prospects for more expansionary fiscal policies.
FOMC communications over the intermeeting period reportedly were interpreted as indicating a somewhat slower pace of policy rate increases than previously expected but an earlier change to the Committee's reinvestment policy. Although the Committee's decision to raise the target range for the federal funds rate at the March meeting was widely anticipated, some of the accompanying communications were viewed as more accommodative than expected. Investors reportedly also took note of the discussion in the March FOMC minutes of the Committee's reinvestment policy as well as statements from some FOMC participants and appeared to pull forward their expectations for when the FOMC will either announce or start to implement a change to that policy. Overall, however, the market reaction to news related to potential changes in reinvestment policy appeared to be fairly limited. Quotes on overnight index swap (OIS) rates pointed to a flattening of the expected path of the federal funds rate through 2020, but a staff model suggested that a reduction in term premiums accounted for about half the decline in OIS rates.
Yields on intermediate- and longer-term nominal Treasury securities decreased 20 to 35 basis points over the intermeeting period. Investors' interpretations of FOMC communications, market perceptions of a reduced likelihood of domestic fiscal and regulatory policy changes, weaker-than-expected domestic economic data releases, and geopolitical factors and foreign political developments all reportedly placed downward pressure on yields. A staff term structure model attributed about one-third of the decline in the 10-year Treasury yield to a decrease in the average expected future short-term rate and the remaining two-thirds to a lower term premium. While inflation compensation based on Treasury Inflation-Protected Securities decreased at near-term horizons, partly reflecting the lower-than-expected March CPI release, far-term inflation compensation was little changed on net.
Broad U.S. equity price indexes increased slightly, on net, since the March FOMC meeting. One-month-ahead option-implied volatility on the S&P 500 index--the VIX--rose appreciably in mid-April, reflecting in part increased investor concerns about geopolitical factors and foreign political developments, but ended the period slightly lower, as investor concerns appeared to ease after the first round of the French presidential election. Over the intermeeting period, spreads of yields on investment- and speculative-grade nonfinancial corporate bonds over comparable-maturity Treasury securities narrowed a bit on net. Private-sector analysts continued to project robust profit growth for S&P 500 firms over 2017 even as first-quarter earnings, on a seasonally adjusted basis, were estimated to be a bit lower than in the fourth quarter.
Conditions in short-term funding markets were stable over the intermeeting period. Reflecting the FOMC's policy action in March, yields on a broad set of money market instruments moved higher. Treasury bills outstanding, which had declined before the reimposition âof the federal debt ceiling on March 15, moved higher thereafter, partly in connection with the Treasury's steps to rebuild its cash balance. Take-up at the System's overnight reverse repurchase agreement facility, which had risen ahead of the debt ceiling date, remained high through March and then fell to relatively low levels after quarter-end.
Financing conditions for large nonfinancial firms stayed accommodative. Gross issuance of corporate bonds and leveraged loans remained strong in March, with a large share of lower-rated debt issued for refinancing purposes. Net debt financing by nonfinancial businesses increased in the first quarter but remained noticeably below the pace of the same time last year. According to the April Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), a modest share of domestic banks reported weaker demand for commercial and industrial (C&I) loans, on net, in the first quarter, mainly citing several factors that pertained to customers' reduced needs for financing. C&I lending continued to be soft early in the second quarter.
Financing conditions for commercial real estate (CRE) were broadly unchanged on net. Spreads on commercial mortgage-backed securities (CMBS) widened slightly over the period since the March FOMC meeting but remained near the lower end of the range seen since the financial crisis. CMBS issuance picked up in March, reportedly reflecting a return to a more normal pace after the adoption of a credit risk retention rule in late December caused some issuance to be shifted from January and February into the fourth quarter. Growth of CRE loans on banks' books slowed in the first quarter but continued to be robust overall. Domestic respondents to the April SLOOS generally reported tightening their lending standards and experiencing weaker loan demand across all major CRE loan categories during the first quarter.
Financing conditions in the residential mortgage market were little changed over the intermeeting period. Credit availability continued to be relatively tight for households with low credit scores or harder-to-document incomes but relatively accommodative for other households. Mortgage rates declined in line with yields on longer-term Treasury securities and mortgage-backed securities, but they remained elevated compared with the very low levels of the third quarter of 2016. Consistent with these developments, refinance originations slowed considerably since the third quarter. In the April SLOOS, banks reported roughly unchanged standards on residential real estate (RRE) loans on average. Banks also reported that demand for some categories of RRE loans weakened during the first quarter, including those insured or guaranteed by government agencies. In line with lower reported demand, growth in RRE loans on banks' balance sheets declined.
Financing conditions in consumer credit markets remained accommodative, on balance, in early 2017. Consumer credit appeared to be broadly available even as interest rates charged on credit card balances and new auto loans drifted up in line with their benchmark shorter-term interest rates. Growth in consumer loan balances moderated a bit further from the relatively strong pace seen during the past few years, although year-over-year growth in credit card balances, student loans, and auto loans stayed in the 6 to 7 percent range through February. In the April SLOOS, banks reported tightening standards on auto loans and easing standards on credit card loans; banks also reported facing weaker demand for both auto and credit card loans.
Over the intermeeting period, movements in foreign financial markets were driven by central bank communications in the United States and abroad, geopolitical risks, and changes in investors' perceptions about future U.S. fiscal and other government policies. Concerns about the outcome of the French presidential election and tensions in the Korean peninsula pushed down 10âyear sovereign yields in the advanced economies for several weeks. Sentiment improved following the outcome of the first round of the French presidential election on April 23, which led to a partial retracement in yields. At their meetings on April 27, the European Central Bank and the Bank of Japan each left their policy stance unchanged. On net, foreign yields declined somewhat less than U.S. yields, contributing to a modest depreciation of the dollar against both the AFE and EME currencies. Equity indexes in most advanced and emerging economies rose. Flows to emerging market mutual funds remained strong, and spreads on emerging market debt were little changed.
The staff provided its latest report on the potential risks to financial stability; it continued to characterize the financial vulnerabilities of the U.S. financial system as moderate on balance. This overall assessment reflected the staff's judgment that leverage as well as vulnerabilities from maturity and liquidity transformation in the financial sector were low, that leverage in the nonfinancial sector was moderate, and that asset valuation pressures in some markets were notable. Although these assessments were unchanged from January's assessment, vulnerabilities appeared to have increased for asset valuation pressures, though not by enough to warrant raising the assessment of these vulnerabilities to elevated.
Staff Economic Outlook
In the U.S. economic forecast prepared by the staff for the May FOMC meeting, real GDP growth was projected to bounce back in the second quarter from its weak first-quarter reading. The staff judged that the weakness in first-quarter real GDP was probably not attributable to residual seasonality and that it instead reflected transitorily soft consumer expenditures and inventory investment. Importantly, PCE growth was expected to pick up to a stronger pace in the spring, which would be more consistent with ongoing gains in employment, real disposable personal income, and households' net worth. In addition, the sharp decrease in the contribution to GDP growth from the change in inventory investment in the first quarter was not expected to be repeated. Beyond the near term, the forecast for real GDP growth was a little stronger, on net, than in the previous projection, mostly due to the effect of a somewhat lower assumed path for the exchange value of the dollar. The staff continued to project that real GDP would expand at a modestly faster pace than potential output in 2017 through 2019, supported in part by the staff's maintained assumption that fiscal policy would become more expansionary in the coming years. The unemployment rate was projected to decline gradually over the next couple of years and to run somewhat below the staff's estimate of its longer-run natural rate over this period; the staff's estimate of the natural rate was revised down slightly in this forecast.
The staff's forecast for consumer price inflation, as measured by changes in the PCE price index, was revised down marginally for 2017 as a whole after incorporating the soft data on consumer prices for March, but it was essentially unrevised thereafter. Inflation was still expected to be somewhat higher this year than last year, reflecting an upturn in the prices for food and non-energy imports as well as a slightly faster increase in energy prices. The staff continued to project that inflation would increase gradually in 2018 and 2019 and that it would be marginally below the Committee's longer-run objective of 2 percent in 2019.
The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The risks to the forecast for real GDP were seen as tilted to the downside, primarily reflecting the staff's assessment that monetary policy appeared to be better positioned to respond to large positive shocks to the economic outlook than to substantial adverse ones. However, the staff viewed the risks to the forecast as less pronounced than late last year, with both somewhat diminished risks to the foreign outlook and an increase in U.S. consumer and business confidence. Consistent with the downside risks to aggregate demand, the staff viewed the risks to its outlook for the unemployment rate as tilted to the upside. The risks to the projection for inflation were judged to be roughly balanced. The downside risks from the possibility that longer-term inflation expectations may have edged down or that the dollar could appreciate substantially were seen as roughly counterbalanced by the upside risk that inflation could increase more than expected in an economy that was projected to continue operating above its longer-run potential.
Participants' Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants agreed that the information received over the intermeeting period indicated that the labor market had continued to strengthen even as growth in economic activity slowed in the first quarter. Job gains remained solid, on average, in recent months, and the unemployment rate declined. Household spending rose only modestly, but the fundamentals underpinning the continued growth of consumption remained solid. Business fixed investment firmed in the first quarter after increasing only slowly over the previous two years. Inflation measured on a 12-month basis recently had been running close to the Committee's 2 percent longer-run objective; consumer prices, both including and excluding prices of energy and food items, declined in March, and core inflation continued to run somewhat below 2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed on balance.
Although the incoming data showed that aggregate spending in the first quarter had been weaker than participants had expected, they viewed the slowing as likely to be transitory. They continued to expect that, with further gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace, labor market conditions would strengthen somewhat further, and inflation would stabilize around 2 percent over the medium term.
Participants generally indicated that their assessments of the medium-term economic outlook had changed little since the March meeting, and they discussed various reasons why the softness in consumer spending in the first quarter was likely to be transitory. Some participants judged that the low reading on GDP growth also could partly reflect residual seasonality and so would likely be followed by stronger GDP growth in subsequent quarters, repeating a pattern evidenced in recent years. A few emphasized the uncertainty with regard to the reasons for the unexpected weakness in consumer spending but considered it too early to judge the implications for the outlook. Many pointed to the recent firming of the housing market and business fixed investment as welcome developments.
Overall, participants continued to see the near-term risks to the economic outlook as roughly balanced. Many participants saw the risks stemming from global economic and financial developments as having receded further over the intermeeting period. They pointed to the encouraging tone of recent data on economic growth abroad, which suggested some upside risks to foreign economic activity. However, several noted that downside risks to the global outlook remained, either because of geopolitical developments and foreign political factors or because monetary policy normalization in the United States could lead to financial strains in EMEs. Many participants continued to view the possibility of expansionary fiscal policy changes in the United States as posing upside risks to their forecasts for U.S. economic growth, although they also noted that prospects for enactment of a more expansionary fiscal program, as well as its size, composition, and timing, remained highly uncertain. Regarding the outlook for inflation, a couple of participants expressed concern that a substantial undershooting of the longer-run normal rate of unemployment could pose an appreciable upside risk to inflation. However, several others continued to see downside risks to the inflation outlook, particularly given the low readings on inflation over the intermeeting period and the still-low measures of inflation compensation and inflation expectations. Participants agreed that the Committee should continue to closely monitor inflation indicators and global economic and financial developments.
While recent data suggested a significant slowdown of growth in consumption spending early in the year, participants expected to see a rebound in consumer spending in coming months in light of the solid fundamentals underpinning household spending, including ongoing job gains, rising household income and wealth, improved household balance sheets, and buoyant consumer sentiment. It was noted that much of the recent slowing likely reflected transitory factors, such as low consumer spending for energy services induced by an unusually mild winter and a decline in motor vehicle sales from an unsustainably high fourth-quarter pace. Nevertheless, contacts expected that demand for motor vehicles would be well maintained. District reports on the service sector were generally positive, although one District's contacts in the tourism industry reported a falloff in international visitors. One participant noted that retail contacts reported upbeat projections for online sales and associated package delivery services, in part reflecting structural shifts in the retail industry.
Several participants discussed the pickup in residential investment in the first quarter. Starts and permits for single-family housing continued to post moderate increases, while sales of new homes rose strongly from their level in the fourth quarter of 2016. Business contacts in some Districts reported that residential construction activity had not kept pace with demand, resulting in shortages in housing supply and upward pressure on prices.
Business fixed investment increased at a solid pace in the first quarter, led by a rebound in drilling for oil and natural gas. Several participants noted that rising orders for capital goods suggested further gains in business equipment investment over coming quarters. Business contacts reported increases in activity in the manufacturing and energy sectors. Contacts in many Districts were said to be generally optimistic about business prospects. Several participants noted that surveys of business conditions in their Districts continued to indicate expanding activity. A few participants commented that firms engaged in international trade were benefiting from improvements in global demand conditions. Several participants reported that firms in their Districts planned to increase capital expenditures, although in another District, uncertainty about changes in trade and regulatory policies was said to be weighing on capital spending. Conditions in the agricultural sector remained weak, partly as a result of low commodity prices.
Labor market conditions strengthened further in recent months. At 4.5 percent, the unemployment rate had reached or fallen below levels that participants judged likely to be normal over the longer run. Increases in nonfarm payroll employment averaged almost 180,000 per month during the first quarter, a pace that, if maintained, would be expected to result in further increases in labor utilization over time. Labor market conditions in many Districts were reported to have continued to improve. Contacts in several Districts reported a pickup in wage increases, shortages of workers in selected occupations, or pressures to train workers for hard-to-fill jobs. Even so, several other participants suggested some margins may remain along which labor market utilization could increase further without giving rise to inflationary pressures. In that regard, they noted that the recent rise in the labor force participation rate in the face of a downward trend from demographic factors was a positive development. However, a couple of participants pointed out that uncertainty about both the longer-run normal rate of unemployment and labor force trends made it difficult to assess the scope for additional sustainable increases in labor utilization. Generally, participants continued to expect that if economic growth stayed moderate, as they projected, the unemployment rate would remain, for the next few years, below their estimates of its longer-run normal level. A few participants continued to anticipate a substantial undershooting of the longer-run normal level of the unemployment rate.
Readings on headline and core PCE price inflation in March had come in lower than expected. On a 12âmonth basis, headline PCE price inflation had edged above the Committee's 2 percent objective in February, but this measure dropped back to 1.8 percent in March, in part reflecting the effects of lower energy prices on the headline index. Core PCE price inflation, which historically has been a good predictor of future headline inflation, moved down to 1.6 percent over the 12 months ending in March. However, it was noted that some of this slowing reflected idiosyncratic factors such as a large drop in the measure of quality-adjusted prices for wireless telephone services. Several participants emphasized that inflation measured on a 12-month basis had been running very close to the Committee's 2 percent target. Overall, most participants viewed the recent softer inflation data as primarily reflecting transitory factors, but a few expressed concern that progress toward the Committee's objective may have slowed. Market-based measures of longer-term inflation compensation remained low, with five-year, five-year-forward CPI inflation compensation a bit below 2 percent--unchanged from the time of the March FOMC meeting but somewhat above levels registered last year. In addition, the median measure of inflation expectations over the next 5 to 10 years in the Michigan survey edged down from 2.5 percent in February to 2.4 percent in March and April. The three-year-ahead measure of inflation expectations from the Federal Reserve Bank of New York's Survey of Consumer Expectations decreased from 3.0 percent to 2.7 percent in March and rose to 2.9 percent in April.
In light of these developments, participants generally continued to expect that inflation would stabilize around the Committee's 2 percent objective over the medium run as the effects of transitory factors waned and conditions in the labor market and the overall economy improved further. Participants noted that import prices had begun to increase, supporting their expectation that inflation would gradually rise. A few participants, however, expressed uncertainty about the reasons for the recent unexpected weakness in inflation measures and about its implications for the inflation outlook.
In their discussion of recent developments in financial markets, some participants commented on changes in financial conditions in the wake of the Committee's decision to increase the target range for the federal funds rate in March. They noted variously that the decline in longer-term interest rates and the modest depreciation of the dollar over the intermeeting period would provide some stimulus to aggregate demand, that the Committee's recent policy actions had not resulted in a tightening of financial conditions, or that some of the decline in longer-term yields reflected investors' perceptions of diminished odds of significant fiscal stimulus and an increase in some geopolitical and foreign political risks.
With regard to financial stability, several participants emphasized that higher requirements for capital and liquidity in the banking system and other prudential standards had contributed to increased resilience in the financial system since the financial crisis. However, they expressed concerns that a possible easing of regulatory standards could increase risks to financial stability. In addition, it was noted that real estate values were elevated in some sectors of the CRE market, that a sharp decline in such valuations could pose risks to financial stability, and that potential reforms in the housing finance sector could have implications for such valuations.
In their consideration of monetary policy, participants judged that it was appropriate to leave the target range for the federal funds rate unchanged at this meeting. Although the data on aggregate spending and inflation received over the intermeeting period were, on balance, weaker than participants expected, they generally saw the outlook for the economy and inflation as little changed and judged that a continued gradual removal of monetary policy accommodation remained appropriate. A couple of participants indicated that increasing the target range for the federal funds rate at the current meeting would be warranted by their economic outlook, but they also noted that maintaining the current stance of policy for now would be consistent with the Committee's gradual approach or that the Committee's recent communications had not pointed to an increase at this meeting. Most participants judged that if economic information came in about in line with their expectations, it would soon be appropriate for the Committee to take another step in removing some policy accommodation. A number of participants pointed out that clarification of prospective fiscal and other policy changes would remove one source of uncertainty for the economic outlook. Participants generally agreed that the current stance of monetary policy remained accommodative, supporting some additional strengthening in labor market conditions and a sustained return to 2 percent inflation.
Participants generally reiterated their support for a continued gradual approach to raising the federal funds rate. Some participants noted that core PCE price inflation had been running below the Committee's objective for overall inflation for the past eight years and that it was important to return inflation to 2 percent, or that the public's longer-term inflation expectations may have fallen somewhat, and that a gradual approach to tightening could help return expectations and inflation to 2 percent. One participant cited results of a District survey of businesses indicating that more than one-third of respondents saw the Federal Reserve as more likely to accept inflation below its 2 percent objective than above; that participant interpreted the survey results as suggesting that the Committee's communications about the symmetry of its inflation objective had not completely taken hold, a concern also mentioned by a couple of other participants. Another participant observed that a gradual approach was appropriate because the neutral rate of interest had declined and considerable uncertainty prevailed about its longer-run level. Several participants, however, pointed to conditions under which the Committee might need to consider a somewhat more rapid removal of monetary accommodation--for instance, if the unemployment rate fell appreciably further than currently projected, if wages increased more rapidly than expected, or if highly stimulative fiscal policy changes were to be enacted. In contrast, a couple of others judged that the Committee could withdraw monetary accommodation even more gradually than reflected in the medians of forecasts in the March Summary of Economic Projections, noting that slack might remain in the labor market or that inflation was not very sensitive to declines in the unemployment rate below its estimated longer-run normal level.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the Committee met in March indicated that the labor market had continued to strengthen even as growth in economic activity had slowed. Job gains had remained solid, on average, in recent months, and the unemployment rate had declined. Household spending had risen only modestly, but the fundamentals underpinning the continued growth of consumption remained solid, while business fixed investment had firmed.
Inflation, measured as the 12-month change in the headline PCE price index, had been running close to the Committee's 2 percent longer-run objective. Core inflation continued to run somewhat below 2 percent. Both headline and core consumer price indexes fell in March. Market-based measures of inflation compensation had remained low, while survey-based measures of longer-term inflation expectations had changed little on balance.
With respect to the economic outlook and its implications for monetary policy, members agreed that the slowing in growth during the first quarter was likely to be transitory and continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace, labor market conditions would strengthen somewhat further, and inflation would stabilize around 2 percent over the medium term. Members continued to judge that there was significant uncertainty about the effects of possible changes in fiscal and other government policies but that near-term risks to the economic outlook appeared roughly balanced. A couple of members noted that the outlook for global growth appeared to have brightened and that downside risks from abroad had waned. Members agreed that they would continue to closely monitor inflation indicators and global economic and financial developments.
After assessing current conditions and the outlook for economic activity, the labor market, and inflation, members agreed to maintain the target range for the federal funds rate at 3/4 to 1 percent. They noted that the stance of monetary policy remained accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
Members generally judged that it would be prudent to await additional evidence indicating that the recent slowing in the pace of economic activity had been transitory before taking another step in removing accommodation. Members agreed that, in determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee would assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Members also agreed to continue to carefully monitor actual and expected inflation developments relative to the Committee's symmetric inflation goal, with one member viewing further progress of inflation toward the 2 percent objective as necessary before taking another step to remove policy accommodation. Members expected that economic conditions would evolve in a manner that would warrant gradual increases in the federal funds rate. Members agreed that the federal funds rate was likely to remain, for some time, below levels that they expected to prevail in the longer run. However, they noted that the actual path of the federal funds rate would depend on the economic outlook as informed by incoming data.
The Committee also decided to maintain its existing policy of reinvesting all principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Members anticipated doing so until normalization of the level of the federal funds rate was well under way, and they noted that this policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
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 SOMA in accordance with the following domestic policy directive, to be released at 2:00 p.m.:
"Effective May 4, 2017, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 3/4 to 1 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 0.75 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."
The vote also encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in March indicates that the labor market has continued to strengthen even as growth in economic activity slowed. Job gains were solid, on average, in recent months, and the unemployment rate declined. Household spending rose only modestly, but the fundamentals underpinning the continued growth of consumption remained solid. Business fixed investment firmed. Inflation measured on a 12-month basis recently has been running close to the Committee's 2 percent longer-run objective. Excluding energy and food, consumer prices declined in March and inflation continued to run somewhat below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 3/4 to 1 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions."
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Charles L. Evans, Stanley Fischer, Patrick Harker, Robert S. Kaplan, Neel Kashkari, and Jerome H. Powell.
Voting against this action: None.
Consistent with the Committee's decision to leave the target range for the federal funds rate unchanged, the Board of Governors voted unanimously to leave the interest rates on required and excess reserve balances unchanged at 1 percent and voted unanimously to approve establishment of the primary credit rate (discount rate) at the existing level of 1-1/2 percent.6
System Open Market Account Reinvestment Policy
Participants continued their discussion of issues related to potential changes to the Committee's policy of reinvesting principal payments from securities held in the SOMA. The staff provided a briefing that summarized a possible operational approach to reducing the System's securities holdings in a gradual and predictable manner. Under the proposed approach, the Committee would announce a set of gradually increasing caps, or limits, on the dollar amounts of Treasury and agency securities that would be allowed to run off each month, and only the amounts of securities repayments that exceeded the caps would be reinvested each month. As the caps increased, reinvestments would decline, and the monthly reductions in the Federal Reserve's securities holdings would become larger. The caps would initially be set at low levels and then be raised every three months, over a set period of time, to their fully phased-in levels. The final values of the caps would then be maintained until the size of the balance sheet was normalized.
Nearly all policymakers expressed a favorable view of this general approach. Policymakers noted that preannouncing a schedule of gradually increasing caps to limit the amounts of securities that could run off in any given month was consistent with the Committee's intention to reduce the Federal Reserve's securities holdings in a gradual and predictable manner as stated in the Committee's Policy Normalization Principles and Plans. Limiting the magnitude of the monthly reductions in the Federal Reserve's securities holdings on an ongoing basis could help mitigate the risk of adverse effects on market functioning or outsized effects on interest rates. The approach would also likely be fairly straightforward to communicate. Moreover, under this approach, the process of reducing the Federal Reserve's securities holdings, once begun, could likely proceed without a need for the Committee to make adjustments as long as there was no material deterioration in the economic outlook.
Policymakers agreed that the Committee's Policy Normalization Principles and Plans should be augmented soon to provide additional details about the operational plan to reduce the Federal Reserve's securities holdings over time. Nearly all policymakers indicated that as long as the economy and the path of the federal funds rate evolved as currently expected, it likely would be appropriate to begin reducing the Federal Reserve's securities holdings this year. Policymakers agreed to continue in June their discussion of plans for a change to the Committee's reinvestment policy.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, June 13-14, 2017. The meeting adjourned at 11:45 a.m. on May 3, 2017.
Notation Vote
By notation vote completed on April 4, 2017, the Committee unanimously approved the minutes of the Committee meeting held on March 14-15, 2017.
_____________________________
Brian F. Madigan
Secretary
1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes. Return to text
2. Attended Tuesday session only. Return to text
3. Attended the discussions on developments in financial markets and System Open Market Account reinvestment policy. Return to text
4. Attended the discussions on monetary policy and System Open Market Account reinvestment policy. Return to text
5. Attended the discussion on System Open Market Account reinvestment policy. Return to text
6. The second vote of the Board also encompassed approval of the establishment of the interest rates for secondary and seasonal credit under the existing formulas for computing such rates. Return to text |
2017-05-03T00:00:00 | 2017-05-03 | Statement | Information received since the Federal Open Market Committee met in March indicates that the labor market has continued to strengthen even as growth in economic activity slowed. Job gains were solid, on average, in recent months, and the unemployment rate declined. Household spending rose only modestly, but the fundamentals underpinning the continued growth of consumption remained solid. Business fixed investment firmed. Inflation measured on a 12-month basis recently has been running close to the Committee's 2 percent longer-run objective. Excluding energy and food, consumer prices declined in March and inflation continued to run somewhat below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 3/4 to 1 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Jerome H. Powell.
Implementation Note issued May 3, 2017 |
2017-03-15T00:00:00 | 2017-03-15 | Statement | Information received since the Federal Open Market Committee met in February indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Job gains remained solid and the unemployment rate was little changed in recent months. Household spending has continued to rise moderately while business fixed investment appears to have firmed somewhat. Inflation has increased in recent quarters, moving close to the Committee's 2 percent longer-run objective; excluding energy and food prices, inflation was little changed and continued to run somewhat below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action was Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate.
Implementation Note issued March 15, 2017 |
2017-03-15T00:00:00 | 2017-04-05 | Minute | Minutes of the Federal Open Market Committee
March 14-15, 2017
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, March 14, 2017, at 10:00 a.m. and continued on Wednesday, March 15, 2017, at 9:00 a.m.1
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
Charles L. Evans
Stanley Fischer
Patrick Harker
Robert S. Kaplan
Neel Kashkari
Jerome H. Powell
Daniel K. Tarullo
Marie Gooding, Jeffrey M. Lacker, Loretta J. Mester, and John C. Williams, Alternate Members of the Federal Open Market Committee
James Bullard, Esther L. George, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively
Brian F. Madigan, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Michael Held,2 Deputy General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
James A. Clouse, Michael Dotsey, Evan F. Koenig, Daniel G. Sullivan, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Robert deV. Frierson, Secretary, Office of the Secretary, Board of Governors
Matthew J. Eichner,3 Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors; Michael S. Gibson, Director, Division of Supervision and Regulation, Board of Governors; Andreas Lehnert, Director, Division of Financial Stability, Board of Governors
Daniel M. Covitz, Deputy Director, Division of Research and Statistics, Board of Governors; Michael T. Kiley, Deputy Director, Division of Financial Stability, Board of Governors; Stephen A. Meyer, Deputy Director, Division of Monetary Affairs, Board of Governors
Trevor A. Reeve, Senior Special Adviser to the Chair, Office of Board Members, Board of Governors
David Bowman, Andrew Figura, Joseph W. Gruber, and David Reifschneider, Special Advisers to the Board, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
David E. Lebow and Michael G. Palumbo, Senior Associate Directors, Division of Research and Statistics, Board of Governors
Antulio N. Bomfim and Ellen E. Meade, Senior Advisers, Division of Monetary Affairs, Board of Governors
Brian M. Doyle, Associate Director, Division of International Finance, Board of Governors; Jane E. Ihrig and David López-Salido, Associate Directors, Division of Monetary Affairs, Board of Governors; Stacey Tevlin, Associate Director, Division of Research and Statistics, Board of Governors
Min Wei, Deputy Associate Director, Division of Monetary Affairs, Board of Governors
Christopher J. Gust and Jason Wu, Assistant Directors, Division of Monetary Affairs, Board of Governors; Paul R. Wood, Assistant Director, Division of International Finance, Board of Governors
Penelope A. Beattie,3 Assistant to the Secretary, Office of the Secretary, Board of Governors
Michele Cavallo and Jeffrey Huther, Section Chiefs, Division of Monetary Affairs, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Andrea Ajello, Principal Economist, Division of Monetary Affairs, Board of Governors
Randall A. Williams, Information Manager, Division of Monetary Affairs, Board of Governors
James M. Lyon and Mark L. Mullinix, First Vice Presidents, Federal Reserve Banks of Minneapolis and Richmond, respectively
David Altig, Jeff Fuhrer, and Glenn D. Rudebusch, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Boston, and San Francisco, respectively
Paolo A. Pesenti, Julie Ann Remache, and Ellis W. Tallman, Senior Vice Presidents, Federal Reserve Banks of New York, New York, and Cleveland, respectively
George A. Kahn, Vice President, Federal Reserve Bank of Kansas City
William Dupor, Assistant Vice President, Federal Reserve Bank of St. Louis
Roy H. Webb, Senior Economist, Federal Reserve Bank of Richmond
Developments in Financial Markets and Open Market Operations
The manager of the System Open Market Account (SOMA) reported on developments in U.S. and global financial markets during the period since the Committee met on January 31 and February 1, 2017. Global equity prices generally increased further, credit spreads on corporate debt and emerging market bonds narrowed, and yields on Treasury securities rose somewhat. In survey responses, market participants again reported elevated uncertainty about the outlook for U.S. economic policies and about financial asset prices, but various measures of implied volatility nonetheless declined further. The monetary policies of other advanced-economy central banks remained quite accommodative, and some signs of progress on central banks' inflation mandates were evident. Late in the intermeeting period, market participants came to interpret U.S. monetary policy communications as implying high odds of a firming of monetary policy at this meeting, and changes in market prices suggested a slightly steeper path for the federal funds rate over the next few years than was previously anticipated. Survey results indicated that market participants saw a change in the FOMC's policy of reinvesting principal payments on its securities holdings as most likely to be announced in late 2017 or the first half of 2018. Most market participants anticipated that, once a change to reinvestment policy was announced, reinvestments would most likely be phased out rather than stopped all at once.
The deputy manager followed with a briefing on developments in money markets and open market operations. Over the intermeeting period, federal funds continued to trade near the center of the Committee's 1/2 to 3/4 percent target range except on month-ends. Spreads of rates on market repurchase agreements (repos) over the rate at the System's overnight reverse repurchase agreement (ON RRP) facility remained relatively low. Market participants attributed some of the recent decline in market repo rates to a reduction in the supply of Treasury bills in advance of the reinstatement of the statutory debt limit on March 16. The lower market repo rates had led to moderately higher take-up at the ON RRP facility in recent weeks.
By unanimous vote, the Committee ratified the Open Market Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account during the intermeeting period.
System Open Market Account Reinvestment Policy
The staff provided several briefings that summarized issues related to potential changes to the Committee's policy of reinvesting principal payments from securities held in the SOMA. These briefings discussed the macroeconomic implications of alternative strategies the Committee could employ with respect to reinvestments, including making the timing of an end to reinvestments either date dependent or dependent on economic conditions. The briefings also considered the advantages and disadvantages of phasing out reinvestments or ending them all at once as well as whether using the same approach would be appropriate for both Treasury securities and agency mortgage-backed securities (MBS).
In their discussion, policymakers reaffirmed the approach to balance sheet normalization articulated in the Committee's Policy Normalization Principles and Plans announced in September 2014. In particular, participants agreed that reductions in the Federal Reserve's securities holdings should be gradual and predictable, and accomplished primarily by phasing out reinvestments of principal received from those holdings. Most participants expressed the view that changes in the target range for the federal funds rate should be the primary means for adjusting the stance of monetary policy when the federal funds rate was above its effective lower bound. A number of participants indicated that the Committee should resume asset purchases only if substantially adverse economic circumstances warranted greater monetary policy accommodation than could be provided by lowering the federal funds rate to the effective lower bound. Moreover, it was noted that the Committee's policy of maintaining reinvestments until normalization of the level of the federal funds rate was well under way had supported the smooth and effective conduct of monetary policy and had helped maintain accommodative financial conditions.
Consistent with the Policy Normalization Principles and Plans, nearly all participants preferred that the timing of a change in reinvestment policy depend on an assessment of economic and financial conditions. Several participants indicated that the timing should be based on a quantitative threshold or trigger tied to the target range for the federal funds rate. Some other participants expressed the view that the timing should depend on a qualitative judgment about economic and financial conditions. Such a judgment would importantly encompass an assessment by the Committee of the risks to the outlook, including the degree of confidence that evolving circumstances would not soon require a reversal in the direction of policy. Taking these considerations into account, policymakers discussed the likely level of the federal funds rate when a change in the Committee's reinvestment policy would be appropriate. Provided that the economy continued to perform about as expected, most participants anticipated that gradual increases in the federal funds rate would continue and judged that a change to the Committee's reinvestment policy would likely be appropriate later this year. Many participants emphasized that reducing the size of the balance sheet should be conducted in a passive and predictable manner. Some participants expressed the view that it might be appropriate for the Committee to restart reinvestments if the economy encountered significant adverse shocks that required a reduction in the target range for the federal funds rate.
When the time comes to implement a change to reinvestment policy, participants generally preferred to phase out or cease reinvestments of both Treasury securities and agency MBS. Policymakers also discussed the potential benefits and costs of approaches that would either phase out or cease all at once reinvestments of principal from these securities. An approach that phased out reinvestments was seen as reducing the risks of triggering financial market volatility or of potentially sending misleading signals about the Committee's policy intentions while only modestly slowing reductions in the Committee's securities holdings. An approach that ended reinvestments all at once, however, was generally viewed as easier to communicate while allowing for somewhat swifter normalization of the size of the balance sheet. To promote rapid normalization of the size and composition of the balance sheet, one participant preferred to set a minimum pace for reductions in MBS holdings and, if and when necessary, to sell MBS to maintain such a pace.
Nearly all participants agreed that the Committee's intentions regarding reinvestment policy should be communicated to the public well in advance of an actual change. It was noted that the Committee would continue its deliberations on reinvestment policy during upcoming meetings and would release additional information as it becomes available. In that context, several participants indicated that, when the Committee announces its plans for a change to its reinvestment policy, it would be desirable to also provide more information to the public about the Committee's expectations for the size and composition of the Federal Reserve's assets and liabilities in the longer run.
Staff Review of the Economic Situation
The information reviewed for the March 14-15 meeting suggested that the labor market strengthened further in January and February and that real gross domestic product (GDP) was continuing to expand in the first quarter, albeit at a slower pace than in the fourth quarter, with some of the slowing likely reflecting transitory factors. The 12-month change in consumer prices moved up in recent months and was close to the Committee's longer-run objective of 2 percent; excluding food and energy prices, inflation was little changed and continued to run somewhat below 2 percent.
Total nonfarm payroll employment increased at a brisk pace in January and February. The unemployment rate edged back down to 4.7 percent in February, and the labor force participation rate rose over the first two months of the year. The share of workers employed part time for economic reasons was little changed on net. The rate of private-sector job openings was unchanged at a high level in December, while the rate of hiring edged up and the rate of quits edged down. The four-week moving average of initial claims for unemployment insurance benefits was at a very low level in early March. Measures of labor compensation continued to rise at a moderate rate. Compensation per hour in the nonfarm business sector increased 3-1/4 percent over the four quarters of 2016, and average hourly earnings for all employees increased 2-3/4 percent over the 12 months ending in February. The unemployment rates for African Americans, for Hispanics, and for whites were close to the levels seen just before the most recent recession, but the unemployment rates for African Americans and for Hispanics remained above the rate for whites. Over the past year or so, the jobless rate for African Americans moved lower, while the rates for Hispanics and for whites moved roughly sideways.
Total industrial production declined in January, as unseasonably warm weather reduced the demand for heating, which held down the output of utilities. Mining output expanded further following a large gain in the fourth quarter, and manufacturing production continued to rise at a modest pace. Automakers' assembly schedules suggested that motor vehicle production would remain near its January pace, on average, over the next few months, while broader indicators of manufacturing production, such as the new orders indexes from national and regional manufacturing surveys, pointed to further modest gains in factory output over the near term.
Real personal consumption expenditures (PCE) appeared to be rising at a slower pace in the first quarter than in the fourth quarter. Motor vehicle sales stepped down in January and February from their brisk year-end pace, and unseasonably warm weather prompted a further decline in consumer spending for energy services. Taken together, the components of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimate of PCE were unchanged in February after a robust gain in January. Recent readings on some key factors that influence consumer spending--including further gains in employment, real disposable personal income, and households' net worth--were consistent with moderate increases in real PCE in early 2017. In addition, consumer sentiment, as measured by the University of Michigan Surveys of Consumers, remained at an elevated level in February.
Recent information on housing activity suggested that residential investment increased at a solid pace early in the year. Starts for both new single-family homes and multifamily units strengthened in the fourth quarter and remained near those levels in January. Issuance of building permits for new single-family homes--which tends to be a reliable indicator of the underlying trend in construction--also moved up in the fourth quarter and remained near that level in January. Sales of existing homes rose in January, while new home sales maintained their fourth-quarter pace.
Real private expenditures for business equipment and intellectual property appeared to be rising in the first quarter after a moderate gain in the fourth quarter. Nominal new orders of nondefense capital goods excluding aircraft recorded a solid net gain over the three months ending in January, and indicators of business sentiment were upbeat. Firms' nominal spending for nonresidential structures excluding drilling and mining was fairly flat in recent months, but the number of crude oil and natural gas rigs in operation, an indicator of spending for structures in the drilling and mining sector, continued to increase through early March. The limited available data suggested that inventory investment was likely to make a smaller contribution to real GDP growth in the early part of the year than it did in the fourth quarter.
Total real government purchases appeared to be moving sideways in the first quarter after having been little changed in the fourth quarter. Nominal outlays for defense in January and February pointed to an increase in real federal purchases. Although state and local government payrolls expanded in January and February, nominal construction spending by these governments fell sharply in January.
Net exports exerted a significant drag on real GDP growth in the fourth quarter of 2016, and the January trade data suggested that net exports would continue to weigh on growth in the first quarter of this year. The U.S. international trade deficit widened in January in nominal terms, with imports--led by consumer goods--rising more than exports. Over the past six months, nominal imports grew at a much faster pace than nominal exports.
Total U.S. consumer prices, as measured by the PCE price index, increased a little less than 2 percent over the 12 months ending in January. Core PCE price inflation, which excludes changes in food and energy prices, was 1-3/4 percent over those same 12 months, held down in part by decreases in the prices of nonenergy imports over part of this period. Over the 12 months ending in February, total consumer prices as measured by the consumer price index (CPI) rose 2-3/4 percent, while core CPI inflation was 2-1/4 percent. The medians of survey-based measures of longer-run inflation expectations--such as those from the Michigan survey, the Survey of Professional Forecasters, and the Desk's Survey of Primary Dealers and Survey of Market Participants--were little changed, on balance, in recent months.
Foreign real GDP growth slowed a bit in the fourth quarter from a relatively strong rate in the third quarter, but it was still somewhat higher than its average pace over the past two years. In much of the world, including Europe, Japan, and most of emerging Asia, economic activity continued to grow at a moderate pace. In Canada and Mexico--two important trading partners of the United States--growth stepped down from unusually strong third-quarter rates to a still-solid pace in the fourth quarter, and Brazil's recession deepened. Recently released purchasing managers indexes and confidence indicators from abroad were generally upbeat and pointed to continued moderate foreign growth in early 2017, although indicators from Mexico suggested a further slowing. Inflation in the advanced foreign economies (AFEs) continued to rise, largely reflecting increases in retail energy prices and currency depreciation. Among the emerging market economies (EMEs), inflation rose in Mexico, in part reflecting a substantial hike in fuel prices, but fell in China and parts of South America.
Staff Review of the Financial Situation
Financial markets were generally quiet over the intermeeting period. The Committee's decision to keep the target range for the federal funds rate unchanged at the January-February FOMC meeting was well anticipated. Broad equity price indexes rose further, leaving some standard measures of valuations above historical norms. Treasury yields rose late in the intermeeting period, following monetary policy communications by several Federal Reserve officials. The broad dollar index was about unchanged. Financing conditions for nonfinancial businesses, households, and state and local governments remained generally accommodative in recent months.
Federal Reserve communications over the intermeeting period contributed to increased expectations of a decision to raise the target range for the federal funds rate at the March meeting. The Chair's semiannual monetary policy testimony reportedly led market participants to price in a slightly higher probability of a monetary policy firming in the near term. Subsequently, investors took note of the mention in the minutes of the January-February FOMC meeting that many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations or if the risks of overshooting the Committee's maximum-
employment and inflation objectives increased. Late in the period, communications from several Federal Reserve officials led to an increase in market-based measures of the probability that the target range for the federal funds rate would rise at the March meeting.
Nominal Treasury yields increased over the intermeeting period, particularly for shorter maturities. Treasury yields reacted only modestly over most of the period to domestic economic data releases that were reportedly seen as a little stronger than expected on balance. Yields on longer-dated Treasury securities rose late in the period following comments by Federal Reserve officials. Measures of inflation compensation based on Treasury Inflation-Protected Securities were little changed, on net, since the February FOMC meeting.
Broad U.S. equity price indexes increased over the intermeeting period, and some measures of valuations, such as price-to-earnings ratios, rose further above historical norms. A standard measure of the equity risk premium edged lower, declining into the lower quartile of its historical distribution of the previous three decades. Stock prices rose across most industries, and equity prices for financial firms outperformed broader indexes. Meanwhile, spreads of yields on bonds issued by nonfinancial corporations over those on comparable-maturity Treasury securities were little changed.
Since the previous FOMC meeting, better-than-expected economic data and earnings releases abroad also supported risk sentiment: Foreign equity prices increased, flows to emerging market mutual funds picked up, and emerging market bond spreads narrowed. Consistent with improved sentiment toward the EMEs, the dollar depreciated against EME currencies. The Mexican peso appreciated substantially against the dollar, although it remained weaker than just before the U.S. elections. In contrast, the dollar appreciated against the AFE currencies, reflecting continued divergence in monetary policy expectations for the United States and AFEs as well as political uncertainty in Europe. The broad dollar index was little changed over the period. Sovereign yields in AFEs generally increased slightly. In the United Kingdom, however, gilt yields declined and the pound weakened against the dollar in response to weaker-than-expected inflation data and to an upward revision by the Bank of England, at its early February policy meeting, of its assessment of the degree of slack in the labor market. As expected by market participants, the European Central Bank, at its meeting in early March, kept its policy rate and the pace of its asset purchases unchanged.
In U.S. financial markets, credit flows to large firms remained solid in recent months, with strong bond issuance by investment-grade corporations and brisk originations of leveraged loans. Bank loans continued to be largely available for small businesses, although small business credit demand reportedly remained subdued.
In the municipal bond market, issuance was strong in January but decreased somewhat in February. Yields increased a little, about in line with the rise in Treasury yields. The number of ratings upgrades notably outpaced the number of downgrades in January and February.
Commercial real estate loans on banks' books continued to grow in January and February. Spreads on highly rated commercial mortgage-backed securities (CMBS) over Treasury securities were little changed. However, the volumes of CMBS issuance and of deals in the pipeline were lower in the first two months of the year than in each of the previous two years. Market commentators attributed some of the slowdown to the response of issuers to risk retention rules that took effect in late 2016. The delinquency rate on loans in CMBS pools had risen since the spring of 2016, reflecting increased delinquencies on loans originated before the financial crisis.
Mortgage credit continued to be readily available for households with strong credit scores and documented incomes. Despite the increase in Treasury yields, the interest rate on 30-year fixed-rate mortgages was little changed over the intermeeting period. Closed-end residential mortgage loans on banks' books were about flat in January and February, while banks' holdings of home equity lines of credit continued their long contraction. Financing conditions in the market for asset-backed securities remained favorable. Consumer credit continued to increase at a steady pace, with similar growth rates across credit card, automobile, and student loans. The growth of consumer lending at banks continued in January and February, albeit at a slower pace than in the fourth quarter of 2016. Financing conditions for consumers remained accommodative except in the market for subprime credit card loans.
Staff Economic Outlook
In the U.S. economic projection prepared by the staff for the March FOMC meeting, the near-term forecast for real GDP growth was a little weaker, on net, than in the previous projection. Real GDP was expected to expand at a slower rate in the first quarter than in the fourth quarter, reflecting some data for January that were judged to be transitorily weak, but growth was projected to move back up in the second quarter. The staff maintained its assumption--provisionally included starting with the December 2016 forecast--of a more expansionary fiscal policy in the coming years, but it pushed back the timing of when those policy changes were anticipated to take effect. The negative effect of this timing change on projected real GDP growth through 2019 was offset by a higher assumed path for equity prices and by a lower assumed path for the exchange value of the dollar. All told, the staff's forecast for the level of real GDP at the end of 2019 was essentially unrevised from the previous forecast, and the staff continued to project that real GDP would expand at a modestly faster pace than potential output in 2017 through 2019. The unemployment rate was forecast to edge down gradually through the end of 2019 and to run below the staff's estimate of its longer-run natural rate; the path for the unemployment rate was little changed from the previous projection.
The staff's forecast for consumer price inflation, as measured by changes in the PCE price index, was unchanged for 2017 as a whole and over the next couple of years. The staff continued to project that inflation would increase gradually over this period, as food and energy prices, along with the prices of non-energy imports, were expected to begin steadily rising this year. However, inflation was projected to be slightly below the Committee's longer-run objective of 2 percent in 2019.
The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The risks to the forecast for real GDP were seen as tilted to the downside, primarily reflecting the staff's assessment that monetary policy appeared to be better positioned to respond to large positive shocks to the economic outlook than substantial adverse ones. However, the staff viewed the risks to the forecast as less pronounced than in the recent past, reflecting both somewhat diminished risks to the foreign outlook and an increase in U.S. consumer and business confidence over recent months. Consistent with the downside risks to aggregate demand, the staff viewed the risks to its outlook for the unemployment rate as tilted to the upside. The risks to the projection for inflation were seen as roughly balanced. The downside risks from the possibility that longer-term inflation expectations may have edged down or that the dollar could appreciate substantially further were seen as roughly counterbalanced by the upside risk that inflation could increase more than expected in an economy that was projected to continue operating above its longer-run potential.
Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, members of the Board of Governors and Federal Reserve Bank presidents submitted their projections of the most likely outcomes for real output growth, the unemployment rate, and inflation for each year from 2017 through 2019 and over the longer run, based on their individual assessments of the appropriate path for the federal funds rate.4 The longer-run projections represented each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy.5 These projections and policy assessments are described in the Summary of Economic Projections (SEP), which is an addendum to these minutes.
In their discussion of the economic situation and the outlook, meeting participants agreed that information received over the intermeeting period indicated that the labor market had continued to strengthen and that economic activity had continued to expand at a moderate pace. Job gains had remained solid and the unemployment rate was little changed in recent months. Household spending had continued to rise moderately while business fixed investment appeared to have firmed somewhat. Inflation had increased in recent quarters and moved close to the Committee's 2 percent longer-run objective; excluding energy and food prices, inflation was little changed and had continued to run somewhat below 2 percent. Market-based measures of inflation compensation had remained low; survey-based measures of inflation compensation were little changed on balance.
Participants generally saw the incoming economic information as consistent, overall, with their expectations and indicated that their views about the economic outlook had changed little since the January-February FOMC meeting. Although GDP appeared to be expanding relatively slowly in the current quarter, that development seemed primarily to reflect temporary factors, possibly including residual seasonality. Participants continued to anticipate that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace, labor market conditions would strengthen somewhat further, and inflation would stabilize around 2 percent over the medium term.
Participants generally judged that risks to the economic outlook remained roughly balanced overall, although they saw some of the considerations underlying that assessment as having changed modestly. Participants continued to underscore the considerable uncertainty about the timing and nature of potential changes to fiscal policies as well as the size of the effects of such changes on economic activity. However, several participants now anticipated that meaningful fiscal stimulus would likely not begin until 2018. In view of the substantial uncertainty, about half of the participants did not incorporate explicit assumptions about fiscal policy in their projections. Nonetheless, most participants continued to view the prospect of more expansionary fiscal policies as an upside risk to their economic forecasts. At the same time, some participants and their business contacts saw downside risks to labor force and economic growth from possible changes to other government policies, such as those affecting immigration and trade. Participants generally viewed the downside risks associated with the global economic outlook, particularly those related to the economic situation in China and Europe, as having diminished over recent months. At the same time, several participants cautioned that upcoming elections in EU countries posed both near-term and longer-term risks.
Regarding the outlook for inflation, several participants noted that the apparently modest response of inflation to measures of resource slack in recent years, along with inflation expectations that appeared to have remained well anchored, limited the risk of a marked pickup in inflation as the labor market tightened further. In contrast, some other participants continued to express concern that a substantial undershooting of the longer-run normal rate of unemployment, if it was to occur, posed a significant upside risk to inflation, in part because of the possibility that the behavior of inflation could differ from that in recent decades. Participants generally agreed that it would be appropriate to continue to closely monitor inflation indicators and global economic and financial developments.
In their discussion of developments in the household sector, participants agreed that consumer spending was likely to contribute significantly to economic growth this year. Although motor vehicle sales had fallen early in the year and some other components of PCE had also declined, many participants suggested that the slowdown in consumer spending in January would likely be temporary. The slowing appeared to mainly reflect transitory factors like lower energy consumption induced by warm weather or delays in processing income tax refunds. In addition, conditions conducive to growth in consumer spending, such as a strong labor market or higher levels of household wealth, were expected to persist. A number of participants also cited buoyant consumer confidence as potentially supporting household expenditures, although some also mentioned that improved sentiment did not appear to have appreciably altered the trajectory of consumer spending so far. In the housing market, access to mortgage credit that was still restricted for some borrowers, constraints on buildable land in some regions, and rising interest rates were cited as having continued to restrain the recovery in housing.
Participants generally agreed that recent momentum in the business sector had been sustained over the intermeeting period. Many reported that manufacturing activity in their Districts had strengthened further, and reports from the service sector were positive. Business optimism remained elevated in a number of Districts. A few participants reported increased capital expenditures by businesses in their Districts, but business contacts in several other Districts said they were waiting for more clarity about government policy initiatives before implementing capital expansion plans. Investment in oil drilling, and particularly extraction from shale, was described as increasing in a couple of Districts, and demand for related production inputs was also said to be expanding. Nonetheless, slower economic growth, ample existing capacity, and modest returns in the energy sector were noted as factors that were continuing to restrain overall capital spending.
Labor market conditions had continued to improve. Monthly increases in nonfarm payroll employment averaged nearly 210,000 over the three months ending in February, the unemployment rate edged down, and the labor force participation rate ticked up. Some participants cited anecdotal evidence of a tightening of labor markets. Business contacts in many Districts reported difficulty recruiting qualified workers and indicated that they had to either offer higher wages or hire workers with lower qualifications than desired. A couple of participants reported that the ongoing mismatch between the skill requirements of available jobs and the qualifications of job applicants was a factor boosting the number of unfilled positions. Tight labor markets were said to increasingly be a factor in businesses' planning. More employers reportedly were addressing the scarcity of labor by expanding vocational programs, but contacts emphasized that, to be effective, such efforts needed to be complemented by other programs such as assistance with child care and transportation. Shortages of production crews were said to have restricted oil drilling in a couple of Districts. In contrast, several other participants cited evidence that some slack remained in the labor market, such as still-modest aggregate wage growth and the unevenness of wage gains across industries, an elevated share of employees working part time for economic reasons, or other broad measures of labor underutilization. Participants noted the continued stability of the labor force participation rate in the face of its demographically driven downward trend. A few participants interpreted that development as suggesting that slack in the labor market was minimal. A few others saw it as an indication that labor force participation could increase a bit more relative to trend and thus that some further reduction in labor market slack could occur. Most participants still expected that if economic growth stayed moderate, as they projected, the unemployment rate would remain only modestly below their estimates of the longer-run normal rate of unemployment over the next few years. Some other participants, however, anticipated a more substantial undershoot.
Participants generally viewed the information received over the intermeeting period as reinforcing their expectation that inflation would stabilize around the Committee's 2 percent objective over the medium term. The 12-month change in headline PCE prices increased from 1.7 percent in December to 1.9 percent in January, as the effects of firmer consumer energy prices were registered. Core PCE prices rose at a relatively quick pace of 0.3 percent for the month of January, although it was noted that residual seasonality might have exaggerated the increase. The Federal Reserve Bank of Dallas's 12-month trimmed mean PCE inflation rate had gradually increased over the past couple of years, reaching 1.9 percent in January. Although market-based measures of inflation compensation had remained low, they were somewhat above the levels seen last year. In addition, longer-term inflation expectations in the Michigan survey had been relatively stable since the beginning of the year, while other survey measures of inflation expectations, such as the three-year-ahead measure from the Federal Reserve Bank of New York's Survey of Consumer Expectations, had increased in recent months. Notwithstanding these developments, some participants cautioned that progress toward the Committee's inflation objective should not be overstated; they noted that inflation had been persistently below 2 percent during the current economic expansion and that core inflation on a 12-month basis was little changed in recent months at a level below 2 percent. In contrast, a few other participants commented that recent inflation data were stronger than they had expected and that they anticipated that inflation would reach the Committee's objective of 2 percent this year.
In their discussion of recent developments in financial markets, participants noted that financial conditions remained accommodative despite the rise in longer-term interest rates in recent months and continued to support the expansion of economic activity. Many participants discussed the implications of the rise in equity prices over the past few months, with several of them citing it as contributing to an easing of financial conditions. A few participants attributed the recent equity price appreciation to expectations for corporate tax cuts or to increased risk tolerance among investors rather than to expectations of stronger economic growth. Some participants viewed equity prices as quite high relative to standard valuation measures. It was observed that prices of other risk assets, such as emerging market stocks, high-yield corporate bonds, and commercial real estate, had also risen significantly in recent months. In contrast, prices of farmland reportedly had edged lower, in part because low commodity prices continued to weigh on farm income. Still, farmland valuations were said to remain quite high as gauged by standard benchmarks such as rent-to-price ratios.
In their consideration of monetary policy, participants generally agreed that the data over the intermeeting period were broadly in line with their expectations, providing evidence of further strengthening of labor market conditions and ongoing progress toward the Committee's objective of 2 percent inflation. Participants noted that their views of the economic outlook were essentially unchanged from those of the past couple of meetings. Almost all participants saw the incoming data as consistent with an increase of 25 basis points in the target range for the federal funds rate at this meeting. They judged that, even after an increase in the target range, the stance of monetary policy would remain accommodative, supporting some additional strengthening in labor market conditions and a sustained return to 2 percent inflation.
With their views of the outlook for the economy little changed, participants generally continued to judge that a gradual pace of rate increases was likely to be appropriate to promote the Committee's objectives of maximum employment and 2 percent inflation. Participants pointed to several reasons for their assessment that a gradual removal of policy accommodation likely would be appropriate. A few noted that it could take some time for inflation to rise to 2 percent on a sustained basis, and thus monetary policy would likely need to remain accommodative for a while longer in order to support the economic conditions that would foster such an increase. Several participants remarked that risk-management considerations still argued for a gradual removal of accommodation because the proximity of the federal funds rate to the effective lower bound placed constraints on the ability of monetary policy to respond to adverse shocks. Moreover, the neutral real rate--defined as the real interest rate that is neither expansionary nor contractionary when the economy is operating at or near its potential--still appeared to be low by historical standards. Furthermore, uncertainty about current and prospective values of the neutral real rate reinforced the argument for a gradual approach to removing monetary policy accommodation over the next few years.
Participants emphasized that they stood ready to change their assessments of, and communications about, the appropriate path for the federal funds rate in response to unanticipated developments. They pointed to several risks that, if realized, could lead them to reassess their views of the appropriate policy path. These risks included the possibility of stronger spending by businesses and households as a result of improved sentiment, appreciably more expansionary fiscal policy, or a more rapid buildup of inflationary pressures than anticipated. In addition, a number of participants remarked that recent and prospective changes in financial conditions posed upside risks to their economic projections, to the extent that financial developments provided greater stimulus to spending than currently anticipated, as well as downside risks to their economic projections if, for example, financial markets were to experience a significant correction. Participants also mentioned potential developments abroad that could have adverse implications for the U.S. economy.
Nearly all participants judged that the U.S. economy was operating at or near maximum employment. In contrast, participants held different views regarding prospects for the attainment of the Committee's inflation goal. A number of participants noted that core inflation was a useful indicator of future headline inflation, and the latest reading on 12-month core inflation suggested that it could still be some time before headline inflation reached 2 percent on a sustained basis. Moreover, several participants remarked that even though inflation was currently not that far below the Committee's 2 percent objective, it was important for the Committee to remove accommodation gradually to help ensure that inflation would stabilize around that objective over the medium term. These participants emphasized that a sustained return to 2 percent inflation was particularly important in light of the persistent shortfall of inflation from its objective over the past several years. However, several other participants judged that--with the headline PCE price index rising nearly 2 percent and the core PCE index increasing close to 1-3/4 percent over the 12-month period ending in January--the Committee essentially had met its inflation goal or was poised to meet it later this year. In the view of these participants, such circumstances could warrant a faster pace of scaling back accommodation than implied by the medians of participants' assessments in the SEP.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that the information received since the Committee's previous meeting indicated that the labor market had continued to strengthen and that economic activity had continued to expand at a moderate pace. Job gains had remained solid, and the unemployment rate had changed little in recent months. Household spending had continued to rise moderately, while business fixed investment appeared to have firmed somewhat.
Inflation had increased in recent quarters, with the 12-month change in the headline PCE price index rising to nearly 2 percent in January, close to the Committee's longer-run objective. However, nearly all members judged that the Committee had not yet achieved its objective for headline inflation on a sustained basis. Members generally viewed it as important to highlight that core inflation--which excludes volatile energy and food prices and historically has tended to be a good indicator of future headline inflation--was little changed and continued to run somewhat below 2 percent. Moreover, market-based measures of inflation compensation had remained low.
With respect to the economic outlook and its implications for monetary policy, members continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would strengthen somewhat further. It was noted that recent increases in consumer energy prices could cause inflation to temporarily reach or even rise a bit above 2 percent in the near term. Members anticipated that inflation would stabilize around 2 percent over the medium term and commented that transitory deviations above and below 2 percent were to be expected. Members continued to judge that there was significant uncertainty about the effects of possible changes in fiscal and other government policies but that near-term risks to the economic outlook appeared roughly balanced. A few members noted that domestic upside risks may have increased somewhat in recent months, partly reflecting potential changes in fiscal policy, while some downside risks from abroad appeared to have diminished. Members agreed that they would continue to closely monitor inflation indicators and global economic and financial developments.
After assessing current conditions and the outlook for economic activity, the labor market, and inflation, all but one member agreed to raise the target range for the federal funds rate to 3/4 to 1 percent. This increase was viewed as appropriate in light of the further progress that had been made toward the Committee's objectives of maximum employment and 2 percent inflation. Members generally noted that the increase in the target range did not reflect changes in their assessments of the economic outlook or the appropriate path of the federal funds rate, adding that the increase was consistent with the gradual pace of removal of accommodation that was anticipated in December, when the Committee last raised the target range.
In the view of one member, it was premature to raise the target range for the federal funds rate at this meeting. That member preferred to await additional information on the amount of slack remaining in the labor market and increased evidence that inflation would stabilize at the Committee's objective before taking another step to remove monetary policy accommodation.
Members agreed that, in determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee would assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Partly in light of the likelihood that the recent higher readings on headline inflation had mostly reflected the temporary effect of increases in consumer energy prices, members agreed that the Committee would continue to carefully monitor actual and expected inflation developments relative to its inflation goal. A few members expressed the view that the Committee should avoid policy actions or communications that might be interpreted as suggesting that the Committee's 2 percent inflation objective was actually a ceiling. Several members observed that an explicit recognition in the statement that the Committee's inflation goal was symmetric could help support inflation expectations at a level consistent with that goal, and it was noted that a symmetric inflation objective implied that the Committee would adjust the stance of monetary policy in response to inflation that was either persistently above or persistently below 2 percent. Members also reiterated that they expected that economic conditions would evolve in a manner that would warrant gradual increases in the federal funds rate. They agreed that the federal funds rate was likely to remain, for some time, below levels expected to prevail in the longer run. However, they noted that the actual path of the federal funds rate would depend on the economic outlook as informed by incoming data.
The Committee decided to maintain its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Members anticipated doing so until normalization of the level of the federal funds rate was well under way. They noted that this policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
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 SOMA in accordance with the following domestic policy directive, to be released at 2:00 p.m.:
"Effective March 16, 2017, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 3/4 to 1 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 0.75 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."
The vote also encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in February indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Job gains remained solid and the unemployment rate was little changed in recent months. Household spending has continued to rise moderately while business fixed investment appears to have firmed somewhat. Inflation has increased in recent quarters, moving close to the Committee's 2 percent longer-run objective; excluding energy and food prices, inflation was little changed and continued to run somewhat below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions."
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Charles L. Evans, Stanley Fischer, Patrick Harker, Robert S. Kaplan, Jerome H. Powell, and Daniel K. Tarullo.
Voting against this action: Neel Kashkari.
Mr. Kashkari dissented because he preferred to maintain the existing target range for the federal funds rate at this meeting. In his view, recent data had not pointed to further progress on the Committee's dual objectives and thus had not provided a compelling case to firm monetary policy at this meeting. He preferred to await additional information on the amount of slack remaining in the labor market and increased evidence that inflation would stabilize at the Committee's symmetric 2 percent inflation objective before taking another step to remove monetary policy accommodation. Mr. Kashkari also preferred that when data do support a removal of monetary policy accommodation, the FOMC first publish a detailed plan to normalize its balance sheet before proceeding with further increases in the federal funds rate.
To support the Committee's decision to raise the target range for the federal funds rate, the Board of Governors voted unanimously to raise the interest rates on required and excess reserve balances 1/4 percentage point, to 1 percent, effective March 16, 2017. The Board of Governors also voted unanimously to approve a 1/4 percentage point increase in the primary credit rate (discount rate) to 1-1/2 percent, effective March 16, 2017.6
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, May 2-3, 2017. The meeting adjourned at 10:40 a.m. on March 15, 2017.
Notation Vote
By notation vote completed on February 21, 2017, the Committee unanimously approved the minutes of the Committee meeting held on January 31-February 1, 2017.
_____________________________
Brian F. Madigan
Secretary
1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes. Return to text
2. Attended Tuesday session only. Return to text
3. Attended through the discussion of System Open Market Account reinvestment policy. Return to text
4. The office of the president of the Federal Reserve Bank of Atlanta was vacant at the time of this FOMC meeting; the incoming president of the Federal Reserve Bank of Atlanta is scheduled to assume office on June 5, 2017. Marie Gooding, First Vice President of the Federal Reserve Bank of Atlanta, submitted economic projections. Return to text
5. One participant did not submit longer-run projections for real output growth, the unemployment rate, or the federal funds rate. Return to text
6. In taking this action, the Board approved requests submitted by the boards of directors of the Federal Reserve Banks of Boston, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Kansas City, Dallas, and San Francisco. This vote also encompassed approval by the Board of Governors of the establishment of a 1-1/2 percent primary credit rate by the remaining Federal Reserve Banks, effective on the later of March 16, 2017, and the date such Reserve Banks informed the Secretary of the Board of such a request. (Secretary's note: Subsequently, the Federal Reserve Banks of New York, St. Louis, and Minneapolis were informed by the Secretary of the Board of the Board's approval of their establishment of a primary credit rate of 1-1/2 percent, effective March 16, 2017.) The second vote of the Board also encompassed approval of the establishment of the interest rates for secondary and seasonal credit under the existing formulas for computing such rates. Return to text |
2017-02-01T00:00:00 | 2017-02-22 | Minute | Minutes of the Federal Open Market Committee
January 31-February 1, 2017
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, January 31, 2017, at 1:00 p.m. and continued on Wednesday, February 1, 2017, at 9:00 a.m.1
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
Charles L. Evans
Stanley Fischer
Patrick Harker
Robert S. Kaplan
Neel Kashkari
Jerome H. Powell
Daniel K. Tarullo
Marie Gooding, Jeffrey M. Lacker, Loretta J. Mester, Michael Strine,2 and John C. Williams, Alternate Members of the Federal Open Market Committee
James Bullard, Esther L. George, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively
Brian F. Madigan, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Michael Held, Deputy General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
James A. Clouse, Thomas A. Connors, Michael Dotsey, Eric M. Engen, Evan F. Koenig, Jonathan P. McCarthy, Daniel G. Sullivan, William Wascher, and Beth Anne Wilson, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Robert deV. Frierson, Secretary, Office of the Secretary, Board of Governors
Matthew J. Eichner,3 Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors; Michael S. Gibson,4 Director, Division of Supervision and Regulation, Board of Governors; Andreas Lehnert, Director, Division of Financial Stability, Board of Governors
Michael T. Kiley, Deputy Director, Division of Financial Stability, Board of Governors; Stephen A. Meyer, Deputy Director, Division of Monetary Affairs, Board of Governors
Trevor A. Reeve, Senior Special Adviser to the Chair, Office of Board Members, Board of Governors
Andrew Figura, Joseph W. Gruber, Ann McKeehan, and David Reifschneider, Special Advisers to the Board, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Antulio N. Bomfim, Ellen E. Meade, and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors; Jeremy B. Rudd, Senior Adviser, Division of Research and Statistics, Board of Governors
Shaghil Ahmed,2 Associate Director, Division of International Finance, Board of Governors; Jane E. Ihrig, Associate Director, Division of Monetary Affairs, Board of Governors
Min Wei, Deputy Associate Director, Division of Monetary Affairs, Board of Governors
Glenn Follette, John M. Roberts, and Paul A. Smith,2 Assistant Directors, Division of Research and Statistics, Board of Governors
Eric C. Engstrom, Adviser, Division of Monetary Affairs, and Adviser, Division of Research and Statistics, Board of Governors
Penelope A. Beattie,2 Assistant to the Secretary, Office of the Secretary, Board of Governors
Dana L. Burnett, Section Chief, Division of Monetary Affairs, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Laurie DeMarco, Principal Economist, Division of International Finance, Board of Governors; Naomi Feldman, Principal Economist, Division of Research and Statistics, Board of Governors; Yuriy Kitsul and Zeynep Senyuz, Principal Economists, Division of Monetary Affairs, Board of Governors
Anna Orlik, Senior Economist, Division of Monetary Affairs, Board of Governors
Kenneth C. Montgomery, First Vice President, Federal Reserve Bank of Boston
David Altig, Ron Feldman, and Christopher J. Waller, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Minneapolis, and St. Louis, respectively
Troy Davig and John A. Weinberg, Senior Vice Presidents, Federal Reserve Banks of Kansas City and Richmond, respectively
Bruce Fallick, Giovanni Olivei, and Robert G. Valletta, Vice Presidents, Federal Reserve Banks of Cleveland, Boston, and San Francisco, respectively
Annual Organizational Matters5
In the agenda for this meeting, it was reported that advices of the election of the following members and alternate members of the Federal Open Market Committee for a term beginning January 31, 2017, had been received and that these individuals had executed their oaths of office.
The elected members and alternate members were as follows:
William C. Dudley, President of the Federal Reserve Bank of New York, with Michael Strine, First Vice President of the Federal Reserve Bank of New York, as alternate
Patrick Harker, President of the Federal Reserve Bank of Philadelphia, with Jeffrey M. Lacker, President of the Federal Reserve Bank of Richmond, as alternate
Charles L. Evans, President of the Federal Reserve Bank of Chicago, with Loretta J. Mester, President of the Federal Reserve Bank of Cleveland, as alternate
Robert S. Kaplan, President of the Federal Reserve Bank of Dallas, with Marie Gooding, First Vice President of the Federal Reserve Bank of Atlanta, as alternate
Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, with John C. Williams, President of the Federal Reserve Bank of San Francisco, as alternate
By unanimous vote, the following officers of the Committee were selected to serve until the selection of their successors at the first regularly scheduled meeting of the Committee in 2018:
Janet L. Yellen
Chairman
William C. Dudley
Vice Chairman
Brian F. Madigan
Secretary
Matthew M. Luecke
Deputy Secretary
David W. Skidmore
Assistant Secretary
Michelle A. Smith
Assistant Secretary
Scott G. Alvarez
General Counsel
Michael Held
Deputy General Counsel
Richard M. Ashton
Assistant General Counsel
Steven B. Kamin
Economist
Thomas Laubach
Economist
David W. Wilcox
Economist
James A. Clouse
Thomas A. Connors
Michael Dotsey
Eric M. Engen
Evan F. Koenig
Jonathan P. McCarthy
Daniel G. Sullivan
William Wascher
Beth Anne Wilson
Associate Economists
Secretary's note: It was noted that President Kashkari intends to nominate an associate economist from the Federal Reserve Bank of Minneapolis when the recently named research director officially joins that Bank.
By unanimous vote, the Federal Reserve Bank of New York was selected to execute transactions for the System Open Market Account (SOMA).
By unanimous vote, the Committee selected Simon Potter and Lorie K. Logan to serve at the pleasure of the Committee as manager and deputy manager of the SOMA, respectively, on the understanding that these selections were subject to their being satisfactory to the Federal Reserve Bank of New York.
Secretary's note: Advice subsequently was received that the manager and deputy manager selections indicated above were satisfactory to the Federal Reserve Bank of New York.
By unanimous vote, the Committee voted to reaffirm without change the Authorization for Domestic Open Market Operations, the Authorization for Foreign Currency Operations, and the Foreign Currency Directive as shown below. The Guidelines for the Conduct of System Open Market Operations in Federal-Agency Issues remained suspended.
AUTHORIZATION FOR DOMESTIC OPEN MARKET OPERATIONS
(As reaffirmed effective January 31, 2017)
1. The Federal Open Market Committee (the "Committee") authorizes and directs the Federal Reserve Bank selected by the Committee to execute open market transactions (the "Selected Bank"), to the extent necessary to carry out the most recent domestic policy directive adopted by the Committee:
A. To buy or sell in the open market securities that are direct obligations of, or fully guaranteed as to principal and interest by, the United States, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, that are eligible for purchase or sale under Section 14(b) of the Federal Reserve Act ("Eligible Securities") for the System Open Market Account ("SOMA"):
i. As an outright operation with securities dealers and foreign and international accounts maintained at the Selected Bank: on a same-day or deferred delivery basis (including such transactions as are commonly referred to as dollar rolls and coupon swaps) at market prices; or
ii. As a temporary operation: on a same-day or deferred delivery basis, to purchase such Eligible Securities subject to an agreement to resell ("repo transactions") or to sell such Eligible Securities subject to an agreement to repurchase ("reverse repo transactions") for a term of 65 business days or less, at rates that, unless otherwise authorized by the Committee, are determined by competitive bidding, after applying reasonable limitations on the volume of agreements with individual counterparties;
B. To allow Eligible Securities in the SOMA to mature without replacement;
C. To exchange, at market prices, in connection with a Treasury auction, maturing Eligible Securities in the SOMA with the Treasury, in the case of Eligible Securities that are direct obligations of the United States or that are fully guaranteed as to principal and interest by the United States; and
D. To exchange, at market prices, maturing Eligible Securities in the SOMA with an agency of the United States, in the case of Eligible Securities that are direct obligations of that agency or that are fully guaranteed as to principal and interest by that agency.
2. The Committee authorizes the Selected Bank to undertake transactions of the type described in paragraph 1 from time to time for the purpose of testing operational readiness, subject to the following limitations:
A. All transactions authorized in this paragraph 2 shall be conducted with prior notice to the Committee;
B. The aggregate par value of the transactions authorized in this paragraph 2 that are of the type described in paragraph 1.A.i shall not exceed $5 billion per calendar year; and
C. The outstanding amount of the transactions described in paragraph 1.A.ii shall not exceed $5 billion at any given time.
3. In order to ensure the effective conduct of open market operations, the Committee authorizes the Selected Bank to operate a program to lend Eligible Securities held in the SOMA to dealers on an overnight basis (except that the Selected Bank may lend Eligible Securities for longer than an overnight term to accommodate weekend, holiday, and similar trading conventions).
A. Such securities lending must be:
i. At rates determined by competitive bidding;
ii. At a minimum lending fee consistent with the objectives of the program;
iii. Subject to reasonable limitations on the total amount of a specific issue of Eligible Securities that may be auctioned; and
iv. Subject to reasonable limitations on the amount of Eligible Securities that each borrower may borrow.
B. The Selected Bank may:
i. Reject bids that, as determined in its sole discretion, could facilitate a bidder's ability to control a single issue;
ii. Accept Treasury securities or cash as collateral for any loan of securities authorized in this paragraph 3; and
iii. Accept agency securities as collateral only for a loan of agency securities authorized in this paragraph 3.
4. In order to ensure the effective conduct of open market operations, while assisting in the provision of short-term investments or other authorized services for foreign central bank and international accounts maintained at a Federal Reserve Bank (the "Foreign Accounts") and accounts maintained at a Federal Reserve Bank as fiscal agent of the United States pursuant to section 15 of the Federal Reserve Act (together with the Foreign Accounts, the "Customer Accounts"), the Committee authorizes the following when undertaken on terms comparable to those available in the open market:
A. The Selected Bank, for the SOMA, to undertake reverse repo transactions in Eligible Securities held in the SOMA with the Customer Accounts for a term of 65 business days or less; and
B. Any Federal Reserve Bank that maintains Customer Accounts, for any such Customer Account, when appropriate and subject to all other necessary authorization and approvals, to:
i. Undertake repo transactions in Eligible Securities with dealers with a corresponding reverse repo transaction in such Eligible Securities with the Customer Accounts; and
ii. Undertake intra-day repo transactions in Eligible Securities with Foreign Accounts.
Transactions undertaken with Customer Accounts under the provisions of this paragraph 4 may provide for a service fee when appropriate. Transactions undertaken with Customer Accounts are also subject to the authorization or approval of other entities, including the Board of Governors of the Federal Reserve System and, when involving accounts maintained at a Federal Reserve Bank as fiscal agent of the United States, the United States Department of the Treasury.
5. The Committee authorizes the Chairman of the Committee, in fostering the Committee's objectives during any period between meetings of the Committee, to instruct the Selected Bank to act on behalf of the Committee to:
A. Adjust somewhat in exceptional circumstances the stance of monetary policy and to take actions that may result in material changes in the composition and size of the assets in the SOMA; or
B. Undertake transactions with respect to Eligible Securities in order to appropriately address temporary disruptions of an operational or highly unusual nature in U.S. dollar funding markets.
Any such adjustment described in subparagraph A of this paragraph 5 shall be made in the context of the Committee's discussion and decision about the stance of policy at its most recent meeting and the Committee's long-run objectives to foster maximum employment and price stability, and shall be based on economic, financial, and monetary developments since the most recent meeting of the Committee. The Chairman, whenever feasible, will consult with the Committee before making any instruction under this paragraph 5.
AUTHORIZATION FOR FOREIGN CURRENCY OPERATIONS
(As reaffirmed effective January 31, 2017)
IN GENERAL
1. The Federal Open Market Committee (the "Committee") authorizes the Federal Reserve Bank selected by the Committee (the "Selected Bank") to execute open market transactions for the System Open Market Account as provided in this Authorization, to the extent necessary to carry out any foreign currency directive of the Committee:
A. To purchase and sell foreign currencies (also known as cable transfers) at home and abroad in the open market, including with the United States Treasury, with foreign monetary authorities, with the Bank for International Settlements, and with other entities in the open market. This authorization to purchase and sell foreign currencies encompasses purchases and sales through standalone spot or forward transactions and through foreign exchange swap transactions. For purposes of this Authorization, foreign exchange swap transactions are: swap transactions with the United States Treasury (also known as warehousing transactions), swap transactions with other central banks under reciprocal currency arrangements, swap transactions with other central banks under standing dollar liquidity and foreign currency liquidity swap arrangements, and swap transactions with other entities in the open market.
B. To hold balances of, and to have outstanding forward contracts to receive or to deliver, foreign currencies.
2. All transactions in foreign currencies undertaken pursuant to paragraph 1 above shall, unless otherwise authorized by the Committee, be conducted:
A. In a manner consistent with the obligations regarding exchange arrangements under Article IV of the Articles of Agreement of the International Monetary Fund (IMF).1
B. In close and continuous cooperation and consultation, as appropriate, with the United States Treasury.
C. In consultation, as appropriate, with foreign monetary authorities, foreign central banks, and international monetary institutions.
D. At prevailing market rates.
STANDALONE SPOT AND FORWARD TRANSACTIONS
3. For any operation that involves standalone spot or forward transactions in foreign currencies:
A. Approval of such operation is required as follows:
i. The Committee must direct the Selected Bank in advance to execute the operation if it would result in the overall volume of standalone spot and forward transactions in foreign currencies, as defined in paragraph 3.C of this Authorization, exceeding $5 billion since the close of the most recent regular meeting of the Committee. The Foreign Currency Subcommittee (the "Subcommittee") must direct the Selected Bank in advance to execute the operation if the Subcommittee believes that consultation with the Committee is not feasible in the time available.
ii. The Committee authorizes the Subcommittee to direct the Selected Bank in advance to execute the operation if it would result in the overall volume of standalone spot and forward transactions in foreign currencies, as defined in paragraph 3.C of this Authorization, totaling $5 billion or less since the close of the most recent regular meeting of the Committee.
B. Such an operation also shall be:
i. Generally directed at countering disorderly market conditions; or
ii. Undertaken to adjust System balances in light of probable future needs for currencies; or
iii. Conducted for such other purposes as may be determined by the Committee.
C. For purposes of this Authorization, the overall volume of standalone spot and forward transactions in foreign currencies is defined as the sum (disregarding signs) of the dollar values of individual foreign currencies purchased and sold, valued at the time of the transaction.
WAREHOUSING
4. The Committee authorizes the Selected Bank, with the prior approval of the Subcommittee and at the request of the United States Treasury, to conduct swap transactions with the United States Exchange Stabilization Fund established by section 10 of the Gold Reserve Act of 1934 under agreements in which the Selected Bank purchases foreign currencies from the Exchange Stabilization Fund and the Exchange Stabilization Fund repurchases the foreign currencies from the Selected Bank at a later date (such purchases and sales also known as warehousing).
RECIPROCAL CURRENCY ARRANGEMENTS, AND STANDING DOLLAR AND FOREIGN CURRENCY LIQUIDITY SWAPS
5. The Committee authorizes the Selected Bank to maintain reciprocal currency arrangements established under the North American Framework Agreement, standing dollar liquidity swap arrangements, and standing foreign currency liquidity swap arrangements as provided in this Authorization and to the extent necessary to carry out any foreign currency directive of the Committee.
A. For reciprocal currency arrangements all drawings must be approved in advance by the Committee (or by the Subcommittee, if the Subcommittee believes that consultation with the Committee is not feasible in the time available).
B. For standing dollar liquidity swap arrangements all drawings must be approved in advance by the Chairman. The Chairman may approve a schedule of potential drawings, and may delegate to the manager, System Open Market Account, the authority to approve individual drawings that occur according to the schedule approved by the Chairman.
C. For standing foreign currency liquidity swap arrangements all drawings must be approved in advance by the Committee (or by the Subcommittee, if the Subcommittee believes that consultation with the Committee is not feasible in the time available).
D. Operations involving standing dollar liquidity swap arrangements and standing foreign currency liquidity swap arrangements shall generally be directed at countering strains in financial markets in the United States or abroad, or reducing the risk that they could emerge, so as to mitigate their effects on economic and financial conditions in the United States.
E. For reciprocal currency arrangements, standing dollar liquidity swap arrangements, and standing foreign currency liquidity swap arrangements:
i. All arrangements are subject to annual review and approval by the Committee;
ii. Any new arrangements must be approved by the Committee; and
iii. Any changes in the terms of existing arrangements must be approved in advance by the Chairman. The Chairman shall keep the Committee informed of any changes in terms, and the terms shall be consistent with principles discussed with and guidance provided by the Committee.
OTHER OPERATIONS IN FOREIGN CURRENCIES
6. Any other operations in foreign currencies for which governance is not otherwise specified in this Authorization (such as foreign exchange swap transactions with private-sector counterparties) must be authorized and directed in advance by the Committee.
FOREIGN CURRENCY HOLDINGS
7. The Committee authorizes the Selected Bank to hold foreign currencies for the System Open Market Account in accounts maintained at foreign central banks, the Bank for International Settlements, and such other foreign institutions as approved by the Board of Governors under Section 214.5 of Regulation N, to the extent necessary to carry out any foreign currency directive of the Committee.
A. The Selected Bank shall manage all holdings of foreign currencies for the System Open Market Account:
Primarily, to ensure sufficient liquidity to enable the Selected Bank to conduct foreign currency operations as directed by the Committee;
Secondarily, to maintain a high degree of safety;
Subject to paragraphs 7.A.i and 7.A.ii, to provide the highest rate of return possible in each currency; and
To achieve such other objectives as may be authorized by the Committee.
B. The Selected Bank may manage such foreign currency holdings by:
i. Purchasing and selling obligations of, or fully guaranteed as to principal and interest by, a foreign government or agency thereof ("Permitted Foreign Securities") through outright purchases and sales;
ii. Purchasing Permitted Foreign Securities under agreements for repurchase of such Permitted Foreign Securities and selling such securities under agreements for the resale of such securities; and
iii. Managing balances in various time and other deposit accounts at foreign institutions approved by the Board of Governors under Regulation N.
C. The Subcommittee, in consultation with the Committee, may provide additional instructions to the Selected Bank regarding holdings of foreign currencies.
ADDITIONAL MATTERS
8. The Committee authorizes the Chairman:
A. With the prior approval of the Committee, to enter into any needed agreement or understanding with the Secretary of the United States Treasury about the division of responsibility for foreign currency operations between the System and the United States Treasury;
B. To advise the Secretary of the United States Treasury concerning System foreign currency operations, and to consult with the Secretary on policy matters relating to foreign currency operations;
C. To designate Federal Reserve System persons authorized to communicate with the United States Treasury concerning System Open Market Account foreign currency operations; and
D. From time to time, to transmit appropriate reports and information to the National Advisory Council on International Monetary and Financial Policies.
9. The Committee authorizes the Selected Bank to undertake transactions of the type described in this Authorization, and foreign exchange and investment transactions that it may be otherwise authorized to undertake, from time to time for the purpose of testing operational readiness. The aggregate amount of such transactions shall not exceed $2.5 billion per calendar year. These transactions shall be conducted with prior notice to the Committee.
10. All Federal Reserve banks shall participate in the foreign currency operations for System Open Market Account in accordance with paragraph 3G(1) of the Board of Governors' Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks dated January 1, 1944.
11. Any authority of the Subcommittee pursuant to this Authorization may be exercised by the Chairman if the Chairman believes that consultation with the Subcommittee is not feasible in the time available. The Chairman shall promptly report to the Subcommittee any action approved by the Chairman pursuant to this paragraph.
12. The Committee authorizes the Chairman, in exceptional circumstances where it would not be feasible to convene the Committee, to foster the Committee's objectives by instructing the Selected Bank to engage in foreign currency operations not otherwise authorized pursuant to this Authorization. Any such action shall be made in the context of the Committee's discussion and decisions regarding foreign currency operations. The Chairman, whenever feasible, will consult with the Committee before making any instruction under this paragraph.
FOREIGN CURRENCY DIRECTIVE
(As reaffirmed effective January 31, 2017)
1. The Committee directs the Federal Reserve Bank selected by the Committee (the "Selected Bank") to execute open market transactions, for the System Open Market Account, in accordance with the provisions of the Authorization for Foreign Currency Operations (the "Authorization") and subject to the limits in this Directive.
2. The Committee directs the Selected Bank to execute warehousing transactions, if so requested by the United States Treasury and if approved by the Foreign Currency Subcommittee (the "Subcommittee"), subject to the limitation that the outstanding balance of United States dollars provided to the United States Treasury as a result of these transactions not at any time exceed $5 billion.
3. The Committee directs the Selected Bank to maintain, for the System Open Market Account:
A. Reciprocal currency arrangements with the following foreign central banks:
Foreign central bank
Maximum amount
(millions of dollars or equivalent)
Bank of Canada
2,000
Bank of Mexico
3,000
B. Standing dollar liquidity swap arrangements with the following foreign central banks:
Bank of Canada
Bank of England
Bank of Japan
European Central Bank
Swiss National Bank
C. Standing foreign currency liquidity swap arrangements with the following foreign central banks:
Bank of Canada
Bank of England
Bank of Japan
European Central Bank
Swiss National Bank
4. The Committee directs the Selected Bank to hold and to invest foreign currencies in the portfolio in accordance with the provisions of paragraph 7 of the Authorization.
5. The Committee directs the Selected Bank to report to the Committee, at each regular meeting of the Committee, on transactions undertaken pursuant to paragraphs 1 and 6 of the Authorization. The Selected Bank is also directed to provide quarterly reports to the Committee regarding the management of the foreign currency holdings pursuant to paragraph 7 of the Authorization.
6. The Committee directs the Selected Bank to conduct testing of transactions for the purpose of operational readiness in accordance with the provisions of paragraph 9 of the Authorization.
By unanimous vote, the Committee amended its Program for Security of FOMC Information (Program) with (1) minor changes that provide some additional flexibility in the classification of FOMC information and (2) the removal of language concerning communication with the Treasury Department regarding SOMA foreign currency operations that was no longer necessary in the Program because similar language was inserted into the Authorization for Foreign Currency Operations in September 2016.
In the Committee's annual reconsideration of the Statement on Longer-Run Goals and Monetary Policy Strategy, participants agreed that only a minor revision was required at this meeting, which was to update the reference to participants' estimates of the longer-run normal rate of unemployment from 4.9 percent to 4.8 percent. All participants supported the statement with the revision, and the Committee voted unanimously to approve the updated statement.
STATEMENT ON LONGER-RUN GOALS AND MONETARY POLICY STRATEGY
(As amended effective January 31, 2017)
"The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.
Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee's policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee's goals.
The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. The Committee would be concerned if inflation were running persistently above or below this objective. Communicating this symmetric inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances. The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants' estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC's Summary of Economic Projections. For example, in the most recent projections, the median of FOMC participants' estimates of the longer-run normal rate of unemployment was 4.8 percent.
In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate.
The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January."
The Committee considered amendments to its Policy on External Communications of Committee Participants and its Policy on External Communications of Federal Reserve System Staff. The amendments consisted of (1) starting the communication blackout earlier (the second Saturday before Committee meetings); (2) revising the treatment of staff presentations during the blackout period; (3) revising provisions regarding regularly published System releases of data, survey results, statistical indexes, and model results during the blackout period; (4) explicitly recognizing the need for ongoing communications with the public by staff members during the blackout period for operational or information-gathering purposes; and (5) making several miscellaneous changes, generally to improve clarity.
All participants supported the revisions, and the Committee voted unanimously to approve the revised policies.
Illustration of Uncertainty in the Summary of Economic Projections
Participants considered a revised proposal from the subcommittee on communications to add to the Summary of Economic Projections (SEP) a number of charts (sometimes called fan charts) that would illustrate the uncertainty that attends participants' macroeconomic projections. The revised proposal was based on further analysis and consultations following Committee discussion of a proposal at the January 2016 meeting. Participants generally supported the revised approach and agreed that fan charts would be incorporated in the SEP to be released with the minutes of the March 14-15, 2017, FOMC meeting. The Chair noted that a staff paper on measures of forecast uncertainty in the SEP, including those that would be used as the basis for fan charts in the SEP, would be made available to the public soon after the minutes of the current meeting were published, and that examples of the new charts using previously published data would be released in advance of the March meeting.
Developments in Financial Markets and Open Market Operations
The SOMA manager reported on developments in U.S. and global financial markets during the period since the Committee met on December 13-14, 2016. Financial asset prices were little changed since the December meeting. Market participants continued to report substantial uncertainty about potential changes in fiscal, regulatory, and other government policies. Nonetheless, measures of implied volatility of various asset prices remained low. Emerging market currencies were generally resilient in recent weeks, reportedly benefiting from investors' anticipation of stronger global economic growth, after depreciating significantly against the dollar during the previous intermeeting period. Market expectations for the path of the federal funds rate were little changed over the intermeeting period.
The deputy manager followed with a briefing on developments in money markets, market expectations for the System's balance sheet, and open market operations. In money markets, interest rates smoothly shifted higher following the Committee's decision at its December meeting to increase the target range for the federal funds rate by 25 basis points, and federal funds subsequently traded near the center of the new range except on year-end. Although year-end pressures in U.S. money markets were similar to past quarter-ends, some notable, albeit temporary, strains appeared over the turn of the year in foreign exchange swap markets and European markets for repurchase agreements. The Open Market Desk's surveys of dealers and market participants pointed to some change in expectations for FOMC reinvestment policy, with more respondents than in previous surveys anticipating a change in policy when the federal funds rate reaches 1 to 1-1/2 percent. The higher level of take-up at the System's overnight reverse repurchase agreement facility that developed following the implementation of money market fund reform last fall generally persisted. The staff also briefed the Committee on plans for small-value tests of various System operations and facilities during 2017 and for quarterly tests of the Term Deposit Facility.
By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account during the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the January 31-February 1 meeting indicated that real gross domestic product (GDP) expanded at a moderate rate in the fourth quarter of last year and that labor market conditions continued to strengthen. Consumer price inflation rose further above the slow pace seen during the first half of last year, but it was still running below the Committee's longer-run objective of 2 percent.
Recent indicators generally showed that labor market conditions continued to improve in late 2016. Total nonfarm payroll employment increased at a solid pace in December. The unemployment rate edged up to 4.7 percent but remained near its recent low, while the labor force participation rate rose slightly. The share of workers employed part time for economic reasons decreased further. The rates of private-sector job openings and of hiring were unchanged in November, while the rate of quits edged up. The four-week moving average of initial claims for unemployment insurance benefits was still low in December and early January. Measures of labor compensation continued to rise at a moderate rate. The employment cost index for private industry workers rose 2-1/4 percent over the 12 months ending in December, and average hourly earnings for all employees increased almost 3 percent over the same 12-month period. The unemployment rates for African Americans, for Hispanics, and for whites were close to the levels seen just before the most recent recession, but the unemployment rates for African Americans and for Hispanics remained above the rate for whites.
Total industrial production edged down in the fourth quarter as a whole. Mining output expanded markedly, but manufacturing production advanced only modestly. The output of utilities declined, as the weather was unseasonably warm, on average, during the fourth quarter. Automakers' assembly schedules suggested that motor vehicle production would be a little lower early this year, but broader indicators of manufacturing production, such as the new orders indexes from national and regional manufacturing surveys, were consistent with modest gains in factory output in the near term.
Real personal consumption expenditures (PCE) rose at a moderate pace in the fourth quarter. Consumer expenditures for durable goods, particularly motor vehicles, increased considerably. However, consumer spending for energy services declined markedly, reflecting unseasonably warm weather. Recent readings on some key factors that influence consumer spending--including further gains in employment, real disposable personal income, and households' net worth--were consistent with moderate increases in real PCE in early 2017. In addition, consumer sentiment, as measured by the University of Michigan Surveys of Consumers, moved up to an elevated level in December and January.
Real residential investment spending rose at a brisk pace in the fourth quarter after decreasing in the previous two quarters. Building permit issuance for new single-family homes--which tends to be a reliable indicator of the underlying trend in construction--advanced solidly. Sales of existing homes increased modestly in the fourth quarter, although new home sales declined.
Real private expenditures for business equipment and intellectual property (E&I) expanded at a moderate pace in the fourth quarter after declining, on net, over the preceding three quarters. Recent increases in nominal new orders of nondefense capital goods excluding aircraft, along with improvements in indicators of business sentiment, pointed to further moderate increases in real E&I spending in the near term. Real business expenditures for nonresidential structures declined in the fourth quarter after rising in the previous quarter. The number of crude oil and natural gas rigs in operation, an indicator of spending for structures in the drilling and mining sector, continued to increase through late January. The change in real inventory investment was estimated to have made an appreciable positive contribution to real GDP growth in the fourth quarter.
Real total government purchases rose somewhat in the fourth quarter. Federal government purchases for defense decreased while nondefense expenditures increased. State and local government purchases increased modestly, as the payrolls of these governments expanded slightly and their construction spending advanced somewhat.
The U.S. international trade deficit widened in November for the second consecutive month. After declining in October, nominal exports fell again in November as decreases in exports of capital goods more than offset increases in exports of industrial supplies. Nominal imports in November rose to their highest level of the year, led by imports of industrial supplies and materials. The Census Bureau's advance trade estimates for December suggested a narrowing of the trade deficit in goods, as imports increased less than exports. Altogether, the change in real net exports was estimated to have made a substantial negative contribution to real GDP growth in the fourth quarter.
Total U.S. consumer prices, as measured by the PCE price index, increased a little more than 1-1/2 percent over the 12 months ending in December, partly restrained by decreases in consumer food prices last year. Core PCE price inflation, which excludes changes in food and energy prices, was 1-3/4 percent over those same 12 months, held down in part by decreases in the prices of nonenergy imports over part of this period. Over the same 12-month period, total consumer prices as measured by the consumer price index (CPI) rose a bit more than 2 percent, while core CPI inflation was 2-1/4 percent. Survey-based measures of median longer-run inflation expectations--such as those from the Michigan survey and from the Desk's Survey of Primary Dealers and Survey of Market Participants--were unchanged, on net, over December and January.
Foreign real GDP growth appeared to slow somewhat in the fourth quarter from its relatively strong third-quarter pace. Nevertheless, recent data on foreign industrial production and trade seemed to be stronger than private analysts had anticipated and were consistent with moderate economic growth abroad. Economic growth in both the euro area and the United Kingdom continued at relatively solid rates. In the emerging market economies (EMEs), GDP growth remained robust in China but slowed elsewhere in the Asian EMEs and in Mexico, while the pace of economic contraction appeared to lessen in South America. Inflation in the advanced foreign economies (AFEs) continued to rise, largely reflecting the pass-through of earlier increases in crude oil prices into retail energy prices. Inflation also rose in many EMEs, in part because of rising food and fuel prices; however, inflation fell notably in much of South America.
Staff Review of the Financial Situation
Domestic financial conditions were mostly little changed, on balance, since the December FOMC meeting. Broad equity price indexes fluctuated in a relatively narrow range and ended the intermeeting period about unchanged. Nominal Treasury yields moved up across most maturities in the days following the December FOMC meeting but subsequently reversed and ended the period little changed on net. Measures of inflation compensation based on Treasury Inflation-Protected Securities (TIPS) rose somewhat on balance. Amid notable volatility, the broad dollar index declined slightly on net. Meanwhile, financing conditions for nonfinancial businesses and households remained generally accommodative.
Although the FOMC's decision to raise the target range for the federal funds rate to 1/2 to 3/4 percent at the December meeting was widely anticipated in financial markets, contacts generally characterized some of the communications associated with the FOMC meeting as less accommodative than expected. In particular, market commentaries highlighted the upward revision of 25 basis points to the median projection for the federal funds rate at the end of 2017 in the SEP. Nonetheless, the expected path of the federal funds rate implied by futures quotes was little changed, on net, since the December meeting. Market-based estimates indicated that investors saw the probability of an increase in the target range for the federal funds rate at the January 31-February 1 FOMC meeting as very low, and the estimated probability of an increase in the target range at or before the March meeting was about 25 percent. Consistent with readings based on market quotes, results from the Desk's January Survey of Primary Dealers and Survey of Market Participants indicated that the median respondent assigned a probability of about 25 percent to the next increase in the target range occurring at or before the March FOMC meeting. Market-based estimates of the probability of an increase in the target range at or before the June meeting were about 70 percent.
Yields on nominal Treasury securities increased across most maturities following the December FOMC meeting, but they fell, on balance, over the remainder of the intermeeting period. While market commentary suggested that a number of factors contributed to the decline, a clear catalyst was difficult to identify. Treasury yields ended the period about unchanged and remained significantly higher than just before the U.S. elections in November. TIPS-based measures of inflation compensation edged up over the intermeeting period.
Broad U.S. equity price indexes fluctuated in a relatively narrow range and were little changed, on net, over the intermeeting period. However, equity prices remained notably higher than just before the November elections, apparently reflecting investors' expectations that fiscal and other policy changes would boost corporate profits and economic activity in the medium term. Implied volatility on the S&P 500 index edged down since the December meeting and remained relatively low. Corporate bond spreads for both investment- and speculative-grade firms continued to narrow over the intermeeting period and were near the bottom of their ranges of the past several years.
Money market rates responded as expected to the change in the target range for the federal funds rate. The effective federal funds rate was 66 basis points--25 basis points higher than previously--every day following the change, except at year-end. Conditions in other domestic short-term funding markets were generally stable over the intermeeting period. Assets under management by money market funds changed little, with government funds experiencing modest net outflows and prime fund assets remaining about flat.
Financing conditions for nonfinancial businesses continued to be accommodative overall. Corporate bond issuance by nonfinancial firms rebounded in December to about its robust average pace of the past few years, and issuance of syndicated leveraged loans was strong. Gross equity issuance was solid in November and December. Meanwhile, after a slowdown in the third quarter, the growth of commercial and industrial (C&I) loans on banks' books picked up in the fourth quarter, although the pace remained slower than earlier in the year. The January Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) indicated that banks left C&I lending standards for large and middle-market firms and for small firms unchanged, on balance, in the fourth quarter. On net, banks expected to ease their standards for C&I loans somewhat in 2017.
Credit continued to be broadly available in the commercial real estate (CRE) sector, although results from the January SLOOS indicated that banks continued to tighten their lending standards in the fourth quarter and expected to tighten them somewhat further in 2017. CRE loans on banks' balance sheets continued to grow in the fourth quarter, although at a somewhat slower rate than earlier in the year, while issuance of commercial mortgage-backed securities (CMBS) was solid over the period, in part because issuers tried to complete deals before the implementation of new risk retention rules in late December. The delinquency rate on CMBS moved up further in November and December; the increase largely reflected delinquencies on loans originated before the financial crisis.
Credit conditions for residential mortgages were little changed, on net, over the intermeeting period. Mortgage credit was broadly available to households with average to high credit scores, while credit remained tight for borrowers with low credit scores, hard-to-document income, or high debt-to-income ratios. According to the January SLOOS, banks reportedly left lending standards unchanged, on net, on most categories of home-purchase loans. The interest rate on 30-year fixed-rate mortgages moved about in line with rates on comparable-maturity Treasury securities, rising notably after the November elections but retracing part of that increase since mid-December. The pace of purchase originations was little changed in recent months despite higher mortgage rates, while refinance originations fell sharply. Bank lending for residential mortgages was solid in the fourth quarter, and the issuance of mortgage-backed securities was robust.
Financing conditions in consumer credit markets remained generally accommodative, although lending standards for credit cards continued to be tight for subprime borrowers. Respondents to the January SLOOS indicated that, over the previous three months, they had tightened standards and terms on auto and credit card loans, and that they expected to tighten standards further in 2017. Consumer loan balances increased at a robust rate through November, with credit card loans, student loans, and auto loans all expanding at a similar pace. Measures of consumer credit quality were little changed, on net, in the fourth quarter.
Foreign economic data that were better than expected and perceptions of an ebbing of some potential downside risks in Europe appeared to contribute to an improvement in investor sentiment in global financial markets. Importantly, a large euro-area bank reached a settlement with the U.S. Department of Justice on issues related to mortgage-backed securities, and the Italian government approved a funding package and other measures to support struggling banks. Reflecting the improved sentiment and positive economic news, global equity prices and longer-term sovereign yields in most AFEs increased moderately over the period. Yield spreads on EME sovereign bonds narrowed somewhat, and flows into EME mutual funds turned positive. The broad dollar index increased immediately after the December FOMC meeting but subsequently retraced its gains and ended the period slightly lower. In contrast, the dollar strengthened further against the Mexican peso over the intermeeting period.
The staff provided its latest report on potential risks to financial stability, indicating that it continued to judge the vulnerabilities of the U.S. financial system as moderate on balance. The staff's assessment took into account the increase in asset valuation pressures since the November elections, the overall low level of financial leverage, the strong capital positions at banks, and the subdued growth of debt among households and businesses. In addition, with money market fund reforms in place, the vulnerabilities from maturity and liquidity transformation were viewed as being somewhat below their longer-run average.
Staff Economic Outlook
In the U.S. economic projection prepared by the staff for this FOMC meeting, the near-term forecast was little changed from the December meeting. Real GDP growth in the fourth quarter of last year was estimated to have been a little faster than the staff had expected in December, and the pace of economic growth in the first half of this year was projected to be essentially the same as in the fourth quarter. The staff's forecast for real GDP growth over the next several years was little changed. The staff continued to project that real GDP would expand at a modestly faster pace than potential output in 2017 through 2019. The unemployment rate was forecast to edge down gradually through the end of 2019 and to run below the staff's estimate of its longer-run natural rate; the path for the unemployment rate was little changed from the previous projection.
The staff's forecast for consumer price inflation was unchanged on balance. The staff continued to project that inflation would increase over the next several years, as food and energy prices, along with the prices of non-energy imports, were expected to begin steadily rising either this year or next. However, inflation was projected to be marginally below the Committee's longer-run objective of 2 percent in 2019.
The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The risks to the forecast for real GDP were seen as tilted to the downside, primarily reflecting the staff's assessment that monetary policy appeared to be better positioned to offset large positive shocks than substantial adverse ones. However, the staff viewed the risks to the forecast from developments abroad as less pronounced than in the recent past. Consistent with the downside risks to aggregate demand, the staff viewed the risks to its outlook for the unemployment rate as tilted to the upside. The risks to the projection for inflation were seen as roughly balanced. The downside risks from the possibility that longer-term inflation expectations may have edged down or that the dollar could appreciate substantially further were seen as roughly counterbalanced by the upside risk that inflation could increase more than expected in an economy that was projected to continue operating above its longer-run potential.
Participants' Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants agreed that information received over the intermeeting period indicated that the labor market had continued to strengthen and that economic activity had continued to expand at a moderate pace. Job gains had remained solid, and the unemployment rate had stayed near its recent low. Household spending had continued to rise moderately, while business fixed investment had remained soft. Measures of consumer and business sentiment had improved of late. Inflation had increased in recent quarters but was still below the Committee's 2 percent longer-run objective. Market-based measures of inflation compensation remained low; most survey-based measures of inflation compensation were little changed on balance.
Participants generally indicated that their economic forecasts had changed little since the December FOMC meeting. They continued to anticipate that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace, labor market conditions would strengthen somewhat further, and inflation would rise to 2 percent over the medium term. They also judged that near-term risks to the economic outlook appeared roughly balanced. Participants again emphasized their considerable uncertainty about the prospects for changes in fiscal and other government policies as well as about the timing and magnitude of the net effects of such changes on economic activity. In discussing the risks to the economic outlook, participants continued to view the possibility of more expansionary fiscal policy as having increased the upside risks to their economic forecasts, although some noted that several potential changes in government policies could pose downside risks. In addition, several viewed the downside risks from weaker economic activity abroad as having diminished somewhat. But several indicated that they continued to be concerned about the downside risks to economic activity associated with the possibility of additional appreciation of the foreign exchange value of the dollar or financial vulnerabilities in some foreign economies, together with the proximity of the federal funds rate to the effective lower bound. Regarding the outlook for inflation, some participants continued to be concerned that faster-than-expected economic growth or a substantial undershooting of the longer-run normal unemployment rate posed upside risks to inflation. However, several others continued to see downside risks to the inflation outlook, citing still-low measures of inflation compensation and inflation expectations or the possibility of further appreciation of the dollar. Participants generally agreed that the Committee should continue to closely monitor inflation indicators and global economic and financial developments.
Regarding the household sector, consumer spending posted a moderate increase in the fourth quarter, and participants generally anticipated that further gains in consumer spending would contribute importantly to economic growth in 2017. They expected that, although interest rates had moved higher, household spending would continue to be supported by rising employment and income as well as high levels of household wealth. The recent improvement in consumer sentiment was also viewed as a potentially positive factor in the outlook for spending, although several participants cautioned that an elevated level of sentiment, even if it was sustained, was likely to make only a small contribution to household spending beyond those from income, wealth, and credit conditions.
Recent indicators of activity in the housing sector were generally positive. Starts and permits for single-family housing and sales of existing homes rose moderately in the fourth quarter, and real residential investment bounced back after two quarterly declines. A couple of participants commented that supply constraints might be holding back new homebuilding. In addition, a few participants noted that prospects for residential investment would also depend on whether household formation picked up and how housing market activity responded to the recent rise in mortgage interest rates.
The outlook for the business sector improved further over the intermeeting period. Business investment in E&I, which had been contracting earlier in 2016, increased at a moderate rate in the fourth quarter. In addition, new orders for nondefense capital goods posted widespread gains in recent months. The available reports from District surveys of activity and revenues in the manufacturing and services industries were very positive. Moreover, a number of national surveys of sentiment among corporate executives and small business owners as well as information from participants' District contacts indicated a high level of optimism about the economic outlook. Many participants indicated that their business contacts attributed the improvement in business sentiment to the expectation that firms would benefit from possible changes in federal spending, tax, and regulatory policies. A few participants indicated that some of their contacts had already increased their planned capital expenditures. However, participants' contacts in some Districts, while optimistic, intended to wait for more clarity about federal policy initiatives before adjusting their capital spending and hiring. In addition, contacts in some industries remained concerned that their businesses might be adversely affected by some of the government policy changes being considered. Activity in the energy sector continued to improve, with District contacts reporting an increase in capital spending, better access to credit, and a pickup in hiring. However, reports from a couple of Districts indicated that the agricultural sector was still weak, with low commodity prices continuing to put financial pressure on farm-related businesses.
The labor market continued to strengthen in recent months. Monthly gains in nonfarm payroll employment averaged 165,000 over the period from October to December, a pace that, if it continued, would be expected to increase labor utilization over time. At 4.7 percent in December, the unemployment rate remained close to levels that most participants judged to be consistent with the Committee's maximum-employment objective. Some participants cited other indicators confirming the strengthening in the labor market, such as a decline in the broader measures of labor underutilization that include workers marginally attached to the labor force, the rise in the quits rate, and faster increases in some measures of labor compensation. Moreover, several participants' business contacts reported shortages of workers in some occupations or the need for training programs to expand the supply of skilled workers. Several other participants thought that some margins of labor underutilization remained, citing the still-high rate of prime-age workers outside the labor force, the elevated share of workers who were employed part time for economic reasons, or the potential for further firming in labor force participation. However, a couple of participants pointed out that the uncertainty attending estimates of longer-run trends in part-time employment and labor force participation made it difficult to assess the scope for additional increases in labor utilization. Most participants still expected that if economic growth remained moderate, labor markets would continue to tighten gradually, with the unemployment rate running only modestly below their estimates of the longer-run normal rate. However, several participants projected a more substantial undershooting.
Information on inflation received over the intermeeting period was broadly in line with participants' expectations and was consistent with a view that PCE inflation was moving closer to the Committee's 2 percent objective. The 12-month change in headline PCE prices increased further, to 1.6 percent in December, as the effects of the earlier declines in consumer energy prices waned. The 12-month change in core PCE prices stayed near 1.7 percent for a fifth consecutive month. A few participants noted that other measures provided additional evidence that inflation was approaching the Committee's objective; for example, the 12-month changes in the headline and core CPI, the median CPI, and the trimmed mean PCE price index had also moved up from year-earlier levels. The available information on pricing from District business contacts varied, with a couple of participants reporting that firms were experiencing rising cost pressures from input costs or had been able to raise their prices, while a few other participants said that firms in their Districts were not experiencing price pressures or that the appreciation of the dollar was continuing to hold down import prices. Most survey-based measures of longer-term inflation expectations had been little changed in recent months. The median response to the Michigan survey of longer-run inflation expectations moved back up to 2.6 percent in January, in line with the average of readings during 2016, and the measure at the three-year horizon from the Federal Reserve Bank of New York's survey rose slightly in December; the measures calculated by the Federal Reserve Bank of Cleveland had been stable over the preceding three months. Some market-based measures of inflation compensation had turned up noticeably in late 2016, but a number of participants noted that they remained relatively low. Most participants continued to expect that inflation would rise to the Committee's 2 percent objective over the medium term. Some saw a risk that inflationary pressures might develop more rapidly than currently anticipated as resource utilization tightened, while several others thought that progress in achieving the Committee's inflation objective might lag if further appreciation of the dollar continued to depress non-energy commodity prices or if inflation was slow to respond to tighter resource utilization.
Financial conditions appeared to have changed little, on net, in recent months: Equity prices had risen and credit spreads had narrowed, but longer-term interest rates had increased and the dollar had appreciated further. In their discussion, participants considered how recent developments had affected their assessment of the stability of the U.S. financial system. Overall, valuation pressures appeared to have risen for some types of assets, while financial-sector leverage remained low and risks associated with maturity and liquidity transformation had declined. A few participants commented that the recent increase in equity prices might in part reflect investors' anticipation of a boost to earnings from a cut in corporate taxes or more expansionary fiscal policy, which might not materialize. They also expressed concern that the low level of implied volatility in equity markets appeared inconsistent with the considerable uncertainty attending the outlook for such policy initiatives.
Recent reforms had diminished the risk of runs on or by prime money market funds. However, it was noted that other risks to financial stability might arise as the structure of funding markets evolved or if real estate asset values declined sharply. More broadly, it was pointed out that an environment of low interest rates and a relatively flat yield curve, if it persisted, had the potential to boost incentives to take on leverage and risk. Several participants emphasized that the increased resilience of the financial system since the financial crisis had importantly been the result of the key safety and soundness reforms put in place in recent years. However, having additional macroprudential tools could prove useful in addressing problems that could arise in real estate financing or in the shadow banking sector.
Participants discussed whether their current assessments of economic conditions and the medium-term outlook warranted altering their earlier views of the appropriate path for the target range for the federal funds rate. Participants generally characterized their economic forecasts and their judgments about monetary policy as little changed since the December meeting. Against this backdrop, they thought it appropriate to maintain the target range for the federal funds rate at 1/2 to 3/4 percent at this meeting.
Most participants continued to judge that, while the outlook was subject to considerable uncertainty, a gradual pace of rate increases over time was likely to be appropriate to promote the Committee's objectives of maximum employment and 2 percent inflation. Some participants viewed a gradual pace as likely to be warranted because inflation was still running below the Committee's objective or because the proximity of the federal funds rate to the effective lower bound placed constraints on the ability of monetary policy to respond to adverse shocks to the aggregate demand for goods and services. In addition, it was noted that the downward pressure on longer-term interest rates exerted by the Federal Reserve's asset holdings was expected to diminish in the years ahead in light of an anticipated gradual reduction in the size and duration of the Federal Reserve's balance sheet. Finally, the view that gradual increases in the federal funds rate were likely to be appropriate also reflected the assessment that the neutral real rate--defined as the real interest rate that is neither expansionary nor contractionary when the economy is operating at or near its potential--was currently quite low and was likely to rise only slowly over time.
Participants emphasized that the Committee might need to change its communications regarding the anticipated path for the policy rate if economic conditions evolved differently than the Committee expected or if the economic outlook changed. They pointed to a number of risks that, if realized, might call for a different policy trajectory than they currently thought most likely to be appropriate. These included upside risks such as appreciably more expansionary fiscal policy or a more rapid buildup of inflationary pressures, as well as downside risks associated with a possible further appreciation of the dollar or financial vulnerabilities in some foreign economies, together with the proximity of the federal funds rate to the effective lower bound. Moreover, most participants continued to see heightened uncertainty regarding the size, composition, and timing of possible changes to fiscal and other government policies, and about their net effects on the economy and inflation over the medium term, and they thought some time would likely be required for the outlook to become clearer. A couple of participants argued that such uncertainty should not deter the Committee from taking further steps in the near term to remove monetary policy accommodation, because fiscal and other policies were only some of the many factors that were likely to influence progress toward the Committee's dual-mandate objectives and thus the appropriate course of monetary policy. However, other participants cautioned against adjusting monetary policy in anticipation of policy proposals that might not be enacted or that, if enacted, might turn out to have different consequences for economic activity and inflation than currently anticipated.
In discussing the outlook for monetary policy over the period ahead, many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations or if the risks of overshooting the Committee's maximum-employment and inflation objectives increased. A few participants noted that continuing to remove policy accommodation in a timely manner, potentially at an upcoming meeting, would allow the Committee greater flexibility in responding to subsequent changes in economic conditions. Several judged that the risk of a sizable undershooting of the longer-run normal unemployment rate was high, particularly if economic growth was faster than currently expected. If that situation developed, the Committee might need to raise the federal funds rate more quickly than most participants currently anticipated to limit the buildup of inflationary pressures. However, with inflation still short of the Committee's objective and inflation expectations remaining low, a few others continued to see downside risks to inflation or anticipated only a gradual return of inflation to the 2 percent objective as the labor market strengthened further. A couple of participants expressed concern that the Committee's communications about a gradual pace of policy firming might be misunderstood as a commitment to only one or two rate hikes per year and stressed the importance of communicating that policy will respond to the evolving economic outlook as appropriate to achieve the Committee's objectives. Participants also generally agreed that the Committee should begin discussions at upcoming meetings about the economic conditions that could warrant changes in the existing policy of reinvesting proceeds from maturing Treasury securities and principal payments from agency debt and mortgage-backed securities, as well as how those changes would be implemented and communicated.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that the information received since the Committee met in December indicated that the labor market had continued to strengthen and that economic activity had continued to expand at a moderate pace. Job gains had remained solid, and the unemployment rate had stayed near its recent low. Household spending had continued to rise moderately, while business fixed investment had remained soft. Measures of consumer and business sentiment had improved of late. Inflation had increased in recent quarters but was still below the Committee's 2 percent longer-run objective. Market-based measures of inflation compensation remained low; most survey-based measures of longer-term inflation expectations were little changed on balance.
With respect to the economic outlook and its implications for monetary policy, members continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would strengthen somewhat further. Members agreed that there was heightened uncertainty about the effects of possible changes in fiscal and other government policies, but that near-term risks to the economic outlook appeared roughly balanced. Many members continued to see only a modest risk of a scenario in which the unemployment rate would substantially undershoot its longer-run normal level and inflation pressures would increase significantly. These members expressed the view that inflation was likely to rise toward 2 percent gradually, and that policymakers would likely have ample time to respond if signs of rising inflationary pressures did begin to emerge. Other members indicated that if the labor market appeared to be tightening significantly more than anticipated or if inflation pressures appeared to be developing more rapidly than expected as resource utilization tightened, it might become necessary to adjust the Committee's communications about the expected path of the federal funds rate. One member noted that, even if incoming data on the economy and inflation were consistent with expectations, taking the next step in reducing policy accommodation relatively soon would give the Committee greater flexibility in calibrating policy to evolving economic conditions.
At this meeting, members continued to expect that, with gradual adjustments in the stance of monetary policy, inflation would rise to the Committee's 2 percent objective over the medium term. This view was reinforced by the rise in inflation and increases in inflation compensation in recent months. Against this backdrop and in light of the current shortfall in inflation from 2 percent, members agreed that they would continue to closely monitor actual and expected progress toward the Committee's inflation goal.
After assessing current conditions and the outlook for economic activity, the labor market, and inflation, members agreed to maintain the target range for the federal funds rate at 1/2 to 3/4 percent. They judged that the stance of monetary policy remained accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation.
The Committee agreed that, in determining the timing and size of future adjustments to the target range for the federal funds rate, it would assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee expected that economic conditions would evolve in a manner that would warrant only gradual increases in the federal funds rate and that the federal funds rate was likely to remain, for some time, below levels expected to prevail in the longer run. However, members emphasized that the actual path of the federal funds rate would depend on the evolution of the economic outlook as informed by incoming data.
The Committee also decided to maintain its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipated doing so until normalization of the level of the federal funds rate is well under way. Members noted that this policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
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 SOMA in accordance with the following domestic policy directive, to be released at 2:00 p.m.:
"Effective February 2, 2017, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1/2 to 3/4 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 0.50 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."
The vote also encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Job gains remained solid and the unemployment rate stayed near its recent low. Household spending has continued to rise moderately while business fixed investment has remained soft. Measures of consumer and business sentiment have improved of late. Inflation increased in recent quarters but is still below the Committee's 2 percent longer-run objective. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will rise to 2 percent over the medium term. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1/2 to 3/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions."
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Charles L. Evans, Stanley Fischer, Patrick Harker, Robert S. Kaplan, Neel Kashkari, Jerome H. Powell, and Daniel K. Tarullo.
Voting against this action: None.
Consistent with the Committee's decision to leave the target range for the federal funds rate unchanged, the Board of Governors voted unanimously to leave the interest rates on required and excess reserve balances unchanged at 0.75 percent and voted unanimously to approve establishment of the primary credit rate (discount rate) at the existing level of 1.25 percent.6
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, March 14-15, 2017. The meeting adjourned at 10:05 a.m. on February 1, 2017.
Notation Vote
By notation vote completed on January 3, 2017, the Committee unanimously approved the minutes of the Committee meeting held on December 13-14, 2016.
_____________________________
Brian F. Madigan
Secretary
1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes. Return to text
2. Attended Tuesday session only. Return to text
3. Attended through the discussion of financial developments and open market operations. Return to text
4. Attended Wednesday session only. Return to text
5. Committee organizational documents are available at www.federalreserve.gov/monetarypolicy/rules_authorizations.htm. Return to text
6. The second vote of the Board also encompassed approval of the establishment of the interest rates for secondary and seasonal credit under the existing formulas for computing such rates. Return to text
1. In general, as specified in Article IV, each member of the IMF undertakes to collaborate with the IMF and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates. These obligations include seeking to direct the member's economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability. These obligations also include avoiding manipulating exchange rates or the international monetary system in such a way that would impede effective balance of payments adjustment or to give an unfair competitive advantage over other members. Return to text |
2017-02-01T00:00:00 | 2017-02-01 | Statement | Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Job gains remained solid and the unemployment rate stayed near its recent low. Household spending has continued to rise moderately while business fixed investment has remained soft. Measures of consumer and business sentiment have improved of late. Inflation increased in recent quarters but is still below the Committee's 2 percent longer-run objective. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will rise to 2 percent over the medium term. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1/2 to 3/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Jerome H. Powell; and Daniel K. Tarullo.
Implementation Note issued February 1, 2017 |
2016-12-14T00:00:00 | 2016-12-14 | Statement | Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year. Job gains have been solid in recent months and the unemployment rate has declined. Household spending has been rising moderately but business fixed investment has remained soft. Inflation has increased since earlier this year but is still below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation have moved up considerably but still are low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1/2 to 3/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Esther L. George; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo.
Implementation Note issued December 14, 2016 |
2016-12-14T00:00:00 | 2017-01-04 | Minute | Minutes of the Federal Open Market Committee
December 13-14, 2016
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, December 13, 2016, at 1:00 p.m. and continued on Wednesday, December 14, 2016, at 9:00 a.m.1
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
James Bullard
Stanley Fischer
Esther L. George
Loretta J. Mester
Jerome H. Powell
Eric Rosengren
Daniel K. Tarullo
Charles L. Evans, Patrick Harker, Robert S. Kaplan, Neel Kashkari, and Michael Strine, Alternate Members of the Federal Open Market Committee
Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively
Brian F. Madigan, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Michael Held, Deputy General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
Thomas A. Connors, David E. Lebow, Stephen A. Meyer, Christopher J. Waller, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Robert deV. Frierson, Secretary, Office of the Secretary, Board of Governors
Matthew J. Eichner,2 Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors; Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors
Margie Shanks,3 Deputy Secretary, Office of the Secretary, Board of Governors
James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors; Andreas Lehnert, Deputy Director, Division of Financial Stability, Board of Governors; Beth Anne Wilson, Deputy Director, Division of International Finance, Board of Governors
Trevor A. Reeve, Senior Special Adviser to the Chair, Office of Board Members, Board of Governors
David Bowman, Andrew Figura, Joseph W. Gruber, Ann McKeehan, and David Reifschneider, Special Advisers to the Board, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Antulio N. Bomfim, Robert J. Tetlow, and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors; Wayne Passmore, Senior Adviser, Division of Research and Statistics, Board of Governors
Brian M. Doyle, Associate Director, Division of International Finance, Board of Governors; Stacey Tevlin, Associate Director, Division of Research and Statistics, Board of Governors
Stephanie R. Aaronson, Assistant Director, Division of Research and Statistics, Board of Governors; Christopher J. Gust, Assistant Director, Division of Monetary Affairs, Board of Governors
Don Kim, Adviser, Division of Monetary Affairs, Board of Governors; Karen M. Pence, Adviser, Division of Research and Statistics, Board of Governors
Penelope A. Beattie,4 Assistant to the Secretary, Office of the Secretary, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Edward Herbst and Lubomir Petrasek, Principal Economists, Division of Monetary Affairs, Board of Governors
Achilles Sangster II, Information Management Analyst, Division of Monetary Affairs, Board of Governors
Mark L. Mullinix, First Vice President, Federal Reserve Bank of Richmond
David Altig, Executive Vice President, Federal Reserve Bank of Atlanta
Michael Dotsey, Evan F. Koenig, Spencer Krane, and Mark E. Schweitzer, Senior Vice Presidents, Federal Reserve Banks of Philadelphia, Dallas, Chicago, and Cleveland, respectively
Terry Fitzgerald, Giovanni Olivei, Argia M. Sbordone, Mark Spiegel, and Alexander L. Wolman, Vice Presidents, Federal Reserve Banks of Minneapolis, Boston, New York, San Francisco, and Richmond, respectively
Willem Van Zandweghe, Assistant Vice President, Federal Reserve Bank of Kansas City
Rules Regarding Availability of Information
The Committee unanimously voted to amend its Rules Regarding Availability of Information (Rules) in order to comply with the FOIA Improvement Act of 2016 and to make a number of other technical changes.5 The amended Rules would be published in the Federal Register as an interim final rule, which would become effective immediately on publication. The Committee anticipated finalization of the Rules after any appropriate changes were incorporated based on comments received from the public during the 60-day comment period following the Federal Register notice.
Secretary's note: The amended Rules were published in the Federal Register on December 27, 2016.
Developments in Financial Markets and Open Market Operations
The manager of the System Open Market Account (SOMA) reported on developments in U.S. and global financial markets during the period since the Committee met on November 1-2, 2016. Nominal yields on longer-term U.S. Treasury securities rose substantially over the period, reflecting both higher real yields and an increase in inflation compensation. The value of the dollar on foreign exchange markets rose, U.S. equity indexes increased considerably, and credit spreads on U.S. corporate bonds narrowed. Market pricing and survey results indicated that market participants had come to see a high probability of an increase of 25 basis points in the FOMC's target range for the federal funds rate at this meeting, and that the path of the federal funds rate anticipated by market participants for coming years had steepened. Surveys of market participants indicated that revised expectations for government spending and tax policy following the U.S. elections in early November were seen as the most important reasons, among several factors, for the increase in longer-term Treasury yields, the climb in equity valuations, and the rise in the dollar.
The manager also reported on developments in money markets and open market operations. Market interest rates on overnight repurchase agreements (repos) fell during the intermeeting period. Market participants pointed to a number of factors contributing to the decline, including lower demands for funding by securities dealers and the ample availability of financing from government-only money market funds (MMFs). The decline in repo rates, together with the shift of MMF assets toward government-only funds, had likely boosted usage of the System's overnight reverse repurchase agreement (ON RRP) facility over the period. In contrast to the decline in interest rates for secured money market transactions, the effective federal funds rate generally remained near the middle of the FOMC's 1/4 to 1/2 percent target range. The manager also reported on the Open Market Desk's regular review of operational readiness for a range of open market operations.
By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account during the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the December 13-14 meeting indicated that real gross domestic product (GDP) was expanding at a moderate pace over the second half of the year and that labor market conditions had continued to strengthen in recent months. Consumer price inflation increased further above its pace early in the year but was still running below the Committee's longer-run objective of 2 percent, restrained in part by earlier declines in energy prices and in prices of non-energy imports.
Taken together, a range of recent indicators showed that labor market conditions had tightened further. Total nonfarm payroll employment increased at a solid pace in October and November, and the unemployment rate declined, reaching 4.6 percent in November. The share of workers employed part time for economic reasons decreased; however, both the labor force participation rate and the employment-to-population ratio edged down on net. The rates of private-sector job openings, of hiring, and of quits were generally little changed in September and October at levels above those seen during much of the current economic expansion. The four-week moving average of initial claims for unemployment insurance benefits remained low. Labor productivity in the business sector was flat over the four quarters ending in the third quarter. Measures of labor compensation continued to rise at a moderate rate. Compensation per hour in the business sector rose 3 percent over the four quarters ending in the third quarter, and average hourly earnings for all employees increased 2-1/2 percent over the 12 months ending in November. The unemployment rates for African Americans, for Hispanics, and for whites all declined in recent months. The unemployment rates for African Americans and for Hispanics remained above the rate for whites but were close to the levels seen just before the most recent recession.
Total industrial production was flat in October. Both manufacturing production and mining output increased, but the output of utilities declined markedly because of unseasonably warm weather in October. Automakers' assembly schedules suggested that motor vehicle production would be roughly flat in the near term, and broader indicators of manufacturing production, such as the new orders indexes from national and regional manufacturing surveys, pointed toward only modest gains in factory output in the coming months.
Real personal consumption expenditures (PCE) appeared to be rising at a moderate pace in the fourth quarter. Consumer expenditures increased modestly in October but were restrained by a decline in spending for energy services that reflected unseasonably warm weather in that month. Unit sales of light motor vehicles were higher in October and November than average monthly sales in the third quarter. The components of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimate of PCE rose moderately in November. Recent readings on key factors that influence consumer spending--such as continued gains in employment, real disposable personal income, and households' net worth--were consistent with moderate real PCE growth for the fourth quarter as a whole. In addition, consumer sentiment as measured by the University of Michigan Surveys of Consumers moved higher in November and early December.
Recent information on housing market activity suggested that real residential investment was picking up in the fourth quarter after decreasing in the previous two quarters. Starts for both new single-family homes and multifamily units rose substantially in October. Building permit issuance for new single-family homes--which tends to be a good indicator of the underlying trend in construction--also increased. Sales of existing homes advanced, although new home sales dipped.
Real private expenditures for business equipment and intellectual property seemed to be soft early in the fourth quarter. Nominal shipments of nondefense capital goods excluding aircraft edged down in October. However, new orders of these capital goods rose and were running above the level of shipments, suggesting a pickup in business spending for equipment in the near term. Nominal business expenditures for nonresidential structures declined in October, but the number of oil and gas rigs in operation, an indicator of spending for structures in the drilling and mining sector, continued to edge up through early December.
Real government purchases looked to be rising modestly in the fourth quarter. Nominal federal government spending in October and November pointed to increases in real defense purchases in the fourth quarter. The payrolls of state and local governments expanded, on balance, in October and November, and nominal construction spending by these governments rose in October.
The U.S. international trade deficit widened in October after narrowing in September. After increasing in September, exports fell substantially in October, reflecting declines in exports of agricultural products, consumer goods, and industrial supplies. Imports in October retraced their September decline, as imports of consumer goods and capital goods rose. The available trade data suggested that real net exports would make a negative contribution to real U.S. GDP growth in the fourth quarter.
Total U.S. consumer prices, as measured by the PCE price index, increased almost 1-1/2 percent over the 12 months ending in October, partly restrained by recent decreases in consumer food prices and earlier declines in consumer energy prices. Core PCE prices, which exclude food and energy prices, rose about 1-3/4 percent over the same period, held down in part by decreases in the prices of non-energy imports over a portion of this period and by the pass-through of earlier declines in energy prices into the prices of other goods and services. Over the same 12âmonth period, total consumer prices as measured by the consumer price index (CPI) rose a bit more than 1-1/2 percent, while core CPI inflation was around 2 percent. The Michigan survey measure of median longer-run inflation expectations edged up, on net, in November and early December. The measure of longer-run inflation expectations for PCE prices from the Survey of Professional Forecasters was unchanged in the fourth quarter, and measures of longer-run inflation expectations from the Desk's Survey of Primary Dealers and Survey of Market Participants were also unchanged in December.
Foreign real GDP growth rebounded in the third quarter from an unusually subdued pace in the second quarter. This bounceback was driven primarily by stronger economic growth in Canada and Mexico, two countries where the second-quarter weakness was most pronounced. In the advanced foreign economies (AFEs), recent indicators were consistent with a more moderate pace of economic activity in the fourth quarter. Economic growth also appeared to slow after its uptick in the third quarter in the emerging market economies (EMEs), as indicators for Mexico suggested a return to a more sustainable pace of economic growth and as investment decelerated in China. Inflation increased in most AFEs in recent months but remained significantly below central bank targets. Inflation in the EMEs also moved up, driven largely by a rebound in Chinese food prices and, in some countries, by the effects of currency depreciation.
Staff Review of the Financial Situation
Over the intermeeting period, incoming U.S. economic data and Federal Reserve communications reinforced market participants' expectations for an increase in the target range for the federal funds rate at the December meeting. Asset price movements as well as changes in the expected path for U.S. monetary policy beyond December appeared to be driven largely by expectations of more expansionary fiscal policy in the aftermath of U.S. elections. Nominal Treasury yields rose across the maturity spectrum, and measures of inflation compensation based on Treasury Inflation-Protected Securities continued to move up. Meanwhile, broad equity price indexes increased, and credit spreads on corporate bonds narrowed. Most private borrowing rates increased somewhat, but financing conditions for nonfinancial firms and households remained broadly accommodative.
Market expectations for an increase in the target range for the federal funds rate at the December meeting rose over the intermeeting period. By the end of the period, quotes on federal funds futures contracts, without adjustment for term premiums, suggested that market participants saw a nearly 95 percent probability of a rate hike. In addition, the expected federal funds rate path over the next few years implied by quotes on overnight index swap (OIS) rates steepened. Most of the steepening of the expected policy path occurred following the U.S. elections, reportedly in part reflecting investors' perception that the incoming Congress and Administration would enact significant fiscal stimulus measures. Market-based measures of uncertainty regarding monetary policy at horizons beyond one year moved up, suggesting that some of the firming in OIS rates could reflect a rise in term premiums. Consistent with market-based estimates, respondents to the Desk's December surveys of primary dealers and market participants assigned a probability near 90 percent to a rate hike in December.
Nominal Treasury yields moved up considerably since the November FOMC meeting. Intermediate- and longer-term yields were boosted by roughly equal increases in real yields and inflation compensation. Measures of inflation compensation extended an upward trajectory that began around midyear. Changes in market quotes for inflation caps and floors suggested that the rise in inflation compensation reflected in part higher costs of protection against above-target inflation outcomes. The rise in inflation compensation appeared to be spurred in part by the recent climb in oil prices, with a notable jump after OPEC's agreement at its November 30 meeting to cut production.
Broad U.S. equity price indexes rose over the intermeeting period, apparently boosted by investors' expectations of stronger earnings growth and improved risk sentiment, with much of the rally coming after the U.S. elections. Share prices for the financial sector outperformed the broader market, while stock prices in sectors that typically benefit from lower interest rates, such as utilities, underperformed. Implied volatility in equity markets decreased, and yield spreads of nonfinancial corporate bonds over those of comparable-maturity Treasury securities narrowed for both investment- and speculative-grade firms. Available reports suggested that earnings for firms in the S&P 500 index increased in the third quarter on a seasonally adjusted basis, and the improvement in earnings was broad based across sectors.
Money market flows continued to stabilize over the intermeeting period following outsized movements in the period before implementation of MMF reforms in mid-October. Assets under management at government MMFs rose modestly, while assets at prime MMFs were about unchanged. In addition, outstanding levels of commercial paper (CP) and negotiable certificates of deposit were stable. The effective federal funds rate remained well within the FOMC's target range. Rates on overnight Eurodollar deposits, CP, and other short-term unsecured instruments were close to the federal funds rate. Overnight Treasury repo rates declined in mid-November but stayed above the ON RRP offering rate. Rates on term money market instruments increased, consistent with firming expectations for a December rate hike.
Financing conditions for nonfinancial firms remained generally accommodative. Although gross issuance of corporate bonds slowed notably in October and November from the brisk pace in the third quarter, the decrease in corporate bond spreads after the U.S. elections suggests that the lower issuance did not reflect a tightening of financial conditions. In addition, growth in commercial and industrial loans from banks picked up after having dipped some during the third quarter, issuance of leveraged loans by nonbanks was robust, and CP outstanding at nonfinancial firms increased on balance.
The credit quality of nonfinancial corporations remained solid. The volume of corporate bond rating downgrades in October and November outpaced that of upgrades but was moderate compared with rates seen in the first half of the year. Default rates and expected year-ahead default rates for nonfinancial firms declined modestly over the intermeeting period, although both remained somewhat elevated compared with their ranges in recent years. Indicators of supply and demand conditions for small business credit were generally unchanged over the past quarter, with demand appearing to remain weak.
Gross issuance of municipal bonds remained solid in October, and the credit quality of state and local governments was stable, as the number of ratings downgrades only moderately outpaced the number of upgrades in October and November. Yields on general obligation bonds rose somewhat more than those on comparable-maturity Treasury securities over the intermeeting period, reportedly reflecting expected reductions in the tax benefit of municipal bonds.
Financing conditions for commercial real estate (CRE) also remained largely accommodative. The average rate of growth of CRE loans at banks continued to be strong in October and November. Spreads on commercial mortgage-backed securities narrowed a little over the intermeeting period, and issuance of such securities continued to outpace that of the first half of 2016.
The interest rate on 30-year fixed-rate residential mortgages moved up in line with Treasury yields, although the rate remained low by historical standards and mortgage availability appeared little changed. Likely in part because of the increase in mortgage rates, refinance originations decreased in November, but purchase originations were little changed.
Consumer credit continued to be readily available for most borrowers, and overall loan balances increased about 6 percent over the 12 months ending in September. In the subprime sector, credit card lending standards appeared to remain tight, and extensions of new credit to subprime auto loan borrowers edged down in the third quarter. Measures of consumer credit quality were little changed in the third quarter.
Foreign financial markets responded primarily to U.S. developments over the intermeeting period, as market participants assessed the effects of potential policy changes resulting from the U.S. elections on foreign economies. Spillovers from U.S. markets lifted yields and equity prices in most AFEs, but higher yields in the United States seemed to weigh on investor sentiment toward EMEs, where prices of risky assets declined. On a trade-weighted basis, the dollar appreciated notably against both AFE and EME currencies. In particular, the dollar strengthened about 10 percent against the Japanese yen and 5 percent against the Mexican peso. The declines in EME currencies and risky asset prices were reportedly driven by higher U.S. yields as well as by uncertainty about possible changes in U.S. trade policies. Currency weakness prompted some EME central banks, such as the Bank of Mexico and the Central Bank of the Republic of Turkey, to tighten monetary policy. However, the Central Bank of Brazil eased monetary policy to support economic growth.
In the euro area, investors were attentive to the constitutional referendum in Italy and the December meeting of the European Central Bank (ECB). In Italy, the "No" vote on constitutional reform and the subsequent resignation of the prime minister raised concerns that recapitalization of the country's banking sector would become more difficult. However, these developments left little imprint on financial markets on net. At its December meeting, the ECB extended its asset purchase program for a longer period of time than market participants anticipated while reducing the pace of asset purchases. In addition, the minimum maturity for eligible securities was lowered, and the limitation on purchases of securities with a yield below the deposit facility rate was relaxed. As a result, sovereign yield curves in the euro area steepened somewhat.
Staff Economic Outlook
In the U.S. economic projection prepared by the staff for the December FOMC meeting, the near-term forecast was little changed from the projection prepared for the November meeting. Real GDP growth in the second half of 2016 was still expected to be faster than in the first half. The staff's forecast for real GDP growth over the next several years was slightly higher, on balance, largely reflecting the effects of the staff's provisional assumption that fiscal policy would be more expansionary in the coming years. These effects were substantially counterbalanced by the restraint from the higher assumed paths for longer-term interest rates and the foreign exchange value of the dollar. The staff projected that real GDP would expand at a modestly faster pace than potential output in 2017 through 2019. The unemployment rate was forecast to edge down gradually, on net, and to continue to run below the staff's estimate of its longer-run natural rate through the end of 2019; the path for the unemployment rate was a little lower than in the previous projection.
The near-term forecast for consumer price inflation was somewhat higher than in the previous projection, reflecting recent increases in energy prices. Beyond the near term, the inflation forecast was little revised. The staff continued to project that inflation would edge up over the next several years, as food and energy prices along with the prices of non-energy imports were expected to begin steadily rising in 2017. However, inflation was projected to be marginally below the Committee's longer-run objective of 2 percent in 2019.
The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The risks to the forecast for real GDP were seen as tilted to the downside, reflecting the staff's assessment that monetary policy appeared to be better positioned to offset large positive shocks than substantial adverse ones. In addition, the staff continued to see the risks to the forecast from developments abroad as skewed to the downside. Consistent with the downside risks to aggregate demand, the staff viewed the risks to its outlook for the unemployment rate as tilted to the upside. The risks to the projection for inflation were seen as roughly balanced. The downside risks from the possibility that longerâterm inflation expectations may have edged lower or that the dollar could appreciate more than anticipated were seen as roughly counterbalanced by the upside risk that inflation could increase more than expected in an economy that was projected to continue operating above its long-run potential.
Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, members of the Board of Governors and Federal Reserve Bank presidents submitted their projections of the most likely outcomes for real output growth, the unemployment rate, and inflation for each year from 2016 through 2019 and over the longer run, based on their individual assessments of the appropriate path for the federal funds rate.6 The longer-run projections represented each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These projections and policy assessments are described in the Summary of Economic Projections, which is an addendum to these minutes.
In their discussion of the economic situation and the outlook, participants agreed that information received over the intermeeting period indicated that the labor market had continued to strengthen and that economic activity had been expanding at a moderate pace since midyear. Job gains had been solid in recent months, and the unemployment rate had declined. Household spending had been rising moderately, but business fixed investment remained soft. Inflation had increased since earlier in the year but was still below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of nonâenergy imports. Marketâbased measures of inflation compensation had moved up considerably but still were low; most surveyâbased measures of longerâterm inflation expectations were little changed, on balance, in recent months.
Participants expected that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would strengthen somewhat further. Inflation was expected to rise to 2 percent over the medium term as the transitory effects of past declines in energy prices and non-energy import prices dissipated and the labor market strengthened further. Participants indicated that recently available economic data had been broadly in line with their expectations, and they judged that nearâterm risks to the economic outlook appeared roughly balanced. Moreover, participants generally made only modest changes to their forecasts for real GDP growth, the unemployment rate, and inflation. About half of the participants incorporated an assumption of more expansionary fiscal policy in their forecasts.
In their discussion of their economic forecasts, participants emphasized their considerable uncertainty about the timing, size, and composition of any future fiscal and other economic policy initiatives as well as about how those policies might affect aggregate demand and supply. Several participants pointed out that, depending on the mix of tax, spending, regulatory, and other possible policy changes, economic growth might turn out to be faster or slower than they currently anticipated. However, almost all also indicated that the upside risks to their forecasts for economic growth had increased as a result of prospects for more expansionary fiscal policies in coming years. Many participants underscored the need to continue to weigh other risks and uncertainties attending the economic outlook. In that regard, several noted upside risks to U.S. economic activity from the potential for better-than-expected economic growth abroad or an acceleration of domestic business investment. Among the downside risks cited were the possibility of additional appreciation of the foreign exchange value of the dollar, financial vulnerabilities in some foreign economies, and the proximity of the federal funds rate to the effective lower bound. Several participants also commented on the uncertainty about the outlook for productivity growth or about the potential effects of tight labor markets on labor supply and inflation. For some participants, the greater upside risks to economic growth, the upward movement in inflation compensation over recent months, or the possibility of further increases in oil prices had increased the upside risks to their inflation forecasts. However, several others pointed out that a further rise in the dollar might continue to hold down inflation. Participants generally agreed that they should continue to closely monitor inflation indicators and global economic and financial developments.
Regarding the household sector, the available information indicated that consumer spending had been rising at a moderate rate, on balance, since midyear. Participants cited a number of factors likely to support continued moderate gains in consumer spending. Consumer confidence remained positive. The outlook was for further solid gains in jobs and income, and household balance sheets had improved. The personal saving rate was still relatively high, and household wealth had been boosted by ongoing gains in housing and equity prices. In the housing market, recent data on starts and permits for new residential construction suggested a firming in residential investment after two quarters of decline. Several participants commented that housing activity appeared to be gaining momentum in their Districts, and it was noted that the rate of new construction still appeared to be low relative to levels that would be expected based on the longer-run rate of household formation.
The outlook for the business sector improved over the intermeeting period. Although nonresidential investment was still weak and equipment spending had been flat in the third quarter, orders for nondefense capital goods and the number of drilling rigs in operation had both turned up recently. A couple of participants reported plans for a pickup in capital spending by businesses in their Districts, driven by stronger demand and increasing revenues. Surveys and information gathered from contacts in several Districts indicated an improvement in manufacturing activity as well as expectations for further gains in factory production in the near term. And the recent firming in oil prices, if sustained, was anticipated to boost domestic energy production. In contrast, conditions in the agricultural sector remained depressed, and a couple of reports highlighted softer activity in some service-sector industries. More generally, participants reported that many of their District business contacts expressed greater optimism about the economic outlook, and several participants commented that the improved sentiment could spur stronger investment spending. Some contacts thought that their businesses could benefit from possible changes in federal spending, tax, and regulatory policies, while others were uncertain about the outlook for significant government policy changes or were concerned that their businesses might be adversely affected by some of the proposals under discussion.
Labor market conditions continued to improve over the intermeeting period. Monthly increases in nonfarm payroll employment averaged nearly 180,000 over the three months ending in November, in line with the average pace of job creation over the past year. The unemployment rate dropped markedly to 4.6 percent in November; a few participants suggested that part of the decline might be reversed in coming months. Most participants viewed the cumulative progress in the labor market as having brought labor market conditions to or close to those consistent with the Committee's maximum-employment objective. Over the past year, broad measures of labor underutilization that include both the unemployed and workers marginally attached to the labor force had trended lower, the labor force participation rate had been relatively steady despite downward pressure from demographic trends, and layoffs had fallen to low levels. National surveys reported that job availability was high and that firms were increasingly finding their job openings hard to fill. Some participants commented that some businesses in their Districts were experiencing shortages of skilled workers in some occupations or were needing to offer higher wages to fill positions. However, some others noted that aggregate measures of wages were still rising at a subdued pace, suggesting that upward pressure on wages had not become widespread.
Participants expected the labor market to strengthen somewhat further over the medium run, with almost all anticipating that the unemployment rate over the next couple of years would run below their estimates of its longer-run normal level. Some participants saw the possibility that an extended period during which labor markets remained relatively tight could continue to shrink remaining margins of underutilization, including the still-high level of prime-age workers outside the labor force and elevated levels of involuntary part-time employment and long-duration unemployment. A few added that continued gradual strengthening in labor markets would help return inflation to the Committee's 2 percent objective. But some other participants were uncertain that a period of tight labor utilization would yield lasting labor market benefits or were concerned that it risked a buildup of inflationary pressures. Most participants expected that if economic growth remained moderate, as they projected, the unemployment rate would be only modestly below their estimates of the longer-run normal rate of unemployment over the next few years, but several anticipated a more substantial undershoot. A few participants noted the uncertainty surrounding realâtime estimates of the longer-run normal rate of unemployment, and it was pointed out that geographic variation in labor market conditions contributed to that uncertainty. In discussing the possible implications of a more significant undershooting of the longer-run normal rate, many participants emphasized that, as the economic outlook evolved, timely adjustments to monetary policy could be required to achieve and maintain both the Committee's maximum-employment and inflation objectives.
Participants generally viewed the information on inflation received over the intermeeting period as reinforcing their expectation that inflation would rise to the Committee's 2 percent objective over the medium term. The 12âmonth change in the headline PCE price index moved up further to 1.4 percent in October, as the rise in energy prices since the spring offset much of the decline earlier in the year. Although the headline measure was still below 2 percent, it had increased more than 1 percentage point over the past year. Core PCE price inflation had also moved up moderately over the past year, and, over the 12 months ending in October, it was 1.7 percent for a third consecutive month. Median 5â to-10-year inflation expectations in the Michigan survey were, on balance, stable in November and early December, just above the low recorded in October. Market-based measures of inflation compensation had moved up considerably over the intermeeting period. A few participants added that other readings from financial markets, such as implied probabilities of various inflation outcomes derived from inflation derivatives, pricing in the inflation swaps market, and the apparent upward shift of the estimated term premium in the 10-year Treasury yield, suggested that the risks to the inflation outlook had become more balanced around the Committee's 2 percent inflation objective. A couple of participants noted that the recent firming in oil prices might have contributed to the changes in these market-based measures. Several, however, pointed out that market-based measures of inflation compensation were still low or that downside risks to inflation remained, given the recent further appreciation of the dollar.
Most participants attributed the substantial changes in financial market conditions over the intermeeting period--including the increase in longer-term interest rates, the strengthening of the dollar, the rise in equity prices, and the narrowing of credit spreads--to expectations for more expansionary fiscal policies in coming years or to possible reductions in corporate tax rates. Many participants expressed the need for caution in evaluating the implications of recent financial market developments for the economic outlook, in light of the uncertainty about how federal spending, tax, and regulatory policies might unfold and how global economic and financial conditions will evolve.
In their consideration of economic conditions and monetary policy, participants agreed that sufficient evidence had accumulated of continued progress toward the Committee's objectives of maximum employment and 2 percent inflation to warrant an increase of 25 basis points in the target range for the federal funds rate at this meeting. Participants judged that, even after the increase in the target range, the stance of policy would remain accommodative, consistent with some further strengthening in labor market conditions and a return of inflation to 2 percent over the medium term.
Participants discussed the implications of the economic outlook for the likely future path of the target range for the federal funds rate. Most participants judged that a gradual pace of rate increases was likely to be appropriate to promote the Committee's objectives of maximum employment and 2 percent inflation. A gradual pace was also viewed by some participants as likely to be warranted because the proximity of the federal funds rate to the effective lower bound placed constraints on the ability of monetary policy to respond to adverse shocks to the aggregate demand for goods and services. In addition, the neutral real rate--defined as the real interest rate that is neither expansionary nor contractionary when the economy is operating at or near its potential--still appeared to be low by historical standards, and it was noted that gradual increases in the federal funds rate over the next few years probably would be sufficient to return to a neutral policy stance.
While viewing a gradual approach to policy firming as likely to be appropriate, participants emphasized the need to adjust the policy path as economic conditions evolved. They pointed to a number of risks that, if realized, might call for a different path of policy than they currently expected. Moreover, uncertainty regarding fiscal and other economic policies had increased. Participants agreed that it was too early to know what changes in these policies would be implemented and how such changes might alter the economic outlook. It was also noted that fiscal and other policies were only some of the many factors that could influence the economic outlook and thus the appropriate course of monetary policy. Moreover, many participants emphasized that the greater uncertainty about these policies made it more challenging to communicate to the public about the likely path of the federal funds rate. Participants noted that, in the circumstances of heightened uncertainty, it was especially important that the Committee continue to underscore in its communications that monetary policy would continue to be set to promote attainment of the Committee's statutory objectives of maximum employment and price stability.
Many participants judged that the risk of a sizable undershooting of the longer-run normal unemployment rate had increased somewhat and that the Committee might need to raise the federal funds rate more quickly than currently anticipated to limit the degree of undershooting and stem a potential buildup of inflationary pressures. However, with inflation still below the Committee's 2 percent objective, it was noted that downside risks to inflation remained and that a moderate undershooting of the longer-run normal unemployment rate could help return inflation to 2 percent. A couple of participants expressed concern that the Committee's communications about a gradual pace of policy firming might be misunderstood as a commitment to only one or two rate hikes per year; participants agreed that policy would need to respond appropriately to the evolving outlook. Several participants noted circumstances that might warrant changes to the path for the federal funds rate could also have implications for the reinvestment of proceeds from maturing Treasury securities and principal payments from agency debt and mortgage-backed securities.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that the information received since the Committee met in November indicated that the labor market had continued to strengthen and that economic activity had been expanding at a moderate pace since midyear. Job gains had been solid in recent months, and the unemployment rate had declined. Household spending had been rising moderately, but business fixed investment had remained soft. Inflation had increased since earlier this year but was still below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation had moved up considerably but still were low; most survey-based measures of longer-term inflation expectations were little changed on balance.
With respect to the economic outlook and its implications for monetary policy, members continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would strengthen somewhat further. They generally observed that labor market conditions had improved appreciably over the past year and that labor market slack had declined. Members agreed that there was heightened uncertainty about possible changes in fiscal and other economic policies as well as their effects. However, members also agreed that near-term risks to the economic outlook appeared roughly balanced. Some members saw, with gradual adjustments of the stance of monetary policy, only modest risk of a scenario in which an undershooting of the longer-run normal rate of unemployment would create a sharp acceleration in prices. These members observed that inflation continued to run below the Committee's 2 percent objective and that wage gains had been subdued, and they expressed the view that inflation was likely to rise gradually, giving monetary policy time to respond if necessary. Several members noted that if the labor market appeared to be tightening significantly more than expected, it might become necessary to adjust the Committee's communications about the expected path of the federal funds rate, consistent with the possibility that a less gradual pace of increases could become appropriate.
At this meeting, members continued to expect that, with gradual adjustments in the stance of monetary policy, inflation would rise to the Committee's 2 percent objective over the medium term as the transitory effects of past declines in energy prices and non-energy import prices dissipated and the labor market strengthened further. This view was reinforced by the rise in inflation in recent months and by recent increases in inflation compensation. Against this backdrop and in light of the current shortfall in inflation from 2 percent, members agreed that they would continue to closely monitor actual and expected progress toward the Committee's inflation goal.
After assessing the outlook for economic activity, the labor market, and inflation, members agreed to raise the target range for the federal funds rate to 1/2 to 3/4 percent. This increase in the target range was viewed as appropriate in light of the considerable progress that had been made toward the Committee's objective of maximum employment and, in view of the rise in inflation since earlier in the year, the Committee's confidence that inflation would rise to 2 percent in the medium term. Members judged that, even after this increase in the target range, the stance of monetary policy remained accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation.
The Committee agreed that, in determining the timing and size of future adjustments to the target range for the federal funds rate, it would assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee expected that economic conditions would evolve in a manner that would warrant only gradual increases in the federal funds rate and that the federal funds rate was likely to remain, for some time, below levels that are expected to prevail in the longer run. However, members emphasized that the actual path of the federal funds rate would depend on the economic outlook as informed by incoming data.
The Committee also decided to maintain its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipated doing so until normalization of the level of the federal funds rate is well under way. Members noted that this policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
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 SOMA in accordance with the following domestic policy directive, to be released at 2:00 p.m.:
"Effective December 15, 2016, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1/2 to 3/4 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 0.50 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."
The vote also encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year. Job gains have been solid in recent months and the unemployment rate has declined. Household spending has been rising moderately but business fixed investment has remained soft. Inflation has increased since earlier this year but is still below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation have moved up considerably but still are low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1/2 to 3/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions."
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, James Bullard, Stanley Fischer, Esther L. George, Loretta J. Mester, Jerome H. Powell, Eric Rosengren, and Daniel K. Tarullo.
Voting against this action: None.
To support the Committee's decision to raise the target range for the federal funds rate, the Board of Governors voted unanimously to raise the interest rates on required and excess reserve balances 1/4 percentage point, to 3/4 percent, effective December 15, 2016. The Board of Governors also voted unanimously to approve a 1/4 percentage point increase in the primary credit rate (discount rate) to 1-1/4 percent, effective December 15, 2016.7
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, January 31-February 1, 2017. The meeting adjourned at 10:05 a.m. on December 14, 2016.
Notation Vote
By notation vote completed on November 22, 2016, the Committee unanimously approved the minutes of the Committee meeting held on November 1-2, 2016.
_____________________________
Brian F. Madigan
Secretary
1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes. Return to text
2. Attended the discussions of the Rules Regarding Availability of Information and developments in financial markets and open market operations. Return to text
3. Attended Wednesday session only. Return to text
4. Attended Tuesday session only. Return to text
5. The approved Rules Regarding Availability of Information are available at www.federalreserve.gov/monetarypolicy/rules_authorizations.htm. Return to text
6. One participant did not submit longer-run projections for real output growth, the unemployment rate, or the federal funds rate. Return to text
7. In taking this action, the Board approved requests submitted by the boards of directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Kansas City, Dallas, and San Francisco. This vote also encompassed approval by the Board of Governors of the establishment of a 1-1/4 percent primary credit rate by the remaining Federal Reserve Bank, effective on the later of December 15, 2016, and the date such Reserve Bank informed the Secretary of the Board of such a request. (Secretary's note: Subsequently, the Federal Reserve Bank of Minneapolis was informed by the Secretary of the Board of the Board's approval of its establishment of a primary credit rate of 1-1/4 percent, effective December 15, 2016.) This vote of the Board of Governors also encompassed approval of the renewal by all 12 Federal Reserve Banks of the existing formulas for calculating the rates applicable to discounts and advances under the secondary and seasonal credit programs. Return to text |
2016-11-02T00:00:00 | 2016-11-23 | Minute | Minutes of the Federal Open Market Committee
November 1-2, 2016
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, November 1, 2016, at 10:00 a.m. and continued on Wednesday, November 2, 2016, at 9:00 a.m.1
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
James Bullard
Stanley Fischer
Esther L. George
Loretta J. Mester
Jerome H. Powell
Eric Rosengren
Daniel K. Tarullo
Charles L. Evans, Patrick Harker, Robert S. Kaplan, Neel Kashkari, and Michael Strine, Alternate Members of the Federal Open Market Committee
Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively
Brian F. Madigan, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Michael Held, Deputy General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
Thomas A. Connors, Troy Davig, Michael P. Leahy, Stephen A. Meyer, Ellis W. Tallman, Christopher J. Waller, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Matthew J. Eichner,2 Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors; Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors; Nellie Liang, Director, Division of Financial Stability, Board of Governors
Margie Shanks, Deputy Secretary, Office of the Secretary, Board of Governors
James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors
Trevor A. Reeve, Senior Special Adviser to the Chair, Office of Board Members, Board of Governors
Andrew Figura, Joseph W. Gruber, and Ann McKeehan, Special Advisers to the Board, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Eric M. Engen and Michael G. Palumbo, Senior Associate Directors, Division of Research and Statistics, Board of Governors; Gretchen C. Weinbach,3 Senior Associate Director, Division of Monetary Affairs, Board of Governors; Beth Anne Wilson, Senior Associate Director, Division of International Finance, Board of Governors
Antulio N. Bomfim, Ellen E. Meade, Robert J. Tetlow, and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors; Brian M. Doyle, Senior Adviser, Division of International Finance, Board of Governors; Jeremy B. Rudd, Senior Adviser, Division of Research and Statistics, Board of Governors
Jane E. Ihrig3 and David López-Salido,3 Associate Directors, Division of Monetary Affairs, Board of Governors; John J. Stevens, Associate Director, Division of Research and Statistics, Board of Governors
Min Wei, Deputy Associate Director, Division of Monetary Affairs, Board of Governors
Stephanie R. Aaronson and Glenn Follette, Assistant Directors, Division of Research and Statistics, Board of Governors; Elizabeth Klee, Assistant Director, Division of Monetary Affairs, Board of Governors
Eric C. Engstrom, Adviser, Division of Monetary Affairs, and Adviser, Division of Research and Statistics, Board of Governors
Penelope A. Beattie,4 Assistant to the Secretary, Office of the Secretary, Board of Governors
Dana L. Burnett, Section Chief, Division of Monetary Affairs, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Kurt F. Lewis,3 Principal Economist, Division of Monetary Affairs, Board of Governors
James M. Lyon, First Vice President, Federal Reserve Bank of Minneapolis
David Altig, Ron Feldman,3 Jeff Fuhrer, Beverly Hirtle, Glenn D. Rudebusch, and Daniel G. Sullivan, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Minneapolis, Boston, New York, San Francisco, and Chicago, respectively
Michael Dotsey, Antoine Martin,3 Susan McLaughlin,3 and Julie Ann Remache,3 Senior Vice Presidents, Federal Reserve Banks of Philadelphia, New York, New York, and New York, respectively
Deborah L. Leonard,3 Ed Nosal,3 and Anna Paulson,3 Vice Presidents, Federal Reserve Banks of New York, Chicago, and Chicago, respectively
Patrick Dwyer,3 Assistant Vice President, Federal Reserve Bank of New York
Andreas L. Hornstein, Senior Advisor, Federal Reserve Bank of Richmond
Anthony Murphy, Economic Policy Advisor, Federal Reserve Bank of Dallas
Jonathan Heathcote, Monetary Advisor, Federal Reserve Bank of Minneapolis
Long-Run Monetary Policy Implementation Framework
Committee participants continued their discussion of potential long-run frameworks for monetary policy implementation, a topic last discussed at the July 2016 FOMC meeting. The staff provided briefings that summarized considerations regarding potential choices of policy rates, operating regimes, and balance sheet policies and highlighted tradeoffs associated with these choices.
The staff noted that if the long-run implementation framework was such that the supply of reserve balances was quite abundant, then operational tools that help establish a floor under short-term interest rates, such as the payment of interest on reserves and the overnight reverse repurchase agreement (ON RRP) facility, would remain important elements of the operating regime. Reserve requirements would probably not be necessary in this case, and the Federal Reserve could likely maintain control of short-term interest rates without needing to conduct frequent open market operations to adjust the supply of reserves. Such an approach could also be effective with an appreciably smaller balance sheet and supply of reserves than at present. In contrast, if in the long run the supply of reserves was quite small, such as was the situation before the financial crisis, either reserve requirements or voluntary reserve targets would probably be needed to help stabilize the demand for reserves and increase its predictability. The Federal Reserve would likely need to conduct frequent open market operations in this case to maintain adequate control of short-term interest rates, and banks would probably trade actively in the federal funds market. Some short-term interest rates could display greater volatility under this approach than one in which the level of reserve balances was relatively high, and operational tools to limit both downward and upward pressure on such rates would probably be needed. Regardless of the level of reserves, the policy rate in either of these cases could be an unsecured overnight market rate or an interest rate administered by the Federal Reserve. The FOMC might instead target an overnight Treasury repurchase agreement rate and use standing facilities to keep repurchase agreement rates close to the target level.
The staff noted the importance of having effective arrangements to provide liquidity in times of stress. Stigma associated with borrowing from the discount window has likely prevented it from effectively enhancing control of short-term interest rates and improving liquidity conditions in various situations. Possible options to provide appropriate liquidity when necessary while mitigating such stigma were mentioned.
The staff discussed the possibility that changes in the size and composition of the Federal Reserve's balance sheet, including the duration of its securities holdings, could be used to help achieve policymakers' macroeconomic goals when short-term interest rates had declined to their effective lower bound--and conceivably when short-term interest rates were above that bound. The staff also described the possibility of using balance sheet policies to promote financial stability.
In the discussion that followed the staff presentations, policymakers agreed that decisions regarding the long-run implementation framework were not necessary at this time. They indicated that the current framework was working well and that, with the supply of reserve balances expected to remain large for a while, the present approach to policy implementation would likely remain appropriate for some time. Moreover, policymakers expected to benefit from accruing additional information before making judgments about a future implementation framework. For example, they acknowledged that recent changes in financial regulations were likely to continue to be an important factor in the ongoing evolution of financial markets. Policymakers also underscored the importance of taking account of the possibility that neutral short-term interest rates could remain quite low. For these reasons, policymakers emphasized that their current views regarding the long-run policy implementation framework were preliminary and they expected that further deliberations would be appropriate before decisions were made.
Meeting participants commented on the advantages of using an approach to policy implementation in which active management of the supply of reserves would not be required. Such an approach could be compatible with a balance sheet that was much smaller than at present, though likely at least somewhat larger than in the years before the financial crisis, reflecting trend growth of balance sheet items such as currency as well as a larger supply of reserves. In addition, such an approach was seen as likely to be relatively simple and efficient to administer, relatively straightforward to communicate, and effective in enabling interest rate control across a wide range of circumstances. A number of policymakers stated that they continued to view expansion of the balance sheet through large-scale asset purchases as an important tool to provide macroeconomic stimulus in situations in which short-term interest rates were at their effective lower bound. Most participants did not indicate support for using the balance sheet as an active tool in other situations or for other purposes, although a few expressed support for undertaking further study of this possibility. Policymakers noted the merits of relying on a policy rate that would be robust to shifts in financial market structure, practices, and regulations as well as to changes in premiums for credit risk. Other important considerations for the choice of policy rate included the volatility of the rate, the breadth of the set of Federal Reserve counterparties that would be required to ensure adequate control of short-term interest rates, and the role of the policy rate in FOMC communications.
At the end of the discussion, the Chair reiterated that additional experience with the Federal Reserve's current monetary policy implementation framework would help inform policymakers' future deliberation of issues related to a long-run framework and that decisions regarding these issues would not be required for some time. The Chair also noted that the Federal Reserve would proceed cautiously and would communicate any intended changes to its approach to implementing monetary policy well in advance of making the changes.
Developments in Financial Markets and Open Market Operations
The manager of the System Open Market Account (SOMA) reported on developments in financial markets during the period since the Committee met on September 20-21, 2016, including changes in market expectations for U.S. monetary policy, adjustments to foreign central bank monetary policies, and the evolution of investors' views about risk factors in global financial markets. The deputy manager followed with a briefing on open market operations and developments in money markets. The implementation on October 14 of reforms to the money market fund (MMF) industry generally proceeded smoothly, although the shift in investments from prime to government-only money funds had been substantial and left an imprint on levels of some money market interest rates. Largely reflecting this shift, usage of the System's ON RRP facility rose somewhat further in the most recent intermeeting period. Federal funds generally continued to trade close to the middle of the FOMC's target range of 1/4 to 1/2 percent. The deputy manager also updated the Committee on implementation of the new framework for investment of foreign currency reserves and on a proposal to publish data series on interest rates in the market for general collateral repurchase agreements.
By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account during the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the November 1-2 meeting indicated that real gross domestic product (GDP) expanded at a faster pace in the third quarter than in the first half of the year and that labor market conditions continued to strengthen in recent months. Consumer price inflation increased further above its pace early in the year but was still running below the Committee's longer-run objective of 2 percent, restrained in part by earlier decreases in energy prices and in prices of non-energy imports. Most survey-based measures of longer-run inflation expectations were little changed, on balance, while market-based measures of inflation compensation moved up but remained low.
Total nonfarm payroll employment expanded at a solid pace in September, and the unemployment rate was little changed at 5.0 percent. The labor force participation rate and the employment-to-population ratio both edged up in September. The share of workers employed part time for economic reasons was still slightly elevated relative to its level before the recession. The rate of private-sector job openings edged down in August, and the rates of hiring and of quits were unchanged. The four-week moving average of initial claims for unemployment insurance benefits remained low. Measures of labor compensation continued to rise at a moderate pace. The employment cost index for private industry workers increased 2-1/4 percent over the 12 months ending in September, and average hourly earnings for all employees increased 2-1/2 percent over the same 12-month period.
The unemployment rates for African Americans and for Hispanics remained above the rate for whites but were close to the levels seen just prior to the most recent recession. The labor force participation rate for white individuals aged 25 to 54 continued to be higher than for African Americans and for Hispanics, but the rates for all three groups appeared to have either moved sideways or edged up recently.
Total industrial production increased slightly in September after little change, on net, in July and August. Mining output continued to rise, on balance, in recent months, but manufacturing production was little changed. Over the previous two years, manufacturing output was relatively flat, reflecting the effects of weak export demand, spillovers from the earlier declines in crude oil and natural gas drilling, and slow domestic capital investment more generally. Automakers' assembly schedules suggested that motor vehicle production would be about unchanged in the near term, and broader indicators of manufacturing production, such as the new orders indexes from national and regional manufacturing surveys, pointed toward only tepid gains, at best, in factory output in the coming months.
Real personal consumption expenditures (PCE) increased at a moderate pace in the third quarter, supported by continued gains in employment, real disposable personal income, and households' net worth. Consumer spending increased in September, partly because of an increase in outlays for motor vehicles. Indeed, unit sales of light motor vehicles rose sharply in September and moved higher in October, supported in part by sizable sales incentives. In addition, consumer sentiment as measured by the University of Michigan Surveys of Consumers remained relatively upbeat in October.
Housing market activity was weak in the third quarter. Real residential investment spending decreased, partly reflecting a decline in total housing starts. The most recent construction data were mixed, with starts for new single-family homes increasing in September and starts for multifamily units declining sharply. Building permit issuance for new single-family homes--which tends to be a good indicator of the underlying trend in construction--was little changed, on balance, in recent months and had remained essentially flat since late last year. Sales of new homes decreased, on net, in August and September, but sales of existing homes increased modestly.
Real private expenditures for business equipment and intellectual property were about flat in the third quarter. New orders for nondefense capital goods excluding aircraft were little changed over August and September, but orders were somewhat above the level of shipments, suggesting a modest pickup in business spending for equipment in the near term. Real business expenditures for nonresidential structures increased in the third quarter, and the number of oil and gas rigs in operation, an indicator of spending for structures in the drilling and mining sector, continued to edge up in October. Real inventory investment was positive in the third quarter after subtracting substantially from real GDP growth in the second quarter. Except in the energy sector, inventories generally seemed well aligned with the pace of sales.
Real federal purchases increased in the third quarter, as defense expenditures turned up and nondefense spending continued to rise. Real state and local government purchases decreased, reflecting a decline in real construction spending by these governments that more than offset a net expansion in state and local government payrolls during the third quarter.
Net exports contributed positively to real GDP growth in the third quarter, largely because of the strength of soybean exports. The nominal U.S. international trade deficit widened in August relative to July, as imports rose more than exports. Import growth was driven by higher imports of capital goods and services, while export growth was led in part by higher exports of industrial supplies and automotive products. The Census Bureau's advance trade estimates for September suggested a narrowing of the trade deficit, with further growth in exports and a decline in imports relative to August.
Total U.S. consumer prices, as measured by the PCE price index, increased about 1-1/4 percent over the 12 months ending in September, partly restrained by recent decreases in consumer food prices and earlier declines in consumer energy prices. Core PCE price inflation, which excludes changes in food and energy prices, was about 1-3/4 percent over those same 12 months, held down in part by decreases in the prices of non-energy imports over part of this period and by the pass-through of earlier declines in energy prices into the prices of other goods and services. Over the 12 months ending in September, total consumer prices as measured by the consumer price index (CPI) rose 1-1/2 percent, while core CPI inflation was around 2-1/4 percent. The Michigan survey measure of median longer-run inflation expectations moved down in October to a new historical low, and the longer-run measure from the Blue Chip Economic Indicators also declined slightly. Measures of longer-run inflation expectations from the Desk's Survey of Primary Dealers and Survey of Market Participants were unchanged in October.
Foreign real GDP growth appeared to pick up significantly in the third quarter following weak growth in the second quarter that primarily reflected contractions in Canada and Mexico. The recovery of oil production in Canada boosted economic activity there, and a pickup in U.S. economic activity and strong household spending in Mexico supported a sharp rebound in Mexican GDP growth. The improvements in these economies more than offset some moderation of growth in China. In the euro area and Japan, economic growth continued at a modest pace. Inflation generally remained subdued in both the emerging market economies and the advanced foreign economies (AFEs). A notable exception was the United Kingdom, where inflationary pressures increased, partly as a result of a substantial depreciation of the pound in recent months.
Staff Review of the Financial Situation
Domestic financial markets were relatively calm over the period since the September FOMC meeting. Asset prices were little changed, and volatility was mostly low. Market expectations for an increase in the target range for the federal funds rate before the end of the year rose modestly. Nominal Treasury yields edged up on net. No significant market disruptions were observed around the October 14 compliance deadline for MMF reform. Financing conditions for nonfinancial firms and households remained accommodative, on balance, and the credit quality of nonfinancial corporations continued to show signs of stabilization after having deteriorated in earlier quarters.
Federal Reserve communications immediately following the September meeting, notably the Summary of Economic Projections, were interpreted by market participants as slightly more accommodative than expected. Subsequent Federal Reserve communications and U.S. economic data releases over the intermeeting period were generally interpreted as in line with market expectations. The expected path for the federal funds rate implied by quotes on overnight index swap rates steepened slightly, on net, over the intermeeting period. Market-based estimates of the probability of a rate increase before the end of the year rose modestly to about 65 percent. Consistent with market-based estimates, respondents to the Desk's November surveys of primary dealers and market participants on average assigned a probability of about 60 percent to a rate increase by the end of this year. Based on the median responses, the most likely path of the target federal funds rate in 2017 and 2018 was little changed from that reported in the September surveys.
Nominal Treasury yields edged up, on net, since the September FOMC meeting. Yields declined early in the period following the September FOMC communications and amid concerns about developments potentially affecting profitability in the European banking sector, but they subsequently rose. Although those market concerns ebbed somewhat, they remained significant. Nominal yields were pushed up by an increase in inflation compensation, which appeared attributable to a combination of factors, including the recent rise in oil prices and a decline in investors' concerns about the risk of very low inflation outcomes, as implied by quotes on inflation caps and floors.
Broad stock price indexes were little changed, on net, since the September FOMC meeting. Realized and implied volatility in equity markets remained relatively low. Spreads of yields on nonfinancial investment-grade and speculative-grade corporate bonds over those of comparable-maturity Treasury securities declined a bit, with both spreads finishing the period at levels close to their medians during the economic expansions of the past two decades. Based on available reports and analysts' estimates, aggregate corporate earnings per share appeared to continue to rebound in the third quarter, reflecting improvements across a wide range of industries, including the energy sector.
Foreign equity indexes broadly increased over the intermeeting period. Nonetheless, foreign financial markets were sensitive to news about upcoming negotiations between the United Kingdom and the European Union (EU) over the U.K. exit from the EU as well as to ongoing developments in the European banking sector. Over the period, the dollar appreciated against most AFE currencies; the appreciation against the pound was particularly pronounced, reflecting increased concerns that negotiations between U.K. and European officials would result in an outcome featuring less economic integration than anticipated earlier. Concerns about U.K.-EU negotiations and higher U.K. inflation compensation also drove up 10-year gilt yields. In contrast, the dollar depreciated against the currencies of most commodity-exporting countries, including the Mexican peso and Russian ruble, consistent with the increase in oil prices.
Money market reform continued to affect several short-term funding markets in the weeks leading up to the October 14, 2016, compliance deadline, as investors continued to shift from prime funds to government funds. However, these flows slowed significantly in the days just before October 14 and remained subdued afterward. Measures of the liquidity of institutional prime funds, which had increased substantially ahead of the compliance deadline, subsequently declined. The rise in total assets of government funds over the intermeeting period appeared to contribute to moderately elevated take-up at the System's ON RRP facility. Overnight Eurodollar deposit volumes fell substantially in the weeks preceding the MMF reform compliance deadline and remained low as prime funds pulled back from lending in this market. Despite these volume changes, there was little effect on overnight money market rates, although the spread between the three-month London interbank offered rate and the overnight index swap rate remained elevated.
Financing conditions for nonfinancial firms remained generally accommodative. Gross issuance of corporate bonds was robust in September amid strong global demand for bonds and low yields. Growth of commercial and industrial (C&I) loans slowed overall in the third quarter but picked up in September. Demand and lending standards for C&I loans remained unchanged, on net, in the third quarter, according to the October Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS).
The credit quality of nonfinancial corporations, which had deteriorated somewhat over the past few quarters, continued to show signs of stabilization. The volume of bond downgrades only slightly outpaced that of upgrades in September. Default rates and expected year-ahead default rates for nonfinancial firms both edged down, although they remained elevated compared with their ranges in recent years.
Financing conditions for commercial real estate (CRE) also remained largely accommodative but showed some signs of tightening. Growth of CRE loans on banks' books continued to be strong in the third quarter, even though a significant number of banks reported in the October SLOOS that they had tightened lending standards on CRE loans. Issuance of commercial mortgage-backed securities (CMBS) picked up in the third quarter relative to its pace in the first half of the year. Spreads on CMBS were little changed over the intermeeting period.
In the municipal bond market, gross issuance of bonds was brisk and yields on general obligation bonds, on balance, edged up. The credit quality of state and local governments was generally stable.
Financing conditions in the residential mortgage market were little changed since the September FOMC meeting, and credit remained readily available for most borrowers. Interest rates on 30-year fixed-rate mortgages edged up but stayed at a low level. In the October SLOOS, several large banks noted a continued easing of standards for home-purchase loans eligible for purchase by the government-sponsored enterprises. Indicators suggested that refinancing activity continued to increase and reached its highest level since 2013 in response to the low level of mortgage rates.
Conditions in consumer credit markets were little changed, on balance, against a backdrop of largely stable credit quality. Growth in both revolving and nonrevolving loans remained robust. While auto credit standards were broadly unchanged, respondents to the October SLOOS indicated that they had tightened credit card standards for subprime customers. Yield spreads for securities backed by credit card and auto loans over Treasury securities of comparable maturities were little changed on balance. Issuance of consumer asset-backed securities picked up somewhat in the third quarter from the levels seen earlier this year.
In its latest report on potential risks to the stability of the U.S. financial system, the staff continued to judge that overall vulnerabilities remained moderate. Vulnerabilities associated with maturity and liquidity transformation appeared to have been reduced, reflecting the effects of newly implemented rules for prime MMFs. Vulnerabilities emanating from leverage in the financial sector remained low, as the largest U.S. banks had strong regulatory capital and liquidity positions. Valuation pressures across major asset categories remained at a moderate level: Although some metrics for CRE transactions indicated notable valuation pressures, CRE lending standards had tightened somewhat over the previous year, and valuations for domestic corporate equity and bonds were, on balance, in the middle of their historical ranges in relation to still-low Treasury yields. Vulnerabilities from leverage in the private nonfinancial sector were seen as moderate overall, reflecting the combination of relatively high aggregate leverage in the corporate sector, a sharp slowdown in the expansion of the riskiest forms of corporate debt, and a continued modest rise in aggregate household debt that accrued almost exclusively to borrowers with very high credit scores.
Monetary policy announcements by foreign central banks had limited effects on asset prices. At its September monetary policy meeting, the Bank of Japan (BOJ) announced that it will purchase Japanese government bonds (JGBs) to keep the yield on 10-year JGBs around zero; the BOJ also announced that it will continue to expand the monetary base until consumer price inflation exceeds the 2 percent target and stays above the target in a stable manner. No further changes were announced following the BOJ's October meeting. The European Central Bank kept its policy stance unchanged at its October meeting while signaling that further changes to its asset purchase program could be announced at its next meeting.
Staff Economic Outlook
In the U.S. economic projection prepared by the staff for the November FOMC meeting, the pace of real GDP growth was forecast to be faster over the second half of this year than in the first half, as business investment was anticipated to turn up and the drag from inventory investment was expected to end. However, the forecast for the second half was lower than in the September projection, primarily reflecting softer-than-expected data on consumer spending. The staff's forecast for real GDP growth over the next couple of years was also slightly lower than in the previous projection, primarily reflecting the effects of higher assumed paths for the dollar and for crude oil prices. Nonetheless, the staff projected that real GDP would expand at a modestly faster pace than potential output in 2017 and 2018, supported by solid gains in consumer spending and, to a lesser degree, by pickups in both residential and business investment; in 2019, GDP was projected to expand at the same rate as its potential. The unemployment rate was forecast to edge down gradually through the end of 2018 and then flatten out in 2019; the path for the unemployment rate was a little higher than in the previous projection but was still projected to run below the staff's estimate of its longer-run natural rate.
The near-term forecast for consumer price inflation was somewhat higher than in the previous projection, reflecting incoming data on core prices and energy prices. Beyond the near term, the inflation forecast was generally little revised. The staff continued to project that inflation would increase over the next several years, as food and energy prices along with the prices of non-energy imports were expected to begin rising steadily this year. However, inflation was projected to be marginally below the Committee's longer-run objective of 2 percent in 2019.
The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The risks to the forecast for real GDP were seen as tilted to the downside, reflecting the staff's assessment that both monetary and fiscal policy appeared to be better positioned to offset large positive shocks than adverse ones. In addition, the staff continued to see the risks to the forecast from developments abroad as skewed to the downside. Consistent with the downside risks to aggregate demand, the staff viewed the risks to its outlook for the unemployment rate as tilted to the upside. The risks to the projection for inflation were seen as roughly balanced. The possibility that longer-term inflation expectations may have edged down was roughly counterbalanced by the risks that somewhat firmer inflation this year could be more persistent than expected, particularly in an economy that was projected to continue operating above its long-run potential.
Participants' Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants agreed that information received over the intermeeting period indicated that the labor market had continued to strengthen and that growth of economic activity had picked up from the modest pace seen in the first half of the year. Job gains had been solid in recent months, although the unemployment rate was little changed. Household spending had been rising moderately, but business fixed investment had remained soft. Inflation had increased somewhat since earlier this year but remained below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation had moved up but remained low; most survey-based measures of longer-term inflation expectations had changed little, on balance, in recent months. Domestic and global asset markets remained relatively calm over the intermeeting period, and U.S. financial conditions continued to be broadly accommodative.
Participants generally indicated that their economic forecasts had changed little over the intermeeting period. They continued to anticipate that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would strengthen somewhat further. Inflation was expected to rise to 2 percent over the medium term, as the transitory effects of past declines in energy and import prices continued to dissipate and the labor market strengthened further. A substantial majority viewed the near-term risks to the economic outlook as roughly balanced, although a few participants judged that significant downside risks remained, citing various factors including the low value of the neutral federal funds rate and its proximity to the effective lower bound, the possibility of weaker-than-expected growth in foreign economies, the continued uncertainty associated with the United Kingdom's exit from the EU, or financial fragilities in some countries. Participants agreed that the Committee should continue to closely monitor inflation indicators and global economic and financial developments.
Participants noted that although real GDP growth in the third quarter was appreciably above the slow pace of the first half, it had been boosted in part by transitory factors, including a surge in agricultural exports and a bounceback in inventory investment. Excluding these factors, underlying economic growth had been relatively modest: Growth of consumer spending had slowed from its brisk pace earlier in the year, residential investment had fallen again, and business fixed investment had remained soft. Retailers in a few Districts reported weak to moderate activity, although some contacts thought that holiday sales were likely to peak late in the season. Real economic activity was expected to advance at a moderate pace in coming quarters, primarily reflecting solid growth in consumer spending, consistent with ongoing employment gains, increases in household wealth, and low interest rates.
Participants continued to expect economic activity in the coming quarters to be supported by a pickup in business investment. Recent increases in oil and gas drilling activity in response to higher energy prices were seen as a positive development for the investment outlook; however, a few participants reported that uncertainty about prospects for government policy, shorter investment time horizons for businesses, or the potential for advances in technology to disrupt existing business models were likely weighing on capital spending plans. A few participants noted weakness in nonresidential construction. District reports on residential construction activity were mixed. One participant reported generally strong conditions in the District's housing markets but also cited various factors that were restraining residential construction in some locales, including constraints on builder financing, limitations on the supply of buildable lots, and shortages of skilled labor.
In their discussion of business activity in their Districts, participants provided mixed reports on manufacturing, with a few areas that had been adversely affected by the downturn in energy prices reporting a modest pickup in output. In the agricultural sector, low crop prices were said to continue to weigh on farm income and farm spending.
Participants noted that economic growth in many foreign economies remained subdued, and that inflation rates abroad generally were still quite low. Some participants observed that important international downside risks remained, including constraints on monetary policies in the low interest rate environments of some countries; investors' concerns about developments potentially affecting profitability in the European banking sector; the possible consequences of upcoming negotiations and eventual terms of the United Kingdom's exit from the EU; potential deleterious effects from rapid credit growth in China; and the potential for further dollar appreciation, which could restrain U.S. inflation for a considerable time.
Participants generally agreed that labor market conditions had continued to improve over the intermeeting period. Reports from some Districts pointed to a tightening in labor markets, evidenced by shortages of qualified workers in some occupations, increases in overtime hours, or a pickup in wage inflation. In several of these Districts, business contacts had undertaken workforce development and worker training to address a shortage of labor with the necessary skills.
Many participants commented on the rise in the labor force participation rate since late 2015. A few of them noted that the increase had largely reflected a diminution in the flow of individuals leaving the workforce rather than an increase of new entrants into the labor force and had been more prevalent among workers with relatively less education. Participants expressed uncertainty about how long the participation rate could be expected to continue rising, particularly in light of the downward structural trend in this series. On the one hand, the participation rate for prime-age males remained significantly below its level before the financial crisis, suggesting that it could rise further over time. In addition, there was some uncertainty around estimates of the longer-run trend rate of labor force participation and it could be higher than previously thought, reflecting, for example, a shift toward later retirement. On the other hand, from a business cycle perspective, the increase in the participation rate in recent months was consistent with a tightening labor market and an economy nearing full employment; furthermore, it was not clear that output growth above the economy's potential growth rate would succeed in drawing new entrants permanently into the labor force. Overall, while some participants expressed the view that the economy was close to or at full employment, several others judged that appreciable slack could remain in the labor market. Some participants characterized wage pressures as only moderate, although one noted that wage growth was similar to its pace at the peak of the previous economic expansion.
Readings on headline and core PCE price inflation had come in somewhat higher than expected in recent months. Participants generally regarded this as a positive development, consistent with headline inflation rising over the medium term to the Committee's objective of 2 percent. A few participants observed that it was difficult to judge how much of the uptick in core PCE price inflation reflected transitory factors, while a couple of others saw the incoming data as suggesting that inflation could move up to the Committee's objective more rapidly than previously expected. Participants discussed possible policy implications of the risks surrounding the outlook for inflation, including the possibility that achieving the Committee's inflation objective sooner than previously anticipated could cause a revision in market expectations of the path for policy rates and a sharp rise in longer-term interest rates, or the possibility that a further appreciation of the dollar stemming from developments abroad could renew disinflationary pressures and postpone the need for policy firming. Some participants regarded the uptick in market-based measures of inflation compensation over the intermeeting period as a welcome suggestion of further progress toward the Committee's inflation goal. However, several cautioned that these measures remained low or that the measures still appeared to embed a significant weight on undesirably low inflation outcomes. The median expectation for inflation over the next 5 to 10 years from the Michigan survey edged down in October to a new historical low, although it was noted that this drop could be explained by a reduction in the number of respondents who had previously expected relatively high inflation outcomes. Overall, participants judged that survey-based measures of inflation expectations had been fairly stable in recent months.
Participants discussed a range of issues related to recent developments in financial markets and financial stability. MMF reforms that became effective in mid-October had resulted in a substantial shift of assets out of prime funds and into government-only funds. It was observed that these reforms had contributed to a sizable reduction of risk in the shadow banking system. Participants also discussed some causes of the low yields on longer-term Treasury securities and their embedded term premiums, which were below historical average levels. Among the factors cited were a persistent decline in the neutral federal funds rate, and depressed term premiums likely owing to the elevated size of the Federal Reserve's balance sheet as well as the reduced likelihood of high inflation relative to several decades ago. Some of these factors could endure for some time.
In connection with the participants' discussion of the long-run monetary policy implementation framework, many participants noted that the Committee's broader monetary policy strategy needed both to be considered in conjunction with the design of such a framework and to receive careful further consideration in its own right. In particular, accumulating evidence of slow trend productivity and output growth and associated persistently low levels of neutral interest rates, both in the United States and abroad, had potential implications for the most effective policy implementation framework for the Federal Reserve in coming years as well as the monetary policy strategy that would best promote the Committee's macroeconomic objectives. Among other factors that needed to be taken into account, it was observed that neutral real short-term interest rates could decline further if central bank balance sheets contracted or the positive effects of quantitative easing on economic activity waned over time. Participants agreed that issues associated with monetary policy implementation should be discussed within the context of the current and potential future economic and financial environment and the Committee's strategy for monetary policy.
Against the backdrop of their views of the economic outlook, participants discussed whether the available information warranted taking another step to reduce policy accommodation at this meeting. Based on the relatively limited information received since the September FOMC meeting, participants generally agreed that the case for increasing the target range for the federal funds rate had continued to strengthen. Participants saw recent information as indicating that labor market conditions had improved further and considered the firming in inflation and inflation compensation to be positive developments, consistent with continued progress toward the Committee's 2 percent inflation objective. However, a number of participants expressed the view that some modest slack remained in the labor market or noted that readings on inflation compensation and inflation expectations remained low. Moreover, some participants suggested that current conditions did not point to an immediate need to tighten policy or that some further evidence of continued progress toward the Committee's objectives would provide greater support for policy firming.
Most participants expressed a view that it could well become appropriate to raise the target range for the federal funds rate relatively soon, so long as incoming data provided some further evidence of continued progress toward the Committee's objectives. Some participants noted that recent Committee communications were consistent with an increase in the target range for the federal funds rate in the near term or argued that to preserve credibility, such an increase should occur at the next meeting. A few participants advocated an increase at this meeting; they viewed recent economic developments as indicating that labor market conditions were at or close to those consistent with maximum employment and expected that recent progress toward the Committee's inflation objective would continue, even with further gradual steps to remove monetary policy accommodation. In addition, many judged that risks to economic and financial stability could increase over time if the labor market overheated appreciably, or expressed concern that an extended period of low interest rates risked intensifying incentives for investors to reach for yield, potentially leading to a mispricing of risk and misallocation of capital. In contrast, some others judged that allowing the unemployment rate to fall below its longer-run normal level for a time could result in favorable supply-side effects or help hasten the return of inflation to the Committee's 2 percent objective; noted that proximity of the federal funds rate to the effective lower bound places potential constraints on monetary policy; or stressed that global developments could pose risks to U.S. economic activity. More generally, it was emphasized that decisions regarding near-term adjustments of the stance of monetary policy would appropriately remain dependent on the outlook as informed by incoming data, and participants expected that economic conditions would evolve in a manner that would warrant only gradual increases in the federal funds rate.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that the information received since the Committee met in September indicated that the labor market had continued to strengthen and that growth of economic activity had picked up from the modest pace seen in the first half of this year. Although the unemployment rate was little changed in recent months, job gains had been solid. Household spending had been rising moderately but business fixed investment had remained soft. Inflation had increased somewhat since earlier this year but was still below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation had moved up but remained low; most survey-based measures of longer-term inflation expectations were little changed, on balance, in recent months.
With respect to the economic outlook and its implications for monetary policy, members continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would strengthen somewhat further. Almost all of them continued to judge that near-term risks to the economic outlook were roughly balanced. Members generally observed that labor market conditions had improved appreciably over the past year, a development that was particularly evident in the solid pace of monthly payroll employment gains and the increase in the labor force participation rate. It was noted that allowing the unemployment rate to modestly undershoot its longer-run normal level could foster the return of inflation to the FOMC's 2 percent objective over the medium term. A few members, however, were concerned that a sizable undershooting of the longer-run normal unemployment rate could necessitate a steep subsequent rise in policy rates, undermining the Committee's prior communications about its expectations for a gradually rising policy rate or even posing risks to the economic expansion.
Members continued to expect inflation to remain low in the near term, but most anticipated that, with gradual adjustments in the stance of monetary policy, inflation would rise to the Committee's 2 percent objective over the medium term. Some members observed that the increases in inflation and inflation compensation in recent months were welcome, although a couple of them noted that inflation was still running below the Committee's objective. Against this backdrop and in light of the current shortfall of inflation from 2 percent, members agreed that they would continue to carefully monitor actual and expected progress toward the Committee's inflation goal.
After assessing the outlook for economic activity, the labor market, and inflation, as well as the risks around that outlook, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent at this meeting. Members generally agreed that the case for an increase in the policy rate had continued to strengthen. But a majority of members judged that the Committee should, for the time being, await some further evidence of progress toward its objectives of maximum employment and 2 percent inflation before increasing the target range for the federal funds rate. A few members emphasized that a cautious approach to removing accommodation was warranted given the proximity of policy rates to the effective lower bound, as the Committee had more scope to increase policy rates, if necessary, than to reduce them. Two members preferred to raise the target range for the federal funds rate by 25 basis points at this meeting. They saw inflation as close to the 2 percent objective and viewed an increase in the federal funds rate as appropriate at this meeting because they judged that the economy was essentially at maximum employment and that monetary policy was unable to contribute to a permanent further improvement in labor market conditions in these circumstances.
The Committee agreed that, in determining the timing and size of future adjustments to the target range for the federal funds rate, it would assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee expected that economic conditions would evolve in a manner that would warrant only gradual increases in the federal funds rate and that the federal funds rate was likely to remain, for some time, below levels that are expected to prevail in the longer run. However, members emphasized that the actual path of the federal funds rate would depend on the economic outlook as informed by incoming data.
The Committee also decided to maintain its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipated doing so until normalization of the level of the federal funds rate is well under way. Members noted that this policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
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 SOMA in accordance with the following domestic policy directive, to be released at 2:00 p.m.:
"Effective November 3, 2016, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1/4 to 1/2 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 0.25 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."
The vote also encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in September indicates that the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. Although the unemployment rate is little changed in recent months, job gains have been solid. Household spending has been rising moderately but business fixed investment has remained soft. Inflation has increased somewhat since earlier this year but is still below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation have moved up but remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The Committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions."
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, James Bullard, Stanley Fischer, Jerome H. Powell, Eric Rosengren, and Daniel K. Tarullo.
Voting against this action: Esther L. George and Loretta J. Mester.
Mses. George and Mester dissented because they preferred to increase the target range for the federal funds rate by 25 basis points at this meeting.
Ms. George judged that, with the labor market near full employment and inflation approaching the Committee's 2 percent objective, another step in the gradual adjustment of monetary policy was appropriate. While a low level of the target range for the federal funds rate had supported achieving the Committee's objectives, such low levels were no longer warranted and, if maintained, could pose a risk to the sustainability of the economic expansion with stable inflation. In particular, she viewed the supply-side benefits of allowing labor utilization to rise above its neutral level as temporary, and noted that monetary policy was unable to affect the longer-run growth potential of the economy.
Ms. Mester judged that the economy was essentially at full employment in terms of what can be achieved through monetary policy. The unemployment rate was at her estimate of its longer-run normal level, and labor market conditions were projected to tighten further. In addition, she noted that inflation was moving up and was close to the Committee's 2 percent objective. In these circumstances, she believed it appropriate to gradually increase the target range for the federal funds rate from its current low level, which would allow monetary policy to continue to lend support to the economic expansion. A gradual path would allow the Committee to better calibrate policy over time as it learns more about the underlying structural aspects of the economy. Ms. Mester saw taking the next step in removing policy accommodation as consistent with the Committee's communications about the appropriate path for monetary policy.
Consistent with the Committee's decision to leave the target range for the federal funds rate unchanged, the Board of Governors took no action to change the interest rates on reserves or discount rates.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, December 13-14, 2016. The meeting adjourned at 10:00 a.m. on November 2, 2016.
Notation Vote
By notation vote completed on October 11, 2016, the Committee unanimously approved the minutes of the Committee meeting held on September 20-21, 2016.
_____________________________
Brian F. Madigan
Secretary
1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes. Return to text
2. Attended the discussions of the long-run monetary policy implementation framework and financial developments. Return to text
3. Attended the discussion of the long-run monetary policy implementation framework. Return to text
4. Attended Tuesday session only. Return to text |
2016-11-02T00:00:00 | 2016-11-02 | Statement | Information received since the Federal Open Market Committee met in September indicates that the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. Although the unemployment rate is little changed in recent months, job gains have been solid. Household spending has been rising moderately but business fixed investment has remained soft. Inflation has increased somewhat since earlier this year but is still below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation have moved up but remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The Committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action were: Esther L. George and Loretta J. Mester, each of whom preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.
Implementation Note issued November 2, 2016 |
2016-09-21T00:00:00 | 2016-10-12 | Minute | Minutes of the Federal Open Market Committee
September 20-21, 2016
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, September 20, 2016, at 1:00 p.m. and continued on Wednesday, September 21, 2016, at 9:00 a.m.1
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
James Bullard
Stanley Fischer
Esther L. George
Loretta J. Mester
Jerome H. Powell
Eric Rosengren
Daniel K. Tarullo
Charles L. Evans, Patrick Harker, Robert S. Kaplan, Neel Kashkari, and Michael Strine, Alternate Members of the Federal Open Market Committee
Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively
Brian F. Madigan, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Michael Held, Deputy General Counsel
Richard M. Ashton, Assistant General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
Thomas A. Connors, Troy Davig, Michael P. Leahy, Stephen A. Meyer, Ellis W. Tallman, Geoffrey Tootell, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Robert deV. Frierson, Secretary of the Board, Office of the Secretary, Board of Governors
Matthew J. Eichner,2 Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors
James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors; Maryann F. Hunter, Deputy Director, Division of Banking Supervision and Regulation, Board of Governors
David Bowman, Andrew Figura, Joseph W. Gruber, Ann McKeehan, and David Reifschneider, Special Advisers to the Board, Office of Board Members, Board of Governors
Trevor A. Reeve, Special Adviser to the Chair, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Eric M. Engen, Joshua Gallin, and Michael G. Palumbo, Senior Associate Directors, Division of Research and Statistics, Board of Governors
Michael T. Kiley, Senior Associate Director, Division of Financial Stability, and Senior Adviser, Division of Research and Statistics, Board of Governors
Antulio N. Bomfim, Ellen E. Meade, and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors
David López-Salido, Associate Director, Division of Monetary Affairs, Board of Governors
Elizabeth Klee and Jason Wu, Assistant Directors, Division of Monetary Affairs, Board of Governors; Shane M. Sherlund, Assistant Director, Division of Research and Statistics, Board of Governors; Paul R. Wood, Assistant Director, Division of International Finance, Board of Governors
Penelope A. Beattie,3 Assistant to the Secretary, Office of the Secretary, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Sophia H. Allison,2 Special Counsel, Legal Division, Board of Governors
Jonathan E. Goldberg and Francisco Vazquez-Grande, Senior Economists, Division of Monetary Affairs, Board of Governors
Paul Dozier,2 Senior Financial Analyst, Division of International Finance, Board of Governors
Randall A. Williams, Information Manager, Division of Monetary Affairs, Board of Governors
Mark A. Gould, First Vice President, Federal Reserve Bank of San Francisco
David Altig, Kartik B. Athreya, and Daniel G. Sullivan, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Richmond, and Chicago, respectively
Mary Daly, Evan F. Koenig, Susan McLaughlin,2 and Paolo A. Pesenti, Senior Vice Presidents, Federal Reserve Banks of San Francisco, Dallas, New York, and New York, respectively
David Andolfatto, Vice President, Federal Reserve Bank of St. Louis
Thomas D. Tallarini, Jr., Assistant Vice President, Federal Reserve Bank of Minneapolis
Satyajit Chatterjee, Senior Economic Advisor, Federal Reserve Bank of Philadelphia
Cindy Hull,2 Markets Officer, Federal Reserve Bank of New York
Selection of Committee Officer
By unanimous vote, the Committee selected Michael Held to serve as deputy general counsel, effective September 20, 2016, until the selection of his successor at the first regularly scheduled meeting of the Committee in 2017.
Revisions to Documents Governing Foreign Currency Operations
The manager of the System Open Market Account (SOMA) briefed the Committee on a staff proposal to revise the documents governing the System's foreign currency operations, including the Authorization for Foreign Currency Operations (Foreign Authorization), the Foreign Currency Directive (Foreign Directive), and the Procedural Instructions with Respect to Foreign Currency Operations (Procedural Instructions). The objectives of the proposal were to simplify the organization of the documents, to better reflect the current operating environment, and to clarify guidance provided to the Federal Reserve Bank selected by the Committee to execute open market transactions (Selected Bank). The staff proposed incorporating the material in the Foreign Authorization, Foreign Directive, and Procedural Instructions into a new authorization and directive that would parallel the domestic authorization and directive; the Procedural Instructions document would no longer be necessary. The proposed Foreign Authorization was structured by operation type, including standalone spot and forward transactions; warehousing of funds for the Exchange Stabilization Fund; reciprocal currency arrangements, and standing dollar and foreign currency liquidity swaps; and foreign currency holdings. Proposed substantive changes to procedures and governance included the removal of the Selected Bank's ability to independently decide, within limits, to enter into standalone spot and forward transactions, the addition of a provision for the Foreign Currency Subcommittee (Subcommittee) to give additional guidance to the Selected Bank regarding management of SOMA foreign currency holdings, and the incorporation of procedures that would allow decisions to be made promptly under circumstances in which the normal procedures would not be feasible. Additionally, the definition of and provisions governing the Subcommittee were removed from the Foreign Authorization and incorporated into the Committee's Rules of Procedure and Rules of Organization, as appropriate. By unanimous vote, the proposed Foreign Authorization, Foreign Directive, Rules of Organization, and Rules of Procedure were approved, and the Procedural Instructions were rescinded.4
AUTHORIZATION FOR FOREIGN CURRENCY OPERATIONS
(As amended effective September 20, 2016)
IN GENERAL
The Federal Open Market Committee (the "Committee") authorizes the Federal Reserve Bank selected by the Committee (the "Selected Bank") to execute open market transactions for the System Open Market Account as provided in this Authorization, to the extent necessary to carry out any foreign currency directive of the Committee:
To purchase and sell foreign currencies (also known as cable transfers) at home and abroad in the open market, including with the United States Treasury, with foreign monetary authorities, with the Bank for International Settlements, and with other entities in the open market. This authorization to purchase and sell foreign currencies encompasses purchases and sales through standalone spot or forward transactions and through foreign exchange swap transactions. For purposes of this Authorization, foreign exchange swap transactions are: swap transactions with the United States Treasury (also known as warehousing transactions), swap transactions with other central banks under reciprocal currency arrangements, swap transactions with other central banks under standing dollar liquidity and foreign currency liquidity swap arrangements, and swap transactions with other entities in the open market.
To hold balances of, and to have outstanding forward contracts to receive or to deliver, foreign currencies.
All transactions in foreign currencies undertaken pursuant to paragraph 1 above shall, unless otherwise authorized by the Committee, be conducted:
In a manner consistent with the obligations regarding exchange arrangements under Article IV of the Articles of Agreement of the International Monetary Fund (IMF).1
In close and continuous cooperation and consultation, as appropriate, with the United States Treasury.
In consultation, as appropriate, with foreign monetary authorities, foreign central banks, and international monetary institutions.
At prevailing market rates.
STANDALONE SPOT AND FORWARD TRANSACTIONS
For any operation that involves standalone spot or forward transactions in foreign currencies:
Approval of such operation is required as follows:
The Committee must direct the Selected Bank in advance to execute the operation if it would result in the overall volume of standalone spot and forward transactions in foreign currencies, as defined in paragraph 3.C of this Authorization, exceeding $5 billion since the close of the most recent regular meeting of the Committee. The Foreign Currency Subcommittee (the "Subcommittee") must direct the Selected Bank in advance to execute the operation if the Subcommittee believes that consultation with the Committee is not feasible in the time available.
The Committee authorizes the Subcommittee to direct the Selected Bank in advance to execute the operation if it would result in the overall volume of standalone spot and forward transactions in foreign currencies, as defined in paragraph 3.C of this Authorization, totaling $5 billion or less since the close of the most recent regular meeting of the Committee.
Such an operation also shall be:
Generally directed at countering disorderly market conditions; or
Undertaken to adjust System balances in light of probable future needs for currencies; or
Conducted for such other purposes as may be determined by the Committee.
For purposes of this Authorization, the overall volume of standalone spot and forward transactions in foreign currencies is defined as the sum (disregarding signs) of the dollar values of individual foreign currencies purchased and sold, valued at the time of the transaction.
WAREHOUSING
The Committee authorizes the Selected Bank, with the prior approval of the Subcommittee and at the request of the United States Treasury, to conduct swap transactions with the United States Exchange Stabilization Fund established by section 10 of the Gold Reserve Act of 1934 under agreements in which the Selected Bank purchases foreign currencies from the Exchange Stabilization Fund and the Exchange Stabilization Fund repurchases the foreign currencies from the Selected Bank at a later date (such purchases and sales also known as warehousing).
RECIPROCAL CURRENCY ARRANGEMENTS, AND STANDING DOLLAR AND FOREIGN CURRENCY LIQUIDITY SWAPS
The Committee authorizes the Selected Bank to maintain reciprocal currency arrangements established under the North American Framework Agreement, standing dollar liquidity swap arrangements, and standing foreign currency liquidity swap arrangements as provided in this Authorization and to the extent necessary to carry out any foreign currency directive of the Committee.
For reciprocal currency arrangements all drawings must be approved in advance by the Committee (or by the Subcommittee, if the Subcommittee believes that consultation with the Committee is not feasible in the time available).
For standing dollar liquidity swap arrangements all drawings must be approved in advance by the Chairman. The Chairman may approve a schedule of potential drawings, and may delegate to the manager, System Open Market Account, the authority to approve individual drawings that occur according to the schedule approved by the Chairman.
For standing foreign currency liquidity swap arrangements all drawings must be approved in advance by the Committee (or by the Subcommittee, if the Subcommittee believes that consultation with the Committee is not feasible in the time available).
Operations involving standing dollar liquidity swap arrangements and standing foreign currency liquidity swap arrangements shall generally be directed at countering strains in financial markets in the United States or abroad, or reducing the risk that they could emerge, so as to mitigate their effects on economic and financial conditions in the United States.
For reciprocal currency arrangements, standing dollar liquidity swap arrangements, and standing foreign currency liquidity swap arrangements:
All arrangements are subject to annual review and approval by the Committee;
Any new arrangements must be approved by the Committee; and
Any changes in the terms of existing arrangements must be approved in advance by the Chairman. The Chairman shall keep the Committee informed of any changes in terms, and the terms shall be consistent with principles discussed with and guidance provided by the Committee.
OTHER OPERATIONS IN FOREIGN CURRENCIES
Any other operations in foreign currencies for which governance is not otherwise specified in this Authorization (such as foreign exchange swap transactions with privateâsector counterparties) must be authorized and directed in advance by the Committee.
FOREIGN CURRENCY HOLDINGS
The Committee authorizes the Selected Bank to hold foreign currencies for the System Open Market Account in accounts maintained at foreign central banks, the Bank for International Settlements, and such other foreign institutions as approved by the Board of Governors under Section 214.5 of Regulation N, to the extent necessary to carry out any foreign currency directive of the Committee.
The Selected Bank shall manage all holdings of foreign currencies for the System Open Market Account:
Primarily, to ensure sufficient liquidity to enable the Selected Bank to conduct foreign currency operations as directed by the Committee;
Secondarily, to maintain a high degree of safety;
Subject to paragraphs7.A.i and 7.A.ii, to provide the highest rate of return possible in each currency; and
To achieve such other objectives as may be authorized by the Committee.
The Selected Bank may manage such foreign currency holdings by:
Purchasing and selling obligations of, or fully guaranteed as to principal and interest by, a foreign government or agency thereof ("Permitted Foreign Securities") through outright purchases and sales;
Purchasing Permitted Foreign Securities under agreements for repurchase of such Permitted Foreign Securities and selling such securities under agreements for the resale of such securities; and
Managing balances in various time and other deposit accounts at foreign institutions approved by the Board of Governors under Regulation N.
The Subcommittee, in consultation with the Committee, may provide additional instructions to the Selected Bank regarding holdings of foreign currencies.
ADDITIONAL MATTERS
The Committee authorizes the Chairman:
With the prior approval of the Committee, to enter into any needed agreement or understanding with the Secretary of the United States Treasury about the division of responsibility for foreign currency operations between the System and the United States Treasury;
To advise the Secretary of the United States Treasury concerning System foreign currency operations, and to consult with the Secretary on policy matters relating to foreign currency operations;
To designate Federal Reserve System persons authorized to communicate with the United States Treasury concerning System Open Market Account foreign currency operations; and
From time to time, to transmit appropriate reports and information to the National Advisory Council on International Monetary and Financial Policies.
The Committee authorizes the Selected Bank to undertake transactions of the type described in this Authorization, and foreign exchange and investment transactions that it may be otherwise authorized to undertake, from time to time for the purpose of testing operational readiness. The aggregate amount of such transactions shall not exceed $2.5 billion per calendar year. These transactions shall be conducted with prior notice to the Committee.
All Federal Reserve banks shall participate in the foreign currency operations for System Open Market Account in accordance with paragraph 3G(1) of the Board of Governors' Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks dated January 1, 1944.
Any authority of the Subcommittee pursuant to this Authorization may be exercised by the Chairman if the Chairman believes that consultation with the Subcommittee is not feasible in the time available. The Chairman shall promptly report to the Subcommittee any action approved by the Chairman pursuant to this paragraph.
The Committee authorizes the Chairman, in exceptional circumstances where it would not be feasible to convene the Committee, to foster the Committee's objectives by instructing the Selected Bank to engage in foreign currency operations not otherwise authorized pursuant to this Authorization. Any such action shall be made in the context of the Committee's discussion and decisions regarding foreign currency operations. The Chairman, whenever feasible, will consult with the Committee before making any instruction under this paragraph.
1 In general, as specified in Article IV, each member of the IMF undertakes to collaborate with the IMF and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates. These obligations include seeking to direct the member's economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability. These obligations also include avoiding manipulating exchange rates or the international monetary system in such a way that would impede effective balance of payments adjustment or to give an unfair competitive advantage over other members.
FOREIGN CURRENCY DIRECTIVE
(As amended effective September 20, 2016)
The Committee directs the Federal Reserve Bank selected by the Committee (the "Selected Bank") to execute open market transactions, for the System Open Market Account, in accordance with the provisions of the Authorization for Foreign Currency Operations (the "Authorization") and subject to the limits in this Directive.
The Committee directs the Selected Bank to execute warehousing transactions, if so requested by the United States Treasury and if approved by the Foreign Currency Subcommittee (the "Subcommittee"), subject to the limitation that the outstanding balance of United States dollars provided to the United States Treasury as a result of these transactions not at any time exceed $5 billion.
The Committee directs the Selected Bank to maintain, for the System Open Market Account:
Reciprocal currency arrangements with the following foreign central banks:
Foreign bank
Amount of arrangement
(millions of dollars equivalent)
Bank of Canada
2,000
Bank of Mexico
3,000
Standing dollar liquidity swap arrangements with the following foreign central banks:
Bank of Canada
Bank of England
Bank of Japan
European Central Bank
Swiss National Bank
Standing foreign currency liquidity swap arrangements with the following foreign central banks:
Bank of Canada
Bank of England
Bank of Japan
European Central Bank
Swiss National Bank
The Committee directs the Selected Bank to hold and to invest foreign currencies in the portfolio in accordance with the provisions of paragraph 7 of the Authorization.
The Committee directs the Selected Bank to report to the Committee, at each regular meeting of the Committee, on transactions undertaken pursuant to paragraphs 1 and 6 of the Authorization. The Selected Bank is also directed to provide quarterly reports to the Committee regarding the management of the foreign currency holdings pursuant to paragraph 7 of the Authorization.
The Committee directs the Selected Bank to conduct testing of transactions for the purpose of operational readiness in accordance with the provisions of paragraph 9 of the Authorization.
Developments in Financial Markets and Open Market Operations
The manager reported on developments in financial markets during the period since the Committee met on July 26-27, 2016. Over much of the period, financial market volatility was relatively low, but volatility increased somewhat in the last couple of weeks of the period amid shifting views among market participants about potential monetary policy actions by the Federal Reserve and foreign central banks. The deputy manager followed with a briefing on open market operations and developments in money markets, including investment flows and changes in market interest rates in anticipation of the upcoming implementation of reforms to the money market fund (MMF) industry. Usage of the System's overnight reverse repurchase agreement facility increased modestly in the most recent intermeeting period. Federal funds generally continued to trade close to the middle of the FOMC's target range of 1/4 to 1/2 percent.
The Committee was also briefed on planned revisions to the policies of the Open Market Desk on counterparties for domestic and foreign open market operations. The proposal was intended in part to create a single unified framework for the management of counterparties and to increase the transparency of the Desk's counterparty policies. The Committee indicated its general support for the proposal. Desk staff anticipated that the revisions would be published later this year.
By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account during the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the September 20-21 meeting indicated that labor market conditions strengthened in recent months and that real gross domestic product (GDP) was increasing at a faster pace in the third quarter than in the first half of the year. Consumer price inflation continued to run below the Committee's longer-run objective of 2 percent, restrained in part by earlier decreases in energy prices and in prices of non-energy imports. Survey-based measures of longer-run inflation expectations were little changed, on balance, while market-based measures of inflation compensation remained low.
Total nonfarm payroll employment expanded strongly, on average, in July and August. The unemployment rate remained at 4.9 percent in recent months. Both the labor force participation rate and the employment-to-population ratio had edged up since June. The share of workers employed part time for economic reasons was little changed on balance. The rates of private-sector job openings and of hires increased over June and July, and the rate of quits was unchanged. The four-week moving average of initial claims for unemployment insurance benefits continued to be low. Labor productivity in the business sector declined slightly over the four quarters ending in the second quarter of 2016. Measures of labor compensation continued to rise at a moderate pace. Compensation per hour in the business sector rose 2 percent over the four quarters ending in the second quarter, the employment cost index for private workers increased 2-1/2 percent over the 12 months ending in June, and average hourly earnings for all employees increased 2-1/2 percent over the 12 months ending in August.
The unemployment rates for African Americans and for Hispanics remained above the rate for whites, although the differentials in jobless rates across these groups were similar to those before the most recent recession. The employment-to-population ratio for individuals aged 25 to 64 continued to be higher for whites than for African Americans and for Hispanics.
Total industrial production rose slightly, on net, in July and August. The output of the mining sector increased since April after having trended down from late 2014. Manufacturing production was unchanged, on balance, since June and had generally been moving sideways since the end of 2014, as weak export demand and spillovers from the decline in crude oil and natural gas drilling weighed on industrial activity. Although automakers' assembly schedules pointed to some increase in motor vehicle production in the near term, broader indicators of manufacturing production, such as new orders diffusion indexes from national and regional manufacturing surveys, suggested that factory output would remain on a flat trajectory in the coming months.
Real personal consumption expenditures (PCE) appeared to be increasing solidly, on net, in the third quarter. Real PCE rose strongly in July, but the components of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimate of PCE were flat in August and the pace of light motor vehicle sales softened. Recent readings on key factors that influence consumer spending were consistent with solid real PCE growth for the third quarter as a whole, including continued gains in employment, real disposable personal income, and households' net worth. In addition, consumer sentiment as measured by the University of Michigan Surveys of Consumers remained relatively upbeat through early September.
Recent information on housing activity suggested that real residential investment spending continued to be soft in the third quarter. Starts for new single-family homes declined, on net, in July and August, as did starts for multifamily units. Building permit issuance for new single-family homes--which tends to be a good indicator of the underlying trend in construction--was little changed, on balance, in recent months and was essentially flat since late last year. Sales of new homes increased strongly in July, but sales of existing homes decreased modestly.
Real private expenditures for business equipment and intellectual property appeared to be rising slowly in the third quarter. Nominal shipments of nondefense capital goods excluding aircraft declined in July. However, new orders for these capital goods rose substantially in July and were notably above the level of shipments, suggesting a pickup in business spending for equipment in the near term. Firms' nominal spending for nonresidential structures excluding drilling and mining increased in June and July. The number of oil and gas rigs in operation, an indicator of spending for structures in the drilling and mining sector, continued to edge up through early September. The limited information available suggested that the change in inventory investment would be positive in the third quarter after subtracting substantially from real GDP growth in the second quarter. Except in the energy sector, inventories generally seemed well aligned with the pace of sales.
Nominal outlays for defense through August pointed to flat real federal government purchases in the third quarter. Real state and local government purchases also appeared to be little changed, on net, relative to their level in the previous quarter. Although payrolls for state and local governments expanded in July and August, nominal construction spending by these governments declined in July.
The U.S. international trade deficit widened in June before narrowing substantially in July. Exports increased in both months, with strong growth in July driven by higher agricultural exports. After rising in June, imports retraced some of this gain in July, driven by lower imports of consumer goods and capital goods.
Total U.S. consumer prices, as measured by the PCE price index, increased about 3/4 percent over the 12 months ending in July, partly restrained by recent decreases in consumer food prices and earlier declines in consumer energy prices. Core PCE price inflation, which excludes changes in food and energy prices, was a little above 1-1/2 percent over those same 12 months, held down in part by decreases in the prices of non-energy imports over much of this period and the pass-through of earlier declines in energy prices into the prices of other goods and services. Over the 12 months ending in August, total consumer prices as measured by the consumer price index (CPI) rose about 1 percent, while core CPI inflation was around 2-1/4 percent. The Michigan survey measure of median longer-run inflation expectations edged down in August and was unchanged in early September. The measure of longer-run inflation expectations for PCE prices from the Survey of Professional Forecasters was unchanged in the third quarter. Other measures of longer-run inflation expectations from the Desk's Survey of Primary Dealers and Survey of Market Participants were also unchanged in September.
Foreign real GDP growth slowed noticeably in the second quarter, primarily owing to contractions in Canada and Mexico; economic growth in other foreign economies fell only slightly on average. Wildfires disrupted oil production in Canada, and a second-quarter decline in U.S. manufacturing production weighed on Mexican exports. Aggregate foreign economic growth appeared to pick up in the third quarter amid signs of recovery of oil production in Canada and of improved manufacturing production in Mexico. However, weaker investment readings pointed to a slight moderation of economic activity in China in the third quarter. The outcome of the U.K. referendum on exit from the European Union (Brexit) apparently exerted less drag on economic activity than previously anticipated by many analysts. Nonetheless, recent data suggested that economic growth in Europe remained modest. Inflation was generally subdued in recent months in both the advanced foreign economies (AFEs) and the emerging market economies (EMEs).
Staff Review of Financial Situation
Domestic financial conditions remained accommodative since the July FOMC meeting. Asset prices moved within a fairly narrow range for much of the intermeeting period, although volatility increased somewhat in the last few days of the period as market participants focused on central bank communications in the United States and abroad. Market expectations for a policy rate increase by the end of this year rose a bit since the July FOMC meeting, reportedly reflecting comments of Federal Reserve officials that were viewed, on balance, as suggesting that the case for policy firming had strengthened over recent months. Nominal Treasury yields across the curve edged up. Anticipation of the impending deadline for compliance with MMF reform measures continued to prompt net outflows from prime MMFs and put upward pressure on some term money market rates.
Comments by a number of Federal Reserve officials over the intermeeting period were interpreted by market participants as raising the odds on policy firming by the end of this year. However, domestic economic data releases appeared to be a little softer, on balance, than investors had expected; the August employment report and manufacturing surveys, in particular, were below expectations. Market-based estimates of the probability of a rate hike at the September FOMC meeting were volatile but ended the period slightly lower, on balance, at roughly 15 percent, while the probability of an increase by the end of the year rose slightly to around 50 percent. The medium-term federal funds rate path implied by market quotes edged up on net. Consistent with market-based estimates, respondents to the Desk's September surveys of primary dealers and market participants assigned a probability of about 15 percent to a rate hike at the September meeting. The median respondent in each survey continued to expect one policy firming in 2016, with respondents generally expecting the rate increase to occur at the December meeting. Based on the median responses, the most likely path of the target federal funds rate in 2017 and 2018 was little changed.
Nominal Treasury yields increased moderately, on net, since the July FOMC meeting, reflecting the slight upward revision in the expected path for the federal funds rate and a rise in global bond yields that was apparently spurred by an increased impression among investors that monetary policy in other advanced economies might be less accommodative than previously expected. Measures of forward inflation compensation based on Treasury Inflation-Protected Securities rose slightly but remained near the lower end of their historical range.
Broad stock price indexes moved down, on net, since the July FOMC meeting. Realized and implied volatilities in various asset markets were relatively low during most of the intermeeting period but increased somewhat in the last few days before the meeting as market participants reacted to global central bank communications. Spreads on yields of both investment-grade and high-yield nonfinancial corporate bonds over those on comparable-maturity Treasury securities declined somewhat to levels fairly close to their historical norms.
MMF reform continued to affect several short-term funding markets in advance of the October 14, 2016, compliance date. While total assets under the management of MMFs changed little over the intermeeting period, investors continued to shift from prime funds to government funds. As a result, MMF holdings of commercial paper (CP) and certificates of deposit continued to decline, and prime institutional funds further reduced their weighted-average maturities to historically low levels. Reflecting MMFs' reduced appetite for term lending, spreads of three-month money market rates over rates on comparable-maturity overnight index swap contracts rose during the intermeeting period. Rates on short-term municipal securities and net yields on tax-exempt MMFs also increased sharply, primarily because of outflows from these funds.
Financing conditions for nonfinancial firms remained generally accommodative. While outstanding commercial and industrial loans and CP both declined somewhat in August, gross issuance of corporate bonds was quite large. The overall credit quality of the nonfinancial corporate sector, which had deteriorated a bit over the past few quarters, showed signs of stabilizing over the intermeeting period. Financing conditions in commercial real estate (CRE) markets also remained accommodative. Commercial mortgage-backed securities (CMBS) issuance picked up in August, likely reflecting the narrowing of CMBS spreads--albeit to levels that were still wider than typical--over the past few months. Growth in CRE loans at banks continued to be strong.
Gross issuance of municipal bonds in July and August was strong, credit quality remained stable, and yields on municipal bonds edged down. Although Puerto Rico missed a small debt payment due on August 1, prices of Puerto Rico's benchmark general obligation bonds were roughly unchanged over the intermeeting period.
Financing conditions for households generally continued to be accommodative; however, mortgage markets remained relatively tight for borrowers with low credit scores. Interest rates on 30-year fixed-rate mortgages moved higher, in line with comparable-maturity Treasury yields, but remained at a low level. Mortgage refinancing activity in August was the highest in three years, reflecting lower mortgage rates during June and July. Consumer loan balances continued to increase, with credit card balances expanding at a robust pace.
Global risk asset prices broadly increased amid improving sentiment among investors and low volatility. Capital flows to EMEs continued, and sovereign debt spreads in these economies and corporate bond spreads in both EMEs and AFEs narrowed further. European financial markets remained resilient following the Brexit vote, and European bank equity prices increased on net.
Announcements by foreign central banks garnered investor attention and contributed to somewhat higher asset price volatility later in the period. The European Central Bank left its policy rates and asset purchase program unchanged at its September meeting. Global yields moved higher and the euro strengthened following the meeting, as some market participants had expected an extension of the program. The Bank of Japan (BOJ) left its policy rates unchanged at its July meeting and instead expanded its purchases of exchange-traded stock funds and introduced additional measures to facilitate dollar funding. Japanese bond yields increased notably and the yen appreciated in the aftermath of the announcement. At its September meeting, the BOJ introduced a new monetary policy framework, which includes yield curve control and a commitment to expand the monetary base until inflation exceeds 2 percent and stays above that target in a stable manner. The introduction of the BOJ's new framework elicited little immediate market reaction outside of Japan. At its early August meeting, the Bank of England announced a rate cut, a resumption of its asset purchase program, and a new bank funding program. Longer-term U.K. yields and the pound fell immediately following the announcement but retraced these declines following better-than-expected economic data later in the period. The Bank of England maintained its policy stance at the September meeting, in line with market expectations.
Staff Economic Outlook
In the U.S. economic projection prepared by the staff for the September FOMC meeting, the forecast for real GDP growth in 2016 through 2019 was little changed from the one presented in July. The pace of real GDP growth was forecast to be faster over the second half of this year than in the first half, primarily reflecting a modest increase in the rate of growth of private domestic final purchases and a sizable turnaround in inventory investment. The staff continued to project that real GDP would expand at a modestly faster pace than potential output in 2016 through 2019, supported primarily by increases in consumer spending and, to a lesser degree, by somewhat faster growth in business investment beginning next year. (The staff slightly lowered its assumption for potential output growth over the medium term and in the longer run.) The unemployment rate was forecast to remain flat over the remainder of this year and then to gradually decline through the end of 2019; over this period, the unemployment rate was projected to run below the staff's estimate of its longer-run natural rate.
The forecast for consumer price inflation was essentially unchanged from the previous projection. The staff continued to project that inflation would increase over the next several years, as food and energy prices along with the prices of non-energy imports were expected to begin steadily rising this year. However, inflation was projected to be marginally below the Committee's longer-run objective of 2 percent in 2019.
The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The risks to the forecast for real GDP were seen as tilted to the downside, reflecting the staff's assessment that both monetary and fiscal policy appeared to be better positioned to offset large positive shocks than adverse ones. In addition, the staff continued to see the risks to the forecast from developments abroad as skewed to the downside. Consistent with the downside risks to aggregate demand, the staff viewed the risks to its outlook for the unemployment rate as tilted to the upside. The risks to the projection for inflation were still judged as weighted somewhat to the downside, partly reflecting the possibility that longer-term inflation expectations may have edged down.
Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, members of the Board of Governors and Federal Reserve Bank presidents submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, inflation, and the federal funds rate for each year from 2016 through 2019 and over the longer run.5 Each participant's projections were conditioned on his or her judgment of appropriate monetary policy. The longer-run projections represented each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These projections and policy assessments are described in the Summary of Economic Projections, which is an addendum to these minutes.
In their discussion of the economic situation and the outlook, participants agreed that information received over the intermeeting period suggested that the labor market had continued to strengthen and growth of economic activity had picked up from the modest pace seen in the first half of the year. Although the unemployment rate was little changed in recent months, job gains had been solid, on average. Household spending had been growing strongly but business fixed investment had remained soft. Inflation had continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remained low; most survey-based measures of longer-term inflation expectations were little changed, on balance, in recent months. Volatility in domestic and global asset markets was relatively low over most of the intermeeting period, and U.S. financial conditions were broadly accommodative.
Participants generally expected that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would strengthen somewhat further. Inflation was expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipated and the labor market strengthened further. A number of participants indicated that there had been little change in their economic outlooks over recent months. A substantial majority now viewed the near-term risks to the economic outlook as roughly balanced, with several of them indicating the risks from Brexit had receded. However, a few still judged that overall risks were weighted to the downside, citing various factors that included the possibility of weaker-than-expected growth in foreign economies, continued uncertainty associated with Brexit, the proximity of policy interest rates to the effective lower bound, or persistent headwinds to economic growth. Participants agreed that the Committee should continue to closely monitor inflation indicators and global economic and financial developments.
Growth in consumer spending appeared to have moderated somewhat in the third quarter from its rapid second-quarter pace, reflecting a softening in retail sales since June. District contacts provided mixed reports, consistent with some easing in growth of sales. Nevertheless, incoming data pointed to still-solid growth in consumption expenditures overall. Many participants noted that they expected household spending to be a primary contributor to economic growth going forward. They saw consumer spending as likely to be supported by a number of factors, including ongoing job gains, rising household income and wealth, improved household balance sheets, and buoyant consumer sentiment.
Economic activity in the second half of the year was expected to be buoyed in part by a pickup in business fixed investment and some rebuilding of inventories. A recent increase in oil drilling rigs in operation was seen as a positive sign for business investment, although the continued low level of oil prices was still weighing on capital investment in the energy industry. Contacts in some Districts suggested that businesses were taking a cautious approach to capital spending even outside of the energy sector--for instance, preferring to modernize existing manufacturing facilities rather than increase capacity by investing in new facilities--in light of continuing sluggish global demand, shorter investment time horizons for businesses, and uncertainty about prospects for government policy and regulation. Nonresidential construction was reported to be strong in a few Districts. However, the sluggishness in the housing sector appeared to have continued into the third quarter. A couple of participants pointed to limited availability of lots and a shortage of skilled labor as restraining residential construction activity in their Districts; in one District, constraints on the supply of new homes for sale were expected to boost spending on home improvements and offset some of the drag from the slowing in new construction.
Participants' reports on the manufacturing sector indicated varying conditions across Districts, but, on the whole, manufacturing activity remained flat. The most recent survey evidence was downbeat, although smoothing through the past several months provided a more neutral signal. A couple of participants noted that the firming in crude oil prices had led to a stabilization in drilling activity. In the agricultural sector, lower crop prices continued to weigh on profit margins, farm income was expected to fall, and loan repayment rates had declined.
Global financial conditions had improved somewhat in recent months. However, participants noted that economic growth in many foreign economies remained subdued, and inflation rates abroad generally continued to be quite low. Some participants continued to see important downside risks from abroad.
Participants generally agreed that labor market conditions had improved appreciably over the course of the year, with monthly payroll gains averaging about 180,000. Reports from several Districts indicated widespread increases in employment over the intermeeting period. Although job gains had slowed from their pace in 2015, average monthly increases so far this year had exceeded most estimates discussed by participants of monthly payroll increases that could be expected to prevail with economic growth proceeding at its longer-run trend rate. In addition, several participants cited the rise in the labor force participation rate since late 2015 or the increase in the employment-to-population ratio--series with downward structural trends--as welcome developments. However, it was noted that the unemployment rate and broader measures of unemployment had changed little since the beginning of the year. Participants generally expected the unemployment rate to run somewhat below their estimates of its longer-run normal rate over the next couple of years, but they offered differing views about the extent of slack that currently remained in the labor market. Some participants pointed to the slowing in payroll gains and modest pickup in wages this year and judged that the labor market had little or no remaining slack. Some others noted that still-muted wage growth, a level of involuntary part-time employment that remained elevated, and recent increases in labor force participation indicated that slack remained in resource utilization, or expressed the view that the longer-run normal rate of unemployment was uncertain and could be lower than current estimates. Participants commented on a staff analysis showing differential patterns of unemployment across racial and ethnic groups that remained after taking education into account; it was suggested that it might be worthwhile to examine such issues further.
Recent readings on headline and core PCE price inflation had come in about as expected, and participants continued to anticipate that headline inflation would rise over the medium term to the Committee's 2 percent objective. It was noted, however, that 12-month core PCE price inflation had been running at a steady rate below 2 percent, and several participants commented on factors that might be expected to restrain increases in inflation. Such factors included the limited evidence of rising cost or price pressures, the apparent low responsiveness of inflation to the rate of labor utilization, a possible downward shift in inflation expectations, and remaining economic slack. The median expectation for inflation over the next 5 to 10 years from the Michigan survey dropped to its historical low of 2.5 percent in August and held steady in September. However, a couple of participants indicated that the drop in some survey-based measures of inflation expectations could be explained by a decline in the number of respondents who had previously expected relatively high inflation outcomes. Overall, survey-based measures of longer-term expectations were judged to have been reasonably stable in recent months. Many participants observed that core CPI inflation had been running appreciably above core PCE inflation; it was noted that different weights on rents and medical prices as well as different measurement of health-care inflation in the two indexes largely accounted for the disparity.
In their discussion of the outlook, participants considered the likelihood of, and the potential benefits and costs associated with, a more pronounced undershooting of the longer-run normal rate of unemployment than envisioned in their modal forecasts. A number of participants noted that they expected the unemployment rate to run somewhat below its longer-run normal rate and saw a firming of monetary policy over the next few years as likely to be appropriate. A few participants referred to historical episodes when the unemployment rate appeared to have fallen well below its estimated longer-run normal level. They observed that monetary tightening in those episodes typically had been followed by recession and a large increase in the unemployment rate. Several participants viewed this historical experience as relevant for the Committee's current decisionmaking and saw it as providing evidence that waiting too long to resume the process of policy firming could pose risks to the economic expansion, or noted that a significant increase in unemployment would have disproportionate effects on low-skilled workers and minority groups. Some others judged this historical experience to be of limited applicability in the present environment because the economy was growing only modestly above trend, inflation was below the Committee's 2 percent objective, and inflation expectations were low--circumstances that differed markedly from those earlier episodes. Moreover, the increase in labor force participation over the past year suggested that there could be greater scope for economic growth without putting undue pressure on labor markets; it was also noted that the longer-run normal rate of unemployment could be lower than previously thought, with a similar implication. Participants agreed that it would be useful to continue to analyze and discuss the dynamics of the adjustment of the economy and labor markets in circumstances when unemployment falls well below its estimated longer-run normal rate.
With regard to recent financial developments, it was noted that regulatory changes and impending MMF reforms likely had led to an increase in certain short-term interest rates, but these developments were expected to have only a small effect on the borrowing costs of nonfinancial corporations and little adverse influence on overall financial market conditions. A few participants expressed concern that the protracted period of very low interest rates might be encouraging excessive borrowing and increased leverage in the nonfinancial corporate sector. Finally, one participant expressed the view that prolonged periods of low interest rates could encourage pension funds, endowments, and investors with fixed future payout obligations to save more, depressing economic growth and adding to downward pressure on the neutral real interest rate.
Participants discussed reasons for the apparent fall over recent years in the neutral real rate of interest--or r*--including lower productivity growth, demographic shifts, and an excess of saving around the world. Although several participants indicated that there was uncertainty as to how long the low level of r* would persist, one pointed to a growing consensus that the long period of slow productivity growth and recent evidence that the neutral rate had fallen across countries suggested that r* was likely to remain low for some time. A number of participants noted that they had revised down their estimates of longer-run r* in their contributions to the Summary of Economic Projections for this meeting. Participants discussed the implications of a fall in longer-run r* for monetary policy, including the possibility that policy interest rates might be closer to the effective lower bound more frequently and for a long period, or that monetary policy was ill equipped to address structural factors such as the decline in productivity growth. A couple of participants noted that a lower estimated value for r* over the near term implied that monetary policy was providing less accommodation than previously thought.
Against the backdrop of their economic projections, participants discussed whether available information warranted taking another step to reduce policy accommodation at this meeting. Participants generally agreed that the case for increasing the target range for the federal funds rate had strengthened in recent months. Many of them, however, expressed the view that recent evidence suggested that some slack remained in the labor market. With inflation continuing to run below the Committee's 2 percent objective and few signs of increased pressure on wages and prices, most of these participants thought it would be appropriate to await further evidence of continued progress toward the Committee's statutory objectives. In contrast, some other participants believed that the economy was at or near full employment and inflation was moving toward 2 percent. They maintained that a further delay in raising the target range would unduly increase the risk of the unemployment rate falling markedly below its longer-run normal level, necessitating a more rapid removal of monetary policy accommodation that could shorten the economic expansion. In addition, several participants expressed concern that continuing to delay an increase in the target range implied a further divergence from policy benchmarks based on the Committee's past behavior or risked eroding its credibility, especially given that recent economic data had largely corroborated the Committee's economic outlook.
Among the participants who supported awaiting further evidence of continued progress toward the Committee's objectives, several stated that the decision at this meeting was a close call. Some participants believed that it would be appropriate to raise the target range for the federal funds rate relatively soon if the labor market continued to improve and economic activity strengthened, while some others preferred to wait for more convincing evidence that inflation was moving toward the Committee's 2 percent objective. Some participants noted the importance of clearly communicating to the public the conditions that would warrant an increase in the policy rate.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that the information received since the Committee met in July indicated that the labor market had continued to strengthen and growth of economic activity had picked up from the modest pace seen in the first half of this year. Although the unemployment rate was little changed in recent months, job gains had been solid, on average. Household spending had been growing strongly but business fixed investment had remained soft. Inflation had continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remained low; most survey-based measures of longer-term inflation expectations were little changed, on balance, in recent months. In addition, financial conditions remained accommodative.
With respect to the economic outlook and its implications for monetary policy, members continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market indicators would strengthen somewhat further. They judged that near-term risks to the economic outlook now appeared roughly balanced.
Members generally acknowledged that labor market conditions had improved appreciably over the past year, evidenced in particular by the solid pace of monthly payroll employment gains. Some of them noted that the increase in the labor force participation rate this year suggested more room for labor supply to expand than previously expected, or contended that the slower progress seen this year in other labor market indicators--such as the unemployment rate, broader measures of labor utilization, job openings and quits, and wage growth--indicated that slack was being taken up at only a modest pace. This view suggested that proceeding cautiously with reducing monetary policy accommodation could promote further labor market improvement. In contrast, a few other members were concerned that, without a prompt resumption of gradual increases in the target range for the federal funds rate, labor market conditions could tighten well beyond normal levels over the next few years, potentially necessitating a subsequent sharp tightening of monetary policy that could shorten the economic expansion.
Members continued to expect inflation to remain low in the near term, but most anticipated that, with gradual adjustments in the stance of monetary policy, it would rise gradually to the Committee's 2 percent objective over the medium term. Many members remarked that there were few signs of emerging inflationary pressures or that progress on inflation had been slow. A couple of other members pointed to recent readings on core CPI inflation as suggesting that PCE price inflation was close to meeting the Committee's 2 percent inflation objective. Nonetheless, in light of the current shortfall of inflation from 2 percent, members agreed that they would continue to carefully monitor actual and expected progress toward the Committee's inflation goal.
After assessing the outlook for economic activity, the labor market, and inflation, as well as the risks around that outlook, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent at this meeting. Members generally agreed that the case for an increase in the policy rate had strengthened. But, with some slack likely remaining in the labor market and inflation continuing to run below the Committee's objective, a majority of members judged that the Committee should, for the time being, await further evidence of progress toward its objectives of maximum employment and 2 percent inflation before increasing the target range for the federal funds rate. It was noted that a reasonable argument could be made either for an increase at this meeting or for waiting for some additional information on the labor market and inflation. A couple of members emphasized that a cautious approach to removing accommodation was warranted given the proximity of policy rates to the effective lower bound, as the Committee had more scope to increase policy rates, if necessary, than to reduce them. Three members preferred to raise the target range for the federal funds rate by 25 basis points at this meeting. They cautioned that postponing policy firming for too long could push the unemployment rate markedly below its longer-run normal rate over the next few years. If so, the Committee might then need to tighten policy more rapidly, thereby posing risks to continued economic expansion. A couple of these members expressed concern about the potential adverse effects on the credibility of the Committee's policy communications if the next step in the gradual removal of accommodation was further postponed.
The Committee agreed that, in determining the timing and size of future adjustments to the target range for the federal funds rate, it would assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee expected that economic conditions would evolve in a manner that would warrant only gradual increases in the federal funds rate, and that the federal funds rate was likely to remain, for some time, below levels that are expected to prevail in the longer run. However, members emphasized that the actual path of the federal funds rate would depend on the economic outlook as informed by incoming data. Several members judged that it would be appropriate to increase the target range for the federal funds rate relatively soon if economic developments unfolded about as the Committee expected; they saw the new sentence in the third paragraph of the Committee's statement--a sentence indicating that the case for an increase in the federal funds rate had strengthened but that the Committee had decided, for the time being, to wait for further evidence of continued progress toward its objectives--as reflecting this view. A few others, however, emphasized that decisions regarding near-term adjustments in the stance of monetary policy would appropriately remain data dependent and expressed some concern that the new sentence might be misread as indicating that the passage of time rather than the accumulation of evidence would be the key factor in the Committee's decisions at future meetings.
The Committee also decided to maintain its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipated doing so until normalization of the level of the federal funds rate is well under way. Members noted that this policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
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 SOMA in accordance with the following domestic policy directive, to be released at 2:00 p.m.:
"Effective September 22, 2016, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1/4 to 1/2 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 0.25 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."
The vote also encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in July indicates that the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. Although the unemployment rate is little changed in recent months, job gains have been solid, on average. Household spending has been growing strongly but business fixed investment has remained soft. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions."
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, James Bullard, Stanley Fischer, Jerome H. Powell, and Daniel K. Tarullo.
Voting against this action: Esther L. George, Loretta J. Mester, and Eric Rosengren.
Mses. George and Mester and Mr. Rosengren dissented because they preferred to increase the target range for the federal funds rate by 25 basis points at this meeting.
Ms. George judged that with the unemployment rate and inflation at or near their longer-run levels, removing some accommodation was warranted and would be consistent with the prescriptions of several frameworks for assessing the appropriate stance of monetary policy. She was concerned that the Committee's recent policy choices had incorporated too much discretion, and her assessment was that by waiting longer to adjust the policy stance and deviating from the appropriate path to policy normalization, the Committee risked eroding the credibility of its policy communications.
Ms. Mester noted that the economy had made considerable progress on the Committee's statutory goals, the outlook for continued progress had been corroborated by recent economic developments, and risks around that outlook had diminished. In these circumstances, she believed it appropriate to gradually increase the target range for the federal funds rate, consistent with the Committee's recent communications. A gradual path would give the Committee a better chance of recalibrating the policy path over time as it gains more insights into the underlying structure of the economy. Further delays in taking the next step on the gradual path might require the Committee to subsequently steepen the policy path to foster its goals, which would be inconsistent with the Committee's recent communications, thereby posing risks to the Committee's credibility.
Mr. Rosengren noted that, since the Committee's most recent policy action in late 2015, significant progress had been made toward the Committee's dual mandate. He believed that with inflation gradually rising and robust employment growth moving the economy very close to full employment, it was appropriate to continue the gradual normalization of monetary policy at this meeting. He believed that a failure to do so could require the Committee to raise policy interest rates faster and more aggressively later on, which could shorten, rather than lengthen, the duration of the economic expansion.
Consistent with the Committee's decision to leave the target range for the federal funds rate unchanged, the Board of Governors took no action to change the interest rates on reserves or discount rates.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, November 1-2, 2016. The meeting adjourned at 10:45 a.m. on September 21, 2016.
Notation Vote
By notation vote completed on August 16, 2016, the Committee unanimously approved the minutes of the Committee meeting held on July 26-27, 2016.
_____________________________
Brian F. Madigan
Secretary
1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes. Return to text
2. Attended through the discussion on financial developments and open market operations. Return to text
3. Attended Tuesday session only. Return to text
4. The approved Foreign Authorization and Foreign Directive are included in these minutes. The approved Rules of Organization and Rules of Procedure, as well as other Committee organizational documents, are available at www.federalreserve.gov/monetarypolicy/rules_authorizations.htm. Return to text
5. One participant did not submit longer-run projections for the change in real GDP, the unemployment rate, or the federal funds rate. Return to text |
2016-09-21T00:00:00 | 2016-09-21 | Statement | Information received since the Federal Open Market Committee met in July indicates that the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. Although the unemployment rate is little changed in recent months, job gains have been solid, on average. Household spending has been growing strongly but business fixed investment has remained soft. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action were: Esther L. George, Loretta J. Mester, and Eric Rosengren, each of whom preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.
Implementation Note issued September 21, 2016 |
2016-07-27T00:00:00 | 2016-07-27 | Statement | Information received since the Federal Open Market Committee met in June indicates that the labor market strengthened and that economic activity has been expanding at a moderate rate. Job gains were strong in June following weak growth in May. On balance, payrolls and other labor market indicators point to some increase in labor utilization in recent months. Household spending has been growing strongly but business fixed investment has been soft. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will strengthen. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook have diminished. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.
Implementation Note issued July 27, 2016 |
2016-07-27T00:00:00 | 2016-08-17 | Minute | Minutes of the Federal Open Market Committee
July 26-27, 2016
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, July 26, 2016, at 10:00 a.m. and continued on Wednesday, July 27, 2016, at 9:00 a.m.1
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
James Bullard
Stanley Fischer
Esther L. George
Loretta J. Mester
Jerome H. Powell
Eric Rosengren
Daniel K. Tarullo
Charles L. Evans, Patrick Harker, Robert S. Kaplan, Neel Kashkari, and Michael Strine, Alternate Members of the Federal Open Market Committee
Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively
Brian F. Madigan, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
Thomas A. Connors, Troy Davig, Michael P. Leahy, David E. Lebow, Stephen A. Meyer, Ellis W. Tallman, Christopher J. Waller, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Robert deV. Frierson, Secretary of the Board, Office of the Secretary, Board of Governors
Matthew J. Eichner,2 Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors; Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors; Nellie Liang, Director, Division of Financial Stability, Board of Governors
James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors; Daniel M. Covitz, Deputy Director, Division of Research and Statistics, Board of Governors
Andrew Figura, David Reifschneider, and Stacey Tevlin, Special Advisers to the Board, Office of Board Members, Board of Governors
Trevor A. Reeve, Special Adviser to the Chair, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Fabio M. Natalucci and Gretchen C. Weinbach,3 Senior Associate Directors, Division of Monetary Affairs, Board of Governors; Michael G. Palumbo, Senior Associate Director, Division of Research and Statistics, Board of Governors; Beth Anne Wilson, Senior Associate Director, Division of International Finance, Board of Governors
Michael T. Kiley, Senior Adviser, Division of Research and Statistics, and Senior Associate Director, Division of Financial Stability, Board of Governors
Antulio N. Bomfim and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors; Brian M. Doyle,3 Senior Adviser, Division of International Finance, Board of Governors
Jane E. Ihrig,3 Associate Director, Division of Monetary Affairs, Board of Governors
John J. Stevens, Deputy Associate Director, Division of Research and Statistics, Board of Governors
Glenn Follette and Steven A. Sharpe, Assistant Directors, Division of Research and Statistics, Board of Governors; Elizabeth Klee,3 Assistant Director, Division of Monetary Affairs, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Elmar Mertens, Principal Economist, Division of Monetary Affairs, Board of Governors
Valerie Hinojosa, Information Manager, Division of Monetary Affairs, Board of Governors
Marie Gooding, First Vice President, Federal Reserve Bank of Atlanta
David Altig and Ron Feldman, Executive Vice Presidents, Federal Reserve Banks of Atlanta and Minneapolis, respectively
Tobias Adrian, Michael Dotsey, Stephanie Heller, Susan McLaughlin,3 Julie Ann Remache,3 and John A. Weinberg, Senior Vice Presidents, Federal Reserve Banks of New York, Philadelphia, New York, New York, New York, and Richmond, respectively
John Duca, Jonas D. M. Fisher, Deborah L. Leonard,3 Antoine Martin,3 Ed Nosal,3 Anna Paulson,3 Joe Peek, and Patricia Zobel,3 Vice Presidents, Federal Reserve Banks of Dallas, Chicago, New York, New York, Chicago, Chicago, Boston, and New York, respectively
John Fernald, Senior Research Advisor, Federal Reserve Bank of San Francisco
Long-Run Monetary Policy Implementation Framework
The staff provided several briefings that reviewed progress on a long-term effort begun in July 2015 to evaluate potential long-run frameworks for monetary policy implementation. The briefings highlighted some foundational considerations that are relevant for such an evaluation. The staff described the recent experience of several central banks of advanced foreign economies (AFEs) in implementing monetary policy, noting that they use a wide variety of frameworks to control short-term interest rates and that their approaches have evolved over time. For example, foreign central banks vary in their choice of the interest rate used to communicate monetary policy; in their approach to the provision of reserve balances; and in their use of policies, such as large-scale asset purchases, various funding programs, and negative interest rates, to supplement more traditional means of policy implementation. The staff also described the Federal Reserve's experience in implementing monetary policy during the recent financial crisis. Before the financial crisis, traditional implementation tools--relatively small-sized open market operations and discount window lending--were adequate for interest rate control even during periods of stress. But the evidence from the period of the crisis and its aftermath suggested that the Federal Reserve's pre-crisis framework did not enable close control over the federal funds rate when liquidity programs were expanded significantly and subsequently was unable to generate sufficiently accommodative financial conditions to support economic recovery without the use of new policy tools. Finally, the staff noted that various aspects of U.S. money markets, which determine short-term interest rates and are important for transmitting monetary policy, have changed since the financial crisis. The differences include changes the Federal Reserve has made to its policy tools and balance sheet, changes in market participants' business practices, and the regulatory changes made around the globe to strengthen the financial system. Taken together, these factors may, for example, raise the long-run demand for safe assets, including reserve balances, and they should help make U.S. money markets more stable than they were before and during the financial crisis.
In the discussion that followed the staff presentations, policymakers agreed that decisions regarding an appropriate long-run implementation framework would not be necessary for some time. Furthermore, their judgments regarding a future framework would benefit from accruing additional experience with recently developed policy tools, such as the payment of interest on reserves, and accumulating more information about some important considerations that are still evolving, including financial regulations and market participants' responses to them.
One key consideration discussed by policymakers was the appropriate amount of flexibility that an implementation framework might have--for example, the extent to which a framework could readily enable interest rate control under a wide range of economic and financial circumstances. With neutral interest rates potentially remaining quite low, policymakers also observed that, in order to promote the Federal Reserve's policy objectives, the framework should have the capacity to supplement conventional policy accommodation with other measures when short-term nominal interest rates are near zero. Policymakers emphasized that the relationship between the monetary policy implementation framework and financial stability considerations would require careful attention. Importantly, the policy implementation framework would need to be consistent with recent changes in regulation designed to enhance the stability of the financial system. Also, because episodes of financial stress can arise with little warning, policymakers noted the advantage of being operationally ready for such situations; however, they also recognized that such operational readiness could entail some costs. Participants observed that various choices associated with policy implementation frameworks--such as the selection of counterparties or types of collateral to accept, and the overall size and composition of the Federal Reserve's balance sheet--may both be influenced by, and themselves influence, incentives and activity in financial markets. Moreover, they indicated that the implications of the implementation framework for the efficiency of the financial system needed to be taken into account.
Meeting participants commented on several other considerations that they saw as being relevant for evaluating possible implementation frameworks. Other major central banks have successfully employed a range of policy rates, including both administered rates and market rates, suggesting that either type of rate can be effective in communicating and implementing policy. However, the factors affecting market rates, as well as the relationships between the policy interest rate and other short-term interest rates, would need to be well understood in deciding on a particular policy rate. The potential benefits of improving the functioning of certain policy tools were noted; for example, approaches to reducing the perceived stigma associated with borrowing at the discount window, particularly in periods of financial strain, would need further careful consideration. In addition, it was noted that the dollar is a principal reserve currency and that monetary transmission in the United States occurs through funding markets that are quite globally connected. At the conclusion of the discussion, the Chair asked the staff to continue its work and noted that policymakers would review further analysis at a future meeting.
Developments in Financial Markets and Open Market Operations
The deputy manager of the System Open Market Account (SOMA) reported on developments in financial markets and open market operations during the period since the Committee met on June 14-15, 2016. Following the outcome of the June 23 referendum in the United Kingdom in which a majority indicated a preference to leave the European Union (EU), yields on U.S. Treasury securities fell sharply, U.S. equity prices declined, and the foreign exchange value of the dollar increased. However, these changes generally reversed in subsequent weeks. On balance, Treasury yields were down only slightly over the intermeeting period, equity prices were higher, and the foreign exchange value of the dollar was little changed. Although the expected path of the federal funds rate implied by market prices was about unchanged on net, the Open Market Desk's Survey of Primary Dealers and Survey of Market Participants indicated that the median responses for the most likely path of the federal funds rate over coming quarters had declined.
During the intermeeting period, federal funds continued to trade at rates well within the FOMC's 1/4 to 1/2 percent target range. However, the average effective federal funds rate was modestly higher than in the previous intermeeting period. The slightly firmer conditions in the federal funds market were supported by higher rates in money markets for secured transactions, which appeared to reflect at least in part more cautious liquidity management by some money market participants in the wake of the U.K. referendum. Take-up at the System's overnight reverse repurchase agreement facility rose somewhat. The increase seemed to be in part the result of shifts in investments by money market funds in advance of the scheduled implementation in October of changes to the regulation of the money market fund industry.
By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account during the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the July 26-27 meeting indicated that labor market conditions generally improved in June and that growth in real gross domestic product (GDP) was moderate in the second quarter. Consumer price inflation continued to run below the Committee's longer-run objective of 2 percent, restrained in part by earlier decreases in energy prices and in prices of non-energy imports. Most survey-based measures of longer-run inflation expectations were little changed, on balance, while market-based measures of inflation compensation remained low.
Total nonfarm payroll employment increased briskly in June, but the increase for the second quarter as a whole was noticeably slower than in the first quarter. The unemployment rate rose to 4.9 percent in June, partly reversing its decline in the previous month. The labor force participation rate edged up in June, while the employment-to-population ratio edged down. The share of workers employed part time for economic reasons declined in June after a similarly sized increase in May. The rate of private-sector job openings declined in May, albeit from an elevated level, and the rates of hires and of quits were both unchanged. The four-week moving average of initial claims for unemployment insurance benefits remained low through mid-July. Average hourly earnings for all employees increased 2-1/2 percent over the 12 months ending in June.
The unemployment rates for African Americans and for Hispanics stayed above the rate for whites, although the differentials in jobless rates across the different groups were similar to those before the most recent recession. A similar pattern among demographic groups held for a broader measure of labor underutilization that also includes persons who were marginally attached to the labor force and those who were employed part time for economic reasons.
Total industrial production rose modestly, on net, in May and June, primarily reflecting an increase in the output of utilities in June related to unseasonably warm weather during that month. Manufacturing production was little changed, on balance, in May and June, and mining output edged up following a string of steep declines. Automakers' assembly schedules pointed to an increase in motor vehicle production during the third quarter, but other indicators of manufacturing production, such as new orders diffusion indexes from national and regional manufacturing surveys, suggested only modest gains in factory output over the next few months.
Growth in real personal consumption expenditures (PCE) appeared to have picked up in the second quarter. The components of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimate of PCE continued to rise at a solid pace in June. Although sales of light motor vehicles declined in June, the average pace for the second quarter as a whole was essentially the same as in the first quarter. The apparent pickup in real PCE growth was consistent with recent readings on key factors that influence consumer spending, including continued gains in real disposable personal income and in households' net worth. Also, consumer sentiment as measured by the University of Michigan Surveys of Consumers remained reasonably upbeat in the second quarter and in early July.
Recent information on housing activity suggested that the pace of the gradual recovery in the sector had slowed in recent months. Starts for new single-family homes were little changed, on average, in May and June at a level below that in the first quarter, while starts for multifamily units moved up, on net, and were above their first-quarter average. Building permit issuance for both single-family and multifamily units remained essentially flat in the second quarter and pointed to little improvement in the rate of starts over the next few months. Sales of new and existing homes both increased, on net, in May and June.
Real private expenditures for business equipment and intellectual property appeared to have declined for a third consecutive quarter. Nominal shipments of nondefense capital goods excluding aircraft decreased in May and June, and orders for these goods also declined on balance. However, recent readings from national and regional surveys of business conditions suggested some pickup in business equipment spending in the near term. Firms' nominal spending for nonresidential structures excluding drilling and mining declined in May. The number of oil and gas rigs in operation, an indicator of spending for structures in the drilling and mining sector, fell through late May but edged up through mid-July.
Nominal outlays for defense through June pointed to a decline in real federal government purchases in the second quarter. Real state and local government purchases also appeared to have declined. Although payrolls for state and local governments expanded over the quarter, nominal construction spending by these governments declined noticeably in April and May.
The U.S. international trade deficit widened in May, as imports rose and exports declined slightly. The export decline was led by decreased exports of capital goods and automotive products. For imports, increased imports of industrial supplies and consumer goods more than offset decreased imports of capital goods. These recent indicators, combined with data from earlier in the year, suggested that net exports made a near-neutral contribution to the growth of real GDP in the first half of 2016.
Total U.S. consumer prices, as measured by the PCE price index, increased about 1 percent over the 12 months ending in May, partly restrained by earlier declines in consumer energy prices. Core PCE price inflation, which excludes changes in food and energy prices, was a little above 1-1/2 percent over the same 12-month period, held down in part by decreases in the prices of non-energy imports over much of this period and the pass-through of the declines in energy prices to the prices of other goods and services. Over the 12 months ending in June, total consumer prices as measured by the consumer price index (CPI) rose 1 percent, while core CPI inflation was about 2-1/4 percent. The Michigan survey measure of longer-run inflation expectations edged up in June and was unchanged in early July. Other measures of longer-run inflation expectations--including those from the Desk's Survey of Primary Dealers and Survey of Market Participants--were generally little changed, on balance, in recent months.
The pace of foreign real GDP growth appeared to slow in the second quarter, driven in large part by temporary factors such as wildfires in Canada and, to a lesser extent, by a deceleration of activity in the euro area. In the emerging market economies (EMEs), a pickup in growth in China in the second quarter, supported by policy stimulus, appeared to be more than offset by slower growth in Latin America. In the United Kingdom, early indicators following the June 23 referendum on exit from the EU ("Brexit") pointed to a slowdown in economic growth. Inflation in the AFEs picked up in the second quarter, largely reflecting some increase in energy prices, but generally remained low. Inflation also remained subdued in the EMEs.
Staff Review of the Financial Situation
Domestic financial conditions remained accommodative over the intermeeting period. Equity price indexes increased, on net, despite an initial sharp decline following the Brexit vote, and corporate bond spreads declined on balance. Conditions in business and consumer credit markets were about unchanged. The expected policy path of the federal funds rate implied by market quotes was little changed, on net, but fluctuated notably over the intermeeting period.
In the days immediately following the Brexit vote, asset prices were volatile, and some financial markets, particularly certain foreign exchange markets, experienced brief periods of strained liquidity. Global stock indexes fell notably, credit spreads widened, and safe-haven assets appreciated substantially. However, broad-based market dislocations did not develop, apparently because market participants had prepared for a significant risk event. Market analysts also pointed to the communications and actions by advanced-economy authorities both before and after the vote as helping to reassure investors. Overall, negative sentiment surrounding the Brexit outcome early in the intermeeting period was subsequently alleviated by expectations for greater policy accommodation in some AFEs, some resolution of near-term political uncertainty in the United Kingdom, and positive U.S. economic data releases. Nevertheless, several longer-term global risks related to Brexit remained.
Federal Reserve communications released in conjunction with the June FOMC meeting were interpreted by market participants as more accommodative than expected. The expected path of the federal funds rate implied by market quotes declined in response to the release of forecasts collected for the June Summary of Economic Projections, which showed larger-than-expected downward revisions to projections of the federal funds rate. The expected policy path implied by market quotes fell further in the aftermath of the Brexit vote, but it later retraced most of the earlier declines, supported by better-than-expected domestic data releases--particularly the employment and retail sales reports for June--as well as improved sentiment regarding the possible near-term implications of Brexit. The median respondents to the Desk's Survey of Primary Dealers and Survey of Market Participants saw one rate hike in 2016 as most likely, the same as in the June surveys.
The nominal Treasury yield curve flattened slightly, on net, over the intermeeting period. Longer-term nominal Treasury yields fell sharply in the two weeks following the Brexit vote. Market participants attributed the decline in Treasury yields to a variety of factors, including expectations for a more accommodative stance of monetary policy by major central banks; an intensification of demand for safe-haven assets immediately following the Brexit vote; and strong demand by global institutional investors for higher-yielding U.S. fixed-income assets following decreases in sovereign yields in Europe and Japan, in some cases further into negative territory. Most of the decline in nominal Treasury yields was reversed later in the period. The small net decline in longer-term nominal Treasury yields over the period was attributable to a comparable drop in real yields, as longer-term inflation compensation measures based on Treasury Inflation-Protected Securities and inflation swaps were little changed on net. Spreads of yields on agency mortgage-backed securities over yields on Treasury securities narrowed slightly.
Broad stock price indexes increased, on net, over the intermeeting period. One-month-ahead option-implied volatility on the S&P 500 index--the VIX--fell, returning to the lower end of its distribution of the past few years. U.S. bank stock prices dropped sharply after the Brexit vote but then retraced that decrease, buoyed by better-than-expected earnings reports from some of the largest domestic banks. Declines in European bank stock prices following the Brexit vote also reversed later in the intermeeting period. Spreads of yields on investment-grade corporate bonds over those on comparable-maturity Treasury securities ended the period somewhat lower, on net, and spreads on speculative-grade corporate bonds declined notably. Near-term forward spreads on speculative-grade issues dropped substantially more than their far-term forward counterparts, suggesting that the overall decline in speculative-grade spreads was due in part to a less negative credit outlook and not just an increase in investors' risk appetite.
Overall financing conditions for nonfinancial firms remained accommodative. Gross issuance of corporate bonds stayed robust in June, particularly in the investment-grade sector. Issuance slowed significantly in early July for both investment- and speculative-grade bonds, in part reflecting seasonal factors. The growth of commercial and industrial (C&I) lending on banks' books slowed in June, but expansion of such loans continued through early July. This pattern was consistent with the responses to the July 2016 Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), in which modest net fractions of respondents indicated that they had tightened their C&I lending standards and experienced weaker demand for such loans during the second quarter.
On balance, the credit quality of nonfinancial corporations continued to weaken in recent months, although some indicators suggested that the pace of deterioration was subsiding. The net volume of bonds downgraded in the second quarter was notably smaller than in the previous quarter. Even so, default rates on bonds issued by nonfinancial corporations and expected year-ahead default rates for nonfinancial firms both remained elevated relative to the ranges that typically prevail during expansions.
Financing conditions for commercial real estate (CRE) stayed fairly accommodative, on balance, and bank lending in all major CRE categories was strong through June. Spreads on U.S. commercial mortgage-backed securities (CMBS) did not appear to have been affected by the Brexit vote. They remained elevated, however, a factor that likely contributed to depressed CMBS issuance so far this year. Meanwhile, CMBS delinquency rates edged up for the third consecutive month. A significant net fraction of respondents to the July SLOOS indicated that, during the second quarter, they had tightened their CRE lending standards for construction and land development loans and loans secured by multifamily residential properties, and a moderate net fraction of respondents reported tightening their lending standards for loans secured by nonfarm nonresidential properties.
Credit conditions in municipal bond markets remained solid. Gross issuance of municipal bonds in June was strong, credit quality continued to be stable overall, and the ratio of yields on general obligation bonds to those on comparable-maturity Treasury securities was little changed on net. The default by Puerto Rico and the downgrade of the general obligation bonds of Illinois both appeared to have only a limited effect on the broader municipal bond market.
Financing conditions in the residential mortgage market became more accommodative, on balance, since the June FOMC meeting. Interest rates on 30-year fixed-rate mortgages decreased further, partly reflecting the declines in yields on Treasury securities. A number of large banks noted in the July SLOOS an easing of standards for home-purchase loans eligible for purchase by the government-sponsored enterprises (GSEs). Banks also reported a broad-based pickup in demand across most major categories of home-purchase loans. Indicators suggested a pickup in refinancing activity in response to the drop in mortgage rates.
Financing conditions in consumer credit markets were little changed and remained largely accommodative against a backdrop of stable credit performance across debt categories. Growth of auto loans remained robust even though a modest net fraction of respondents to the July SLOOS indicated that they had tightened their standards for such loans. Credit card balances continued to grow moderately on balance. Yield spreads for securities backed by credit card and auto loans over Treasury securities remained largely stable, and market participants reportedly expected asset-backed security issuance to pick up in the coming weeks.
As in the United States, global financial market developments during the intermeeting period were driven, in large part, by reactions to the U.K. referendum on EU membership on June 23 and to the release of U.S. economic data. Immediately after the Brexit vote, the British pound depreciated sharply against other major currencies, while the U.S. dollar and the Japanese yen strengthened on what appeared to be safe-haven flows. Prices of risky assets and advanced-economy bond yields also fell in response to the heightened uncertainty and expectations of slower economic growth. Later in the period, however, investors' concerns eased substantially on the resolution of some of the near-term political uncertainty in the United Kingdom, increased expectations for additional policy stimulus in Europe and Japan, and U.S. data on employment and retail sales in June that exceeded market expectations. Some AFE sovereign yields recovered partially from their post-Brexit lows, but U.K. long-term yields remained low on expectations of slower growth there and further monetary policy accommodation. Global equity indexes ended higher, on net, over the intermeeting period. However, European bank equities, especially those of Italian banks, underperformed, reflecting investor fears that lower interest rates will continue to weigh on profitability. Emerging market asset prices were generally resilient over the intermeeting period; the dollar was weaker against most emerging market currencies, and flows into emerging market assets surged. Although the Chinese renminbi depreciated against both the U.S. dollar and the broader currency basket referenced by the Chinese government, this development elicited little market reaction. The unsuccessful coup attempt in Turkey on July 15 left little imprint on global financial markets.
In its latest report on potential risks to the stability of the U.S. financial system, the staff continued to judge that vulnerabilities overall remained at a moderate level and noted that the financial system had been resilient to the Brexit vote. While vulnerabilities stemming from financial-sector leverage were assessed as still low, those from maturity and liquidity transformation were judged by the staff to be somewhat higher in the near term than in the previous assessment. Although upcoming regulatory changes were expected to improve the stability of money market funds in the longer run, the staff noted the potential for large withdrawals by investors in anticipation of those changes to lead to some disruptions in the short run. Vulnerabilities emanating from leverage in the nonfinancial private sector remained moderate: While business debt ratios stayed elevated, household debt-to-income ratios continued to inch down. Valuation pressures also remained at a moderate level. Although term premiums on Treasury securities became more deeply negative and CRE valuation pressures remained appreciable, corporate bond and equity risk premiums were unchanged on net.
Staff Economic Outlook
In the U.S. economic projection prepared by the staff for the July FOMC meeting, real GDP growth was estimated to have picked up in the second quarter, consistent with the forecast in June. However, the projected step-up in real GDP growth over the second half of this year was marked down a little, partly reflecting softer news on construction. The forecast for real GDP growth in 2017 and 2018 was little revised, as the positive effects of a slightly lower assumed path for interest rates and a stronger trajectory for household wealth were mostly offset by the restraint from a weaker outlook for foreign GDP growth and a slightly stronger path for the foreign exchange value of the dollar. The staff continued to forecast that real GDP would expand at a modestly faster pace than potential output in 2016 through 2018, supported primarily by increases in consumer spending and, to a lesser degree, by a projected pickup in business and residential investment. The unemployment rate was expected to remain flat over the second half of this year and then to gradually decline through the end of 2018. Over this period, the unemployment rate was projected to run somewhat below the staff's estimate of its longer-run natural rate.
The staff's forecast for consumer price inflation over the second half of 2016 was a little lower than in the previous projection, as recent declines in crude oil prices were expected to hold down consumer energy prices. Thereafter, the forecast for inflation was essentially unrevised. The staff continued to project that inflation would increase over the next several years, as energy prices and the prices of non-energy imports were expected to begin steadily rising this year and as resource utilization was expected to tighten further. However, inflation was still projected to be slightly below the Committee's longer-run objective of 2 percent in 2018.
The staff viewed the uncertainty around its July projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The risks to the forecast for real GDP were seen as tilted to the downside, reflecting the staff's assessment that both monetary and fiscal policy appeared to be better positioned to offset large positive shocks than adverse ones. In addition, the staff continued to see the risks to the forecast from developments abroad as skewed to the downside. Consistent with the downside risks to aggregate demand, the staff viewed the risks to its outlook for the unemployment rate as tilted to the upside. The risks to the projection for inflation were still judged as weighted to the downside, reflecting the possibility that longer-term inflation expectations may have edged lower.
Participants' Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants agreed that the information received over the intermeeting period indicated that the labor market had strengthened and that economic activity had been expanding at a moderate rate. Job gains were strong in June following weak growth in May. On balance, payrolls and other labor market indicators pointed to some increase in labor utilization in recent months. Household spending had been growing strongly, but business fixed investment had been soft. Inflation had continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remained low; most survey-based measures of longer-run inflation expectations were little changed, on balance, in recent months. Domestic and global asset prices were volatile early in the intermeeting period following the vote by the United Kingdom to leave the EU, but they subsequently recovered their earlier declines, and, on net, U.S. financial conditions eased over the intermeeting period.
Participants generally indicated that their economic forecasts had changed little over the intermeeting period. They continued to anticipate that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market indicators would strengthen. Inflation was expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipated and the labor market strengthened further. Participants viewed the near-term risks to the U.S. economic outlook as having diminished. However, some noted that the Brexit vote had created uncertainty about the medium- to longer-run outlook for foreign economies that could affect economic and financial conditions in the United States. Participants generally agreed that the Committee should continue to closely monitor inflation indicators and global economic and financial developments.
Growth in consumer spending was estimated to have rebounded in the second quarter from the slow pace in the first quarter, as monthly gains in retail sales were strong through June. Sales of new motor vehicles remained at a high level, on average, in the second quarter, although sales appeared to be supported by substantial incentives for consumers and by business fleet purchases. With the second-quarter pickup in spending, real PCE appeared to have risen over the first half of the year at a rate consistent with the positive trends in fundamental determinants of household spending. Participants cited a number of factors that had likely been supporting household spending, including solid real income growth, gains in house and equity values, low gasoline prices, and favorable levels of consumer confidence.
Residential investment posted a strong increase in the first quarter of the year, but data on starts of new single-family homes indicated that outlays likely edged down in the second quarter. Data on permit issuance through June suggested that new-home building activity might rise only slowly in the near term. However, participants commented on a number of factors suggesting that the housing sector was likely to continue to improve, albeit gradually: Rising sales of existing homes, responses to the July SLOOS pointing to stronger demand for residential mortgage loans, and the steady increase in house prices were seen as evidence of rising demand. In addition, credit conditions remained favorable: Mortgage rates had fallen further, and the SLOOS reported easier terms for loans eligible for purchase by the GSEs. Moreover, several participants noted positive reports on residential construction activity from business contacts in their Districts, with a few suggesting that shortages of lots and skilled labor, rather than low demand, might be contributing to the recent slowing.
Business fixed investment appeared to have declined further during the second quarter, with broad-based weakness in equipment and another steep drop in drilling and mining structures. Participants noted that the recent rise in energy prices had spurred an uptick in drilling activity, suggesting that if energy prices firm over time as expected, the drag on investment from declining energy-sector activity should diminish. In addition, it was pointed out that the upward trend in investment in intellectual property products was a positive in the outlook for investment. Several participants commented on favorable reports from their business contacts on commercial construction. Based on conversations with their contacts, participants discussed a number of factors that may have been contributing to businesses' cautious approach to investment spending, including concern about the likelihood of an extended period of slow economic growth, both in the United States and abroad; narrowing profit margins; and uncertainty about prospects for government policies.
In their discussion of business conditions in their Districts, many participants reported that their contacts anticipated that the U.K. referendum would have little effect on their businesses. Activity in the manufacturing sector continued to be mixed: Several participants indicated that manufacturing in their Districts was still quite weak, while several others reported that their Banks' June surveys showed that manufacturing activity had picked up or stabilized. The available surveys indicated that service-sector activity continued to expand. However, economic activity continued to be depressed in areas affected by the downturn in the energy sector and falling agricultural commodity prices, although several participants noted that the recent firming in crude oil prices had led to a modest increase in drilling activity. Businesses in the energy industry were reported to be highly leveraged, and additional restructurings and bankruptcies were seen as likely. Farm loans continued to increase, and banks had seen some rise in delinquencies on such credits.
The labor market report for June appeared to confirm participants' earlier assessments that the small gain in payroll employment in May likely had substantially understated its underlying pace. The sharp rebound in payroll employment gains put the average monthly increase in jobs over the three months ending in June at about 150,000. Although this pace was noticeably slower than the average rate during 2015 and the first quarter of 2016, many participants viewed it as consistent with continued strengthening in labor market conditions and with a further gradual decline in the unemployment rate. The unemployment rate rose in June after having declined in May, but the labor force participation rate ticked up, the rate of involuntary part-time employment more than reversed its increase in May, and the broader U-6 measure of labor underutilization continued to move down. Some participants noted that recent signs of a moderate step-up in wage increases provided further evidence of improving labor market conditions. Although most participants judged that labor market conditions were at or approaching those consistent with maximum employment, their views on the implications for progress on the Committee's policy objectives varied. Some of them believed that a convergence to a more moderate, sustainable pace of job gains would soon be necessary to prevent an unwanted increase in inflationary pressures. Other participants continued to judge that labor utilization remained below that consistent with the Committee's maximum-employment objective. These participants noted that progress in reducing slack in the labor market had slowed, citing relatively little change, on net, since the beginning of the year in the unemployment rate, the number of persons working part time for economic reasons, the employment-to-population ratio, labor force participation, or rates of job openings and quits.
Available information on inflation suggested that the change in headline PCE prices for the 12 months ending in June continued to run well below the Committee's longer-run objective and that the 12-month change in core PCE prices likely remained near its May level of 1.6 percent. On a 12-month-change basis, core PCE inflation had risen from 1.3 percent a year earlier, but it continued to be held down by the pass-through of earlier declines in energy prices and by soft prices of imports. Core PCE inflation over the first half of 2016 was expected to have been close to an annual rate of 2 percent, but it was noted that some of the increase likely reflected transitory effects that would be in part reversed during the second half of the year. Longer-run inflation expectations, as reported in the Michigan survey, were little changed in June and early July. The reading from the Federal Reserve Bank of New York's Survey of Consumer Expectations for inflation three years ahead moved up further in June, returning to near its level of a year earlier. Most market-based measures of longer-run inflation compensation remained low.
Participants also discussed recent developments in financial markets and issues related to financial stability. The vote by the United Kingdom to leave the EU led to sharp declines in risk asset prices and a spike in volatility in financial markets early in the intermeeting period. But those price moves were subsequently reversed, likely in response to expectations for policy actions by some major central banks, the resolution of some of the political uncertainty in the United Kingdom, and better-than-expected data on U.S. economic activity. Financial markets and institutions were generally resilient in the aftermath of the vote, apparently reflecting in part advance preparations by key market participants and communications from advanced-economy central banks before and after the vote that they would take the steps necessary to provide liquidity to support the orderly functioning of markets. Overall, U.S. financial conditions eased during the intermeeting period: Major equity indexes rose, longer-term interest rates fell, credit spreads narrowed, and the broad index of the foreign exchange value of the dollar was little changed.
In the discussion of developments related to financial stability, it was noted that while the capital and liquidity positions of U.S. banks remained strong, European banks, particularly Italian banks, were under pressure--as evidenced by the sharp declines in their equity prices--from a weaker economic outlook for that region, thin interest margins, and concerns about the quality of their loan portfolios. In U.S. markets, overall financial vulnerabilities were judged to remain moderate, as nonfinancial debt had continued to increase roughly in line with nominal GDP and valuation pressures were not widespread. However, during the discussion, several participants commented on a few developments, including potential overvaluation in the market for CRE, the elevated level of equity values relative to expected earnings, and the incentives for investors to reach for yield in an environment of continued low interest rates. Regarding CRE, it was noted that the recent SLOOS reported that a significant fraction of banks tightened lending standards in the first and second quarters of the year and that overvaluation did not appear to be widespread across markets. It was also pointed out that investors potentially were becoming more comfortable locking in current yields in an environment in which low interest rates were expected to persist, rather than engaging in the type of speculative behavior that could pose financial stability concerns.
Participants discussed the implications of recent economic and financial developments for the economic outlook and the risks attending the outlook. They indicated that their forecasts for economic growth, the labor market, and inflation had changed little over the intermeeting period. Regarding the near-term outlook, participants generally agreed that the prompt recovery in financial markets following the Brexit vote and the pickup in job gains in June had alleviated two key uncertainties about the outlook that they had faced at the June meeting. Brexit now appeared likely to have little effect on the U.S. economic outlook in the near term. Moreover, the employment report for June, along with other recent information that suggested that real GDP rose at a moderate rate in the second quarter, provided some reassurance that a sharp slowdown in employment and economic activity was not under way. Participants judged that the incoming information, on the whole, had lowered the downside risks to the near-term economic outlook. Most participants anticipated that economic growth would move up to a rate somewhat above its longer-run trend during the second half of 2016 and that the labor market would strengthen further. However, several noted that while the outlook for consumer spending remained positive, continued weakness in business investment and the possibility of slower improvement in the housing sector posed some downside risks to their forecasts.
Although the near-term risks to the outlook associated with Brexit had diminished over the intermeeting period, participants generally agreed that they should continue to closely monitor economic and financial developments abroad. As a consequence of Brexit, economic growth in the United Kingdom and, to a lesser extent, in the euro area would likely be slower than previously anticipated. Moreover, the exit process was expected to entail an extended period of negotiations that, in the view of most participants, had the potential to increase the political and economic uncertainties in that region; several also saw the possibility that complications during the exit process could result in spells of elevated volatility in global financial markets. Some participants noted that the weak capital positions and high levels of nonperforming loans at some European banks could also weigh on economic growth in the region. In addition to the situation in Europe, some participants continued to see a number of other downside risks to the medium-term economic and financial outlook from abroad, including weakness in the global economy more broadly, uncertainty about the outlook for China's foreign exchange policy, and the implications of China's run-up in debt to support its economy. A few others noted uncertainty about the strength of domestic economic activity going forward. However, some other participants indicated that they did not view the uncertainties attending the outlook to be unusually elevated and continued to see the risks to their economic forecasts as balanced.
In discussing the outlook for the labor market, most participants viewed some further strengthening in labor market indicators as consistent with achieving the Committee's maximum-employment objective. With inflation still below the Committee's longer-run objective and likely to continue to respond only slowly to somewhat tighter labor markets, most also saw relatively low risk that a further gradual strengthening of the labor market would generate an unwanted increase in inflationary pressures. Nevertheless, a few participants continued to caution about the risks to the inflation outlook from overshooting the natural rate of unemployment. Some indicated that a step-down in monthly job gains seemed appropriate as labor market conditions approached those consistent with the Committee's maximum-employment objective and that a more moderate pace of hiring could still be consistent with further increases in labor utilization. However, several others were concerned that if labor market slack diminished more slowly than they had previously anticipated, progress on the Committee's maximum-employment and inflation objectives could be delayed.
Regarding the outlook for inflation, incoming information appeared to be broadly in line with most participants' earlier expectations that inflation would gradually rise to 2 percent over the medium term. Most noted that the firming in various indicators of core inflation over the past year, together with signs that the direct and indirect effects of earlier declines in energy prices and prices of non-oil imports had begun to fade, provided support for their forecasts. Several added that recent indications of a pickup in wage increases were evidence of the effect of tightening resource utilization. However, other participants expressed greater uncertainty about the trajectory of inflation. They saw little evidence that inflation was responding much to higher levels of resource utilization and suggested that the natural rate of unemployment, and the responsiveness of inflation to labor market conditions, may be lower than most current estimates. Several viewed the risks to their inflation forecasts as weighted to the downside, particularly in light of the still-low level of measures of longer-run inflation expectations and inflation compensation and the likelihood that disinflationary pressures from abroad would persist.
Against the backdrop of their views of the economic outlook, participants discussed the conditions that could warrant taking another step in removing monetary policy accommodation. With inflation continuing to run below the Committee's 2 percent objective, many judged that it was appropriate to wait for additional information that would allow them to evaluate the underlying momentum in economic activity and the labor market and whether inflation was continuing to rise gradually to 2 percent as expected. Several suggested that the Committee would likely have ample time to react if inflation rose more quickly than they currently anticipated, and they preferred to defer another increase in the federal funds rate until they were more confident that inflation was moving closer to 2 percent on a sustained basis. In addition, although near-term downside risks to the outlook had diminished over the intermeeting period, some participants stressed that the Committee needed to consider the constraints on the conduct of monetary policy associated with proximity to the effective lower bound on short-term interest rates. These participants concluded that the Committee should wait to take another step in removing accommodation until the data on economic activity provided a greater level of confidence that economic growth was strong enough to withstand a possible downward shock to demand. However, some other participants viewed recent economic developments as indicating that labor market conditions were at or close to those consistent with maximum employment and expected that the recent progress in reaching the Committee's inflation objective would continue, even with further steps to gradually remove monetary policy accommodation. Given their economic outlook, they judged that another increase in the federal funds rate was or would soon be warranted, with a couple of them advocating an increase at this meeting. A few participants pointed out that various benchmarks for assessing the appropriate stance of monetary policy supported taking another step in removing policy accommodation. A few also emphasized the risk to the economic expansion that would be associated with allowing labor market conditions to tighten to an extent that could lead to an unwanted buildup of inflation pressures and thus eventually require a rapid increase in the federal funds rate. In addition, several expressed concern that an extended period of low interest rates risked intensifying incentives for investors to reach for yield and could lead to the misallocation of capital and mispricing of risk, with possible adverse consequences for financial stability.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that the information received since the Committee met in June indicated that the labor market had strengthened and that economic activity had been expanding at a moderate rate. They noted that the most recent employment report showed that job gains had been strong in June following weak growth in May, and, on balance, payrolls and other labor market indicators pointed to some increase in labor utilization in recent months. Members agreed that household spending had been growing strongly but business fixed investment had been soft. Inflation continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remained low over the intermeeting period, and most survey-based measures of longer-term inflation expectations were, on balance, little changed.
With respect to the economic outlook and its implications for monetary policy, members continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market indicators would strengthen. Members saw developments during the intermeeting period as reducing near-term uncertainty along two dimensions discussed at the June meeting. The first was about the outlook for the labor market. They agreed that the strong rebound in job gains in June--together with a rise in the labor force participation rate and a decline in the number of individuals who were working part time for economic reasons--suggested that, despite the very soft employment report for May, labor market conditions remained solid and slack had continued to diminish. Many members commented on the somewhat slower average pace of improvement in labor market conditions in recent months. Several of these members observed that the recent pace of job gains remained well above that consistent with stable rates of labor utilization. A couple of members indicated that, in light of their judgment that labor market conditions were at or close to the Committee's objectives, some moderation in employment gains was to be expected. In contrast, several other members expressed concern about the likelihood of a further reduction in the pace of job gains, and it was noted that if that slowing turned out to be persistent, the case for increasing the target range for the federal funds rate in the near term would be less compelling.
A second source of near-term uncertainty that members had discussed at the June meeting pertained to the potential economic and financial market consequences of the U.K. referendum on membership in the EU. At the current meeting, most members pointed to the quick recovery of financial market conditions since the "leave" vote as an encouraging sign of resilience in global financial markets that helped reduce near-term uncertainty about the outlook for the U.S. economy.
While members judged that near-term risks to the domestic outlook had diminished, some noted that the U.K. vote, along with other developments abroad, still imparted significant uncertainty to the medium- to longer-term outlook for foreign economies, with possible consequences for the U.S. outlook. As a result, members agreed to indicate that they would continue to closely monitor global economic and financial developments.
Members continued to expect inflation to remain low in the near term, in part because of earlier declines in energy prices, but most anticipated that inflation would rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipated and the labor market strengthened further. Nonetheless, in light of the current shortfall of inflation from 2 percent, members agreed that they would continue to carefully monitor actual and expected progress toward the Committee's inflation goal.
After assessing the outlook for economic activity, the labor market, and inflation, as well as the risks around that outlook, members decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent at this meeting. Members generally agreed that, before taking another step in removing monetary accommodation, it was prudent to accumulate more data in order to gauge the underlying momentum in the labor market and economic activity. A couple of members preferred also to wait for more evidence that inflation would rise to 2 percent on a sustained basis. Some other members anticipated that economic conditions would soon warrant taking another step in removing policy accommodation. One member preferred to raise the target range for the federal funds rate at the current meeting, citing the easing of financial conditions since the U.K. referendum, the return to trend economic growth, solid job growth, and inflation moving toward 2 percent.
Members again agreed that, in determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee would assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. They noted that this assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee expected that economic conditions would evolve in a manner that would warrant only gradual increases in the federal funds rate, and that the federal funds rate was likely to remain, for some time, below levels that are expected to prevail in the longer run. However, members emphasized that the actual path of the federal funds rate would depend on the economic outlook as informed by incoming data. In that regard, members judged it appropriate to continue to leave their policy options open and maintain the flexibility to adjust the stance of policy based on incoming information and its implications for the Committee's assessment of the outlook for economic activity, the labor market, and inflation, as well as the risks to the outlook. Most members noted that effective communications from the Committee would help the public understand how monetary policy might respond to incoming data and developments.
The Committee also decided to maintain its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipated doing so until normalization of the level of the federal funds rate is well under way. Members noted that this policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
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 SOMA in accordance with the following domestic policy directive, to be released at 2:00 p.m.:
"Effective July 28, 2016, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1/4 to 1/2 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 0.25 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."
The vote also encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in June indicates that the labor market strengthened and that economic activity has been expanding at a moderate rate. Job gains were strong in June following weak growth in May. On balance, payrolls and other labor market indicators point to some increase in labor utilization in recent months. Household spending has been growing strongly but business fixed investment has been soft. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will strengthen. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook have diminished. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions."
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, James Bullard, Stanley Fischer, Loretta J. Mester, Jerome H. Powell, Eric Rosengren, and Daniel K. Tarullo.
Voting against this action: Esther L. George.
Ms. George dissented because she believed that a 25 basis point increase in the target range for the federal funds rate was appropriate at this meeting. Information available since the June FOMC meeting showed solid employment growth, economic growth near its trend, and inflation outcomes aligning with the Committee's objective. Domestic financial conditions had eased since the U.K. referendum. She believed that monetary policy should respond to these developments by gradually removing accommodation, consistent with the prescriptions of several frameworks for assessing the appropriate stance of monetary policy. She believed that by waiting longer to adjust the policy stance and deviating from the appropriate path to policy normalization, the Committee risked eroding the credibility of its policy communications.
Consistent with the Committee's decision to leave the target range for the federal funds rate unchanged, the Board of Governors took no action to change the interest rates on reserves or discount rates.
Secretary's note: The following statement regarding the June 14-15, 2016, FOMC meeting was inadvertently omitted from minutes of that meeting: "Consistent with the Committee's decision to leave the target range for the federal funds rate unchanged, the Board of Governors took no action to change the interest rates on reserves or discount rates."
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, September 20-21, 2016. The meeting adjourned at 10:30 a.m. on July 27, 2016.
Notation Vote
By notation vote completed on July 5, 2016, the Committee unanimously approved the minutes of the Committee meeting held on June 14-15, 2016.
_____________________________
Brian F. Madigan
Secretary
1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes. Return to text
2. Attended the discussions of the long-run monetary policy implementation framework and financial developments. Return to text
3. Attended the discussion of the long-run monetary policy implementation framework. Return to text |
2016-06-15T00:00:00 | 2016-07-06 | Minute | Minutes of the Federal Open Market Committee
June 14-15, 2016
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, June 14, 2016, at 1:00 p.m. and continued on Wednesday, June 15, 2016, at 9:00 a.m.1
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
James Bullard
Stanley Fischer
Esther L. George
Loretta J. Mester
Jerome H. Powell
Eric Rosengren
Daniel K. Tarullo
Charles L. Evans, Patrick Harker, Robert S. Kaplan, and Neel Kashkari, Alternate Members of the Federal Open Market Committee
Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively
Brian F. Madigan, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
Thomas A. Connors, Michael P. Leahy, David E. Lebow, Jonathan P. McCarthy, Stephen A. Meyer, Ellis W. Tallman, Christopher J. Waller, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Robert deV. Frierson, Secretary of the Board, Office of the Secretary, Board of Governors
Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors
James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors; Andreas Lehnert, Deputy Director, Division of Financial Stability, Board of Governors
David Bowman, Andrew Figura, Ann McKeehan, David Reifschneider, and Stacey Tevlin, Special Advisers to the Board, Office of Board Members, Board of Governors
Trevor A. Reeve, Special Adviser to the Chair, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Fabio M. Natalucci, Senior Associate Director, Division of Monetary Affairs, Board of Governors; Beth Anne Wilson, Senior Associate Director, Division of International Finance, Board of Governors
Michael T. Kiley, Senior Adviser, Division of Research and Statistics, and Senior Associate Director, Division of Financial Stability, Board of Governors
Antulio N. Bomfim, Ellen E. Meade, and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors; Jeremy B. Rudd, Senior Adviser, Division of Research and Statistics, Board of Governors
Shaghil Ahmed, Deputy Associate Director, Division of International Finance, Board of Governors
Christopher J. Gust2 and Jason Wu, Assistant Directors, Division of Monetary Affairs, Board of Governors; Paul A. Smith, Assistant Director, Division of Research and Statistics, Board of Governors
Eric C. Engstrom and Patrick E. McCabe, Advisers, Division of Research and Statistics, Board of Governors
Penelope A. Beattie,3 Assistant to the Secretary, Office of the Secretary, Board of Governors
Brett Berger, Senior Economic Project Manager, Division of International Finance, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Wendy E. Dunn, Principal Economist, Division of Research and Statistics, Board of Governors; Marcelo Rezende, Principal Economist, Division of Monetary Affairs, Board of Governors
Edward Herbst and Hiroatsu Tanaka, Senior Economists, Division of Monetary Affairs, Board of Governors
Randall A. Williams, Information Manager, Division of Monetary Affairs, Board of Governors
David Sapenaro, First Vice President, Federal Reserve Bank of St. Louis
David Altig, Kartik B. Athreya, and Jeff Fuhrer, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Richmond, and Boston, respectively
Stephanie Heller, Evan F. Koenig, and Spencer Krane, Senior Vice Presidents, Federal Reserve Banks of New York, Dallas, and Chicago, respectively
Roc Armenter, Sarah K. Bell, Òscar Jordà, and George A. Kahn, Vice Presidents, Federal Reserve Banks of Philadelphia, New York, San Francisco, and Kansas City, respectively
Cristina Arellano, Senior Research Economist, Federal Reserve Bank of Minneapolis
Developments in Financial Markets and Open Market Operations
The manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Committee met on April 26-27, 2016. Market participants' expectations for a firming of monetary policy at the June FOMC meeting rose considerably in the middle of the period, largely in response to monetary policy communications, but those expectations subsequently fell sharply following the release of labor market data for May. Nominal yields on Treasury securities declined over the period. Forward measures of inflation compensation derived from yields on nominal and inflation-indexed Treasury securities fell despite an appreciable increase in crude oil prices, a development that contrasted with the positive correlation between these variables that had been evident for some time. The manager also noted that bond yields globally had declined to very low levels and discussed some of the possible reasons for the drop. Actions by investors to shift their portfolios away from very low-yielding foreign sovereign debt were cited as adding to the downward pressure on U.S. yields. The manager also reviewed the apparent effects on financial markets of changes in the perceived odds that the United Kingdom would vote in a referendum on June 23 to leave the European Union.
In domestic money markets, the effective federal funds rate once again stayed close to the middle of the FOMC's 1/4 to 1/2 percent target range over the intermeeting period except on month-ends. Usage of the System's overnight reverse repurchase agreement facility remained low. Market participants anticipated that changes to the regulation of money market mutual funds that will take effect later in the year could lead to some increase in usage of the facility. Finally, the manager briefed the Committee on various efforts, including small-value tests of System facilities, to enhance operational readiness.
By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account during the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the June 14-15 meeting indicated that the pace of improvement in labor market conditions slowed in April and May but that real gross domestic product (GDP) appeared to be rising faster than in the first quarter. Consumer price inflation continued to run below the Committee's longer-run objective of 2 percent, restrained in part by earlier decreases in energy prices and in prices of non-energy imports. Survey-based measures of longer-run inflation expectations were mixed in recent months, while market-based measures of inflation compensation declined from levels that were already low.
Total nonfarm payroll employment gains slowed in April and May, even after adjusting for the effects of a strike at a large telecommunications company. The unemployment rate dropped to 4.7 percent in May, partly reflecting an unusually large number of unemployed persons exiting the labor force. Over the first two months of the second quarter, both the labor force participation rate and the employment-to-population ratio moved down on net. The share of workers employed part time for economic reasons rose noticeably in May. Although the rate of private-sector job openings remained elevated, the rate of hires declined in both March and April and the rate of quits was unchanged. The four-week moving average of initial claims for unemployment insurance benefits moved up a little, on net, from late April to early June but was still at a low level. Labor productivity growth remained slow over the four quarters ending in the first quarter of 2016. Measures of labor compensation continued to rise at a moderate pace on balance: Compensation per hour in the nonfarm business sector increased 3-3/4 percent over the four quarters ending in the first quarter, the employment cost index for private workers rose 1-3/4 percent over the 12 months ending in March, and average hourly earnings for all employees increased 2-1/2 percent over the 12 months ending in May.
The unemployment rates for African Americans and for Hispanics stayed above the rate for whites, although the differentials in jobless rates across the different groups were similar to those before the most recent recession. The share of African American and Hispanic workers employed part time for economic reasons remained higher than for whites, and the gap in these rates was wider than in the years just before the most recent recession.
Total industrial production (IP) rose in April, principally reflecting a rebound in the output of utilities following a couple of unseasonably warm winter months as well as a moderate increase in manufacturing production. Meanwhile, mining output continued to contract as a result of further declines in drilling activity, a slower pace of crude oil extraction, and a continued pullback in coal production. A variety of indicators--including manufacturing production worker hours, motor vehicle assemblies, and oil and gas extraction and drilling activity--suggested that IP likely declined in May. Automakers' assembly schedules and mixed readings on other indicators of manufacturing production, such as new orders from national and regional manufacturing surveys, pointed to only subdued gains in factory output over the next few months.
Growth in real personal consumption expenditures (PCE) appeared to be picking up in the second quarter. The components of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimate of PCE rose at a solid pace in April and May, and sales of light motor vehicles rebounded after dipping in March. The apparent pickup in real PCE growth was consistent with recent readings on key factors that influence consumer spending. Gains in real disposable personal income continued to be solid in March and April, and households' net worth was boosted by further strong increases in home values through April. Also, consumer sentiment as measured by the University of Michigan Surveys of Consumers remained upbeat in early June.
Recent information on housing activity was broadly consistent with a continued gradual recovery in this sector. Starts for new single-family homes increased in April but were below the average pace in the first quarter, and building permit issuance remained essentially flat at the level that prevailed since late last year. The pace of starts for multifamily units moved up in April and was faster than in the first quarter. Sales of both new and existing homes rose in April.
Real private expenditures for business equipment and intellectual property appeared to be relatively flat early in the second quarter after declining sharply in the previous quarter. Nominal shipments of nondefense capital goods excluding aircraft edged up in April, and forward-looking indicators, such as new orders for these capital goods and recent readings from national and regional surveys of business conditions, suggested little change in business equipment spending in the near term. Firms' nominal spending for nonresidential structures excluding drilling and mining was little changed, on net, in March and April. The number of oil and gas rigs in operation, an indicator of spending for structures in the drilling and mining sector, fell through late May but edged up in early June.
Total real government purchases rose modestly in the first quarter and appeared to be increasing at about the same pace in the second quarter. Nominal outlays for defense in April and May pointed to an increase in real federal purchases in the second quarter, after such purchases had declined in the first quarter. In contrast, real state and local government purchases seemed to be edging down in the second quarter; the payrolls of these governments were little changed, on net, in April and May, and their nominal spending for construction declined in April.
The U.S. international trade deficit narrowed substantially in March, with a sharp decline in imports more than offsetting a fall in exports. The March data, together with revised estimates for earlier months, suggested that real exports were about flat in the first quarter while imports fell slightly. In April, the deficit widened as imports recovered somewhat, but it remained narrower than its first-quarter average.
Total U.S. consumer prices, as measured by the PCE price index, increased about 1 percent over the 12 months ending in April, partly restrained by earlier declines in consumer energy prices. Core PCE price inflation, which excludes changes in food and energy prices, was a little above 1-1/2 percent over the same 12-month period, held down in part by decreases in the prices of non-energy imports over much of this period and the pass-through of the declines in energy prices to prices of other goods and services. Over the 12 months ending in April, total consumer prices as measured by the consumer price index (CPI) also rose about 1 percent, while core CPI inflation was a little above 2 percent. The Michigan survey measure of longer-run inflation expectations fell to its lowest level on record in early June, but other measures of such expectations--including those from the Survey of Professional Forecasters and from the Desk's Survey of Primary Dealers and Survey of Market Participants--were generally little changed, on balance, in recent months.
Foreign real GDP growth picked up in the first quarter, supported by relatively robust increases in Canada, the euro area, Japan, and Mexico. However, the pace of growth appeared to slow in many foreign economies in the second quarter, although in some cases as a result of what were likely to be temporary disruptions, including wildfires in Canada and an earthquake in Japan. In the United Kingdom, uncertainty about the outcome of the referendum on exit from the European Union seemed to be holding down investment. In contrast, indicators for emerging Asia, including China, suggested that economic growth picked up in the second quarter. Inflation remained low in the advanced foreign economies (AFEs), in part reflecting previous declines in energy prices. Inflation also continued to be subdued in most emerging market economies (EMEs).
Staff Review of the Financial Situation
Domestic financial market conditions remained accommodative over the intermeeting period. Equity price indexes and corporate bond spreads were little changed, on net, and, in aggregate, corporations continued to tap credit markets at a solid pace. Credit also remained broadly available to households, except for higher-risk borrowers in some markets. The expected near-term path of the federal funds rate implied by market quotes varied notably over the intermeeting period. On balance, it flattened, largely in response to the disappointing May employment report and growing concerns among investors about the British referendum on membership in the European Union. The flatter expected path of the federal funds rate, along with an apparent decline in global risk sentiment early in the period, contributed to an appreciable reduction in longer-term Treasury yields.
Market-based estimates of the probability of a hike in the federal funds rate at the June FOMC meeting were variable during the intermeeting period. The probability of an increase in June fell to near zero in early May in response to incoming economic data, jumped to about 30 percent after the release of the April FOMC minutes and other Federal Reserve communications, and dropped again to near zero after the May employment report. The expected path of the federal funds rate for the medium term implied by market quotes declined somewhat on net. The average probability assigned by respondents to the Desk's June Survey of Primary Dealers and Survey of Market Participants was near zero for a rate hike in June and around 20 percent for a rate increase in July. The median respondent in each survey indicated that the most likely outcome was only one hike in 2016, down from two in the April surveys.
The nominal Treasury yield curve flattened, on net, over the intermeeting period, mainly reflecting declines in longer-term rates; the flattening left the spread between yields on 2- and 10-year Treasury securities near its lowest level since 2007. Although a significant portion of the declines in yields occurred following the release of the May employment report, yields at longer maturities had begun drifting down earlier in the period, consistent with an apparent deterioration in global risk sentiment. Yields moved lower late in the period amid growing concerns about the upcoming British referendum. Some market participants attributed the decline in Treasury yields in part to heavy demand from foreign investors faced with extraordinarily low yields on foreign sovereign securities. Inflation compensation based on Treasury Inflation-Protected Securities (TIPS) decreased, particularly at longer tenors. Measures of inflation compensation based on inflation swaps also declined, but less than TIPS-based measures, consistent with anecdotal reports suggesting that a portion of the declines in TIPS-based measures might have been driven by elevated demand for longer-term nominal Treasury securities.
Broad stock price indexes moved within narrow ranges but were modestly lower, on net, over the intermeeting period. However, one-month-ahead option-implied volatility on the S&P 500 index--the VIX--rose notably from fairly low levels and ended the period close to its historical median level. Spreads of 10-year triple-B-rated corporate bond yields over those on comparable-maturity Treasury securities were little changed on balance. High-yield spreads widened, mainly for firms outside of the energy sector; spreads on bonds for firms in the energy sector narrowed, likely in response to rising oil prices.
Overall financing conditions for nonfinancial firms improved a bit over the intermeeting period, remaining accommodative. Amid still-low yields, bond issuance by investment-grade corporations rose to a robust pace in May, and speculative-grade issuance also picked up. Growth of commercial and industrial (C&I) loans on banks' books remained strong in April and May, particularly at large banks. Following significant declines in the first quarter of 2016, gross issuance of leveraged loans increased slightly in April and May, as refinancing was reportedly boosted by lower loan spreads. Equity issuance by nonfinancial firms through initial public offerings remained subdued over the intermeeting period. Meanwhile, nonfinancial firms continued to repurchase their shares at a brisk pace in the first quarter, and dividends stayed near record levels.
Recent developments pointed to some decline in the credit quality of nonfinancial firms. The percentage of C&I loans entering delinquency or being charged off increased further in the first quarter, the default rate of corporate bonds moved up in April, and downgrades of nonfinancial bonds significantly outpaced upgrades in May. Expected year-ahead default rates for nonfinancial firms remained moderately elevated relative to previous expansions, while those for oil companies continued to be high.
Financing conditions for commercial real estate remained fairly accommodative. All major categories of commercial real estate loans on banks' books increased briskly during April and May. However, spreads on commercial mortgage-backed securities (CMBS) stayed elevated, continuing to depress CMBS issuance.
On balance, credit conditions in municipal bond markets continued to be stable. Yield spreads on general obligation municipal bonds were little changed, and gross issuance remained solid. The default by Puerto Rico's Government Development Bank on debt payments due in early May was widely expected and elicited limited reaction in broader municipal bond markets.
Conditions in consumer credit markets were little changed and generally remained accommodative. Consumer loan balances continued to increase at a robust pace in recent months, with year-over-year growth in credit card balances outstanding continuing to trend upward. Credit in mortgage markets stayed tight for borrowers with low credit scores, hard-to-document income, or high debt-to-income ratios. Interest rates on 30-year fixed-rate mortgages declined and continued to be low by historical standards.
Over the intermeeting period, developments in global financial markets were driven in large part by shifting views on the expected path of U.S. monetary policy and by fluctuating expectations about the outcome of the U.K. vote on membership in the European Union. The exchange value of the U.S. dollar rose in the middle of the intermeeting period along with expectations for less accommodative Federal Reserve monetary policy. However, the dollar partially retraced these increases following the much weaker-than-expected U.S. employment report for May, finishing the period a bit stronger against the currencies of the AFEs and about 3 percent higher against EME currencies. In contrast to its changes against most currencies, the dollar depreciated against the Japanese yen, in large part because of the unexpected decision by the Bank of Japan not to ease policy further at its April meeting. AFE sovereign yields declined, with U.K. yields in particular being weighed down following polls showing an increase in support for the "leave" vote in the upcoming referendum. Decreases in equity indexes in the AFEs, particularly in Europe, also reportedly reflected concerns about the possibility of a successful "leave" vote. Most EME equity markets also edged lower.
Staff Economic Outlook
In the U.S. economic forecast prepared by the staff for the June FOMC meeting, real GDP growth was estimated to have been faster in the first quarter than in the April forecast, and the incoming information was consistent with a moderate pickup in GDP growth in the second quarter. Real GDP was projected to rise a little slower in the second half of this year than in the previous forecast and to increase at about the same pace thereafter; the small boosts to real GDP growth implied by a lower assumed path for interest rates and by a slightly stronger trajectory for home values were essentially offset by restraint from higher projected paths for the foreign exchange value of the dollar and for oil prices. The staff continued to forecast that real GDP would expand at a modestly faster pace than potential output in 2016 through 2018, supported primarily by increases in consumer spending. The unemployment rate was expected to remain relatively flat over the second half of the year and then to gradually decline further; over this period, the unemployment rate was projected to run somewhat below the staff's estimate of its longer-run natural rate.
The staff's forecast for inflation was little changed from the previous projection. The staff continued to project that inflation would increase over the next several years, as energy prices and the prices of non-energy imports were expected to begin steadily rising this year. However, inflation was still projected to be slightly below the Committee's longer-run objective of 2 percent in 2018.
The staff viewed the uncertainty around its April projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The risks to the forecast for real GDP were seen as tilted to the downside, reflecting the staff's assessment that neither monetary nor fiscal policy was well positioned to help the economy withstand substantial adverse shocks. In addition, the staff continued to see the risks to the forecast from developments abroad as skewed to the downside. Consistent with the downside risks to aggregate demand, the staff viewed the risks to its outlook for the unemployment rate as tilted to the upside. The risks to the projection for inflation were still judged as weighted to the downside, reflecting the possibility that longer-term inflation expectations may have edged down.
Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, members of the Board of Governors and Federal Reserve Bank presidents submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, inflation, and the federal funds rate for each year from 2016 through 2018 and over the longer run.4 Each participant's projections were conditioned on his or her judgment of appropriate monetary policy. The longer-run projections represented each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These projections and policy assessments are described in the Summary of Economic Projections, which is an addendum to these minutes.
In their discussion of the economic situation and the outlook, meeting participants agreed that information received over the intermeeting period indicated that the pace of improvement in the labor market had slowed while growth in economic activity appeared to have picked up. Although the unemployment rate had declined, job gains had diminished. Growth in household spending had strengthened. Since the beginning of the year, the housing sector had continued to improve and the drag from net exports appeared to have lessened, but business fixed investment had been soft. Inflation had continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation declined; most survey-based measures of longer-term inflation expectations were little changed, on balance, in recent months.
Participants generally expected that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market indicators would strengthen. Inflation was expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipated and the labor market strengthened further. Participants generally agreed that the Committee should continue to closely monitor inflation indicators and global economic and financial developments.
Growth of consumer spending appeared to have picked up from its slow pace in the first quarter. Retail sales posted strong gains in April and May, and sales of light motor vehicles moved back up. At the time of the April meeting, most participants had anticipated a rebound in consumer spending in light of the still-solid fundamental determinants of household spending. Some participants indicated that consumption was likely to continue being supported by these factors, which included ongoing gains in income, robust household balance sheets, and the positive assessment of current economic conditions that was evident in recent surveys of consumers. However, a few participants expressed caution about the outlook for consumer expenditures, noting that slower increases in employment and higher energy prices could restrain spending.
The housing sector continued to improve since the beginning of the year. Reports from a number of participants indicated that single-family construction was strengthening and house prices were rising in most parts of their Districts. However, some areas that were affected by the slowdown in the energy sector experienced house price declines or increases in mortgage delinquency rates.
Participants summarized survey readings and anecdotal reports on business conditions in their Districts. Those indicators were mixed regarding the pace of economic activity within the manufacturing sector. Some of the weakness in manufacturing activity was linked to the effects of earlier declines in oil prices on firms in the energy sector and to previous increases in the exchange value of the dollar, which had adversely affected exporters. But manufacturing activity was judged to have stabilized in a couple of Districts, and contacts there were optimistic about further improvement in the months ahead. It was noted that the recent increase in crude oil prices had improved the outlook for the energy sector. However, a couple of participants observed that financial strains caused by previous declines in energy prices had continued for firms or financial institutions in their Districts, and such difficulties were seen as likely to persist absent further increases in energy prices. Regarding the service sector, a few participants commented that activity and hiring continued to expand in their Districts. The near-term outlook for farm income remained weak despite recent increases in the futures prices of some agricultural commodities.
Available indicators suggested that the softness in business fixed investment since late last year persisted early in the second quarter. While weakness in the drilling and mining sector was attributable to the earlier declines in oil prices, participants identified a variety of potential causes of the broader weakness in investment spending, including a slowdown in corporate profits, concern about prospects for economic growth, heightened uncertainty regarding the future course of domestic regulatory and fiscal policies, and a persistent reluctance on the part of firms to undertake new projects in the wake of the financial crisis. Some participants mentioned that the sluggishness in business investment could portend a broader economic slowdown. A couple of participants also noted that elevated inventory levels could be a drag on economic growth in the near term. However, participants also cited factors that could lead to a pickup in business spending, including the recent turnaround in energy prices and the greater optimism on the part of firms indicated by surveys of businesses and anecdotal reports in some Districts.
The employment report for May showed considerably weaker growth in payrolls than had been expected, and gains in previous months were revised down. Although the unemployment rate fell in May, a drop in labor force participation accounted for the decline. Participants discussed a range of interpretations of these data. Many participants observed that, because of transitory factors, such as statistical noise and the effects of a strike in the telecommunications industry, the reported rate of payroll job growth likely understated its underlying pace; however, many participants thought that the underlying pace had slowed some from that of previous months. Some noted that other indicators did not corroborate a material weakening of labor market conditions. These indicators included a number of regional surveys of labor market conditions, relatively low levels of initial claims for unemployment insurance, surveys of business hiring plans, and positive views of labor market conditions in recent consumer surveys. In addition, a few participants commented that the movements in labor force participation in recent months were, on balance, consistent with its secular downtrend. In contrast, some noted that the lower rate of payroll gains could instead be indicative of a broader slowdown in growth of economic activity that was also evidenced by other downbeat labor market indicators, such as a decline in the diffusion indexes of industry payrolls, an increase in the number of workers reporting that they were working part time for economic reasons, or the recent sharp drop in labor force participation. Finally, a few participants suggested that the weak employment growth may instead reflect supply constraints associated with a general tightening of labor market conditions. These participants saw the rising trend in wages, business reports of reduced worker availability, and high rate of job openings as supporting this interpretation. Others thought it unlikely that such constraints would have become evident so abruptly.
Almost all participants judged that the surprisingly weak May employment report increased their uncertainty about the outlook for the labor market. Even so, many remarked that they were reluctant to change their outlook materially based on one economic data release. Participants generally expected to see a resumption of monthly gains in payroll employment that would be sufficient to promote continued strengthening of the labor market. However, some noted that with labor market conditions at or near those consistent with maximum employment, it would be reasonable to anticipate that gains in payroll employment would soon moderate from the pace seen over the past few years.
Inflation continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Core PCE price inflation registered an increase of 1.6 percent for the 12 months ending in April, while recent readings on retail energy prices moved up notably. Most participants expected to see continued progress toward the Committee's 2 percent inflation objective. They viewed the firming in some measures of core inflation, the evidence that wage growth was picking up, the ongoing tightening of resource utilization, the recent firming in oil prices, and the stabilization of the foreign exchange value of the dollar this year as factors likely to boost inflation over time. However, other participants were less confident that inflation would return to its target level over the medium term. They thought that progress could be very slow, particularly in light of the likelihood that tighter resource utilization may impart only modest upward pressure on prices. They also saw important downside risks, including persistent disinflationary pressures from very low inflation and weak economic growth abroad as well as the softening in some survey-based measures of longer-term inflation expectations and market-based measures of inflation compensation.
Global financial conditions had improved since earlier in the year, and recent data on net exports suggested that the drag on domestic economic activity from the external sector had abated somewhat. Still, participants generally agreed that global economic and financial developments should continue to be monitored closely. Some participants indicated that prospects for economic activity in many foreign economies appeared to be subdued, that global inflation and interest rates remained very low by historical standards, and that recurring bouts of global financial market instability remained a risk. Most participants noted that the upcoming British referendum on membership in the European Union could generate financial market turbulence that could adversely affect domestic economic performance. Some also noted that continued uncertainty regarding the outlook for China's foreign exchange policy and the relatively high levels of debt in China and some other EMEs represented appreciable risks to global financial stability and economic performance.
In light of participants' updates to their economic projections, they discussed their current assessments of the appropriate trajectory of monetary policy over the medium term. Most still expected that the appropriate target range for the federal funds rate associated with their projections of further progress toward the Committee's statutory objectives would rise gradually in coming years. However, some noted that their forecasts were now consistent with a shallower path than they had expected at the time of the March meeting. Many participants commented that the level of the federal funds rate consistent with maintaining trend economic growth--the so-called neutral rate--appeared to be lower currently or was likely to be lower in the longer run than they had estimated earlier. While recognizing that the longer-run neutral rate was highly uncertain, many judged that it would likely remain low relative to historical standards, held down by factors such as slow productivity growth and demographic trends. Several noted that in the prevailing circumstances of considerable uncertainty about the neutral federal funds rate, the Committee could better gauge the effects of increases in the federal funds rate on the economy if it proceeded gradually in adjusting policy.
Participants weighed a number of considerations in assessing the conditions under which it would be appropriate to increase the target range for the federal funds rate. Most participants indicated that they made only small changes to their forecasts for achieving and maintaining the Committee's objectives of maximum employment and 2 percent inflation over the medium term. Several noted that the fundamentals underlying their forecasts remained solid, with several mentioning, in particular, that financial conditions were accommodative and household balance sheets had improved. In evaluating recent economic information, participants generally agreed that it was advisable to avoid overreacting to one or two labor market reports; however, the implications of the recent data on labor market conditions for the economic outlook were uncertain. Most judged that they would need to accumulate additional information on the labor market, production, and spending to help clarify how the economy was evolving in order to evaluate whether the stance of monetary policy should be adjusted. In addition, participants generally thought that it would be prudent to wait for the outcome of the upcoming referendum in the United Kingdom on membership in the European Union in order to assess the consequences of the vote for global financial market conditions and the U.S. economic outlook.
Most participants judged that, in the absence of significant economic or financial shocks, raising the target range for the federal funds rate would be appropriate if incoming information confirmed that economic growth had picked up, that job gains were continuing at a pace sufficient to sustain progress toward the Committee's maximum-employment objective, and that inflation was likely to rise to 2 percent over the medium term. Some participants viewed a broad range of labor market indicators as well as the recent firming in wages as consistent with a high level of labor utilization. They also pointed out that core inflation had begun to move up and that the transitory factors that had been holding down headline inflation were receding. Several of these participants expressed concern that a delay in resuming further gradual increases in the federal funds rate would increase the risks to financial stability or would raise the potential for overshooting the Committee's objectives; such an overshooting might require a rapid removal of policy accommodation at some point in the future, which could entail significant risks for U.S. financial markets and the economy.
However, some other participants were uncertain whether economic conditions would soon warrant an increase in the target range for the federal funds rate. Several of them noted downside risks to the outlook for growth in economic activity and for further improvement in labor market conditions, including the possibility that the sharp slowdown in employment gains and the continued weakness in business fixed investment signaled a downshift in economic growth, as well as the potential for global economic or financial shocks. Moreover, several of them worried about the declines in measures of inflation compensation and in some survey-based measures of inflation expectations and suggested that monetary policy may need to remain accommodative for some time in order to move inflation closer to 2 percent on a sustained basis. A few pointed out that with inflation likely to remain low for some time and to rise only gradually, maintaining an accommodative stance of policy could extend the strengthening of the labor market. In addition, several participants observed that because short-term interest rates were still near zero, monetary policy could, if necessary, respond more effectively to surprisingly strong inflationary pressures in the future than to a weakening in the labor market and falling inflation.
A number of participants emphasized that the Committee's approach to policy-setting was necessarily data dependent given the uncertainties associated with medium-term forecasts of economic activity and, accordingly, with the appropriate policy path over the medium term. It was noted that their expectations for the federal funds rate did not represent a preset plan and could change as incoming information influenced their views of the economic outlook and the risks associated with it. Several participants expressed concern that the Committee's communications had not been fully effective in informing the public how incoming information affected the Committee's view of the economic outlook, its degree of confidence in the outlook, or the implications for the trajectory of monetary policy.
Committee Policy Action
In their consideration of monetary policy for the period ahead, members judged that the information received since the Committee met in April indicated that the pace of improvement in labor market conditions had slowed in recent months while growth in economic activity appeared to have picked up from the low rates recorded in the fourth quarter of 2015 and the first quarter of 2016. Although the unemployment rate had declined over the intermeeting period, job gains had diminished. After only a modest increase early in the year, growth in household spending had strengthened in recent months. Since the beginning of the year, the housing sector had continued to improve and the drag from net exports had lessened, but business fixed investment had been soft. Inflation continued to run below the Committee's 2 percent objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation declined over the intermeeting period; most survey-based measures of inflation expectations were little changed.
With respect to the economic outlook and its implications for monetary policy, members continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market indicators would strengthen. Most members made only small changes to their forecasts for economic activity and the labor market. Most judged it appropriate to avoid overweighting one or two labor market reports in their consideration of the economic outlook, but they indicated that the recent slowing in payroll employment gains had increased their uncertainty about the likely pace of improvements in the labor market going forward. Many noted that the slowdown could be a temporary aberration and that other labor market indicators--such as new claims for unemployment insurance, the rate of job openings, and readings on consumers' perceptions of the labor market--remained positive. Some of them judged that labor market conditions were now at or close to the Committee's objectives and pointed out that some moderation in employment gains was to be expected when such conditions were near those consistent with maximum employment. However, other members observed that the recent soft readings on payroll jobs as well as the decline in the labor force participation rate and the absence of further reductions in the number of individuals who were working part time for economic reasons in recent months suggested a possible downshift in the pace of improvement in the labor market.
An additional factor in the Committee's policy deliberations was the upcoming U.K. referendum on membership in the European Union. Members noted the considerable uncertainty about the outcome of the vote and its potential economic and financial market consequences. They indicated that they would closely monitor developments associated with the referendum as well as other global economic and financial developments that could affect the U.S. outlook.
Members expected inflation to remain low in the near term, in part because of earlier declines in energy prices, but most anticipated that inflation would rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipated and the labor market strengthened further. Although headline inflation continued to run below the Committee's objective, some members observed that core inflation had risen, and one member noted that the annual rate of increase in core PCE inflation in the first quarter had exceeded 2 percent. However, several others continued to see downside risks to inflation, citing the decline in inflation expectations and the risk of adverse shocks to U.S. economic activity from developments abroad. In light of the current shortfall of inflation from 2 percent, the Committee agreed to continue carefully monitoring actual and expected progress toward its inflation goal.
After assessing the outlook for economic activity, the labor market, and inflation, and after weighing the uncertainties associated with the outlook, members agreed to leave the target range for the federal funds rate unchanged at 1/4 to 1/2 percent at this meeting. Members generally agreed that, before assessing whether another step in removing monetary accommodation was warranted, it was prudent to wait for additional data regarding labor market conditions as well as information that would allow them to assess the consequences of the U.K. vote for global financial conditions and the U.S. economic outlook. They judged that their decisions about the appropriate level of the federal funds rate in coming months would depend importantly on whether incoming information corroborated the Committee's expectations for economic activity, the labor market, and inflation. Some of them emphasized that, with labor market conditions and inflation at or close to the Committee's objectives, taking another step in removing monetary accommodation should not be delayed too long. However, a couple of members underscored that they would need to accumulate sufficient evidence to increase their confidence that economic growth was strong enough to withstand a possible downward shock to demand and that inflation was moving closer to 2 percent on a sustained basis.
Members reiterated that, in determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee would assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee expected that economic conditions would evolve in a manner that would warrant only gradual increases in the federal funds rate, and the federal funds rate was likely to remain, for some time, below levels that were expected to prevail in the longer run. Members emphasized that the actual path of the federal funds rate would depend on the economic outlook as informed by incoming data. In that regard, they judged it appropriate to continue to leave their policy options open and maintain the flexibility to adjust the stance of policy based on how incoming information affected the Committee's assessment of the outlook for economic activity, the labor market, and inflation as well as the risks to the outlook.
The Committee also decided to maintain its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipated doing so until normalization of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
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 SOMA in accordance with the following domestic policy directive, to be released at 2:00 p.m.:
"Effective June 16, 2016, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1/4 to 1/2 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 0.25 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."
The vote also encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in April indicates that the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up. Although the unemployment rate has declined, job gains have diminished. Growth in household spending has strengthened. Since the beginning of the year, the housing sector has continued to improve and the drag from net exports appears to have lessened, but business fixed investment has been soft. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation declined; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will strengthen. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions."
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, James Bullard, Stanley Fischer, Esther L. George, Loretta J. Mester, Jerome H. Powell, Eric Rosengren, and Daniel K. Tarullo.
Voting against this action: None.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, July 26-27, 2016. The meeting adjourned at 10:30 a.m. on June 15, 2016.
Notation Vote
By notation vote completed on May 17, 2016, the Committee unanimously approved the minutes of the Committee meeting held on April 26-27, 2016.
_____________________________
Brian F. Madigan
Secretary
1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes. Return to text
2. Attended Wednesday session only. Return to text
3. Attended Tuesday session only. Return to text
4. One participant did not submit longer-run projections in conjunction with the June 2016 FOMC meeting. Return to text |
2016-06-15T00:00:00 | 2016-06-15 | Statement | Information received since the Federal Open Market Committee met in April indicates that the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up. Although the unemployment rate has declined, job gains have diminished. Growth in household spending has strengthened. Since the beginning of the year, the housing sector has continued to improve and the drag from net exports appears to have lessened, but business fixed investment has been soft. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation declined; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will strengthen. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Esther L. George; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo.
Implementation Note issued June 15, 2016 |
2016-04-27T00:00:00 | 2016-04-27 | Statement | Information received since the Federal Open Market Committee met in March indicates that labor market conditions have improved further even as growth in economic activity appears to have slowed. Growth in household spending has moderated, although households' real income has risen at a solid rate and consumer sentiment remains high. Since the beginning of the year, the housing sector has improved further but business fixed investment and net exports have been soft. A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and falling prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.
Implementation Note issued April 27, 2016 |
2016-04-27T00:00:00 | 2016-05-18 | Minute | Minutes of the Federal Open Market Committee
April 26-27, 2016
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, April 26, 2016, at 10:30 a.m. and continued on Wednesday, April 27, 2016, at 9:00 a.m.1
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
James Bullard
Stanley Fischer
Esther L. George
Loretta J. Mester
Jerome H. Powell
Eric Rosengren
Daniel K. Tarullo
Charles L. Evans, Patrick Harker, Robert S. Kaplan, Neel Kashkari, and Michael Strine, Alternate Members of the Federal Open Market Committee
Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively
Brian F. Madigan, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Thomas C. Baxter, Deputy General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
Thomas A. Connors, Troy Davig, Michael P. Leahy, David E. Lebow, Stephen A. Meyer, Geoffrey Tootell, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Robert deV. Frierson, Secretary of the Board, Office of the Secretary, Board of Governors
Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors
Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors
James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors
William B. English, Senior Special Adviser to the Board, Office of Board Members, Board of Governors
Andrew Figura, Ann McKeehan, David Reifschneider, and Stacey Tevlin, Special Advisers to the Board, Office of Board Members, Board of Governors
Trevor A. Reeve, Special Adviser to the Chair, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Eric M. Engen, Senior Associate Director, Division of Research and Statistics, Board of Governors; Fabio M. Natalucci, Senior Associate Director, Division of Monetary Affairs, Board of Governors
Antulio N. Bomfim, Egon Zakrajšek,2 and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors; Jeremy B. Rudd, Senior Adviser, Division of Research and Statistics, Board of Governors
Mark Carey,2 Associate Director, Division of International Finance, Board of Governors; Joshua Gallin, Associate Director, Division of Research and Statistics, Board of Governors
Shaghil Ahmed, Deputy Associate Director, Division of International Finance, Board of Governors
Rochelle M. Edge, Deputy Associate Director, Office of Financial Stability Policy and Research, Board of Governors
Glenn Follette and John M. Roberts, Assistant Directors, Division of Research and Statistics, Board of Governors; Christopher J. Gust, Assistant Director, Division of Monetary Affairs, Board of Governors
Burcu Duygan-Bump, Adviser, Division of Monetary Affairs, Board of Governors
Penelope A. Beattie,3 Assistant to the Secretary, Office of the Secretary, Board of Governors
Dana L. Burnett, Section Chief, Division of Monetary Affairs, Board of Governors
Bora Durdu,2 Section Chief, Office of Financial Stability Policy and Research, Board of Governors
Jae Sim,2 Principal Economist, Division of Research and Statistics, Board of Governors
Andrea Ajello, Senior Economist, Division of Monetary Affairs, Board of Governors
Kelly J. Dubbert, First Vice President, Federal Reserve Bank of Kansas City
David Altig, Kartik B. Athreya, Jeff Fuhrer,2 and Glenn D. Rudebusch, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Richmond, Boston, and San Francisco, respectively
Tobias Adrian,2 Michael Dotsey, and Samuel Schulhofer-Wohl, Senior Vice Presidents, Federal Reserve Banks of New York, Philadelphia, and Minneapolis, respectively
Joseph G. Haubrich, Anna Paulson, and David C. Wheelock, Vice Presidents, Federal Reserve Banks of Cleveland, Chicago, and St. Louis, respectively
Richard K. Crump2 and Marco Del Negro, Assistant Vice Presidents, Federal Reserve Bank of New York
Jim Dolmas, Senior Research Economist, Federal Reserve Bank of Dallas
Nina Boyarchenko,2 Financial Economist, Federal Reserve Bank of New York
The Relationship between Monetary Policy and Financial Stability
The staff presented several briefings on a special topic, the relationship between monetary policy and financial stability. The presentations began with an overview of the possible linkages among monetary policy, macroprudential tools, and financial stability, drawing on both academic research and experience with such tools in various countries. The staff then reviewed empirical literature on the linkages between the stance of monetary policy and financial stability. Lastly, the staff presented illustrative simulation results from a specific macroeconomic model to explore whether and how monetary policy should react to financial imbalances as well as the extent to which monetary and macroprudential policies should be coordinated to best achieve macroeconomic goals and financial stability goals.
In their comments on the briefings and in their discussion of the relationship between monetary policy and financial stability, FOMC participants noted that more stringent regulatory and supervisory policies implemented since the financial crisis, including enhanced capital and liquidity requirements for some types of financial institutions, had significantly increased the resilience of the financial system to shocks. Participants emphasized the importance of macroprudential tools in promoting financial stability, and they generally expressed the view that such tools should be the primary means to address financial stability risks. However, it was noted that relatively few macroprudential tools are available to financial regulators in the United States and that, for the most part, such tools are untested. Moreover, a number of institutional factors, including the dispersion of responsibilities across regulatory agencies, differences in mandates among those agencies, and resulting coordination challenges, may make it difficult to deploy macroprudential tools expeditiously in the United States and may lessen their effectiveness. Some participants noted that these considerations would be less significant for tools that were likely to be adjusted only infrequently. Most participants judged that the benefits of using monetary policy to address threats to financial stability would typically be outweighed by the costs associated with deviations from the Committee's employment and price-stability objectives induced by such actions; some also noted that the benefits are highly uncertain. Nonetheless, participants generally agreed that the Committee should not completely rule out the possibility of using monetary policy to address financial stability risks, particularly in circumstances in which such risks significantly threatened the achievement of its dual mandate and when macroprudential tools had been or were likely to be ineffective at mitigating those risks. Finally, participants stressed the need for further research and analysis to advance understanding of the relationship between monetary policy and financial stability and to help identify situations in which it might be desirable to incorporate financial stability considerations in the design of monetary policy.
Developments in Financial Markets and Open Market Operations
The manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets, including changes in market participants' expectations for the course of U.S. monetary policy. The deputy manager provided a briefing on money market developments and System open market operations conducted by the Open Market Desk during the period since the Committee met on March 15-16, 2016. Except for the March quarter-end, the daily effective federal funds rate had again remained very close to the center of the Committee's 1/4 to 1/2 percent target range over the intermeeting period. The manager then briefed the Committee on a routine review by the staff of the process for managing foreign currency reserves and a resulting proposal for an enhanced analytical framework for the management of those reserves.
The Committee voted unanimously to renew the reciprocal currency arrangements with the Bank of Canada and the Bank of Mexico; these arrangements are associated with the Federal Reserve's participation in the North American Framework Agreement of 1994. In addition, the Committee voted unanimously to renew the dollar and foreign currency liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank. The votes to renew the Federal Reserve's participation in these standing arrangements are taken annually at the April FOMC meeting.
By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account during the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the April 26-27 FOMC meeting indicated that labor market conditions improved further in the first quarter even though growth in real gross domestic product (GDP) appeared to have slowed. Consumer price inflation continued to run below the Committee's longer-run objective of 2 percent, restrained in part by earlier decreases in energy prices and declining prices of non-energy imports. Survey-based measures of longer-run inflation expectations were little changed, on balance, in recent months, while market-based measures of inflation compensation were still low.
Total nonfarm payroll employment expanded at a solid pace in March, and labor market conditions generally continued to strengthen. Although the unemployment rate edged up to 5.0 percent, both the labor force participation rate and the employment-to-population ratio continued to increase. The share of workers employed part time for economic reasons rose slightly but had been about flat, on balance, over recent months. The rates of private-sector hires and quits moved up in February, while the rate of job openings declined a little but was still at an elevated level. In late March and early April, the four-week moving average of initial claims for unemployment insurance benefits was essentially unchanged, on net, at a low level. Labor productivity growth appeared to have remained slow over the four quarters ending in the first quarter of this year. Measures of labor compensation continued to rise at a modest pace, as average hourly earnings for all employees increased 2-1/4 percent over the 12 months ending in March.
Total industrial production declined in February and March. Manufacturing output decreased, partly reflecting the effects on export demand of earlier appreciation of the foreign exchange value of the dollar. Meanwhile, mining output continued to contract as a result of further declines in drilling activity associated with low crude oil prices. Moreover, unseasonably warm weather in February and March held down the output of utilities. Automakers' assembly schedules and broader indicators of manufacturing production, such as the readings on new orders from national and regional manufacturing surveys, mostly pointed to only modest gains in factory output over the next few months. Information on extraction and drilling activity for crude oil and natural gas in early April was consistent with further declines in mining output.
Growth in real personal consumption expenditures (PCE) appeared to have slowed in the first quarter. Real PCE rose moderately in February after being flat in January. The components of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimate of PCE moved sideways in March, and the rate of sales of new light motor vehicles decreased markedly. Nevertheless, recent readings on key factors that influence consumer spending were consistent with a pickup in real PCE growth in the coming months. Gains in real disposable income continued to be solid in February. Households' net worth was boosted by the rise in equity prices over the intermeeting period and by further strong increases in home values through February. Also, consumer sentiment as measured by the University of Michigan Surveys of Consumers remained upbeat in early April.
Recent information on housing activity was broadly consistent with a continued slow recovery in this sector. Starts and building permits for new single-family homes declined in March, but both measures were higher in the first quarter as a whole than in the fourth quarter of 2015. However, starts of multifamily units continued to decrease in March. Sales of existing homes rose in March after decreasing in February, while new home sales moved lower in both months; nonetheless, sales of both new and existing homes in the first quarter as a whole were above those in the fourth quarter.
Real private expenditures for business equipment and intellectual property appeared to decline further in the first quarter. Nominal shipments of nondefense capital goods excluding aircraft decreased, on net, in February and March. Forward-looking indicators of equipment spending, such as new orders for nondefense capital goods along with recent readings from national and regional surveys of business conditions, continued to be soft. Firms' nominal spending for nonresidential structures excluding drilling and mining decreased in February. Indicators of spending for structures in the drilling and mining sector, such as the number of oil and gas rigs in operation, continued to fall through early April. The available data suggested that inventory investment moved down in the first quarter.
Total real government purchases seemed to have risen modestly in the first quarter. Federal government spending for defense appeared to have declined. However, the payrolls of state and local governments increased in the first quarter, and nominal construction spending by these governments rose, on net, in the first two months of the quarter.
The U.S. international trade deficit widened in February, as imports rose more than exports; however, preliminary data on trade in goods suggested that the deficit narrowed substantially in March, with imports falling back sharply even as exports declined. Large increases in both exports and imports of consumer goods in February were more than reversed in March. Also, imports of capital goods dropped sharply in March after increasing in February. In all, the recent data indicated that net exports probably continued to be a moderate drag on real GDP growth in the first quarter.
Total U.S. consumer prices, as measured by the PCE price index, increased 1 percent over the 12 months ending in February, partly restrained by declines in consumer energy prices. Core PCE price inflation, which excludes changes in food and energy prices, was 1-3/4 percent over the same 12-month period, held down in part by falling prices of non-energy imports and the pass-through of declines in energy prices to prices of other goods and services. Over the 12 months ending in March, total consumer prices as measured by the consumer price index (CPI) rose 1 percent, while core CPI inflation was 2-1/4 percent. In light of the CPI data, both total and core PCE price inflation on a 12-month basis appeared to slow a bit in March. Survey measures of longer-run inflation expectations--including those from the Michigan survey along with the Desk's Survey of Primary Dealers and Survey of Market Participants--were generally little changed, on balance, in recent months, although the reading from the Michigan survey in early April was at the low end of its historical range.
Recent indicators suggested that foreign real GDP growth had picked up in the first quarter after a lackluster performance last year. Economic growth in Canada appeared to have rebounded from a very weak fourth quarter. Recent data on industrial production and retail sales pointed to a pickup in economic growth in the euro area. Although weak economic performance persisted in Japan and South America, the weakness appeared to have abated somewhat. In contrast, economic growth in China moderated in the first quarter, although economic indicators in March were more upbeat than in the earlier months of the year. In the advanced foreign economies (AFEs), headline inflation remained low, held down by earlier declines in energy prices. With inflation generally running below the target rates in these economies, monetary policies remained very accommodative. By contrast, overall inflation in emerging market economies (EMEs) rose in the first quarter, largely reflecting increases in inflation in much of Latin America along with an increase in inflation in China that was driven by higher food prices.
Staff Review of the Financial Situation
Financial market conditions improved further, on balance, over the intermeeting period, with investors appearing to respond to Federal Reserve communications that were viewed as more accommodative than anticipated and to somewhat better-than-expected incoming data on foreign economic activity. Risk sentiment also appeared to improve further, on net, accompanied by a decline in financial market volatility and higher oil prices. Domestic economic data releases over the period had, on balance, a limited effect on asset prices.
Federal Reserve communications following the March FOMC meeting were interpreted by market participants as more accommodative than expected. In particular, investors were attentive to the larger-than-expected downward revisions to the projections of the federal funds rate in the FOMC's Summary of Economic Projections as well as to references in the March FOMC statement and the Chair's prepared remarks at the press conference to risks to the U.S. economic outlook stemming from global economic and financial developments. Meanwhile, domestic data releases were mixed and elicited only modest market reactions. On net, financial market quotes implied that the federal funds rate path expected by investors flattened notably, and that their estimated probability of a rate hike by the June FOMC meeting declined significantly. In the Survey of Market Participants, the median investor's modal path for the federal funds rate also moved down substantially, while in the Survey of Primary Dealers, the median dealer's modal path was little changed.
Consistent with the flatter path for the federal funds rate implied by market quotes, yields on nominal Treasury securities with maturities up to 10 years declined slightly over the period since the March FOMC meeting. Measures of inflation compensation based on Treasury Inflation-Protected Securities increased somewhat but remained at low levels. Credit conditions in municipal bond markets continued to be stable even as the situation facing Puerto Rico and its creditors deteriorated further.
Over the intermeeting period, broad U.S. equity price indexes moved up, on net, likely because of investors' views that monetary policy would be more accommodative than previously expected along with an improvement in risk sentiment. Stock prices increased broadly across industries, including the energy sector. One-month-ahead implied volatility on the S&P 500 index--the VIX--moved down and ended the period below its historical median. Spreads on 10-year corporate bond yields over yields on comparable-maturity Treasury securities for both triple-B-rated and speculative-grade issuers declined, on balance, but remained at levels near the high end of their ranges since 2012, as the outlook for corporate earnings deteriorated somewhat over the period. In light of available earnings reports of some companies in the S&P 500 index along with equity analysts' forecasts for companies that had not yet issued reports, corporate earnings in the first quarter appeared to have decreased markedly relative to the previous quarter.
Financing conditions for U.S. nonfinancial businesses remained generally accommodative for investment-grade issuers, and those for speculative-grade firms improved somewhat after showing strains earlier in the year. Corporate bond issuance by speculative-grade firms rebounded in March from the sluggish pace in January and February. Growth of commercial and industrial (C&I) loans on banks' books remained strong and continued to be driven by lending to investment-grade borrowers by large banks. Nonetheless, according to the most recent Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), on balance, banks further tightened their lending standards on C&I loans to large and middle-market firms in the first quarter, while demand for such loans weakened. The SLOOS indicated that banks expected an increase this year in delinquencies and charge-offs on existing loans to firms in the energy sector; banks also noted some deterioration in credit quality of loans to non-energy businesses located in U.S. regions that were dependent on the energy sector.
A significant number of SLOOS respondents reported tightening their lending standards on all major categories of commercial real estate (CRE) loans during the first quarter. However, demand for CRE loans reportedly strengthened, and CRE loans on banks' books continued to grow at a robust pace over the first quarter. In response to wider and more volatile spreads on commercial mortgage-backed securities (CMBS) since the summer of 2015, CMBS issuance was subdued in the first quarter, consistent with reports from banks in the SLOOS. Over the intermeeting period, CMBS spreads narrowed markedly but remained elevated.
Growth of residential real estate (RRE) loans on banks' books continued to be low through the first quarter, and credit conditions stayed tight for mortgage borrowers with low credit scores, hard-to-document income, or relatively high debt-to-income ratios. A significant number of SLOOS respondents reportedly eased lending standards on residential mortgages eligible for purchase by the government-sponsored enterprises, and a significant number also experienced stronger demand overall for RRE loans in the first quarter. Over the intermeeting period, rates on 30-year fixed-rate mortgages for well-qualified borrowers edged down in line with yields on mortgage-backed securities and comparable-duration Treasury securities and were near their all-time lows at the end of the period.
Financing conditions in consumer credit markets were little changed and remained largely accommodative in the first quarter, with student and auto loans continuing to be broadly available. Credit card lending conditions were still relatively tight, particularly for borrowers with subprime credit scores. Responses to the SLOOS indicated that during the first quarter, while credit card lending standards were little changed, a modest number of banks eased standards on auto and other consumer loans. Over the same period, demand for auto loans reportedly strengthened further at many banks. Consumer loan balances continued to increase at a robust pace through February, and data on bank lending activities suggested further growth through March. Issuance of asset-backed securities continued to be strong in the first quarter. Spreads on such securities remained at levels that were a bit higher than usual.
Since the March FOMC meeting, foreign financial market conditions eased, on net, and overall risk sentiment appeared to have improved. A number of factors likely contributed to the improvement, including expectations of more accommodative monetary policy in the United States. Sentiment was also likely boosted by the release of generally favorable foreign economic data. Against this backdrop, stock prices rose in most countries, with the equity indexes of the EMEs outperforming those of the AFEs. Changes in longer-term yields in the AFEs were mixed: Ten-year sovereign yields decreased slightly in Germany and Japan but increased in Canada and in the United Kingdom. The foreign exchange value of the dollar depreciated against most currencies, in part because higher oil prices supported the currencies of oil exporters.
In its latest report on potential risks to the stability of the U.S. financial system, the staff continued to judge that vulnerabilities were moderate overall. In particular, leverage and maturity transformation in the financial sector were subdued relative to historical levels, and growth of aggregate private nonfinancial-sector credit was modest. These indicators suggested that the financial system was fairly resilient, as did the absence of a significant increase in funding stresses or margin calls earlier this year when prices of risky assets fell and volatility rose sharply. Since then, prices of risky assets rebounded notably, and valuation pressures rose somewhat. Term premiums remained very low, and CRE valuations were elevated. In addition, corporate debt positions were high, although the issuance of low-rated debt had slowed.
Staff Economic Outlook
In the U.S. economic forecast prepared by the staff for the April FOMC meeting, real GDP growth in the first quarter of this year was estimated to have been much slower than in the forecast prepared for the March meeting, although projected real GDP growth in the second quarter was revised up a little. Beyond the near term, real GDP was expected to increase slightly faster than in the previous forecast, largely reflecting a somewhat higher projected trajectory for equity prices and lower assumed paths for both longer-term interest rates and the foreign exchange value of the dollar. The staff continued to project that real GDP would expand at a modestly faster pace than potential output in 2016 through 2018, supported primarily by increases in consumer spending. The unemployment rate was expected to gradually decline further and to run somewhat below the staff's estimate of its longer-run natural rate over this period.
The staff's forecast for inflation was little changed from the previous projection. The staff continued to project that inflation would increase over the next several years, as energy prices and the prices of non-energy imports were expected to begin steadily rising this year, but inflation was still projected to be slightly below the Committee's longer-run objective of 2 percent in 2018.
The staff viewed the uncertainty around its April projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The risks to the forecast for real GDP were seen as tilted to the downside, reflecting the staff's assessment that neither monetary nor fiscal policy was well positioned to help the economy withstand substantial adverse shocks. In addition, while there had been recent improvements in global financial and economic conditions, downside risks to the forecast from developments abroad, though smaller, remained. Consistent with the downside risk to aggregate demand, the staff viewed the risks to its outlook for the unemployment rate as skewed to the upside. The risks to the projection for inflation were still judged as weighted to the downside, reflecting the possibility that longer-term inflation expectations may have edged down.
Participants' Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants agreed that the information received over the intermeeting period indicated that labor market conditions improved further even as growth in economic activity appeared to have slowed. Growth in household spending had moderated, although households' real income had risen at a solid rate and consumer sentiment remained high. Since the beginning of the year, the housing sector had improved further, but business fixed investment and net exports had been soft. A range of indicators, including strong job gains, pointed to additional strengthening of the labor market. Inflation had continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and falling prices of non-energy imports. Market-based measures of inflation compensation remained low; survey-based measures of longer-run inflation expectations were little changed, on balance, in recent months. Domestic and global financial conditions eased over the intermeeting period, the incoming news on the foreign economic outlook was generally positive, and investor sentiment improved.
Although the incoming data suggested that aggregate spending in the first quarter had been weaker than expected, participants continued to anticipate that economic activity would expand at a moderate pace over the medium term and that labor market indicators would continue to strengthen. Inflation was expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of the declines in energy and import prices dissipated and the labor market strengthened further. Participants generally saw the risks stemming from global economic and financial developments as having diminished over the intermeeting period but as continuing to warrant close monitoring.
Participants indicated that their assessments of the medium-term economic outlook had not changed materially since March and discussed a number of factors suggesting that the apparent softness in spending in the first quarter was unlikely to persist. Most pointed to the steady improvement in the labor market as an indicator that the underlying pace of economic activity had likely not deteriorated as much as was suggested by the recent data on spending and production. Notably, solid job gains and real income growth, along with a high level of household wealth and relatively upbeat consumer sentiment, were expected to support a pickup in consumer spending after its slowdown in the first quarter. In addition, the easing of financial conditions in recent months was anticipated to provide some support for consumer spending and business investment going forward. Many also thought that, as had apparently been the case in recent years, a low reading on seasonally adjusted first-quarter GDP growth could partly reflect measurement problems and, if so, would likely be followed by stronger GDP growth in subsequent quarters. However, some participants were concerned that transitory factors may not fully explain the softness in consumer spending or the broad-based declines in business investment in recent months. They saw a risk that a more persistent slowdown in economic growth might be under way, which could hinder further improvement in labor market conditions.
Participants generally agreed that the risks to the economic outlook posed by global economic and financial developments had receded over the intermeeting period. The public appeared to have interpreted Federal Reserve communications following the March FOMC meeting as indicating that achieving the Committee's economic objectives would likely require a somewhat more gradual pace of increases in the federal funds rate than anticipated earlier. The shift in policy expectations, along with incoming data showing that economic growth abroad picked up during the first quarter of the year, seemed to contribute to the improved tone in global financial markets. Several FOMC participants judged that the risks to the economic outlook were now roughly balanced. However, many others indicated that they continued to see downside risks to the outlook either because of concerns that the recent slowdown in domestic spending might persist or because of remaining concerns about the global economic and financial outlook. Some participants noted that global financial markets could be sensitive to the upcoming British referendum on membership in the European Union or to unanticipated developments associated with China's management of its exchange rate.
While the recent data suggested markedly slower growth in consumer spending in the first quarter than seen in 2015, most participants expected to see a pickup in the growth rate of consumer spending in coming months in light of the still-solid fundamental determinants of household spending. Ongoing strong gains in employment and low energy prices were boosting aggregate household real income, and the level of household wealth was relatively high. It was noted that the slowdown in consumer spending early this year was primarily due to weaker expenditures for goods while outlays for services continued to increase in line with recent trends. Although a couple of participants noted that consumers' caution in recent months might have been the result of financial market turmoil in the first two months of this year, they and others observed that financial conditions had since improved and that consumer confidence remained at a relatively high level. Reports from District contacts on consumer spending were generally positive.
In the housing sector, indicators of sales and starts of new single-family homes were up, on balance, from their fourth-quarter levels. Activity in the multifamily sector appeared to have slowed during the first quarter, although demographic trends should continue to support this sector going forward. Business contacts in a number of Districts noted an improvement in housing activity and a continued rise in house prices, although their reports showed that the pace of sales and construction varied across regions.
Participants summarized survey readings and anecdotal reports on business conditions that were, on balance, mixed. According to several District surveys, activity in services industries continued to expand, and in some Districts, surveys and reports from business contacts indicated that manufacturing activity had strengthened or stabilized. Motor vehicle production remained at a high level. Nonetheless, manufacturing industries dependent on exports or the energy sector were still experiencing weak demand. The low level of oil prices continued to depress activity in the domestic energy sector, and a couple of participants suggested that, even with the ongoing cutbacks in production and potential increases in global demand, the imbalance of supply of crude oil relative to demand could last into 2017 and lead to further reductions in capital investment by energy firms. One participant noted that bankruptcies were rising among natural gas and coal producers as well as among firms engaged in oil exploration and extraction. A few participants also reported that low prices for agricultural commodities continued to strain the profitability of farming operations in their Districts.
Business fixed investment declined in the fourth quarter of 2015 and appeared to have dropped further in early 2016. As noted by a number of participants, the weakness in capital spending in recent quarters was in part due to the ongoing contraction in drilling activity and weak demand from abroad for goods manufactured in the United States. More broadly, several participants commented that their business contacts had expressed considerable caution about the economic outlook or had indicated that their firms were focused on cost-cutting measures that included delaying major expenditures, despite relatively favorable financial conditions. However, some other participants were more positive about the outlook for business spending, pointing to the optimism reported in a number of business surveys or to rising business investment in both equipment and commercial structures in their Districts.
Labor market conditions strengthened further in recent months. Increases in nonfarm payroll employment averaged almost 210,000 per month over the first three months of 2016. Although the unemployment rate changed little over that period, the labor force participation rate moved up and the pool of potential workers, which includes the unemployed as well as those who would like a job but are not actively looking, continued to shrink. Many participants judged that labor market conditions had reached or were quite close to those consistent with their interpretation of the Committee's objective of maximum employment. Several of them reported that businesses in their Districts had seen a pickup in wages, shortages of workers in selected occupations, or pressures to retain or train workers for hard-to-fill jobs. Many other participants continued to see scope for reducing labor market slack as labor demand continued to expand. In that regard, a number of participants indicated that the recent rise in the participation rate was a positive development, suggesting that a tighter labor market could potentially draw more individuals back into the workforce on a sustained basis without adding to inflationary pressures and thus increase the productive capacity of the economy. It was also noted that businesses might satisfy increases in labor demand in part by converting involuntary part-time jobs to full-time positions.
Over the past five years, employment and hours worked rose relatively strongly while the pace of the expansion in output was moderate, resulting in measured productivity growth of slightly less than 1/2 percent per year on average. It was noted that participants' projections of the longer-run growth rate of real GDP, shown in the Summary of Economic Projections, appeared to assume that productivity growth would strengthen. While acknowledging uncertainty about the reasons for the slowdown in productivity growth in recent years and whether it would persist, many participants commented on a range of possible outcomes that could result from slower-than-expected productivity growth. Some saw the possibility that, even with real GDP growth remaining relatively slow, the unemployment rate might decline more quickly and inflation might rise a bit more rapidly than expected if productivity growth continued to disappoint in coming quarters while hiring remained strong. In that case, monetary policy accommodation might need to be removed more quickly than currently anticipated. Alternatively, continued low productivity growth for a time might instead lead to slower-than-anticipated growth in household income and business sales, thereby resulting in paths for the unemployment rate and the federal funds rate little different than currently expected. Moreover, several participants noted that if trend productivity growth remained permanently lower--a development that could be quite difficult to identify in only a few quarters--the likely implication for monetary policy would be a reduction in the longer-run equilibrium federal funds rate.
The incoming information on inflation over the intermeeting period showed that the earlier declines in energy prices and falling prices of non-energy imports were still contributing importantly to low headline inflation. The 12-month change in core PCE prices also continued to run below 2 percent, but it moved up to 1.7 percent in January and February from 1.4 percent at the end of 2015. Despite the recent rise in core inflation, some participants continued to see progress toward the Committee's 2 percent inflation objective as likely to be gradual. They noted that, as they had expected, the March CPI data showed that the high monthly readings on some components of core prices in January and February were transitory, and that the March CPI data suggested that the 12-month change in core PCE prices likely moved down in March. Several commented that the stronger labor market still appeared to be exerting little upward pressure on wage or price inflation. Moreover, several continued to see important downside risks to inflation in light of the still-low readings on market-based measures of inflation compensation and the slippage in the past couple of years in some survey measures of expected longer-run inflation. However, for many other participants, the recent developments provided greater confidence that inflation would rise to 2 percent over the medium term. Some viewed the recent firming in core inflation as broadly based and unlikely to unwind, with several noting recent increases in alternative measures of the trend in inflation, such as the trimmed mean PCE and the median CPI, or citing evidence that wage growth was picking up. In addition to the ongoing tightening of resource utilization, the recent depreciation of the dollar and the firming in oil prices suggested that the downward pressures on both core and headline inflation from declining prices of non-oil imports and energy should begin to subside.
U.S. and global financial conditions improved significantly over the intermeeting period, marked by a rise in equity indexes, more positive risk sentiment, and a decline in financial market volatility. During their discussion of these developments, participants cited several factors that likely contributed to the easing in financial conditions. In the view of many FOMC participants, Federal Reserve communications after the March FOMC meeting led financial market participants to shift down their expectations concerning the likely path of the Committee's target for the federal funds rate. In addition, the recent depreciation of the dollar and indications of a rebound of economic growth in China appeared to reduce pressures on the renminbi. More broadly, signs of a pickup in growth in economic activity in some AFEs and emerging Asian economies other than China also appeared to contribute to the improvement in sentiment in financial markets. Participants generally agreed that the easing in financial conditions in the United States would provide some support for consumer spending and business investment going forward and had reduced the downside risks to the outlook. Moreover, a number of participants cited reports from business contacts in their Districts of favorable credit conditions for household and business borrowers.
Several participants pointed out that U.S. firms and financial markets had come through the period of elevated financial market volatility earlier in the year looking relatively resilient. However, several noted the ongoing need to remain alert to vulnerabilities in the financial system. In that regard, a few cited concerns about rapidly rising prices of CRE, including multifamily properties, or about illiquidity of the assets of some mutual funds. It was also noted that the debt situation in Puerto Rico had deteriorated further over the intermeeting period and remained unresolved. To date, the situation had not led to strains in broader financial markets and was not expected to do so.
Participants discussed whether their current assessments of economic conditions and the medium-term outlook warranted increasing the target range for the federal funds rate at this meeting. Participants agreed that incoming indicators regarding labor market developments continued to be encouraging. They generally concurred that data releases during the intermeeting period on components of private domestic demand had been disappointing, but most participants judged that the slowdown in growth of domestic spending would be temporary, citing possible measurement problems and other transitory factors. Financial market conditions continued to improve, providing support to aggregate demand and suggesting that market participants saw some reduction in downside risks to the outlook: Equity prices rose further, credit spreads declined somewhat, and the dollar depreciated over the intermeeting period. Taking these developments into account, participants generally judged that the medium-term outlook for economic activity and the labor market had not changed appreciably since the previous meeting. Furthermore, most participants continued to expect that, with labor markets continuing to strengthen, the dollar no longer appreciating, and energy prices apparently having bottomed out, inflation would move up to the Committee's 2 percent objective in the medium run.
Still, with 12-month PCE inflation continuing to run below the Committee's 2 percent objective, a number of participants judged that it would be appropriate to proceed cautiously in removing policy accommodation. Some participants pointed to the risk that the recent weak data on domestic spending could reflect a loss of momentum in the economy that might hinder further gains in the labor market and raise the likelihood that inflation could fail to increase as expected. Accordingly, these participants believed that it would be important to evaluate whether incoming information was consistent with their expectation that economic growth would pick up and thus support continued improvement in the labor market. In addition, a number of participants judged that the risks to the outlook for inflation remained tilted to the downside in light of low readings on measures of inflation compensation and the fall over the past year in some survey measures of longer-term inflation expectations. Also, many participants noted that downside risks emanating from developments abroad, while reduced, still warranted close monitoring. For these reasons, participants generally saw maintaining the target range for the federal funds rate at 1/4 to 1/2 percent at this meeting and continuing to assess developments carefully as consistent with setting policy in a data-dependent manner and as leaving open the possibility of an increase in the federal funds rate at the June FOMC meeting.
Some participants saw limited costs to maintaining a patient posture at this meeting but noted the risks--including potential risks to financial stability--of waiting too long to resume the process of removing policy accommodation, especially given the lags with which monetary policy affects the economy. A couple of participants were concerned that further postponement of action to raise the federal funds rate might confuse the public about the economic considerations that influence the Committee's policy decisions and potentially erode the Committee's credibility.
A few participants judged it appropriate to increase the target range for the federal funds rate at this meeting, citing their assessments that downside risks associated with global economic and financial developments had diminished substantially since early this year, that labor market conditions were consistent with the Committee's maximum-employment objective, and that inflation was likely to rise this year toward the Committee's 2 percent objective. Two participants noted that several standard policy benchmarks, such as a number of interest rate rules and some measures of the equilibrium real interest rate, continued to imply values for the federal funds rate well above the current target range. Such large and persistent deviations of the federal funds rate from these benchmarks, in their view, posed a risk that the removal of policy accommodation was proceeding too slowly and that the Committee might, in the future, find it necessary to raise the federal funds rate quickly to combat inflation pressures, potentially unduly disrupting economic or financial activity. Overly accommodative policy could also induce imprudent risk-taking in financial markets, posing additional risks to achieving the Committee's goals in the future.
Participants agreed that their ongoing assessments of the data and other incoming information, as well as the implications for the outlook, would determine the timing and pace of future adjustments to the stance of monetary policy. Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee's 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June. Participants expressed a range of views about the likelihood that incoming information would make it appropriate to adjust the stance of policy at the time of the next meeting. Several participants were concerned that the incoming information might not provide sufficiently clear signals to determine by mid-June whether an increase in the target range for the federal funds rate would be warranted. Some participants expressed more confidence that incoming data would prove broadly consistent with economic conditions that would make an increase in the target range in June appropriate. Some participants were concerned that market participants may not have properly assessed the likelihood of an increase in the target range at the June meeting, and they emphasized the importance of communicating clearly over the intermeeting period how the Committee intends to respond to economic and financial developments.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the FOMC met in March indicated that labor market conditions had improved further even as growth in economic activity had appeared to slow. They noted that growth in household spending had moderated, although households' real income had risen at a solid rate and consumer sentiment had remained high. They also agreed that since the beginning of the year, the housing sector had improved further, but business fixed investment and net exports had been soft. Members saw a range of recent indicators, including strong job gains, as pointing to additional strengthening of the labor market. Members noted that inflation had continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and falling prices of non-energy imports. Market-based measures of inflation compensation remained low. Survey-based measures of longer-term inflation expectations were little changed, on balance, in recent months.
With respect to the economic outlook and its implications for monetary policy, members continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market indicators would continue to strengthen. Although the recent spending and production data had been disappointing, members generally judged this weakness to be temporary, though some members noted the risk that it might persist, potentially undermining further improvement in the labor market. Members also continued to expect inflation to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipated and the labor market strengthened further. In its postmeeting statement, rather than stating that global economic and financial developments continued to pose risks, the Committee decided to indicate that it would continue to closely monitor inflation indicators and global economic and financial developments. This change in language was intended to convey the Committee's sense that the risks associated with global developments had diminished somewhat since the March FOMC meeting without characterizing the overall balance of risks.
Against the backdrop of its discussion of current conditions, the economic outlook, and the risks and uncertainties surrounding the outlook, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent at this meeting. Members generally agreed that, in light of the recent weak readings on spending and production, and with inflation below the Committee's objective, it would be prudent to wait for additional information bearing on the medium-term outlook before deciding whether to raise the target range for the federal funds rate. One member, however, preferred to raise the target range for the federal funds rate at this meeting, noting that downside risks to the outlook had diminished and that the outlook was for outcomes consistent with the Committee's objectives.
Members again agreed that, in determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee would assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee agreed that it would carefully monitor actual and expected progress toward its inflation goal. The Committee expected that economic conditions would evolve in a manner that would warrant only gradual increases in the federal funds rate, and that the federal funds rate was likely to remain, for some time, below levels that were expected to prevail in the longer run. Regarding the possibility of adjustments in the stance of policy at the next meeting, members generally judged it appropriate to leave their policy options open and maintain the flexibility to make this decision based on how the incoming data and developments shaped their outlook for the labor market and inflation as well as their evolving assessments of the balance of risks around that outlook. It was noted that communications could help the public understand how the Committee might respond to incoming data and developments over the upcoming intermeeting period. Some members expressed concern that the likelihood implied by market pricing that the Committee would increase the target range for the federal funds rate at the June meeting might be unduly low.
The Committee also decided to maintain its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipated doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
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 SOMA in accordance with the following domestic policy directive, to be released at 2:00 p.m.:
"Effective April 28, 2016, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1/4 to 1/2 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 0.25 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."
The vote also encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in March indicates that labor market conditions have improved further even as growth in economic activity appears to have slowed. Growth in household spending has moderated, although households' real income has risen at a solid rate and consumer sentiment remains high. Since the beginning of the year, the housing sector has improved further but business fixed investment and net exports have been soft. A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and falling prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions."
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, James Bullard, Stanley Fischer, Loretta J. Mester, Jerome H. Powell, Eric Rosengren, and Daniel K. Tarullo.
Voting against this action: Esther L. George.
Ms. George dissented because she believed that a 25 basis point increase in the target range for the federal funds rate was appropriate at this meeting. Potential downside risks to the economic outlook had diminished since the March FOMC meeting, and the modal outlook was for economic growth, employment, and inflation outcomes consistent with the Committee's statutory objectives. She believed that monetary policy should respond to these developments by gradually removing accommodation and noted that several frameworks for assessing the appropriate stance of monetary policy, such as prescriptions from various policy rules and some estimates of equilibrium interest rates, also suggested that a reduction in monetary policy accommodation would be appropriate.
Consistent with the Committee's decision to leave the target range for the federal funds rate unchanged, the Board of Governors took no action to change the interest rates on reserves or discount rates.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, June 14-15, 2016. The meeting adjourned at 10:05 a.m. on April 27, 2016.
Notation Vote
By notation vote completed on April 5, 2016, the Committee unanimously approved the minutes of the Committee meeting held on March 15-16, 2016.
_____________________________
Brian F. Madigan
Secretary
1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes. Return to text
2. Attended the discussion of the relationship between monetary policy and financial stability. Return to text
3. Attended Tuesday session only. Return to text |
2016-03-16T00:00:00 | 2016-04-06 | Minute | Minutes of the Federal Open Market Committee
March 15-16, 2016
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, March 15, 2016, at 1:00 p.m. and continued on Wednesday, March 16, 2016, at 9:00 a.m.1
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
James Bullard
Stanley Fischer
Esther L. George
Loretta J. Mester
Jerome H. Powell
Eric Rosengren
Daniel K. Tarullo
Charles L. Evans, Patrick Harker, Robert S. Kaplan, Neel Kashkari, and Michael Strine, Alternate Members of the Federal Open Market Committee
Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively
Brian F. Madigan, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
Thomas A. Connors, Michael P. Leahy, David E. Lebow, Stephen A. Meyer, Christopher J. Waller, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Robert deV. Frierson, Secretary of the Board, Office of the Secretary, Board of Governors
Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors
Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors
James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors
William B. English, Senior Special Adviser to the Board, Office of Board Members, Board of Governors
Andrew Figura, Ann McKeehan, David Reifschneider, and Stacey Tevlin,2 Special Advisers to the Board, Office of Board Members, Board of Governors
Trevor A. Reeve, Special Adviser to the Chair, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Diana Hancock and Michael G. Palumbo, Senior Associate Directors, Division of Research and Statistics, Board of Governors;Beth Anne Wilson, Senior Associate Director, Division of International Finance, Board of Governors
Ellen E. Meade and Robert J. Tetlow, Senior Advisers, Division of Monetary Affairs, Board of Governors
Jane E. Ihrig and David López-Salido, Associate Directors, Division of Monetary Affairs, Board of Governors
Stephanie R. Aaronson and Glenn Follette,3 Assistant Directors, Division of Research and Statistics, Board of Governors
Penelope A. Beattie,4 Assistant to the Secretary, Office of the Secretary, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Kurt F. Lewis, Principal Economist, Division of Monetary Affairs, Board of Governors
Randall A. Williams, Information Manager, Division of Monetary Affairs, Board of Governors
Kenneth C. Montgomery, First Vice President, Federal Reserve Bank of Boston
David Altig, Ron Feldman, Alberto G. Musalem, Glenn D. Rudebusch, and Daniel G. Sullivan, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Minneapolis, New York, San Francisco, and Chicago, respectively
Michael Dotsey, Evan F. Koenig, Paolo A. Pesenti, and John A. Weinberg, Senior Vice Presidents, Federal Reserve Banks of Philadelphia, Dallas, New York, and Richmond, respectively
Edward S. Knotek II, Giovanni Olivei, and Jonathan L. Willis, Vice Presidents, Federal Reserve Banks of Cleveland, Boston, and Kansas City, respectively
Developments in Financial Markets and Open Market Operations
The manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets, including recent monetary policy actions of foreign central banks and the expectations of market participants for the trajectory of U.S. monetary policy. The deputy manager followed with a briefing on money market developments and System open market operations conducted by the Open Market Desk during the period since the Committee met on January 26-27, 2016. Experience during the intermeeting period continued to suggest that the operational framework for monetary policy implementation was effective in maintaining control over the federal funds rate. Also, the transitions in early March to the FR 2420 reporting form (Report of Selected Money Market Rates) as the underlying source of data for computing the effective federal funds rate, and to a volume-weighted median as the calculation method, proceeded smoothly. In addition, the deputy manager reviewed recent and projected trends in foreign portfolio income of the SOMA, including the implications for portfolio income of foreign nominal interest rates that were very low, even negative.
The deputy manager also outlined factors that the Committee might consider in determining whether to offer term reverse repurchase agreements (RRPs) over the end of the first quarter. In the ensuing discussion of this question among Committee participants, it was noted that, in view of the very elevated capacity of the overnight (ON) RRP facility that would remain available for the time being, offering term RRPs in addition to ON RRPs would be unlikely to enhance control of the federal funds rate over quarter-end, and offering term RRPs at an interest rate spread over ON RRPs could marginally increase the Federal Reserve's interest costs. For these reasons, Committee participants generally preferred not to offer term RRPs over the end of the first quarter. Participants noted that it may be appropriate to offer term RRPs at some point in the future after the Committee reintroduces an aggregate cap on ON RRP operations, and the Committee's decisions regarding term RRPs over quarter-ends had no implications for the FOMC's plan to phase out the ON RRP facility when it was no longer needed to help control the federal funds rate.
By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the March 15-16 meeting suggested that labor market conditions were continuing to improve in the first quarter, and that the pace of expansion in real gross domestic product (GDP) was picking up somewhat from the previous quarter. Consumer price inflation was still running below the Committee's longer-run objective of 2 percent, restrained in part by decreases in both consumer energy prices and the prices of non-energy imports. Survey-based measures of longer-run inflation expectations were little changed, on balance, in recent months, while market-based measures of inflation compensation remained low.
Total nonfarm payroll employment increased in January and February at a solid average monthly pace. The unemployment rate declined to 4.9 percent in January and remained at that level in February, while both the labor force participation rate and the employment-to-population ratio increased over these months. The share of workers employed part time for economic reasons edged down in January and February. The rates of private-sector job openings, hires, and quits rose a little in December. The four-week moving average of initial claims for unemployment insurance benefits moved down in February and early March after increasing a little in January. Labor compensation continued to rise at a modest pace. Compensation per hour in the nonfarm business sector increased 2-1/2 percent over the four quarters of 2015, and the employment cost index rose nearly 2 percent over the 12 months ending in December; both increases were similar to their averages in recent years. Average hourly earnings for all employees increased 2-1/4 percent over the 12 months ending in February, about 1/4 percentage point more than over the preceding 12 months.
Industrial production increased in January. Manufacturing output rose, reversing the declines seen in the two previous months, and the output of utilities moved up sharply as the demand for heating rebounded after having been held down by unseasonably warm weather in December. Mining output was unchanged following four months of sizable declines that resulted from decreases in drilling activity. Automakers' assembly schedules and broader indicators of manufacturing production, such as the readings on new orders from national and regional manufacturing surveys, mostly pointed to a modest pace of gains in factory output over the next few months. Information on drilling activity for crude oil and natural gas through early March was consistent with further declines in mining output.
Growth in real personal consumption expenditures (PCE) appeared to pick up some in the first quarter. The components of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimate of PCE were little changed, on net, in January and February, but spending on energy services appeared likely to increase somewhat and the rate of sales of new light motor vehicles stepped up following a decline in December. Recent readings on key factors that influence consumer spending generally pointed toward solid growth in real PCE over the first half of the year. Gains in real disposable income picked up in December and January. Households' net worth was supported both by a rebound in equity prices following declines earlier in the year and by further increases in home values through January. Also, consumer sentiment in the University of Michigan Surveys of Consumers remained at an elevated level in February.
Recent information on housing activity was consistent with a continued gradual recovery in this sector. Starts for new single-family homes moved higher, on balance, in January and February, and building permits were little changed. Starts of multifamily units declined on net. New home sales fell in January, more than reversing an increase in December. Sales of existing homes increased further in January following a strong gain in December.
Real private expenditures for business equipment and intellectual property products appeared to be increasing only modestly in the first quarter. Nominal shipments of nondefense capital goods excluding aircraft declined in January, and forward-looking indicators of equipment spending, such as new orders for nondefense capital goods along with recent readings from national and regional surveys of business conditions, were generally soft. Firms' nominal spending for nonresidential structures excluding drilling and mining increased somewhat in January after having declined for two months. Indicators of spending for structures in the drilling and mining sector, such as the number of oil and gas rigs in operation, continued to fall through early March. The limited available data suggested that inventory investment continued to decline in the early part of the year. Nonetheless, with the exception of the energy sector, inventories generally seemed well aligned with the pace of sales.
Growth in total real government purchases appeared to be modest in the first quarter. Federal government spending for defense was soft in January and February, while nondefense spending seemed likely to be slightly boosted early in the year by the effect of the 2015 Bipartisan Budget Act. Nominal construction spending by state and local governments increased sharply in January, but the payrolls of these governments were little changed, on net, over the first two months of the year.
The U.S. international trade deficit widened in both December and January, as exports declined in both months, continuing a downward trend that began in late 2014, with particular weakness in exports of capital goods. Imports rose slightly in December before falling back in January. Net exports subtracted from real GDP growth in the fourth quarter, and the January trade data suggested that net exports would continue to weigh on growth in the first quarter.
Total U.S. consumer prices as measured by the PCE price index increased 1-1/4 percent over the 12 months ending in January, partly restrained by declines in consumer energy prices. Core PCE price inflation, which excludes changes in food and energy prices, was 1-3/4 percent over the same 12-month period, held down in part by decreases in the prices of non-energy imports and the pass-through of declines in energy prices. Over the 12 months ending in February, total consumer prices as measured by the consumer price index (CPI) rose 1 percent, while core CPI inflation was around 2-1/4 percent. Both readings on core inflation were boosted, in part, by movements in prices for some categories of goods and services whose prices tend to be volatile. Survey measures of longer-run inflation expectations--including those from the Michigan survey, Blue Chip Economic Indicators, Survey of Professional Forecasters, Survey of Primary Dealers, and Survey of Market Participants--were generally little changed on balance. In February, the Michigan survey measure of median inflation expectations over the next 5 to 10 years was below its typical range of the past 15 years, likely reflecting--at least in part--decreases in energy prices over the past year and a half.
Foreign real GDP growth slowed in the fourth quarter, with Canadian activity restrained by declines in oil-related investment and the Japanese economy contracting amid weakness in consumption. Economic growth continued to be steady but modest in the euro area and the United Kingdom, while Brazil remained in recession. In contrast, some economies in emerging Asia recorded robust growth. Indicators pointed to a pickup in growth in most foreign economies in the current quarter but to a further softening of growth in China. Inflation in the advanced foreign economies remained low. In contrast, inflation rose in China because of a rebound in local food prices, while inflation in much of South America remained elevated, reflecting weaker currencies. Concerns about persistently low inflation spurred further monetary policy accommodation by the Bank of Japan (BOJ) and the European Central Bank (ECB).
Staff Review of the Financial Situation
Financial markets were turbulent over the first month and a half of the year, apparently reflecting investors' concerns about global growth prospects and associated risks to the U.S. outlook. However, these concerns appeared to diminish beginning in mid-February, and domestic financial conditions generally eased, on balance, since the January FOMC meeting: Stock prices rose, equity price volatility declined, and credit spreads on corporate bonds narrowed. The dollar depreciated against most foreign currencies, and long-term sovereign bond yields declined amid easing by central banks in advanced foreign economies.
Yields on 5- and 10-year nominal Treasury securities declined at the outset of the intermeeting period, reflecting the continued pullback from risky assets that began early in the year on concerns about prospects for global economic growth. These yields subsequently increased as market sentiment improved and were little changed, on balance, over the intermeeting period. Measures of inflation compensation over the next 5 years rose, on net, consistent with increases in oil prices, while inflation compensation 5 to 10 years ahead was little changed on the period and remained at the lower end of its historical range.
After becoming considerably flatter early in the intermeeting period, the path of the federal funds rate implied by market quotes on interest rate derivatives steepened subsequently as financial market conditions improved and was little changed, on balance, over the intermeeting period. However, the median respondent to the Desk's March Survey of Primary Dealers and to the Survey of Market Participants expected only two increases in the FOMC's target range for the federal funds rate this year, one fewer than they had projected in January.
Broad equity market indexes increased, on balance, over the intermeeting period and continued to exhibit a high correlation with crude oil prices. Reflecting the improvement in investor sentiment that started in mid-February, corporate bond spreads narrowed, with spreads on investment-grade issues finishing the period slightly lower while spreads on speculative-grade issues--particularly those for the lowest-rated bonds--declined appreciably.
Financing conditions for investment-grade nonfinancial firms continued to be relatively accommodative. Corporate bond issuance by these firms was robust in January and February, while speculative-grade bond issuance stayed subdued. Commercial and industrial loan growth at banks was also strong, mostly driven by the origination of large loans to investment-grade borrowers. Refinancings of institutional leveraged loans were near zero in February, as was equity issuance through initial public offerings.
The credit quality of speculative-grade nonfinancial corporations continued to show signs of deterioration. Market analysts' earnings forecasts for speculative-grade companies, including those outside the energy sector, were revised down for the first quarter of 2016 amid concerns about a deterioration in the global economic outlook. In the broader corporate bond market, the volume of downgrades of ratings outpaced that of upgrades, even for investment-grade securities, in January and February, with energy firms accounting for most of the downgrades in February. The default rate on nonfinancial bonds remained somewhat elevated compared with typical levels outside recession periods.
Financing conditions for commercial real estate (CRE) tightened somewhat over the intermeeting period but remained accommodative. Spreads on commercial mortgage-backed securities (CMBS) continued to widen, on net, despite the narrowing of spreads in broader bond markets. Reportedly in response, CMBS issuance was down somewhat over the first two months of the year, although CRE loans on banks' balance sheets continued to increase at a robust pace through February.
Lending conditions in residential real estate markets were little changed, on balance, over the intermeeting period. Financing conditions in consumer credit markets generally remained accommodative, and outstanding student and auto debt continued to grow at a robust pace.
During the intermeeting period, foreign financial conditions improved on net. After deteriorating further early in the period, foreign equity prices bounced back and credit spreads on emerging market bonds narrowed, in both cases returning to December levels in most countries. Since the January FOMC meeting, the dollar depreciated, on net, against most foreign currencies. Long-term sovereign bond yields declined notably in the advanced economies, in part as foreign central banks announced additional monetary policy easing measures. The BOJ introduced a negative deposit rate. The ECB announced a comprehensive package of easing measures, including a further cut in benchmark policy rates, accelerated and more expansive asset purchases, and a new round of targeted long-term refinancing operations.
Over the period since mid-December, when the Committee raised the target range for the federal funds rate 1/4 percentage point, U.S. financial market conditions had registered relatively small changes, on balance, amid significant volatility. Financial derivatives suggested that market participants had revised down their expected trajectory of the federal funds rate somewhat, and yields on medium- and longer-term Treasury securities declined 20 to 30 basis points. Yields on investment- and speculative-grade corporate bonds were down slightly less, leaving spreads over Treasury securities little changed over the period between mid-December and mid-March. Similarly, broad equity price indexes ended this interval only a bit lower, and one-month-ahead option-implied volatility on the S&P 500 index, the VIX, declined on balance. The broad index of the foreign exchange value of the dollar was also roughly unchanged, on net, since the December meeting.
Staff Economic Outlook
In the U.S. economic forecast prepared by the staff for the March FOMC meeting, real GDP in the first half of the year was projected to increase a little more slowly than in the forecast prepared for the January meeting, although estimated real GDP growth in the fourth quarter of last year was revised up. Beyond the near term, real GDP was expected to increase slightly faster than in the previous forecast, largely reflecting a somewhat higher projected path for equity prices and a lower assumed trajectory for the foreign exchange value of the dollar. The staff continued to project that real GDP would expand at a somewhat faster pace than potential output in 2016 through 2018, supported primarily by increases in consumer spending. The unemployment rate was expected to gradually decline further and to run somewhat below the staff's estimate of its longer-run natural rate over this period; the staff's estimate of the natural rate was revised down slightly in this forecast.
The staff's forecast for inflation over the first half of the year was revised up somewhat, reflecting recent increases in the price of crude oil as well as stronger-than-expected data on core consumer prices early in the year. The staff continued to project that inflation would increase gradually over the next several years, as energy prices and the prices of non-energy imported goods were expected to begin steadily rising later this year. Beyond 2016, the forecast was a bit lower than the previous projection, primarily reflecting a flatter expected path for crude oil prices. As a result, inflation was projected still to be slightly below the Committee's longer-run objective of 2 percent in 2018.
The staff viewed the uncertainty around its March projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The risks to the forecast for real GDP were seen as tilted to the downside, reflecting the staff's assessment that neither monetary nor fiscal policy was well positioned to help the economy withstand substantial adverse shocks; in addition, global economic prospects were still seen as an important downside risk to the forecast. Consistent with the downside risk to aggregate demand, the staff viewed the risks to its outlook for the unemployment rate as skewed to the upside. The risks to the projection for inflation were still seen as weighted to the downside, reflecting the possibility that longer-term inflation expectations may have edged down, and that the foreign exchange value of the dollar could rise substantially, which would put additional downward pressure on inflation.
Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, members of the Board of Governors and Federal Reserve Bank presidents submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, inflation, and the federal funds rate for each year from 2016 through 2018 and over the longer run. Each participant's projections were conditioned on his or her judgment of appropriate monetary policy. The longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These projections and policy assessments are described in the Summary of Economic Projections, which is an addendum to these minutes.
In their discussion of the economic situation and the outlook, meeting participants viewed the information received over the intermeeting period as suggesting that economic activity had been expanding moderately despite the global economic and financial developments of recent months. Household spending had been increasing at a moderate rate, and the housing sector had improved further; however, business fixed investment and net exports had been soft. A range of labor market indicators, including strong employment growth and rising labor force participation, pointed to a further strengthening of the labor market. Participants generally saw the data on economic activity and labor market conditions as broadly consistent with their earlier expectations. Inflation picked up in recent months, but it continued to run below the Committee's 2 percent longer-run objective. Market-based measures of inflation compensation remained low, while survey-based measures of longer-term inflation expectations were little changed, on balance, in recent months. Early in the intermeeting period, concerns among investors about the global economic outlook appeared to trigger a sharp reduction in their risk-taking. Financial conditions deteriorated, with equity prices falling and credit spreads on riskier corporate bonds widening. Subsequently, investor sentiment rebounded, and domestic and global financial conditions eased on net over the intermeeting period.
With respect to the outlook for economic activity and the labor market, participants shared the assessment that, with gradual adjustments in the stance of monetary policy, real GDP would continue to increase at a moderate rate over the medium term and labor market indicators would continue to strengthen. Participants observed that strong job gains in recent months had reduced concerns about a possible slowing of progress in the labor market. Many participants, however, anticipated that relative strength in household spending would be partially offset by weakness in net exports associated with lackluster foreign growth and the appreciation of the dollar since mid-2014. In addition, business fixed investment seemed likely to remain sluggish. Furthermore, participants generally saw global economic and financial developments as continuing to pose risks to the outlook for economic activity and the labor market in the United States. In particular, several participants expressed the view that the underlying factors abroad that led to a sharp, though temporary, deterioration in global financial conditions earlier this year had not been fully resolved and thus posed ongoing downside risks. Several participants also noted the possibility that economic activity or labor market conditions could turn out to be stronger than anticipated. For example, strong expansion of household demand could result in rapid employment growth and overly tight resource utilization, particularly if productivity gains remained sluggish.
Notwithstanding the downward revisions to recent retail sales data, participants were encouraged by the moderate average growth of consumer spending over recent quarters. Continued increases in household spending had buoyed growth of overall aggregate demand despite the volatility in financial markets. Among the various categories of household spending, participants noted that motor vehicle sales remained particularly strong, albeit with some support from price discounting and other incentives. Looking ahead, participants generally expected consumer spending to continue to rise moderately. Solid gains in employment and income, the relatively high ratio of household wealth to income, low gasoline prices, and a high level of consumer confidence were seen as factors that should contribute to moderate growth in consumer spending.
Reports on the housing sector were mixed, with some participants noting a weakening of housing activity in regions adversely affected by the decline in energy prices. Nonetheless, fundamentals for housing activity were seen as strong except for a reported shortage of buildable lots in some areas. Some participants reported that contacts were generally upbeat about the outlook for housing construction in their Districts, and participants anticipated that activity in the housing sector would continue to expand this year.
In contrast, several participants noted recent softness in business fixed investment and signs that the sluggish growth would continue. Orders and shipments for nondefense capital goods had been about flat. Capital expenditures continued to be depressed by the contraction in the energy sector. Capital spending plans appeared to remain soft. The possible adverse effects on investment spending of concerns about global growth and the associated volatility in financial markets were also noted. District reports on commercial construction activity, however, were generally positive.
With regard to the external sector, a number of participants said that they expected declines in net exports to continue to subtract from real GDP growth, reflecting weak foreign activity as well as the earlier appreciation of the dollar. The outlook for growth abroad had dimmed in recent months, suggesting a more persistent drag on growth of U.S. exports. A couple of participants commented that emerging market economies faced an extended period of less rapid export growth, reflecting slower economic growth in many advanced foreign economies and in China. It also was noted that weak growth abroad could lead to further appreciation of the dollar.
In discussing domestic business conditions, several participants noted that their contacts saw rising sales in the retail sector and that reports from firms in the services sector were mostly strong. In some Districts, surveys suggested that manufacturing activity had bottomed out. However, a number of participants commented that previous declines in commodity and energy prices, along with the earlier appreciation of the dollar and weak foreign activity, continued to weigh on manufacturing activity. A few participants also noted that such factors were reducing farm incomes in their Districts.
During the intermeeting period, the labor market strengthened further. In their comments on labor market conditions, participants cited strong payroll gains and a further tick down in the civilian unemployment rate. Broader measures of labor force underutilization had also shown progress, including an increase in labor force participation. The quits rate had returned to its pre-recession level, as had households' perceptions of job availability and firms' assessments of the difficulty of filling jobs, providing further evidence of improved labor market conditions. Some participants judged that current labor market conditions were at or near those consistent with maximum sustainable employment, noting that the unemployment rate was at or below their estimates of its longer-run normal level and citing anecdotal reports of labor shortages or increased wage pressures. In contrast, some other participants judged that the economy had not yet reached maximum employment. They noted several indicators other than the unemployment rate that pointed to remaining underutilization of labor resources; these indicators included the still-high rate of involuntary part-time employment and the low level of the employment-to-population ratio for prime-age workers. The surprisingly limited extent to which aggregate data indicated upward pressure on wage growth also suggested some remaining slack in labor markets.
Participants commented on the recent increase in inflation. Some participants saw the increase as consistent with a firming trend in inflation. Some others, however, expressed the view that the increase was unlikely to be sustained, in part because it appeared to reflect, to an appreciable degree, increases in prices that had been relatively volatile in the past. Participants continued to anticipate that inflation would run below the Committee's 2 percent objective in the near term but that, as the transitory effects of earlier declines in energy and import prices dissipated and the labor market strengthened further, inflation would rise to 2 percent over the medium term. Several participants indicated that the persistence of global disinflationary pressures or the possibility that inflation expectations were moving lower continued to pose downside risks to the inflation outlook. A few others expressed the view that there were also risks that could lead to inflation running higher than anticipated; for example, overly tight resource utilization could push inflation above the Committee's 2 percent goal, particularly if productivity gains remained sluggish.
Participants discussed readings from various market- and survey-based measures of longer-run inflation expectations. Some survey-based measures had edged down, while others had remained stable and one had edged up; such measures were little changed, on balance, in recent months. The market-based measures of inflation compensation that had declined earlier were still at low levels. Several participants noted that some of the softness in the market-based measures likely reflected changes in risk and liquidity premiums, and that some of the survey-based measures appeared to be excessively sensitive to movements in gasoline prices. Some participants concluded that longer-run inflation expectations remained reasonably stable, but some others expressed concern that longer-run inflation expectations may have already moved lower, or that they might do so if inflation was to persist for much longer at a rate below the Committee's objective.
Participants discussed the implications of the global economic and financial developments of the past few months for the medium-term outlook, and they offered different characterizations of the risks to the U.S. economy stemming from these developments. Many participants expressed a view that the global economic and financial situation still posed appreciable downside risks to the domestic economic outlook. Some noted that recent financial market turbulence provided an important reminder that the ability of central banks to offset the effects of adverse economic shocks might be limited, particularly by the low level of policy interest rates in most advanced economies. In contrast, a few noted that the actions taken by several foreign central banks in recent weeks to increase monetary accommodation likely had helped mitigate downside risks to the global outlook. Nonetheless, many participants indicated that the heightened global risks and the asymmetric ability of monetary policy to respond to them warranted caution in making adjustments to the stance of U.S. monetary policy.
Participants generally agreed that the incoming information indicated that the U.S. economy had been resilient to recent global economic and financial developments, and that the domestic economic indicators that had become available in recent weeks had been mostly consistent with their expectations. Moreover, the sharp asset price movements that occurred earlier in the year had been reversed to a large extent, but longer-term interest rates and market participants' expectations for the future path of the federal funds rate remained lower. Taking these developments into account, participants generally judged that the medium-term outlook for domestic demand was not appreciably different than it had been when the Committee met in December. However, most participants, while recognizing the likely positive effects of recent policy actions abroad, saw foreign economic growth as likely to run at a somewhat slower pace than previously expected, a development that probably would further restrain growth in U.S. exports and tend to damp overall aggregate demand. Several participants also cited wider credit spreads as a factor that was likely to restrain growth in demand. Accordingly, many participants expressed the view that a somewhat lower path for the federal funds rate than they had projected in December now seemed most likely to be appropriate for achieving the Committee's dual mandate. Many participants also noted that a somewhat lower projected interest rate path was one reason for the relatively small revisions in their medium-term projections for economic activity, unemployment, and inflation.
Several participants also argued for proceeding cautiously in reducing policy accommodation because they saw the risks to the U.S. economy stemming from developments abroad as tilted to the downside or because they were concerned that longer-term inflation expectations might be slipping lower, skewing the risks to the outlook for inflation to the downside. Many participants noted that, with the target range for the federal funds rate only slightly above zero, the FOMC continued to have little room to ease monetary policy through conventional means if economic activity or inflation turned out to be materially weaker than anticipated, but could raise rates quickly if the economy appeared to be overheating or if inflation was to increase significantly more rapidly than anticipated. In their view, this asymmetry made it prudent to wait for additional information regarding the underlying strength of economic activity and prospects for inflation before taking another step to reduce policy accommodation.
For all of these reasons, most participants judged it appropriate to maintain the target range for the federal funds rate at 1/4 to 1/2 percent at this meeting while noting that global economic and financial developments continued to pose risks. These participants saw their judgment as consistent with the Committee's data-dependent approach to setting monetary policy; it was noted that, in this context, the relevant data include not only domestic economic releases, but also information about developments abroad and changes in financial conditions that bear on the economic outlook. A couple of participants, however, saw an increase in the target range to 1/2 to 3/4 percent as appropriate at this meeting, citing evidence that the economy was continuing to expand at a moderate rate despite developments abroad and earlier volatility in financial conditions, continued improvement in labor market conditions, the firming of inflation over recent months, and the apparent leveling-off of oil prices. In their judgment, increasing the target range for the federal funds rate too gradually in the near term risked having to raise it quickly later, which could cause economic and financial strains at that time.
Participants agreed that their ongoing assessments of the data and the implications for the outlook, rather than calendar dates, would determine the timing and pace of future adjustments to the stance of monetary policy. They expressed a range of views about the likelihood that incoming information would make an adjustment appropriate at the time of their next meeting. A number of participants judged that the headwinds restraining growth and holding down the neutral rate of interest were likely to subside only slowly. In light of this expectation and their assessment of the risks to the economic outlook, several expressed the view that a cautious approach to raising rates would be prudent or noted their concern that raising the target range as soon as April would signal a sense of urgency they did not think appropriate. In contrast, some other participants indicated that an increase in the target range at the Committee's next meeting might well be warranted if the incoming economic data remained consistent with their expectations for moderate growth in output, further strengthening of the labor market, and inflation rising to 2 percent over the medium term.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the Committee met in January suggested that economic activity had been expanding at a moderate pace despite the global economic and financial developments of recent months. They also agreed that household spending had been increasing at a moderate rate, and that the housing sector had improved further; however, business fixed investment and net exports had been soft. Members saw a range of recent indicators, including strong job gains, as pointing to additional strengthening of the labor market. Members noted that inflation had picked up in recent months; however, they also noted that inflation had continued to run below the Committee's 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remained low. Survey-based measures of longer-term inflation expectations were little changed, on balance, in recent months.
With respect to the economic outlook and its implications for monetary policy, members continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market indicators would continue to strengthen. However, they saw global economic and financial developments as continuing to pose risks. Members also continued to expect inflation to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipated and the labor market strengthened further. Members noted the increase in inflation reported in recent months but expressed a range of views about the extent to which the increase would prove persistent. Several members expressed concern that longer-run inflation expectations may have declined. Members agreed they would continue to monitor inflation developments closely.
Against the backdrop of its discussion of current conditions, the economic outlook, and the risks and uncertainties surrounding the outlook, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent at this meeting. This accommodative stance of monetary policy was expected to support further improvement in labor market conditions and a return to 2 percent inflation. One member, however, preferred to raise the target range for the federal funds rate, indicating that the current low level of real interest rates was not appropriate in the context of current economic conditions and the progress that had been achieved toward the Committee's objectives.
Members again agreed that, in determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee would assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee agreed that it would carefully monitor actual and expected progress toward its inflation goal. The Committee expected that economic conditions would evolve in a manner that would warrant only gradual increases in the federal funds rate, and that the federal funds rate was likely to remain, for some time, below levels that were expected to prevail in the longer run. Indeed, several members noted that their current projections of the path for the federal funds rate that would likely be appropriate this year and next were lower than they had projected in December. However, members agreed that future data and developments could lead to changes in the economic outlook and in their projections of appropriate monetary policy, and that the actual path of the federal funds rate would depend on the economic outlook as informed by incoming data.
The Committee also decided to maintain its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipated doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
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 SOMA in accordance with the following domestic policy directive, to be released at 2:00 p.m.:
"Effective March 17, 2016, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1/4 to 1/2 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 0.25 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."
The vote also encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in January suggests that economic activity has been expanding at a moderate pace despite the global economic and financial developments of recent months. Household spending has been increasing at a moderate rate, and the housing sector has improved further; however, business fixed investment and net exports have been soft. A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Inflation picked up in recent months; however, it continued to run below the Committee's 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. However, global economic and financial developments continue to pose risks. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to monitor inflation developments closely.
Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions."
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, James Bullard, Stanley Fischer, Loretta J. Mester, Jerome H. Powell, Eric Rosengren, and Daniel K. Tarullo.
Voting against this action: Esther L. George.
Ms. George dissented because she believed that a 25 basis point increase in the target range for the federal funds rate was warranted at this meeting. Although risks to the global economy had increased in recent months and financial markets were unusually volatile at times, she believed that monetary policy should focus primarily on progress toward the Committee's longer-run objectives.
Recently, labor market conditions had continued to strengthen, with the economy apparently near full employment, and some data had suggested a firming of underlying inflation trends. She believed that monetary policy should respond to these developments by gradually removing accommodation. She noted that, in such circumstances, postponing the removal of accommodation could increase financial distortions and risks to the economy and undermine the achievement of the Committee's longer-run objectives.
Consistent with the Committee's decision to leave the target range for the federal funds rate unchanged, the Board of Governors took no action to change the interest rates on reserves or discount rates.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, April 26-27, 2016. The meeting adjourned at 10:40 a.m. on March 16, 2016.
Notation Vote
By notation vote completed on February 16, 2016, the Committee unanimously approved the minutes of the Committee meeting held on January 26-27, 2016.
_____________________________
Brian F. Madigan
Secretary
1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes. Return to text
2. Attended the discussion of the economic and financial situation through the close of the meeting. Return to text
3. Attended Wednesday session only. Return to text
4. Attended Tuesday session only. Return to text |
2016-03-16T00:00:00 | 2016-03-16 | Statement | Information received since the Federal Open Market Committee met in January suggests that economic activity has been expanding at a moderate pace despite the global economic and financial developments of recent months. Household spending has been increasing at a moderate rate, and the housing sector has improved further; however, business fixed investment and net exports have been soft. A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Inflation picked up in recent months; however, it continued to run below the Committee's 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. However, global economic and financial developments continue to pose risks. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to monitor inflation developments closely.
Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.
Implementation Note issued March 16, 2016 |
2016-01-27T00:00:00 | 2016-01-27 | Statement | Information received since the Federal Open Market Committee met in December suggests that labor market conditions improved further even as economic growth slowed late last year. Household spending and business fixed investment have been increasing at moderate rates in recent months, and the housing sector has improved further; however, net exports have been soft and inventory investment slowed. A range of recent labor market indicators, including strong job gains, points to some additional decline in underutilization of labor resources. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation declined further; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. Inflation is expected to remain low in the near term, in part because of the further declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.
Given the economic outlook, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Esther L. George; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo.
Implementation Note issued January 27, 2016 |
2016-01-27T00:00:00 | 2016-02-17 | Minute | Minutes of the Federal Open Market Committee
January 26-27, 2016
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, January 26, 2016, at 12:00 p.m. and continued on Wednesday, January 27, 2016, at 9:00 a.m.1
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
James Bullard
Stanley Fischer
Esther L. George
Loretta J. Mester
Jerome H. Powell
Eric Rosengren
Daniel K. Tarullo
Charles L. Evans, Patrick Harker, Robert S. Kaplan, and Neel Kashkari, Alternate Members of the Federal Open Market Committee
Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively
Brian F. Madigan, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Thomas C. Baxter, Deputy General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
Thomas A. Connors, Troy Davig, Michael P. Leahy, Jonathan P. McCarthy, Stephen A. Meyer, Ellis W. Tallman, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Robert deV. Frierson, Secretary of the Board, Office of the Secretary, Board of Governors
Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors
Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors
James A. Clouse and William R. Nelson, Deputy Directors, Division of Monetary Affairs, Board of Governors; Daniel M. Covitz, Deputy Director, Division of Research and Statistics, Board of Governors
William B. English, Senior Special Adviser to the Board, Office of Board Members, Board of Governors
Andrew Figura, Ann McKeehan,2 David Reifschneider, and Stacey Tevlin, Special Advisers to the Board, Office of Board Members, Board of Governors
Trevor A. Reeve, Special Adviser to the Chair, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Eric M. Engen, Senior Associate Director, Division of Research and Statistics, Board of Governors; Beth Anne Wilson, Senior Associate Director, Division of International Finance, Board of Governors
Michael T. Kiley, Senior Adviser, Division of Research and Statistics, and Senior Associate Director, Office of Financial Stability Policy and Research, Board of Governors
Ellen E. Meade and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors; Jeremy B. Rudd, Senior Adviser, Division of Research and Statistics, Board of Governors
Gretchen C. Weinbach, Associate Director, Division of Monetary Affairs, Board of Governors
Min Wei, Deputy Associate Director, Division of Monetary Affairs, Board of Governors
Glenn Follette, Assistant Director, Division of Research and Statistics, Board of Governors
Eric C. Engstrom, Adviser, Division of Research and Statistics, Board of Governors
Penelope A. Beattie,2 Assistant to the Secretary, Office of the Secretary, Board of Governors
Etienne Gagnon, Section Chief, Division of Monetary Affairs, Board of Governors
Katie Ross,3 Manager, Office of the Secretary, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Deepa Datta, Senior Economist, Division of International Finance, Board of Governors; Jonathan E. Goldberg, Senior Economist, Division of Monetary Affairs, Board of Governors
Achilles Sangster II, Information Management Analyst, Division of Monetary Affairs, Board of Governors
David Altig, Jeff Fuhrer, Glenn D. Rudebusch, and Daniel G. Sullivan, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Boston, San Francisco, and Chicago, respectively
Samuel Schulhofer-Wohl, Senior Vice President, Federal Reserve Bank of Minneapolis
Todd E. Clark,4 Deborah L. Leonard, Keith Sill, and Mark A. Wynne, Vice Presidents, Federal Reserve Banks of Cleveland, New York, Philadelphia, and Dallas, respectively
William Dupor, Assistant Vice President, Federal Reserve Bank of St. Louis
Robert L. Hetzel, Senior Economist, Federal Reserve Bank of Richmond
Annual Organizational Matters5
In the agenda for this meeting, it was reported that advices of the election of the following members and alternate members of the Federal Open Market Committee for a term beginning January 26, 2016, had been received and that these individuals had executed their oaths of office.
The elected members and alternate members were as follows:
William C. Dudley, President of the Federal Reserve Bank of New York, with Michael Strine, First Vice President of the Federal Reserve Bank of New York, as alternate
Eric Rosengren, President of the Federal Reserve Bank of Boston, with Patrick Harker, President of the Federal Reserve Bank of Philadelphia, as alternate
Loretta J. Mester, President of the Federal Reserve Bank of Cleveland, with Charles L. Evans, President of the Federal Reserve Bank of Chicago, as alternate
James Bullard, President of the Federal Reserve Bank of St. Louis, with Robert S. Kaplan, President of the Federal Reserve Bank of Dallas, as alternate
Esther L. George, President of the Federal Reserve Bank of Kansas City, with Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, as alternate
By unanimous vote, the following officers of the Committee were selected to serve until the selection of their successors at the first regularly scheduled meeting of the Committee in 2017:
Janet L. Yellen
Chairman
William C. Dudley
Vice Chairman
Brian F. Madigan
Secretary
Matthew M. Luecke
Deputy Secretary
David W. Skidmore
Assistant Secretary
Michelle A. Smith
Assistant Secretary
Scott G. Alvarez
General Counsel
Thomas C. Baxter
Deputy General Counsel
Richard M. Ashton
Assistant General Counsel
Steven B. Kamin
Economist
Thomas Laubach
Economist
David W. Wilcox
Economist
Thomas A. Connors
Troy Davig
Michael P. Leahy
David E. Lebow
Jonathan P. McCarthy
Stephen A. Meyer
Ellis W. Tallman
Geoffrey Tootell
Christopher J. Waller
William Wascher
Associate Economists
By unanimous vote, the Federal Reserve Bank of New York was selected to execute transactions for the System Open Market Account (SOMA).
By unanimous vote, the Committee selected Simon Potter and Lorie K. Logan to serve at the pleasure of the Committee as manager and deputy manager of the SOMA, respectively, on the understanding that these selections were subject to their being satisfactory to the Federal Reserve Bank of New York.
Secretary's note: Advice subsequently was received that the manager and deputy manager selections indicated above were satisfactory to the Federal Reserve Bank of New York.
By unanimous vote, the Authorization for Domestic Open Market Operations was approved with a nonsubstantive amendment that changed terminology used in paragraph 4.B.ii, related to the provision of intraday credit to Foreign Accounts in exchange for securities. The Guidelines for the Conduct of System Open Market Operations in Federal-Agency Issues remained suspended.
AUTHORIZATION FOR DOMESTIC OPEN MARKET OPERATIONS
(As amended effective January 26, 2016)
1. The Federal Open Market Committee (the "Committee") authorizes and directs the Federal Reserve Bank selected by the Committee to execute open market transactions (the "Selected Bank"), to the extent necessary to carry out the most recent domestic policy directive adopted by the Committee:
A. To buy or sell in the open market securities that are direct obligations of, or fully guaranteed as to principal and interest by, the United States, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, that are eligible for purchase or sale under Section 14(b) of the Federal Reserve Act ("Eligible Securities") for the System Open Market Account ("SOMA"):
i. As an outright operation with securities dealers and foreign and international accounts maintained at the Selected Bank: on a same-day or deferred delivery basis (including such transactions as are commonly referred to as dollar rolls and coupon swaps) at market prices; or
ii. As a temporary operation: on a same-day or deferred delivery basis, to purchase such Eligible Securities subject to an agreement to resell ("repo transactions") or to sell such Eligible Securities subject to an agreement to repurchase ("reverse repo transactions") for a term of 65 business days or less, at rates that, unless otherwise authorized by the Committee, are determined by competitive bidding, after applying reasonable limitations on the volume of agreements with individual counterparties;
B. To allow Eligible Securities in the SOMA to mature without replacement;
C. To exchange, at market prices, in connection with a Treasury auction, maturing Eligible Securities in the SOMA with the Treasury, in the case of Eligible Securities that are direct obligations of the United States or that are fully guaranteed as to principal and interest by the United States; and
D. To exchange, at market prices, maturing Eligible Securities in the SOMA with an agency of the United States, in the case of Eligible Securities that are direct obligations of that agency or that are fully guaranteed as to principal and interest by that agency.
2. The Committee authorizes the Selected Bank to undertake transactions of the type described in paragraph 1 from time to time for the purpose of testing operational readiness, subject to the following limitations:
A. All transactions authorized in this paragraph 2 shall be conducted with prior notice to the Committee;
B. The aggregate par value of the transactions authorized in this paragraph 2 that are of the type described in paragraph 1.A.i shall not exceed $5 billion per calendar year; and
C. The outstanding amount of the transactions described in paragraph 1.A.ii shall not exceed $5 billion at any given time.
3. In order to ensure the effective conduct of open market operations, the Committee authorizes the Selected Bank to operate a program to lend Eligible Securities held in the SOMA to dealers on an overnight basis (except that the Selected Bank may lend Eligible Securities for longer than an overnight term to accommodate weekend, holiday, and similar trading conventions).
A. Such securities lending must be:
i. At rates determined by competitive bidding;
ii. At a minimum lending fee consistent with the objectives of the program;
iii. Subject to reasonable limitations on the total amount of a specific issue of Eligible Securities that may be auctioned; and
iv. Subject to reasonable limitations on the amount of Eligible Securities that each borrower may borrow.
B. The Selected Bank may:
i. Reject bids that, as determined in its sole discretion, could facilitate a bidder's ability to control a single issue;
ii. Accept Treasury securities or cash as collateral for any loan of securities authorized in this paragraph 3; and
iii. Accept agency securities as collateral only for a loan of agency securities authorized in this paragraph 3.
4. In order to ensure the effective conduct of open market operations, while assisting in the provision of short-term investments or other authorized services for foreign central bank and international accounts maintained at a Federal Reserve Bank (the "Foreign Accounts") and accounts maintained at a Federal Reserve Bank as fiscal agent of the United States pursuant to section 15 of the Federal Reserve Act (together with the Foreign Accounts, the "Customer Accounts"), the Committee authorizes the following when undertaken on terms comparable to those available in the open market:
A. The Selected Bank, for the SOMA, to undertake reverse repo transactions in Eligible Securities held in the SOMA with the Customer Accounts for a term of 65 business days or less; and
B. Any Federal Reserve Bank that maintains Customer Accounts, for any such Customer Account, when appropriate and subject to all other necessary authorization and approvals, to:
i. Undertake repo transactions in Eligible Securities with dealers with a corresponding reverse repo transaction in such Eligible Securities with the Customer Accounts; and
ii. Undertake intra-day repo transactions in Eligible Securities with Foreign Accounts.
Transactions undertaken with Customer Accounts under the provisions of this paragraph 4 may provide for a service fee when appropriate. Transactions undertaken with Customer Accounts are also subject to the authorization or approval of other entities, including the Board of Governors of the Federal Reserve System and, when involving accounts maintained at a Federal Reserve Bank as fiscal agent of the United States, the United States Department of the Treasury.
5. The Committee authorizes the Chairman of the Committee, in fostering the Committee's objectives during any period between meetings of the Committee, to instruct the Selected Bank to act on behalf of the Committee to:
A. Adjust somewhat in exceptional circumstances the stance of monetary policy and to take actions that may result in material changes in the composition and size of the assets in the SOMA; or
B. Undertake transactions with respect to Eligible Securities in order to appropriately address temporary disruptions of an operational or highly unusual nature in U.S. dollar funding markets.
Any such adjustment described in subparagraph A of this paragraph 5 shall be made in the context of the Committee's discussion and decision about the stance of policy at its most recent meeting and the Committee's long-run objectives to foster maximum employment and price stability, and shall be based on economic, financial, and monetary developments since the most recent meeting of the Committee. The Chairman, whenever feasible, will consult with the Committee before making any instruction under this paragraph 5.
The manager noted that the staff was in the process of evaluating the current framework for foreign reserves management and considering a possible restructuring of the documents governing the framework for foreign operations. He recommended that any changes to these documents be postponed until that process was complete. The Committee voted unanimously to reaffirm without change the Authorization for Foreign Currency Operations, the Foreign Currency Directive, and the Procedural Instructions with Respect to Foreign Currency Operations as shown below. The votes to reaffirm these documents included approval of the System's warehousing agreement with the U.S. Treasury.
AUTHORIZATION FOR FOREIGN CURRENCY OPERATIONS
(As reaffirmed effective January 26, 2016)
1. The Federal Open Market Committee (the "Committee") authorizes and directs the Federal Reserve Bank selected by the Committee to execute open market transactions (the "Selected Bank"), for the System Open Market Account, to the extent necessary to carry out the Committee's foreign currency directive and express authorizations by the Committee pursuant thereto, and in conformity with such procedural instructions as the Committee may issue from time to time:
A. To purchase and sell the following foreign currencies in the form of cable transfers through spot or forward transactions on the open market at home and abroad, including transactions with the U.S. Treasury, with the U.S. Exchange Stabilization Fund established by section 10 of the Gold Reserve Act of 1934, with foreign monetary authorities, with the Bank for International Settlements, and with other international financial institutions:
Australian dollars
Brazilian reais
Canadian dollars
Danish kroner
euro
Japanese yen
Korean won
Mexican pesos
New Zealand dollars
Norwegian kroner
Pounds sterling
Singapore dollars
Swedish kronor
Swiss francs
B. To hold balances of, and to have outstanding forward contracts to receive or to deliver, the foreign currencies listed in paragraph A above.
C. To draw foreign currencies and to permit foreign banks to draw dollars under the arrangements listed in paragraph 2 below, in accordance with the Procedural Instructions with Respect to Foreign Currency Operations.
D. To maintain an overall open position in all foreign currencies not exceeding $25.0 billion. For this purpose, the overall open position in all foreign currencies is defined as the sum (disregarding signs) of net positions in individual currencies, excluding changes in dollar value due to foreign exchange rate movements and interest accruals. The net position in a single foreign currency is defined as holdings of balances in that currency, plus outstanding contracts for future receipt, minus outstanding contracts for future delivery of that currency, i.e., as the sum of these elements with due regard to sign.
2. The Committee directs the Selected Bank to maintain for the System Open Market Account (subject to the requirements of section 214.5 of Regulation N, Relations with Foreign Banks and Bankers):
A. Reciprocal currency arrangements with the following foreign banks:
Foreign bank
Amount of arrangement
(millions of dollars equivalent)
Bank of Canada
2,000
Bank of Mexico
3,000
B. Standing dollar liquidity swap arrangements with the following foreign banks:
Bank of Canada
Bank of England
Bank of Japan
European Central Bank
Swiss National Bank
C. Standing foreign currency liquidity swap arrangements with the following foreign banks:
Bank of Canada
Bank of England
Bank of Japan
European Central Bank
Swiss National Bank
Dollar and foreign currency liquidity swap arrangements have no pre-set size limits. Any new swap arrangements shall be referred for review and approval to the Committee. All swap arrangements are subject to annual review and approval by the Committee.
3. All transactions in foreign currencies undertaken under paragraph 1.A above shall, unless otherwise expressly authorized by the Committee, be at prevailing market rates. For the purpose of providing an investment return on System holdings of foreign currencies or for the purpose of adjusting interest rates paid or received in connection with swap drawings, transactions with foreign central banks may be undertaken at non-market exchange rates.
4. It shall be the normal practice to arrange with foreign central banks for the coordination of foreign currency transactions. In making operating arrangements with foreign central banks on System holdings of foreign currencies, the Selected Bank shall not commit itself to maintain any specific balance, unless authorized by the Committee. Any agreements or understandings concerning the administration of the accounts maintained by the Selected Bank with the foreign banks designated by the Board of Governors under section 214.5 of Regulation N shall be referred for review and approval to the Committee.
5. Foreign currency holdings shall be invested to ensure that adequate liquidity is maintained to meet anticipated needs and so that each currency portfolio shall generally have an average duration of no more than 24 months (calculated as Macaulay duration). Such investments may include buying or selling outright obligations of, or fully guaranteed as to principal and interest by, a foreign government or agency thereof; buying such securities under agreements for repurchase of such securities; selling such securities under agreements for the resale of such securities; and holding various time and other deposit accounts at foreign institutions. In addition, when appropriate in connection with arrangements to provide investment facilities for foreign currency holdings, U.S. government securities may be purchased from foreign central banks under agreements for repurchase of such securities within 30 calendar days.
6. All operations undertaken pursuant to the preceding paragraphs shall be reported promptly to the Foreign Currency Subcommittee (the "Subcommittee") and the Committee. The Subcommittee consists of the Chairman and Vice Chairman of the Committee, the Vice Chairman of the Board of Governors, and such other member of the Board as the Chairman may designate (or in the absence of members of the Board serving on the Subcommittee, other Board members designated by the Chairman as alternates, and in the absence of the Vice Chairman of the Committee, the Vice Chairman's alternate). Meetings of the Subcommittee shall be called at the request of any member, or at the request of the manager, System Open Market Account ("manager"), for the purposes of reviewing recent or contemplated operations and of consulting with the manager on other matters relating to the manager's responsibilities. At the request of any member of the Subcommittee, questions arising from such reviews and consultations shall be referred for determination to the Committee.
7. The Chairman is authorized:
A. With the approval of the Committee, to enter into any needed agreement or understanding with the Secretary of the Treasury about the division of responsibility for foreign currency operations between the System and the Treasury;
B. To keep the Secretary of the Treasury fully advised concerning System foreign currency operations, and to consult with the Secretary on policy matters relating to foreign currency operations;
C. From time to time, to transmit appropriate reports and information to the National Advisory Council on International Monetary and Financial Policies.
8. All Federal Reserve Banks shall participate in the foreign currency operations for System Account in accordance with paragraph 3G(1) of the Board of Governors' Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks dated January 1, 1944.
9. The Committee authorizes the Selected Bank to undertake transactions of the type described in paragraphs 1, 2, and 5, and foreign exchange and investment transactions that it may be otherwise authorized to undertake from time to time for the purpose of testing operational readiness. The aggregate amount of such transactions shall not exceed $2.5 billion per calendar year. These transactions shall be conducted with prior notice to the Committee.
FOREIGN CURRENCY DIRECTIVE
(As reaffirmed effective January 26, 2016)
1. System operations in foreign currencies shall generally be directed at countering disorderly market conditions, provided that market exchange rates for the U.S. dollar reflect actions and behavior consistent with IMF Article IV, Section 1.
2. To achieve this end the System shall:
A. Undertake spot and forward purchases and sales of foreign exchange.
B. Maintain reciprocal currency arrangements with foreign central banks in accordance with the Authorization for Foreign Currency Operations.
C. Maintain standing dollar liquidity swap arrangements with foreign banks in accordance with the Authorization for Foreign Currency Operations.
D. Maintain standing foreign currency liquidity swap arrangements with foreign banks in accordance with the Authorization for Foreign Currency Operations.
E. Cooperate in other respects with central banks of other countries and with international monetary institutions.
3. Transactions may also be undertaken:
A. To adjust System balances in light of probable future needs for currencies.
B. To provide means for meeting System and Treasury commitments in particular currencies, and to facilitate operations of the Exchange Stabilization Fund.
C. For such other purposes as may be expressly authorized by the Committee.
4. System foreign currency operations shall be conducted:
A. In close and continuous consultation and cooperation with the United States Treasury;
B. In cooperation, as appropriate, with foreign monetary authorities; and
C. In a manner consistent with the obligations of the United States in the International Monetary Fund regarding exchange arrangements under IMF Article IV.
PROCEDURAL INSTRUCTIONS WITH RESPECT TO FOREIGN CURRENCY OPERATIONS
(As reaffirmed effective January 26, 2016)
In conducting operations pursuant to the authorization and direction of the Federal Open Market Committee (the "Committee") as set forth in the Authorization for Foreign Currency Operations and the Foreign Currency Directive, the Federal Reserve Bank selected by the Committee to execute open market transactions (the "Selected Bank"), through the manager, System Open Market Account ("manager"), shall be guided by the following procedural understandings with respect to consultations and clearances with the Committee, the Foreign Currency Subcommittee (the "Subcommittee"), and the Chairman of the Committee, unless otherwise directed by the Committee. All operations undertaken pursuant to such clearances shall be reported promptly to the Committee.
1. For the reciprocal currency arrangements authorized in paragraphs 2.A of the Authorization for Foreign Currency Operations:
A. Drawings must be approved by the Subcommittee (or by the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available) if the swap drawing proposed by a foreign bank does not exceed the larger of (i) $200 million or (ii) 15 percent of the size of the swap arrangement.
B. Drawings must be approved by the Committee (or by the Subcommittee, if the Subcommittee believes that consultation with the full Committee is not feasible in the time available, or by the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available) if the swap drawing proposed by a foreign bank exceeds the larger of (i) $200 million or (ii) 15 percent of the size of the swap arrangement.
C. The manager shall also consult with the Subcommittee or the Chairman about proposed swap drawings by the System.
D. Any changes in the terms of existing swap arrangements shall be referred for review and approval to the Chairman. The Chairman shall keep the Committee informed of any changes in terms, and the terms shall be consistent with principles discussed with and guidance provided by the Committee.
2. For the dollar and foreign currency liquidity swap arrangements authorized in paragraphs 2.B and 2.C of the Authorization for Foreign Currency Operations:
A. Drawings must be approved by the Chairman in consultation with the Subcommittee. The Chairman or the Subcommittee will consult with the Committee prior to the initial drawing on the dollar or foreign currency liquidity swap lines if possible under the circumstances then prevailing; authority to approve subsequent drawings for either the dollar or foreign currency liquidity swap lines may be delegated to the manager by the Chairman.
B. Any changes in the terms of existing swap arrangements shall be referred for review and approval to the Chairman. The Chairman shall keep the Committee informed of any changes in terms, and the terms shall be consistent with principles discussed with and guidance provided by the Committee.
3. Any operation must be approved by:
A. The Subcommittee (or by the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available) if it:
i. Would result in a change in the System's overall open position in foreign currencies exceeding $300 million on any day or $600 million since the most recent regular meeting of the Committee.
ii. Would result in a change on any day in the System's net position in a single foreign currency exceeding $150 million, or $300 million when the operation is associated with repayment of swap drawings.
iii. Might generate a substantial volume of trading in a particular currency by the System, even though the change in the System's net position in that currency (as defined in paragraph 1.D of the Authorization for Foreign Currency Operations) might be less than the limits specified in 3.A.ii.
B. The Committee (or by the Subcommittee, if the Subcommittee believes that consultation with the full Committee is not feasible in the time available, or by the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available) if it would result in a change in the System's overall open position in foreign currencies exceeding $1.5 billion since the most recent regular meeting of the Committee.
4. The Committee authorizes the Selected Bank to undertake transactions of the type described in paragraphs 1, 2, and 5 of the Authorization for Foreign Currency Operations and foreign exchange and investment transactions that it may be otherwise authorized to undertake from time to time for the purpose of testing operational readiness. The aggregate amount of such transactions shall not exceed $2.5 billion per calendar year. These transactions shall be conducted with prior notice to the Committee.
By unanimous vote, the Committee amended its Program for Security of FOMC Information (Program) with four sets of changes. These changes consisted of (1) a clarification that all Federal Reserve persons, which includes FOMC participants as well as staff members, must receive, review, and agree to abide by the Program before gaining access to confidential FOMC information, and annually thereafter; (2) a change to provide the Chairman flexibility to designate Board staff members to make decisions regarding access to FOMC information by Board staff; (3) technical changes to improve the consistency and accuracy of Program language; and (4) changes to the Program's provisions for handling potential breaches of the Committee's information security rules. This final set of changes codifies the approach used in recent years of promptly referring material potential breaches to the Board's inspector general (IG). In addition, it incorporates revised language that states that the prompt referral to the IG, which would include a request for an investigation, would be made by the secretary or the Committee's general counsel, with appropriate consultation with the Chairman, thereby vesting the referral responsibility in more than one person and thus reducing the possibility of any apparent conflict of interest in making a referral determination.
At the end of the Committee's annual disposition of organizational matters, participants considered a revised Statement on Longer-Run Goals and Monetary Policy Strategy. The proposed revisions would clarify that the Committee viewed its 2 percent inflation goal as symmetric. In presenting the revised statement on behalf of the subcommittee on communications, Governor Fischer pointed out that, in a discussion of the statement in October 2014, participants had expressed widespread agreement that inflation moderately above the Committee's 2 percent goal and inflation the same amount below that level were equally costly. He noted that the proposed language was intended to encompass situations in which deviations from the Committee's inflation objective were expected to continue for a time and had the potential to affect longer-term inflation expectations. In addition to the explicit indication that the Committee viewed its inflation objective as symmetric, the revised statement would update the reference to participants' estimates of the longer-run normal rate of unemployment from the most recent Summary of Economic Projections (SEP), using the median of those projections rather than the central tendency.
Participants noted that the statement reflects an exceptionally high degree of consensus and that the threshold for amendments should be high; they judged that the revisions were important because they would clarify the symmetry of the Committee's 2 percent inflation objective and communicate to the public that the objective was not a ceiling. Participants also noted that the proposed new language indicating that the Committee would "be concerned if inflation were running persistently above or below" its 2 percent objective would not require that participants hold similar views about inflation dynamics; in addition, the proposed language would not specify the stance of monetary policy in such circumstances but would afford the Committee appropriate flexibility in tailoring a policy response to persistent deviations from the inflation objective. Moreover, participants generally agreed that the proposed new language should be interpreted as applying to situations in which inflation was seen as likely to remain below or above 2 percent for a sustained period. However, one participant judged that the proposed language could be read as referring to current and past deviations from the inflation objective, and argued that the statement should more clearly indicate that the Committee's policy decisions were based on expected future inflation. A couple of others agreed that there were reasons for concerns about deviations above or below the 2 percent objective, but noted that the reasons for, and degree of, those concerns could differ depending upon the direction of the deviation or broader macroeconomic conditions.
All participants but one supported adopting the proposed amendments. Participants agreed that it was appropriate to release the amended statement, which is reproduced below, in advance of the Monetary Policy Report and testimony, which were scheduled for mid-February.
STATEMENT ON LONGER-RUN GOALS AND MONETARY POLICY STRATEGY
(As amended effective January 26, 2016)
"The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.
Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee's policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee's goals.
The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. The Committee would be concerned if inflation were running persistently above or below this objective. Communicating this symmetric inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances. The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants' estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC's Summary of Economic Projections. For example, in the most recent projections, the median of FOMC participants' estimates of the longer-run normal rate of unemployment was 4.9 percent.
In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate.
The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January."
All Committee members but one voted to adopt the revised statement. Although Mr. Bullard supported the statement without the changes and agreed that the Committee's inflation goal is symmetric, he dissented because he judged that the amended language was not sufficiently focused on expected future deviations of inflation from the 2 percent objective. In addition, because the Committee's past behavior had demonstrated the emphasis it places on expected future inflation, Mr. Bullard viewed the amended language as potentially confusing to the public.
Developments in Financial Markets, Open Market Operations, and Policy Normalization
The SOMA manager reported on developments in domestic and foreign financial markets, including changes in the expectations of market participants for the trajectory of monetary policy. The deputy manager followed with a briefing on money market developments and System open market operations conducted by the Open Market Desk during the period since the Committee met on December 15-16, 2015. The report included an assessment of the response of money market interest rates to the increase in the target range for the federal funds rate announced following the December meeting. Overall, the rate increase was implemented smoothly and money markets responded as anticipated. Take-up of overnight reverse repurchase agreement (ON RRP) operations over this period was consistent with that observed in the testing phase of operations over the second half of last year. The deputy manager also reviewed plans for reinvestment of the proceeds of upcoming maturations of SOMA holdings of Treasury securities, for small-value tests of various System operations and facilities during 2016, and for quarterly tests of the Term Deposit Facility.
The Committee then resumed its consideration of matters related to the System's reverse repurchase agreement (RRP) facilities, focusing in particular on the appropriate aggregate capacity of the ON RRP facility going forward. Previous communications had indicated that the Committee intended to allow aggregate capacity of the ON RRP facility to be temporarily elevated after policy firming had commenced to support monetary policy implementation and expected that it would be appropriate to reduce capacity fairly soon thereafter. A staff presentation at this meeting reviewed broad strategies for reintroducing an aggregate cap on ON RRP operations and managing the cap subsequently. In the discussion that followed, participants reiterated that the Committee expects to phase out the facility when it is no longer needed to help control the federal funds rate, and they unanimously expressed the view that it would be appropriate to reintroduce an aggregate cap on ON RRP operations at some point. Regarding when to do so, participants held varied views, but nearly all indicated a preference for waiting a couple of months or longer before making operational adjustments to the facility, in part so that the Federal Reserve could gain additional experience with its policy implementation tools. Concerning the strategy that would be used to cap the ON RRP facility when the time came, most policymakers favored an approach in which a relatively high cap level would be imposed initially--though one that nonetheless would significantly reduce capacity relative to the current situation--with the intention of periodically making further reductions in the level of the cap as appropriate. Other participants indicated a preference for initially imposing a somewhat lower cap. Some noted that the demand for ON RRPs could be reduced by widening the spread between the interest rate on reserves and the offering rate on ON RRPs. In making these judgments, most policymakers emphasized the primacy of maintaining monetary control in setting the appropriate capacity of the ON RRP facility for the time being; participants indicated that the Committee's future decisions regarding the size and ultimate longevity of the facility should be largely driven by considerations of monetary control, although other factors, such as financial stability, should also be taken into account. Finally, policymakers also discussed the appropriate management of the Federal Reserve's RRP operations over quarter-ends, when private-sector cash investment options temporarily and predictably decline and result in temporary downward pressure on some money market rates, including the federal funds rate. Several participants indicated a preference for continuing to take account of such calendar effects in conducting RRPs; some policymakers emphasized, however, that they do not view such temporary declines in the federal funds rate as a materially adverse factor for monetary control. Overall, participants agreed that, for some time at least, the Committee would continue to provide ample RRPs in some form over quarter-ends, including in March.
By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the January 26-27 meeting indicated that labor market conditions continued to improve in the fourth quarter of last year even though growth in real gross domestic product (GDP) appeared to slow. Consumer price inflation was still running below the Committee's longer-run objective of 2 percent, restrained in part by decreases in both energy prices and the prices of non-energy imports. Recent survey-based measures of longer-run inflation expectations were little changed, on balance, while market-based measures of inflation compensation declined further.
Total nonfarm payroll employment increased substantially in December, and the monthly pace of job gains in the fourth quarter as a whole was faster than in the third quarter. The unemployment rate remained at 5.0 percent in December, while both the labor force participation rate and the employment-to-population ratio increased a little. The share of workers employed part time for economic reasons moved down a bit in December. The rates of private-sector job openings, hires, and quits were little changed in November. The four-week moving average of initial claims for unemployment insurance benefits was somewhat higher in early January than its very low level late last year. Average hourly earnings for all employees increased 2-1/2 percent over the 12 months ending in December, about 1/2 percentage point more than over the same period a year earlier.
Industrial production decreased in November and December, primarily reflecting the ongoing effects of the appreciation of the foreign exchange value of the dollar and the declines in crude oil prices since the middle of 2014. Manufacturing output declined, with a step-down in the production of motor vehicles and parts from the high levels seen earlier last year, while production outside of the motor vehicle sector was roughly flat. Production in the mining sector continued to fall, and the output of utilities declined, as the weather was unseasonably warm. Automakers' assembly schedules and broader indicators of manufacturing production, such as the readings on new orders from national and regional manufacturing surveys, mostly pointed to a slow pace of gains in factory output early this year. Information on drilling activity for crude oil and natural gas in early January was consistent with further declines in mining output.
Real personal consumption expenditures (PCE) appeared to have increased at a slower rate in the fourth quarter than in the previous quarter. Although real PCE rose solidly in November, spending had been flat in October. Moreover, in December the components of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimate of PCE edged down, and the rate of sales of light motor vehicles, while remaining at a high level, declined. However, recent readings on key factors that influence consumer spending were generally favorable. Growth in real disposable income continued to be solid in November. Households' net worth was supported by further strong gains in home values through November, although equity prices declined in recent months. Also, consumer sentiment in the University of Michigan Surveys of Consumers remained at an elevated level in early January.
Recent information on housing activity was consistent with a continued gradual recovery in this sector. Both starts and building permits for new single-family homes moved higher, on balance, in November and December, and starts of multifamily units also stepped up. New home sales increased modestly in November. Sales of existing homes rose strongly in December, more than offsetting an outsized decline in November, which likely reflected a change in mortgage regulations that temporarily held down existing home sales.
Growth in real private expenditures for business equipment and intellectual property products looked to be slower in the fourth quarter than in the third quarter. Nominal shipments of nondefense capital goods excluding aircraft moved down in November. Forward-looking indicators of equipment spending, such as new orders for nondefense capital goods along with recent readings from national and regional surveys of business conditions, generally pointed to soft business equipment spending in the coming months. Firms' nominal spending for nonresidential structures excluding drilling and mining declined somewhat in November. Indicators of spending for structures in the drilling and mining sector, such as the number of oil and gas rigs in operation, continued to fall through early January. The available information indicated that inventory investment decreased again in the fourth quarter, although there was little evidence that inventory-to-sales ratios were uncomfortably high outside of the energy sector.
Total real government purchases appeared to be about flat in the fourth quarter. Federal government spending for defense moved roughly sideways. State and local government payrolls increased somewhat in the fourth quarter, while nominal construction spending by these governments declined in October and November.
The U.S. international trade deficit narrowed in November, as imports fell more than exports. The value of exports declined to its lowest level since the beginning of 2012. The decrease in imports was widespread across categories, with a particularly large decline in the imports of consumer goods. The available trade data suggested that net exports continued to weigh on real GDP growth in the fourth quarter.
Total U.S. consumer prices, as measured by the PCE price index, increased about 1/2 percent over the 12 months ending in November, partly restrained by substantial declines in consumer energy prices. Core PCE price inflation, which excludes changes in food and energy prices, was 1-1/4 percent over the same 12-month period, held down in part by decreases in the prices of non-energy imports and the pass-through of declines in energy prices. Over the 12 months ending in December, total consumer prices as measured by the consumer price index (CPI) rose 3/4 percent, while core CPI inflation was around 2 percent. Recent survey measures of longer-run inflation expectations were little changed on balance. In early January, the Michigan survey measure of median inflation expectations over the next 5 to 10 years ticked up but continued to run near the low end of its typical range of the past 15 years. The Survey of Primary Dealers and the Survey of Market Participants indicated that the median expectation of CPI inflation 5 to 10 years ahead was essentially unchanged in January.
In many foreign economies, real GDP growth in the fourth quarter appeared to continue at a pace roughly similar to that in the third quarter. In contrast, economic growth weakened in Canada, in part because investment spending continued to be weighed down by the effects of the sharp decline in oil prices since the middle of 2014. Lower oil prices and the slowing in U.S. manufacturing activity contributed to a step-down in the rate of economic growth in Mexico. Economic growth slowed slightly in China but remained robust, supported by a modest pickup in growth of Chinese manufacturing output. Further declines in energy prices pulled down inflation in many foreign economies in the fourth quarter, with inflation falling to near zero in several advanced economies.
Staff Review of the Financial Situation
Domestic financial conditions tightened over the intermeeting period, as turmoil in Chinese financial markets and lower oil prices contributed to concerns about pros-pects for global economic growth and a pullback from risky assets. The increased reluctance to hold risky assets was associated with a sharp decline in equity prices and a notable widening in risk spreads on corporate bonds. Treasury yields declined across maturities, reflecting a downward revision in the expected path of the federal funds rate and likely some increase in safe-haven demands amid the market turbulence. The dollar appreciated against most foreign currencies.
The Committee's decision to raise the target range for the federal funds rate to 1/4 to 1/2 percent at the December meeting was widely anticipated in financial markets and elicited little reaction in Treasury and interest rate futures markets. The expected path of the federal funds rate implied by market quotes on interest-rate derivatives moved down notably after year-end; the turbulence in global financial markets evidently led investors to expect a more gradual increase in the target range for the federal funds rate than they had previously anticipated. In line with that interpretation, results from the Desk's January Survey of Primary Dealers and Survey of Market Participants indicated that, on average, respondents expected fewer increases in the target range this year than they had projected in December.
Consistent with the decline in the expected path of the federal funds rate, yields on nominal Treasury securities moved lower over the intermeeting period. Part of the decline likely also reflected an increase in safe-haven demands for low-risk and highly liquid assets amid the turbulence in financial markets. Measures of forward inflation compensation based on Treasury Inflation-Protected Securities and inflation swaps fell further.
Broad U.S. equity price indexes declined sharply over the intermeeting period, exhibiting a high correlation with movements in crude oil prices and foreign equity indexes. Domestic equity indexes were quite volatile in January, and one-month-ahead option-implied volatility on the S&P 500 index climbed to the upper end of its range of the past few years. Spreads on corporate bonds over comparable-maturity Treasury securities widened over the intermeeting period, reportedly reflecting increased concerns about corporate credit quality, particularly in the energy sector, and a decline in investors' willingness to assume risk.
Financing conditions for nonfinancial businesses remained accommodative for firms of higher credit quality but tightened somewhat for riskier firms. Investment-grade bond issuance stayed robust, while speculative-grade bond issuance was weak. The growth of commercial and industrial (C&I) loans on banks' books continued to be strong, although a modest net percentage of banks reported tightening standards for C&I loans to large and middle-market firms during the fourth quarter in the most recent Senior Loan Officer Opinion Survey (SLOOS). Issuance of syndicated leveraged loans decreased in the fourth quarter amid higher spreads, with the most pronounced slowing in relatively risky loans such as those earmarked for leveraged buyouts.
Credit continued to be broadly available in the commercial real estate (CRE) sector. The growth of CRE loans on banks' balance sheets remained strong in the fourth quarter, and issuance of commercial mortgage-backed securities (CMBS) continued at a robust pace in December. However, a moderate net percentage of banks reported in the most recent SLOOS that they had tightened standards on CRE loans during the fourth quarter, and credit spreads in CMBS markets continued to widen over the intermeeting period.
Credit conditions for residential mortgages were little changed over the intermeeting period. Credit remained tight for borrowers with low credit scores, hard-to-document income, or high debt-to-income ratios. According to the January SLOOS, moderate net fractions of banks eased standards on several types of home mortgages over the past three months and expected to ease standards this year.
Financing conditions in consumer credit markets were little changed over the intermeeting period and remained accommodative on balance. Consumer loan balances continued to rise at a robust pace in the fourth quarter, reflecting further expansions in credit card, auto, and student loan balances. Student and auto loans remained broadly available, even to borrowers with subprime credit histories, but the availability of credit card loans to subprime borrowers was still tight. Respondents to the January SLOOS indicated that, over the past three months, they had eased standards and terms on auto loans but tightened standards and terms on credit card loans.
Global financial market conditions deteriorated sharply in January, as recent developments in Chinese financial markets and the further decrease in crude oil prices appeared to increase concerns about global economic growth. Equity prices in emerging market economies (EMEs) and in advanced foreign economies (AFEs) fell sharply, and 10-year sovereign yields in the AFEs decreased substantially. Market expectations for the policy rates of major foreign central banks, which had risen somewhat after the December FOMC meeting, ended the period lower. Credit spreads in the EMEs widened. The foreign exchange value of the U.S. dollar appreciated further against most currencies, with larger increases relative to the currencies of commodity-exporting countries.
The staff provided its latest report on potential risks to financial stability and judged the financial vulnerabilities of the U.S. financial system as moderate on balance. Their assessment reflected strong capital and liquidity positions at banks, moderate leverage in the nonbank financial sector, and subdued borrowing by households. Risk premiums had increased as spreads widened by more than was estimated to be necessary to compensate for expected losses, suggesting a decline in the willingness of investors to bear credit risk. However, leverage continued to increase in the nonfinancial business sector, particularly among energy-related and other relatively risky firms. The high leverage of nonfinancial corporations and the liquidity mismatch at high-yield bond mutual funds suggested some elevated risks for bond investors and lower-rated borrowers.
Staff Economic Outlook
In the economic projection prepared by the staff for the January FOMC meeting, real GDP growth in the fourth quarter of last year was estimated to have been markedly slower than in the forecast for the December meeting. However, the medium-term projection for real GDP growth was only slightly lower, on balance, than the previous forecast. The staff estimated that the negative effects of a lower projected path for equity prices and a higher assumed trajectory for the foreign exchange value of the dollar would be mostly offset by the positive effects of a lower path for crude oil prices and slightly more stimulus to aggregate demand from changes in fiscal policy than was assumed in the previous forecast. In particular, federal legislation enacted in December unexpectedly included both a multiyear extension of the bonus depreciation tax credit for business investment and a delay in the introduction of several tax increases related to the Affordable Care Act. The staff continued to project that real GDP would expand at a somewhat faster pace than potential output in 2016 through 2018, supported primarily by increases in consumer spending. The unemployment rate was expected to gradually decline further and to run somewhat below the staff's estimate of its longer-run natural rate over this period.
The staff's forecast for inflation in the near term was revised down slightly, reflecting recent data for consumer prices and the further declines in the price of crude oil; the projection for inflation over the medium term was little revised. Energy prices and the prices of non-energy imported goods were expected to begin steadily rising later this year. The staff continued to project that inflation would increase gradually over the next several years and reach the Committee's longer-run objective of 2 percent by the end of 2018.
The staff viewed the uncertainty around its January projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The risks to the forecast for real GDP were seen as tilted to the downside, reflecting the staff's assessment that neither monetary nor fiscal policy was well positioned to help the economy withstand substantial adverse shocks; the downside risks to the forecast of economic activity were seen as more pronounced than in December, mainly reflecting the greater uncertainty about global economic prospects and the financial market turbulence in the United States and abroad. Consistent with the downside risk to aggregate demand, the staff viewed the risks to its outlook for the unemployment rate as skewed to the upside. The risks to the projection for inflation were seen as weighted to the downside, reflecting the possibility that longer-term inflation expectations may have edged down and that the foreign exchange value of the dollar could rise substantially further, which would put downward pressure on inflation.
Participants' Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants saw the information received over the intermeeting period as suggesting that labor market conditions had improved further in late 2015 even as economic growth slowed. Household and business spending had been increasing at moderate rates; however, net exports had been soft and inventory investment had slowed. A range of labor market indicators pointed to some additional decline in underutilization of labor resources. Inflation continued to run below the Committee's 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation declined further over the intermeeting period; survey-based measures of longer-term inflation expectations were little changed, on balance, in recent months.
In considering the outlook for economic activity, participants weighed the divergent signals from recent strength in the labor market and the modest increase in real GDP suggested by the available data on spending and production. In part, the projected slow growth of real GDP in the fourth quarter of 2015 appeared to be caused by reduced inventory investment and a weather-related slowing in consumer spending on energy services--developments that would likely be reversed in the current quarter. Moreover, some participants noted that the preliminary spending data and initial estimates of GDP are often revised substantially, and they judged that labor market indicators tended to provide a more reliable early reading on the economy's underlying strength.
In assessing the medium-term outlook, participants discussed the extent to which the recent turbulence in global financial markets might restrain U.S. economic activity. While acknowledging the possible adverse effects of the tightening of financial conditions that had occurred, most policymakers thought that the extent to which tighter conditions would persist and what that might imply for the outlook were unclear, and they therefore judged that it was premature to alter appreciably their assessment of the medium-term economic outlook. They continued to anticipate that economic activity would expand at a moderate pace over the medium term and that the labor market would continue to strengthen. Inflation was expected to remain low in the near term, in part because of the further decline in energy prices. However, most participants continued to anticipate that inflation would rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipated and the labor market strengthened further. Given their increased uncertainty about how global economic and financial developments might evolve, participants emphasized the importance of closely monitoring these developments and of assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.
Growth of consumer spending appeared to have slowed in the fourth quarter, with the December data showing a decline in nominal retail sales and a step-down in purchases of new motor vehicles from the elevated level of the preceding three months. Moreover, households' spending on energy services was evidently held down by unseasonably warm weather in many parts of the country. Although participants received mixed reports from their District contacts on consumer spending, some heard that retail activity had been generally positive at year-end, and a number of participants relayed indications that spending on services in their Districts remained solid. Regarding the outlook for consumer spending, a number of participants noted that the recent moderation in spending seemed inconsistent with continued strong gains in households' real income from rising employment and falling energy prices and with the relatively elevated level of consumer sentiment. Because of these favorable fundamentals, many participants indicated that they still expected consumer spending to contribute importantly to economic growth in the coming year. However, several were concerned that the rise in the saving rate since the middle of 2015 might suggest an elevated degree of caution about the economic outlook or that the recent retreat in equity values, if sustained, might damp spending. Nonetheless, a couple of others pointed out that information from surveys of consumer sentiment suggested that households, to date, had not appeared to be particularly sensitive to changes in financial market conditions.
Housing sales and construction continued to trend up though the end of 2015, extending the gradual recovery in the housing sector. In participants' reports on economic conditions in their Districts, some highlighted the sector as one in which activity had improved or about which contacts were upbeat. A couple of participants noted that new mortgage lending regulations appeared to have slowed the mortgage origination process and temporarily reduced home sales.
Manufacturing activity continued to weaken in late 2015. Production continued to contract in industries--such as steel and heavy machinery--in which demand had been negatively affected, either directly or indirectly, by the appreciation of the dollar, slow economic growth abroad, and declining oil prices. Participants from those Reserve Banks that conduct surveys of manufacturing activity reported that the weakness extended into January. Nonetheless, several participants pointed to aerospace, autos, and consumer products as areas of strength in the manufacturing sector, and a few commented that manufacturers surveyed in their Districts were still relatively optimistic about the outlook for 2016. Information on business activity outside of the manufacturing sector was mixed. Commercial construction was reported to be strong in a couple of Districts, and a few participants commented that government spending was likely to provide a boost to business activity in the coming year. Several participants reported moderate growth in services industries, but a couple noted some slowing of activity. Some participants reported a deterioration in business sentiment among their contacts in the wake of recent global economic and financial developments, which could result in more-cautious capital spending plans.
Downward pressure on domestic energy activity intensified over the intermeeting period as oil prices dropped further. The imbalance of the supply of crude oil relative to demand remained very high and appeared unlikely to be resolved quickly, as was evidenced by a further downshift in oil futures prices. Participants' contacts in the energy sector reported that firms were still adjusting to lower prices and the contraction in their businesses, and some firms expected that they would need to cut investment and employment further. In addition, it was noted that energy firms continued to face tightening financial conditions and that financial stress was building for those with high levels of debt. In agriculture, depressed levels of crop prices and weak global demand continued to weaken farm income.
A broad range of indicators showed ongoing improvement in labor market conditions. Most notably, increases in nonfarm payroll employment were quite strong during the final three months of 2015. Although the unemployment rate, at 5.0 percent, was unchanged over that period, it was at a level close to or below most participants' estimates of its longer-run normal rate. Moreover, the labor force participation rate and the employment-to-population rate moved up toward year-end. Many viewed labor market underutilization as having been substantially reduced over the past year, and a few saw slack as having been largely eliminated. In their comments on labor market conditions, participants cited strong employment gains, low levels of unemployment in their Districts, reports of shortages of workers in various industries, or firming in wage increases. Most anticipated that employment would expand at a solid rate over the year ahead, although several saw the prospect of some moderation in employment gains from the particularly large increases in the fourth quarter of 2015.
Participants discussed the implications of the further decline in the prices of oil and other commodities and the additional appreciation of the dollar since the previous FOMC meeting for the outlook for inflation. They agreed that these developments would keep inflation low in the near term but offered a range of views on the effects on the medium-term outlook and the risks attending the outlook. Most continued to anticipate that once the price of energy and the exchange value of the dollar stabilized, the effects of those factors on inflation would fade. Several saw that outlook as depending importantly on continued strengthening of the labor market or on an above-trend pace of economic activity. Moreover, some emphasized the need for longer-run inflation expectations to remain well anchored. In that regard, while some participants interpreted the recent readings on survey-based measures of inflation expectations and market-based measures of inflation compensation as suggesting that long-term inflation expectations were still relatively well anchored, some others expressed concern about the further decline in inflation compensation recently and the historically low levels of some survey measures of longer-run inflation expectations. Some noted the difficulty of distinguishing declines in expected inflation embedded in those market-based measures from changes in risk and liquidity premiums or of interpreting the current high correlation of far-forward measures of inflation compensation and oil prices. Although most participants continued to expect that inflation would rise to the Committee's 2 percent objective over the medium term, a number of participants indicated that, in light of recent developments, they viewed the outlook for inflation as somewhat more uncertain or saw the risks as being to the downside. Several participants reiterated the importance of monitoring inflation developments closely to confirm that inflation was evolving along the path anticipated by the Committee.
Regarding the foreign economic outlook, it was noted that the slowdown in China's industrial sector and the decline in global commodity prices could restrain economic activity in the EMEs and other commodity-producing countries for some time. Participants discussed recent developments in China, including the possibility that structural changes and financial imbalances in the Chinese economy might lead to a sharper deceleration in economic growth in that country than was generally anticipated. Such a downshift, if it occurred, could increase the economic and financial stresses on other EMEs and on commodity producers, including Canada and Mexico. Moreover, global financial markets could continue to be affected by uncertainty about China's exchange rate regime. While the exposure of the United States to the Chinese economy through direct trade ties was limited, a number of participants were concerned about the potential drag on the U.S. economy from the broader effects of a greater-than-expected slowdown in China and other EMEs.
Participants also discussed a range of issues related to financial market developments. Almost all participants cited a number of recent events as indicative of tighter financial conditions in the United States; these events included declines in equity prices, a widening in credit spreads, a further rise in the exchange value of the dollar, and an increase in financial market volatility. Some participants also pointed to significantly tighter financing conditions for speculative-grade firms and small businesses, and to reports of tighter standards at banks for C&I and CRE loans. The effects of these financial developments, if they were to persist, may be roughly equivalent to those from further firming in monetary policy. Participants mentioned several apparent factors underlying the recent financial market turbulence, including economic and financial developments in China and other foreign countries, spillovers in financial markets from stresses at firms and in countries that are producers of energy and other commodities, and an increase in concerns among market participants regarding the prospects for domestic economic growth. However, a number of participants noted that the large magnitude of changes in domestic financial market conditions was difficult to reconcile with incoming information on U.S. economic developments. A couple of participants pointed out that the recent decline in equity prices could be viewed as bringing equity valuations more in line with historical norms. Additionally, a few participants cautioned that valuations in CRE markets should be closely monitored. The effects of a relatively flat yield curve and low interest rates in reducing banks' net interest margins were also noted.
Participants discussed whether their current assessments of economic conditions and the medium-term outlook warranted either increasing the target range for the federal funds rate at this meeting or altering their earlier views of the appropriate path for the target range for the federal funds rate. Participants agreed that incoming indicators regarding labor market developments had been encouraging, but also that data releases since the December meeting on spending and production had been disappointing. Furthermore, developments in commodity and financial markets as well as the possibility of a significant weakening of some foreign economies had the potential to further restrain domestic economic activity, partly because the large cumulative declines in energy and other commodity prices could have pronounced adverse effects on some firms and countries that are important producers of such commodities. However, a few noted that the potential positive effects of lower energy costs on economic activity were a mitigating factor. Participants judged that the overall implication of these developments for the outlook for domestic economic activity was unclear, but they agreed that uncertainty had increased, and many saw these developments as increasing the downside risks to the outlook.
As expected, inflation had continued to run below 2 percent, but the further decline in energy prices and the additional appreciation of the dollar likely implied that inflation would take somewhat longer than previously anticipated to rise to the Committee's objective. It was noted that although it was generally appropriate for monetary policy not to respond substantially to temporary shocks to inflation, that prescription depended in part on the assumption that longer-term inflation expectations remained well anchored. Participants pointed out that some market-based measures of longer-term inflation compensation had declined to historically low levels, which increased concerns about whether inflation expectations could be moving lower. Other participants, however, noted that survey-based measures of longer-term inflation expectations had remained fairly steady, and a few participants characterized measures of underlying inflation rates, such as core and trimmed mean PCE inflation, as having stayed relatively stable. Most participants still expected inflation to increase gradually once energy prices and the prices of non-energy imports stabilized and as the labor market strengthened further. However, a few participants noted that direct evidence that inflation was rising toward 2 percent would be an important element of their assessment of the outlook and of the appropriate path for policy.
Participants expressed a range of views regarding the balance of risks to the medium-term economic outlook and its implications for the conduct of monetary policy. Most participants indicated that it was difficult to judge at this point whether the outlook for inflation and economic growth had changed materially, but they thought that uncertainty surrounding the outlook had increased as a result of recent financial and economic developments. Most participants were of the view that there was not yet enough evidence to indicate whether the balance of risks to the medium-term outlook had changed materially, but others judged that recent developments had increased the level of downside risks or that the risks were no longer balanced.
Several participants noted that monetary policy was less well positioned to respond effectively to shocks that reduce inflation or real activity than to upside shocks, and that waiting for additional information regarding the underlying strength of economic activity and prospects for inflation before taking the next step to reduce policy accommodation would be prudent. While participants continued to expect that gradual adjustments in the stance of monetary policy would be appropriate, they emphasized that the timing and pace of adjustments will depend on future economic and financial market developments and their implications for the medium-term economic outlook. A couple of participants questioned whether some financial market participants fully appreciated that monetary policy is data dependent, and a number of participants emphasized the importance of continuing to communicate this aspect of monetary policy.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the Committee met in December suggested that labor market conditions had improved further even as economic growth slowed late last year. Members noted that a range of recent labor market indicators, including strong job gains, pointed to some additional decline in the underutilization of labor resources. Members also agreed that household spending and business fixed investment had been increasing at moderate rates in recent months, and the housing sector had improved further; however, net exports had been soft and inventory investment had slowed. Members noted that inflation continued to run below the Committee's 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation had declined further; survey-based measures of longer-term inflation expectations were little changed, on balance, in recent months. Members expected that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would continue to strengthen.
In assessing whether economic conditions had improved sufficiently to warrant a further increase in the target range for the federal funds rate at this meeting, members agreed that labor market data had generally been stronger than anticipated at the time of the December meeting, and some members noted that wage growth had picked up. However, the spending and production data generally had been disappointing--in particular, information regarding indicators of manufacturing activity, consumption expenditures, and inventory investment. Regarding the outlook for inflation, the additional sharp declines in energy prices and strengthening of the exchange value of the dollar since the December meeting were likely to hold down inflation for longer than previously anticipated, but inflation was expected to increase gradually as energy prices and the prices of non-energy imports stabilized and the labor market strengthened further. A couple of members emphasized that direct evidence that inflation was rising toward 2 percent would be an important element of their assessments of the appropriate timing of further policy firming.
In discussing the appropriate path for the target range for the federal funds rate over the medium term, members agreed that it would be important to closely monitor global economic and financial developments and to continue to assess their implications for the labor market and inflation, and for the balance of risks to the outlook. Members expressed a range of views regarding the implications of recent economic and financial developments for the degree of uncertainty about the medium-term outlook, with many members judging that uncertainty had increased. Members generally agreed that the implications of the available information were not sufficiently clear to allow members to assess the balance of risks to the economic outlook in the Committee's postmeeting statement. However, members observed that if the recent tightening of global financial conditions was sustained, it could be a factor amplifying downside risks.
After assessing the outlook for economic activity, the labor market, and inflation, and after weighing the uncertainties associated with the outlook, members agreed to leave the target range for the federal funds rate unchanged at 1/4 to 1/2 percent. The Committee also maintained its policy of reinvesting principal payments from agency debt and agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipated that it would be appropriate to continue this reinvestment policy until normalization of the level of the federal funds rate was well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
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 SOMA in accordance with the following domestic policy directive, to be released at 2:00 p.m.:
"Effective January 28, 2016, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1/4 to 1/2 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 0.25 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."
The vote also encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in December suggests that labor market conditions improved further even as economic growth slowed late last year. Household spending and business fixed investment have been increasing at moderate rates in recent months, and the housing sector has improved further; however, net exports have been soft and inventory investment slowed. A range of recent labor market indicators, including strong job gains, points to some additional decline in underutilization of labor resources. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation declined further; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. Inflation is expected to remain low in the near term, in part because of the further declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.
Given the economic outlook, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions."
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, James Bullard, Stanley Fischer, Esther L. George, Loretta J. Mester, Jerome H. Powell, Eric Rosengren, and Daniel K. Tarullo.
Voting against this action: None.
Consistent with the Committee's decision to leave the target range for the federal funds rate unchanged, the Board of Governors took no action to change the interest rates on reserves or discount rates.
Potential Enhancements to the Summary of Economic Projections
Next, participants considered a proposal by the subcommittee on communications to add to the SEP several charts that would illustrate the uncertainty that attends participants' macroeconomic projections. A staff briefing reviewed the subcommittee's proposal, noting that these so-called fan charts could be constructed largely from information on historical errors from government and private-sector forecasts that is already provided in the SEP, thereby making it easy to explain the new charts to the public; in addition, the inclusion of a fan chart for the federal funds rate could help convey to the public that the future path of monetary policy is uncertain and will depend on economic and financial developments. The subcommittee had considered other approaches but opted to recommend a simple method similar to that followed by some foreign central banks.
Participants expressed a range of views regarding the advantages and disadvantages of including fan charts in the SEP. On the one hand, these charts would enhance the Committee's communications by providing a visual representation of the uncertainty surrounding the median projections for each variable, although it was noted that the meeting minutes and the SEP already provide information about participants' assessments of the uncertainty regarding the economic outlook. In addition, fan charts would help illustrate that the dispersion of participants' projections was usually modest relative to the uncertainty that attends macroeconomic forecasts. Moreover, a number of participants noted that the simple approach that the subcommittee was recommending would be more straightforward to explain to the public than the other options considered by the subcommittee and could be modified over time to incorporate greater complexity--for instance, by showing that the magnitude of uncertainty above the median projection was not necessarily equal to the magnitude of uncertainty below it. On the other hand, some participants thought that the proposed fan charts still could be challenging for the general public to interpret. It was also noted that other central banks that employ fan charts typically display uncertainty around a staff forecast or policymakers' consensus forecast, but that the median SEP projections do not necessarily represent the Committee's collective view. Moreover, the typical magnitude of the historical forecast errors used to construct the proposed fan charts could well differ from participants' judgments about uncertainty going forward--information that is already included in the SEP--and this difference could be difficult to explain.
With regard to including a fan chart to illustrate the uncertainty surrounding the path of the policy interest rate, a fan chart for the federal funds rate might be helpful in explaining that future monetary policy is necessarily uncertain and will depend upon economic and financial developments. However, participants raised several questions, including whether the band around the federal funds rate path should extend below zero, how any future forward guidance would be represented in this framework, and whether it would be appropriate to include a fan chart for the federal funds rate in light of the Committee's role in setting the policy target.
At the end of the discussion, the Chair noted that further work might be helpful to address participants' concerns and asked the subcommittee on communications to continue to investigate the possibility of incorporating a graphical depiction of uncertainty into the SEP.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, March 15-16, 2016. The meeting adjourned at 12:25 p.m. on January 27, 2016.
Notation Vote
By notation vote completed on January 5, 2016, the Committee unanimously approved the minutes of the Committee meeting held on December 16-17, 2015.
_____________________________
Brian F. Madigan
Secretary
1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes. Return to text
2. Attended Wednesday session only. Return to text
3. Attended Tuesday session only. Return to text
4. Attended the discussion of potential enhancements to the Summary of Economic Projections. Return to text
5. Committee organizational documents are available at www.federalreserve.gov/monetarypolicy/rules_authorizations.htm. Return to text |
2015-12-16T00:00:00 | 2016-01-06 | Minute | Minutes of the Federal Open Market Committee
December 15-16, 2015
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, December 15, 2015, at 1:00 p.m. and continued on Wednesday, December 16, 2015, at 9:00 a.m.
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
Charles L. Evans
Stanley Fischer
Jeffrey M. Lacker
Dennis P. Lockhart
Jerome H. Powell
Daniel K. Tarullo
John C. Williams
James Bullard, Esther L. George, Loretta J. Mester, Eric Rosengren, and Michael Strine, Alternate Members of the Federal Open Market Committee
Patrick Harker and Robert S. Kaplan, Presidents of the Federal Reserve Banks of Philadelphia and Dallas, respectively
James M. Lyon, First Vice President, Federal Reserve Bank of Minneapolis
Brian F. Madigan, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Thomas C. Baxter, Deputy General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
David Altig, Eric M. Engen, Michael P. Leahy, William R. Nelson, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Robert deV. Frierson, Secretary of the Board, Office of the Secretary, Board of Governors
Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors
Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors
James A. Clouse and Stephen A. Meyer, Deputy Directors, Division of Monetary Affairs, Board of Governors
William B. English, Senior Special Adviser to the Board, Office of Board Members, Board of Governors
David Bowman, Andrew Figura, David Reifschneider, and Stacey Tevlin, Special Advisers to the Board, Office of Board Members, Board of Governors
Trevor A. Reeve, Special Adviser to the Chair, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Michael G. Palumbo, Senior Associate Director, Division of Research and Statistics, Board of Governors; Beth Anne Wilson, Senior Associate Director, Division of International Finance, Board of Governors
Ellen E. Meade and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors; Wayne Passmore, Senior Adviser, Division of Research and Statistics, Board of Governors
Joseph W. Gruber, Deputy Associate Director, Division of International Finance, Board of Governors
Francisco Covas, Christopher J. Gust, and Jason Wu, Assistant Directors, Division of Monetary Affairs, Board of Governors; John M. Roberts and Steven A. Sharpe, Assistant Directors, Division of Research and Statistics, Board of Governors
Patrick E. McCabe, Adviser, Division of Research and Statistics, Board of Governors
Penelope A. Beattie, Assistant to the Secretary, Office of the Secretary, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Katie Ross,1 Manager, Office of the Secretary, Board of Governors
Valerie Hinojosa, Information Manager, Division of Monetary Affairs, Board of Governors
Mark L. Mullinix, First Vice President, Federal Reserve Bank of Richmond
James J. McAndrews, Executive Vice President, Federal Reserve Bank of New York
Troy Davig, Michael Dotsey, Evan F. Koenig, Spencer Krane, Samuel Schulhofer-Wohl, Ellis W. Tallman, Geoffrey Tootell, and Christopher J. Waller, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Philadelphia, Dallas, Chicago, Minneapolis, Cleveland, Boston, and St. Louis, respectively
Douglas Tillett, Robert G. Valletta, and Alexander L. Wolman, Vice Presidents, Federal Reserve Banks of Chicago, San Francisco, and Richmond, respectively
William E. Riordan,2 Markets Officer, Federal Reserve Bank of New York
Developments in Financial Markets and Open Market Operations
The manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets, including expectations of market participants for monetary policy action by the Federal Open Market Committee (FOMC) at this meeting and in the future. The deputy manager followed with a briefing on money market developments and System open market operations conducted by the Open Market Desk during the period since the Committee met on October 27-28. It was noted that the System's reverse repurchase (RRP) agreement operations continued to provide a soft floor under short-term interest rates. The deputy manager also discussed plans to publish additional information on details of the Committee's current Treasury securities reinvestment policy. The manager then briefed the Committee on several other matters, including plans to begin publishing the effective federal funds rate and a broader overnight bank funding rate based on the Report of Selected Money Market Rates (FR 2420) in early March 2016; the possibility that the Federal Reserve, in cooperation with the Office of Financial Research, might publish a reference rate for overnight transactions collateralized by Treasury securities; and the staff's ongoing review of the readiness of various Desk operations and facilities.
By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the December 15-16 meeting suggested that real gross domestic product (GDP) was increasing at a moderate pace and that labor market conditions had improved further. Consumer price inflation continued to run below the FOMC's longer-run objective of 2 percent, restrained in part by declines in both energy prices and the prices of non-energy imported goods. Some survey-based measures of longer-run inflation expectations edged down, while market-based measures of inflation compensation were still low.
Total nonfarm payroll employment expanded at a faster monthly rate in October and November than in the third quarter. The unemployment rate ticked down to 5.0 percent in October and remained at that level in November; over the 12 months ending in November, the unemployment rate fell 3/4 percentage point. Both the labor force participation rate and the employment-to-population ratio increased slightly, on net, over October and November. The share of workers employed part time for economic reasons was flat, on balance, in recent months after declining considerably over the previous year. The rates of private-sector job openings, hires, and quits were little changed in October from their average levels in the third quarter. Recent measures of the gains in labor compensation were mixed: Over the four quarters ending in the third quarter, compensation per hour in the business sector advanced at a strong 3-1/2 percent rate, while the employment cost index rose at a more moderate 2 percent pace. Average hourly earnings for all employees increased 2-1/4 percent over the 12 months ending in November.
Manufacturing production increased in October, although output in the mining sector continued to decrease. Automakers' assembly schedules and broader indicators of manufacturing production, such as the readings on new orders from national and regional manufacturing surveys, generally pointed to a slow pace of gains in factory output in the coming months. Information on crude oil and natural gas extraction through early December indicated further declines in mining output.
Real personal consumption expenditures (PCE) appeared to be rising at a solid rate in the fourth quarter. The components of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimate of PCE increased in October and moved up at a faster pace in November, while the rate of sales of light motor vehicles remained high. Household spending was supported by strong growth in real disposable income in September and October, and households' net worth was bolstered by recent gains in home values. In addition, consumer sentiment in the University of Michigan Surveys of Consumers improved a little in November and early December.
Recent information on activity in the housing sector was mixed. Starts of new single-family homes were somewhat lower in October than in the third quarter, although building permits moved up. Meanwhile, starts of multifamily units declined. Sales of new homes rose in October, while existing home sales decreased.
Real private expenditures for business equipment and intellectual property products increased at a solid pace in the third quarter, but business spending growth looked to be slowing somewhat in the fourth quarter. Nominal shipments of nondefense capital goods excluding aircraft edged down in October, although new orders for these capital goods continued to move up. Recent readings from national and regional surveys of business conditions were consistent with more modest increases in business equipment spending than in the third quarter. Firms' nominal spending for nonresidential structures excluding drilling and mining rose in October, although available indicators of drilling activity, such as the number of oil and gas rigs in operation, continued to fall through early December.
Total real government purchases appeared to be about flat in the fourth quarter. Federal government spending for defense moved roughly sideways, on balance, over recent months. State and local government payrolls were little changed, on net, in October and November, while the level of nominal construction spending of these governments in October was essentially the same as its average in the third quarter.
The U.S. international trade deficit widened in October after narrowing in September. Exports declined, on balance, to the lowest level in three years; lower prices for commodities, along with reduced shipments of capital and consumer goods, weighed on nominal exports. Imports decreased in September and October, partly reflecting further declines in the price of imported oil. The available trade data suggested that declines in real net exports would likely continue to be a drag on real GDP growth in the fourth quarter.
Total U.S. consumer prices, as measured by the PCE price index, rose only 1/4 percent over the 12 months ending in October, held down by large declines in consumer energy prices. Core PCE inflation, which excludes changes in food and energy prices, was 1-1/4 percent over the same 12-month period, partly restrained by declines in the prices of non-energy imported goods. Over the 12 months ending in November, total consumer prices as measured by the consumer price index (CPI) rose 1/2 percent, while core CPI inflation was 2 percent. Survey measures of expected longer-run inflation were relatively stable, although they showed some hints of having edged slightly lower: In November and early December, the Michigan survey measure continued to run somewhat below its typical range of the past 15 years, though historical patterns suggest that these relatively low readings may have reflected softness in total inflation and energy prices. The measures from both the Survey of Professional Forecasters for the fourth quarter and the Survey of Primary Dealers in December moved down slightly.
Foreign real GDP growth improved in the third quarter after being weak in the first half, and recent indicators were consistent with a further moderate expansion in the fourth quarter. Economic activity in Canada rebounded in the third quarter, boosted by rising exports and a smaller drag from declines in oil-sector investment. The Japanese economy expanded in the third quarter following a small contraction in the previous quarter. In contrast, growth in the euro-area economy slowed in the third quarter. Recent indicators for economic activity in China were relatively favorable, and several other emerging Asian economies strengthened in the third quarter. Mexican economic growth also picked up in the third quarter, but the Brazilian economy continued to contract. Falling energy prices kept headline inflation very low in many foreign economies.
Staff Review of the Financial Situation
Federal Reserve communications and economic data releases over the intermeeting period appeared to have led investors to raise the odds they assigned to an increase in the target range for the federal funds rate at the December FOMC meeting. The October FOMC statement and the stronger-than-expected October employment report, in particular, boosted expectations of FOMC action at this meeting. Subsequent data releases and FOMC communications firmed those views, and in the weeks before the meeting, market participants came to attach high odds to the possibility of a December increase.
The expected path of the federal funds rate implied by market quotes on interest rate derivatives rose moderately over the intermeeting period. Nominal yields on 2- and 10-year Treasury securities rose about 40 basis points and 25 basis points, respectively. Measures of inflation compensation based on Treasury Inflation-Protected Securities remained low.
Over the first few weeks of the intermeeting period, the increase in the perceived likelihood of an increase in the target range for the federal funds rate at the December meeting was not accompanied by a rise in implied or realized volatility in domestic equity and fixed-income markets. However, later in the period, concerns among market participants about the implications of falling crude oil prices and the credit quality of high-yield bonds evidently increased. In reaction, broad measures of U.S. equity prices declined, with a steep selloff in energy-sector stocks, and the one-month-ahead option-implied volatility on the S&P 500 index, the VIX, climbed. In addition, strains in the high-yield bond market increased notably after a mutual fund that specialized in very low-rated and unrated bonds suspended investor redemptions and closed. Over the intermeeting period, high-yield bond spreads widened significantly, on net, particularly for bonds rated triple-C or below, with more pronounced increases for firms in the energy sector. In contrast, spreads on investment-grade corporate bonds were little changed on balance.
Nonfinancial businesses continued to tap financial markets at a brisk pace in the intermeeting period. Issuance of investment-grade corporate bonds and institutional leveraged loans remained solid, buoyed by demand to finance mergers and acquisitions. Growth of commercial and industrial loans on banks' books continued to be strong in October and November, driven mainly by the expansion of large loans at large banks. However, high-yield bond issuance slowed and refinancing-related leveraged loan issuance stayed weak during the intermeeting period.
Corporate earnings and credit quality continued to show some signs of weakening. Available reports and analysts' estimates suggested that aggregate earnings per share in the third quarter declined slightly compared with year-earlier levels, in line with expectations. Earnings were particularly weak in the energy and materials sectors because of declines in prices of crude oil and metals. The stronger dollar appeared to weigh on earnings growth across many sectors.
Conditions in the municipal bond market were generally stable. Gross issuance of municipal bonds was solid in recent months. Yields on municipal bonds declined a little, leaving their ratios to long-term Treasury yields somewhat lower but still near the high end of their historical range.
Financing conditions for commercial real estate tightened somewhat. Spreads on commercial mortgage-backed securities (CMBS) widened further, suggesting that investors in CMBS continued to reassess the risks in this sector following several years of robust demand for these securities. Nonetheless, underwriting standards continued to be relatively loose, and financing conditions appeared to remain quite accommodative overall. CMBS issuance stayed strong.
Residential mortgage market conditions were little changed, on net, over the intermeeting period. Credit remained tight for borrowers with low credit scores, hard-to-document income, or higher debt-to-income ratios. Interest rates on 30-year fixed-rate mortgages increased 30 basis points, in line with increases in yields on mortgage-backed securities and comparable-maturity Treasury securities. Nevertheless, mortgage rates continued to be quite low by historical standards.
Consumer credit markets remained accommodative for most borrowers. Consumer loan balances continued to rise at a robust pace through October because of sustained expansion in credit card balances and sizable increases in auto and student loans; growth of student loans continued to slow gradually. Student and auto loans remained broadly available, even to borrowers with subprime credit histories, but the availability of credit card loans for subprime borrowers was still tight.
Movements in foreign financial markets over the period reflected increased expectations that the FOMC would begin raising the target range for the federal funds rate in December, investors' views about monetary policies abroad, and substantial declines in commodity prices. The broad nominal index of the dollar rose appreciably. Equity indexes declined in many advanced and emerging market economies amid concerns about corporate earnings and falling oil and metals prices. Short-term sovereign yields changed little in the euro area and Japan but rose moderately in the United Kingdom. Longer-term sovereign yields moved higher in Europe along with U.S. Treasury yields.
Staff Economic Outlook
In the economic forecast prepared by the staff for the December FOMC meeting, real GDP growth in the second half of this year was little changed, on net, relative to the projection for the October meeting. The staff's medium-term projection for real GDP growth was revised up slightly, on balance, from the previous forecast, primarily because the recently passed Bipartisan Budget Act of 2015 was anticipated to lead to somewhat higher federal government purchases. The staff continued to project that real GDP would expand at a somewhat faster pace than potential output in 2016 through 2018, supported primarily by increases in consumer spending. The unemployment rate was expected to decline gradually and to run somewhat below the staff's estimate of its longer-run natural rate over this period.
The staff's forecast for inflation was revised down slightly in the near term in response to recent data for consumer prices and the further decline in the price of crude oil; over the medium term, the projection was little revised. Energy prices and prices of non-energy imported goods were expected to begin steadily rising next year. The staff projected that inflation would increase gradually over the next several years and reach the Committee's longer-run objective of 2 percent by the end of 2018.
The staff viewed the uncertainty around its December projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The risks to the forecast for real GDP were seen as tilted somewhat to the downside, reflecting the staff's assessment that neither monetary nor fiscal policy was currently well positioned to help the economy withstand substantial adverse shocks. Consistent with this downside risk to aggregate demand, the staff viewed the risks to its outlook for the unemployment rate as skewed somewhat to the upside. The risks to the projection for inflation were seen as weighted to the downside, reflecting the possibility that longer-term inflation expectations may have edged down and that the foreign exchange value of the dollar could rise substantially further, which would put downward pressure on inflation.
Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, members of the Board of Governors and Federal Reserve Bank presidents submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, inflation, and the federal funds rate for each year from 2015 through 2018 and over the longer run.3 Each participant's projections were conditioned on his or her judgment of appropriate monetary policy. The longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These projections and policy assessments are described in the Summary of Economic Projections, which is an addendum to these minutes.
In their discussion of the economic situation and the outlook, meeting participants viewed the information received over the intermeeting period as indicating that economic activity was expanding moderately and confirming that underutilization of labor resources had diminished appreciably since early in the year. Participants' outlook indicated that, with gradual adjustments in the stance of monetary policy, real GDP would continue to increase at a moderate rate over the medium term and that labor market indicators would continue to strengthen. They anticipated that the relative strength in domestic demand would be only partially offset by some further weakness in net exports. Participants generally saw the downside risks to U.S. economic activity from global economic and financial developments, although still material, as having diminished since late summer. In addition, new and revised information on employment in recent months had reduced earlier concerns about a possible slowing of progress in the labor market. Accordingly, taking into account domestic and international developments, most participants judged the risks to the outlook for both economic activity and the labor market to be balanced.
Incoming data indicated that inflation continued to run below the Committee's 2 percent longer-run objective, partly reflecting declines in energy prices and prices of non-energy imports. The price of crude oil fell further over the intermeeting period, and many participants lowered their near-term forecasts for inflation somewhat while leaving their medium-term forecasts little changed. Nearly all continued to anticipate that inflation would rise to or very close to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipated and the labor market strengthened further. Over the intermeeting period, market-based measures of inflation compensation stayed low; some survey-based measures of longer-term inflation expectations edged down. Although many participants remained concerned about downside risks attending the outlook for inflation, a majority of participants saw the risks to the outlook for inflation as balanced.
Consumer spending continued to rise at a solid rate in recent months; retail sales picked up over the October-November period, and motor vehicle sales remained strong. The available information from District business contacts was generally consistent with the recent trend in data on spending, although a couple of reports noted that households were spending cautiously and that some price discounting was likely. Over the coming year, participants expected consumer outlays to be supported importantly by ongoing gains in jobs, rising income, and improved household balance sheets. In addition, several participants pointed out that low energy costs should help support consumer expenditures.
The housing market was recovering gradually, with single-family homebuilding continuing to trend up and multifamily construction remaining at a high level. The reports on the pace of construction and real estate activity across Districts varied. Nonetheless, several participants noted factors pointing to continued improvement in the housing sector, including ongoing house price appreciation, low levels of home inventories, the substantial gap between the rate of household formation and the relatively slow pace of construction, and the possibility that homebuyers may be entering the market in anticipation of higher mortgage rates. Outside of the residential sector, commercial building was highlighted as an area of relative strength in a few Districts.
As a result of the recently passed Bipartisan Budget Act, federal spending was expected to provide a modest boost to economic activity over the next few years. Contacts in one District with a relatively large amount of federal government activity reported that their businesses would also benefit from the reduced uncertainty about the federal fiscal outlook.
Business activity was solid outside of sectors adversely affected by low energy prices and weak exports. A number of participants commented on the strength in the services sector in their Districts, citing, in particular, activity in high-tech, transportation, leisure and hospitality, and health-related businesses. Some reported that the stronger manufacturing industries in their Districts included aerospace, power generation equipment, and medical equipment, and that the domestic auto industry was still a bright spot. However, manufacturing activity overall continued to be restrained by weakness in industries with significant international exposures, such as steel, agricultural and drilling equipment, and chemicals. In addition, domestic energy producers and their service suppliers remained under significant pressure from the excess supply of crude oil and declining prices. The cutbacks in drilling led to further reductions in capital spending and to layoffs; credit conditions for some firms continued to deteriorate. In the agricultural sector, high levels of domestic crop production and weak global demand had depressed commodity prices, and farm income was expected to decline.
Participants generally agreed that the drag on U.S. economic activity from the appreciation of the dollar since the summer of 2014 and the slowdown in foreign economic growth, particularly in emerging market economies, was likely to continue to depress U.S. net exports for some time. Many expressed the view that the risks to the global economy that emerged late this summer had receded and anticipated moderate improvement in economic growth abroad in the coming year as currency and commodity markets stabilized. However, participants cited a number of lingering concerns, including the possibility that further dollar appreciation and persistent weakness in commodity prices could increase the stress on emerging market economies and that China could find it difficult to navigate the cyclical and structural changes under way in its economy. Several upside risks to the U.S. outlook also were noted, including the possibility that declining energy prices could spur consumer spending more than currently anticipated.
Consumer prices, as measured by the PCE index, were little changed, on net, in September and October, held down importantly by declines in energy prices; core PCE prices posted only small increases. Over the intermeeting period, crude oil prices dropped notably, other commodity prices declined, and the dollar appreciated further. The 12-month change in the core PCE price index was 1.3 percent in October and had been running at about that rate since the beginning of the year, despite the declines in prices of non-energy imported goods over the period. Several participants noted that alternative indicators of underlying inflation, such as the core CPI, the trimmed mean PCE, and the sticky price CPI, showed somewhat higher year-over-year increases, close to or above 2 percent. Inflation by these measures, however, had typically run higher than PCE price inflation, and a range of views was expressed about their implications for the outlook for PCE inflation.
Almost all participants continued to expect that once energy prices and prices of non-energy commodities stabilized, the effects of the declines in those prices on headline and core PCE inflation would fade. Moreover, with margins of resource underutilization having already diminished appreciably and longer-run inflation expectations reasonably stable, most anticipated that tightening resource utilization over the next year would contribute to higher inflation. Nearly all participants were now reasonably confident that inflation would move back to 2 percent over the medium term. However, because of the recent further decline in crude oil prices, many participants judged that falling energy prices would depress headline inflation somewhat longer than previously anticipated. Also, several observed that the additional appreciation of the dollar would continue to hold down the prices of imported goods. Although almost all still expected that the downward pressure on inflation from energy and commodity prices would be transitory, many viewed the persistent weakness in those prices as adding uncertainty or posing important downside risks to the inflation outlook.
Participants also discussed readings from various market- and survey-based measures of longer-run inflation expectations. Recently, some of the available surveys had reported softer longer-run inflation expectations, while others suggested still-stable expectations. In addition, the market-based measures of inflation compensation that had declined earlier were still at low levels. A number of participants noted, based on historical patterns, that some of the survey-based measures could be overly sensitive to energy price fluctuations rather than indicating shifts in perceptions of underlying inflation trends and that the declines in the market-based measures could reflect changes in risk and liquidity premiums. Many concluded that longer-run inflation expectations remained reasonably stable. However, some expressed concerns that inflation expectations may have already moved lower, or that they might do so if inflation persisted for much longer at a rate below the Committee's objective.
Labor market conditions improved further in recent months: Monthly gains in nonfarm payroll employment averaged more than 200,000 over the period from September to November, and the unemployment rate edged lower. The cumulative reduction in the underutilization of labor resources since early in the year was appreciable. The unemployment rate, at 5.0 percent in November, was 0.7 percentage point lower than in January and close to most participants' estimates of its longer-run normal level. Broader measures of underemployment that include marginally attached workers and those employed part time for economic reasons also fell substantially since January. However, the labor force participation rate moved down since January as well, with some FOMC participants attributing part of the decline to demographic trends or a structural rise in detachment among prime-age men. A number of participants observed that wage increases had begun to pick up, or that they appeared likely to do so over the coming year. Although many participants judged that the improvement in labor market conditions had been substantial, some others indicated that further progress in reducing labor market slack would be required before conditions would be consistent with the Committee's objective of maximum employment. In particular, some participants stressed the importance of the pace of economic growth staying above that of potential output in order to reduce remaining labor underutilization across broader dimensions--for example, by lowering the still-elevated numbers of workers employed part time for economic reasons and by encouraging additional workers who are currently outside the labor force but want a job to reenter the labor force.
Most participants expected that the unemployment rate would edge below their estimates of its longer-run level in the coming year and then stabilize for a time, with the further strengthening of the labor market helping move inflation higher. Because labor compensation was still increasing at a subdued rate and inflation remained well below 2 percent, some participants judged that a moderate further decline in unemployment would be unlikely to lead to a buildup of unduly strong inflation pressures. A few commented that a sustained period of labor market activity above levels consistent with maximum employment should speed the rise in inflation to the Committee's objective.
Financial conditions tightened modestly over the intermeeting period. Quotes in financial markets and survey results suggested that investors were quite confident that the Committee would raise the federal funds target range 25 basis points at the current meeting. Concerns among investors about the high-yield bond market increased notably in the days before the meeting after an open-ended mutual fund specializing in junk bonds suspended redemptions and closed. In their discussion, several participants commented that markets for leveraged finance had been correcting since midyear--particularly for the most risky assets, including those associated with energy firms--and noted that the widening of credit spreads in corporate bond markets appeared to be largely due to the repricing of riskier assets.
During their consideration of economic conditions and monetary policy, almost all participants agreed that the improvements that had occurred in the labor market and their confidence in a return of inflation to 2 percent over the medium term now satisfied the Committee's criteria for beginning the policy normalization process. Participants also discussed the implications of economic conditions going forward for the likely future path of the target range for the federal funds rate. Even after the initial increase in the target range, the stance of policy would remain accommodative. Participants saw several reasons why a gradual removal of policy accommodation would likely be appropriate. Normalizing policy gradually would keep the stance of monetary policy sufficiently accommodative to support further improvement in labor market conditions and to exert upward pressure on inflation. Also, a number of participants pointed out that because inflation was still running well below the Committee's objective and the outlook for inflation was subject to considerable uncertainty, it would probably take some time for the data to confirm that inflation was on a trajectory to return to 2 percent over the medium term. Gradual adjustments in the federal funds rate would also allow policymakers to assess how the economy was responding to increases in interest rates. In addition, by several estimates, the neutral short-term real interest rate was currently close to zero and was expected to rise only slowly as headwinds restraining the expansion receded. Moreover, the ability of monetary policy to offset the economic effects of an unanticipated economic shock remained asymmetric, and a cautious approach to normalizing policy could help minimize the risk of having to respond to a negative economic shock while the policy rate remained near its effective lower bound.
While viewing a gradual approach to policy normalization as likely to be appropriate given their economic outlook, participants emphasized the need to adjust the policy path as economic conditions evolved and to avoid appearing to commit to any specific pace of adjustments. They stressed the importance of communicating clearly that the future policy path could become shallower if the economic expansion weakened and inflation rose more slowly than currently anticipated, and that it could become steeper if real activity and inflation surprised to the upside. A few participants also indicated that significant risks to financial stability, should they emerge, could alter their view of the appropriate policy path.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the FOMC met in October indicated that economic activity had been expanding at a moderate pace. Although net exports remained soft, consumer and business spending remained solid, and the housing sector improved further. Overall, taking into account domestic and foreign developments, members saw the risks to the outlook for both economic activity and the labor market as balanced, and they expected that, with gradual adjustments in the stance of monetary policy, economic activity would most likely continue to expand at a moderate pace.
Members agreed that a range of recent labor market indicators, including ongoing job gains and declining unemployment, showed further improvement and confirmed that underutilization of labor resources had diminished appreciably since early this year. Members anticipated that economic activity was likely to continue to expand at a pace sufficient to lead to a further increase in the utilization of labor resources, and many members judged that additional progress would be required to reach the Committee's maximum-employment objective.
Inflation continued to run below the Committee's longer-run objective, held down in part by the effects of declines in energy and non-energy import prices. Market-based measures of inflation compensation remained low; some survey-based measures of longer-term inflation expectations had edged down. Members anticipated that the further decline in crude oil prices over the intermeeting period was likely to exert some additional transitory downward pressure on inflation in the near term.
Regarding the medium-term outlook, inflation was projected to increase gradually as energy prices and prices of non-energy imports stabilized and the labor market strengthened. Overall, taking into account economic developments and the outlook for economic activity and the labor market, the Committee was now reasonably confident in its expectation that inflation would rise, over the medium term, to its 2 percent objective. However, for some members, the risks attending their inflation forecasts remained considerable. Among those risks was the possibility that additional downward shocks to prices of oil and other commodities or a sustained rise in the exchange value of the dollar could delay or diminish the expected upturn in inflation. A couple also worried that a further strengthening of the labor market might not prove sufficient to offset the downward pressures from global disinflationary forces. And several expressed unease with indications that inflation expectations may have moved down slightly. In view of these risks and the shortfall of inflation from 2 percent, members expressed their intention to carefully monitor actual and expected progress toward the Committee's inflation goal.
After assessing the outlook for economic activity, the labor market, and inflation and weighing the uncertainties associated with the outlook, members agreed to raise the target range for the federal funds rate to 1/4 to 1/2 percent at this meeting. A number of members commented that it was appropriate to begin policy normalization in response to the substantial progress in the labor market toward achieving the Committee's objective of maximum employment and their reasonable confidence that inflation would move to 2 percent over the medium term. Members agreed that the postmeeting statement should report that the Committee's decision reflected both the economic outlook and the time it takes for policy actions to affect future economic outcomes. If the Committee waited to begin removing accommodation until it was closer to achieving its dual-mandate objectives, it might need to tighten policy abruptly, which could risk disrupting economic activity. Members observed that after this initial increase in the federal funds rate, the stance of monetary policy would remain accommodative. However, some members said that their decision to raise the target range was a close call, particularly given the uncertainty about inflation dynamics, and emphasized the need to monitor the progress of inflation closely.
Members also discussed their expectations for the size and timing of adjustments in the target range for the federal funds rate going forward. Based on their current forecasts for economic activity, the labor market, and inflation, as well as their expectation that the neutral short-term real interest rate will rise slowly over the next few years, members expected economic conditions would evolve in a manner that would warrant only gradual increases in the federal funds rate. However, they also recognized that the appropriate path for the federal funds rate would depend on the economic outlook as informed by incoming data. Members stressed the potential need to accelerate or slow the pace of normalization as the economic outlook evolved. In the current situation, because of their significant concern about still-low readings on actual inflation and the uncertainty and risks present in the inflation outlook, they agreed to indicate that the Committee would carefully monitor actual and expected progress toward its inflation goal. In determining the size and timing of further adjustments to monetary policy, some members emphasized the importance of confirming that inflation would rise as projected and of maintaining the credibility of the Committee's inflation objective. Based on their current economic outlook, they continued to anticipate that the federal funds rate was likely to remain, for some time, below levels that the Committee expected to prevail in the longer run.
The Committee also maintained its policy of reinvesting principal payments from agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. In view of members' outlook for moderate growth in economic activity, inflation moving toward its target only gradually, and the asymmetric risks posed by the continued proximity of short-term interest rates to their effective lower bound, the Committee anticipated retaining this policy until normalization of the level of the federal funds rate was well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
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 SOMA in accordance with the following domestic policy directive, to be released at 2:00 p.m.:
"Effective December 17, 2015, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1/4 to 1/2 percent, including: (1) overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 0.25 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day; and (2) term reverse repurchase operations to the extent approved in the resolution on term RRP operations approved by the Committee at its March 17-18, 2015, meeting.
The Committee directs the Desk to continue rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."
The vote also encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in October suggests that economic activity has been expanding at a moderate pace. Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. A range of recent labor market indicators, including ongoing job gains and declining unemployment, shows further improvement and confirms that underutilization of labor resources has diminished appreciably since early this year. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; some survey-based measures of longer-term inflation expectations have edged down.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen. Overall, taking into account domestic and international developments, the Committee sees the risks to the outlook for both economic activity and the labor market as balanced. Inflation is expected to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to monitor inflation developments closely.
The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective. Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent. The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions."
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Charles L. Evans, Stanley Fischer, Jeffrey M. Lacker, Dennis P. Lockhart, Jerome H. Powell, Daniel K. Tarullo, and John C. Williams.
Voting against this action: None.
To support the Committee's decision to raise the target range for the federal funds rate, the Board of Governors voted unanimously to raise the interest rates on required and excess reserve balances by 1/4 percentage point, to 1/2 percent, effective December 17, 2015. The Board of Governors also voted unanimously to approve a 1/4 percentage point increase in the primary credit rate (discount rate) to 1 percent, effective December 17, 2015.4
After these policy decisions, the deputy manager of the System Open Market Account briefed the Committee on plans for term RRPs over year-end.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, January 26-27, 2016. The meeting adjourned at 10:30 a.m. on December 16, 2015.
Notation Vote
By notation vote completed on November 17, 2015, the Committee unanimously approved the minutes of the Committee meeting held on October 27-28, 2015.
_____________________________
Brian F. Madigan
Secretary
1. Attended Wednesday session only. Return to text
2. Attended through the discussion of financial developments and open market operations. Return to text
3. The president of the Federal Reserve Bank of Minneapolis did not participate in this FOMC meeting, and the incoming president is scheduled to assume office on January 1, 2016. James M. Lyon, First Vice President of the Federal Reserve Bank of Minneapolis, submitted economic projections. Return to text
4. In taking this action, the Board approved requests submitted by the boards of directors of the Federal Reserve Banks of Boston, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Kansas City, Dallas, and San Francisco. This vote also encompassed approval by the Board of Governors of the establishment of a 1 percent primary credit rate by the remaining Federal Reserve Banks, effective on the later of December 17, 2015, and the date such Reserve Banks informed the Secretary of the Board of such a request. (Secretary's note: Subsequently, the Federal Reserve Banks of New York and Minneapolis were informed by the Secretary of the Board of the Board's approval of their establishment of a primary credit rate of 1 percent, effective December 17, 2015.) This vote of the Board of Governors also encompassed approval of the renewal by all 12 Federal Reserve Banks of the existing formulas for calculating the rates applicable to discounts and advances under the secondary and seasonal credit programs. Return to text |
2015-12-16T00:00:00 | 2015-12-16 | Statement | Information received since the Federal Open Market Committee met in October suggests that economic activity has been expanding at a moderate pace. Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. A range of recent labor market indicators, including ongoing job gains and declining unemployment, shows further improvement and confirms that underutilization of labor resources has diminished appreciably since early this year. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; some survey-based measures of longer-term inflation expectations have edged down.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen. Overall, taking into account domestic and international developments, the Committee sees the risks to the outlook for both economic activity and the labor market as balanced. Inflation is expected to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to monitor inflation developments closely.
The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective. Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent. The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams. |
2015-10-28T00:00:00 | 2015-10-28 | Statement | Information received since the Federal Open Market Committee met in September suggests that economic activity has been expanding at a moderate pace. Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. The pace of job gains slowed and the unemployment rate held steady. Nonetheless, labor market indicators, on balance, show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved slightly lower; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring global economic and financial developments. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams. Voting against the action was Jeffrey M. Lacker, who preferred to raise the target range for the federal funds rate by 25 basis points at this meeting. |
2015-10-28T00:00:00 | 2015-11-18 | Minute | Minutes of the Federal Open Market Committee
October 27-28, 2015
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, October 27, 2015, at 10:00 a.m. and continued on Wednesday, October 28, 2015, at 9:00 a.m.
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
Charles L. Evans
Stanley Fischer
Jeffrey M. Lacker
Dennis P. Lockhart
Jerome H. Powell
Daniel K. Tarullo
John C. Williams
James Bullard, Esther L. George, Loretta J. Mester, Eric Rosengren, and Michael Strine, Alternate Members of the Federal Open Market Committee
Patrick Harker, Robert S. Kaplan, and Narayana Kocherlakota, Presidents of the Federal Reserve Banks of Philadelphia, Dallas, and Minneapolis, respectively
Brian F. Madigan, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
David Altig, Thomas A. Connors, Eric M. Engen, Michael P. Leahy, William R. Nelson, Glenn D. Rudebusch, Daniel G. Sullivan, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Robert deV. Frierson,1 Secretary of the Board, Office of the Secretary, Board of Governors
Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors
Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors
Margaret Shanks,2 Deputy Secretary, Office of the Secretary, Board of Governors
James A. Clouse and Stephen A. Meyer, Deputy Directors, Division of Monetary Affairs, Board of Governors
Andreas Lehnert, Deputy Director, Office of Financial Stability Policy and Research, Board of Governors
William B. English, Senior Special Adviser to the Board, Office of Board Members, Board of Governors
Andrew Figura and Stacey Tevlin, Special Advisers to the Board, Office of Board Members, Board of Governors
Trevor A. Reeve, Special Adviser to the Chair, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
David E. Lebow, Senior Associate Director, Division of Research and Statistics, Board of Governors
Jeremy B. Rudd, Senior Adviser, Division of Research and Statistics, Board of Governors; Joyce K. Zickler, Senior Adviser, Division of Monetary Affairs, Board of Governors
Fabio M. Natalucci, Associate Director, Division of Monetary Affairs, Board of Governors
Joseph W. Gruber,3 Deputy Associate Director, Division of International Finance, Board of Governors; Jane E. Ihrig4 and David López-Salido,5 Deputy Associate Directors, Division of Monetary Affairs, Board of Governors
Glenn Follette and John M. Roberts, Assistant Directors, Division of Research and Statistics, Board of Governors; Christopher J. Gust, Assistant Director, Division of Monetary Affairs, Board of Governors
Robert J. Tetlow, Adviser, Division of Monetary Affairs, Board of Governors
Penelope A. Beattie,3 Assistant to the Secretary, Office of the Secretary, Board of Governors
Dana L. Burnett, Section Chief, Division of Monetary Affairs, Board of Governors; Andrea Raffo,5 Section Chief, Division of International Finance, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Yuriy Kitsul, Senior Economist, Division of Monetary Affairs, Board of Governors
Benjamin K. Johannsen,5 Economist, Division of Monetary Affairs, Board of Governors
David Sapenaro, First Vice President, Federal Reserve Bank of St. Louis
Jeff Fuhrer, Executive Vice President, Federal Reserve Bank of Boston
Kei-Mu Yi, Special Policy Advisor to the President, Federal Reserve Bank of Minneapolis
Michael Dotsey, Michael Held, Evan F. Koenig, and Christopher J. Waller, Senior Vice Presidents, Federal Reserve Banks of Philadelphia, New York, Dallas, and St. Louis, respectively
Edward S. Knotek II and George A. Kahn, Vice Presidents, Federal Reserve Banks of Cleveland and Kansas City, respectively
Robert Rich and Andrea Tambalotti,5 Assistant Vice Presidents, Federal Reserve Bank of New York
Andreas L. Hornstein, Senior Advisor, Federal Reserve Bank of Richmond
Jing Zhang,5 Senior Economist, Federal Reserve Bank of Chicago
Equilibrium Real Interest Rates
The staff presented several briefings regarding the concept of an equilibrium real interest rate--sometimes labeled the "neutral" or "natural" real interest rate, or "r*"--that can serve as a benchmark to help gauge the stance of monetary policy. Various concepts of r* were discussed. According to one definition, short-run r* is the level of the real short-term interest rate that, if obtained currently, would result in the economy operating at full employment or, in some simple models of the economy, at full employment and price stability. The staff summarized the behavior of estimates of the short-run equilibrium real rate over recent business cycles as well as longer-run trends in real interest rates and key factors that influence those trends. Estimates derived using a variety of empirical models of the U.S. economy and a range of econometric techniques indicated that short-run r* fell sharply with the onset of the 2008-09 financial crisis and recession, quite likely to negative levels. Short-run r* was estimated to have recovered only partially and to be close to zero currently, still well below levels that prevailed during recent economic expansions when the unemployment rate was close to estimates of its longer-run normal level.
With respect to longer-run trends, the staff noted that multiyear averages of short-term real interest rates had been declining not only in the United States, but also in many other large economies for the past quarter-century and stood near zero in most of those economies. Moreover, economic theory indicates that the equilibrium level of short-term real interest rates would likely remain low relative to estimates of its level before the financial crisis if trend growth of total factor productivity does not pick up and if demographic projections for slow growth in working-age populations are borne out. Finally, the staff discussed the implications of uncertainty about the level of the equilibrium real rate for using estimates of short-run r* as a guideline for appropriate monetary policy.
In their comments on the briefings and in their discussion of the potential use of r* in monetary policy deliberations, policymakers made a number of observations. The unemployment rate has declined gradually in recent years, indicating that real gross domestic product (GDP) growth has, on average, exceeded growth of potential GDP, but not by a substantial margin. This outcome, in turn, suggested that the actual level of short-term real interest rates has been below but not substantially below the equilibrium real rate, consistent with estimates that r* currently is close to zero, notably below its historical average.
A number of participants indicated that they expected short-run r* to rise as the economic expansion continued, but probably only gradually. Moreover, it was noted that the longer-run downward trend in real interest rates suggested that short-run r* would likely remain below levels that were normal during previous business cycle expansions, and that the longer-run normal level to which the nominal federal funds rate might be expected to converge in the absence of further shocks to the economy--that is, the level that would be consistent, in the long run, with maximum employment and 2 percent inflation--would likely be lower than was the case in previous decades. A lower long-run level of r* would also imply that the gap between the actual level of the federal funds rate and its near-zero effective lower bound would be smaller on average. A smaller gap might increase the frequency of episodes in which policymakers would not be able to reduce the federal funds rate enough to promote a strong economic recovery and rapid return to maximum employment or to maintain price stability in the aftermath of negative shocks to aggregate demand. Some participants noted that it would be prudent to have additional policy tools that could be used in such situations.
Developments in Financial Markets, Open Market Operations, and Policy Normalization
The deputy manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets, money markets, and System open market operations conducted by the Open Market Desk during the period since the Federal Open Market Committee (FOMC) met on September 16-17. Take-up of the System's overnight reverse repurchase agreement operations increased during this period, evidently reflecting a modest narrowing of the spread of money market interest rates over the offered rate on such operations. Total take-up of overnight and term reverse repurchase agreements at the end of the third quarter was also elevated. The deputy manager briefed the Committee on plans for the upcoming quarterly test of the Term Deposit Facility in December and for term reverse repurchase agreement operations to be conducted ahead of year-end. In addition, an update was provided on a data collection that will allow the calculation of the federal funds effective rate and a new overnight bank funding rate based on transaction-level data reported by depository institutions that are active in overnight bank funding markets; as previously reported, the Federal Reserve expects to begin publication of the rates based on these data in the first few months of 2016.
A staff presentation reviewed issues that could arise if the Treasury was temporarily unable to meet its obligations because of constraints associated with the statutory federal debt limit. Following the presentation, policymakers indicated that, if such issues arose, it remained appropriate to follow the strategy for open market operations, the discount window, and other System responsibilities that was discussed at the Committee's video-conference meeting of October 16, 2013, and summarized in the minutes of that meeting.
By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the October 27-28 meeting suggested that real GDP was increasing at a moderate pace, but that the improvement in labor market conditions had slowed somewhat in recent months. Inflation continued to run below the FOMC's longer-run objective of 2 percent, restrained in part by declines in energy prices and prices of non-energy imported goods. Survey measures of longer-run inflation expectations remained stable; market-based measures of inflation compensation moved slightly lower.
Total nonfarm payroll employment expanded at about the same rate in September as in August, although at a slower pace than earlier this year, and the unemployment rate remained at 5.1 percent. Both the labor force participation rate and the employment-to-population ratio edged down. However, the share of workers employed part time for economic reasons fell a little. The rate of private-sector job openings declined in August but was still at a high level, while the rates of hiring and quits were unchanged.
Industrial production decreased in September as the output of both the manufacturing and mining sectors declined, likely reflecting the effects of the appreciation in the foreign exchange value of the dollar and the fall in crude oil prices since the middle of last year. Automakers' assembly schedules, as well as broader indicators of manufacturing production, such as the readings on new orders from national and regional manufacturing surveys, generally pointed to further decreases in factory output in coming months. Recent information on crude oil and natural gas extraction indicated further declines in mining output.
Real personal consumption expenditures (PCE) appeared to rise at a solid rate in the third quarter as a whole. The components of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimate of PCE increased only slightly in September, but the rate of sales of light motor vehicles rose to a new high for the year. Real disposable income grew at a solid pace in July and August. Households' net worth was boosted by recent gains in home values and the net increase in equity prices over the intermeeting period. Moreover, consumer sentiment in the University of Michigan Surveys of Consumers improved in early October.
Activity in the housing sector was mixed, but it generally continued to recover slowly. Starts of new single-family homes stepped down modestly, on net, over August and September, although building permits increased slightly. Meanwhile, starts of multifamily units rose notably. Sales of new and existing homes moved down somewhat on balance.
Real private expenditures for business equipment and intellectual property products appeared to increase at a solid pace in the third quarter. Nominal shipments of nondefense capital goods excluding aircraft rose in September. However, forward-looking indicators, such as new orders for these capital goods along with national and regional surveys of business conditions, pointed to more modest increases in business equipment spending in the coming months. Firms' nominal spending for nonresidential structures excluding drilling and mining rose in August, although available indicators of drilling activity, such as the number of oil and gas rigs in operation, continued to fall. Real private inventory investment appeared to have slowed markedly in the third quarter.
Total real government purchases looked to have moved sideways in the third quarter. Federal government purchases likely declined a little, as defense spending stepped down further. In contrast, state and local government purchases appeared to have been rising; the payrolls of these governments expanded further in September, and their nominal construction spending in July and August was above its level in the second quarter.
The U.S. international trade deficit widened in August as exports declined and imports rose. The fall in exports was concentrated in industrial supplies, while consumer and capital goods accounted for much of the growth in imports. Advance estimates for September indicated a narrower merchandise trade deficit, with a rebound in exports and a decline in imports relative to August. After falling sharply early this year, real net exports were little changed in the second quarter and appeared to have stayed flat in the third quarter, with real exports remaining soft.
Total U.S. consumer prices in August, as measured by the PCE price index, were unchanged from 12 months earlier, reflecting large declines in consumer energy prices. Core PCE inflation, which excludes changes in food and energy prices, was 1-1/4 percent over the same 12-month period, restrained in part by declines in the prices of non-energy goods imports. In September, total consumer prices as measured by the consumer price index (CPI) were unchanged from a year earlier, while the core CPI increased almost 2 percent. Measures of expected longer-run inflation from a number of surveys, including the Michigan survey, the Blue Chip Economic Indicators, and the Desk's Survey of Primary Dealers, remained stable. However, market-based measures of inflation compensation moved a little lower. Average hourly earnings for all employees increased 2-1/4 percent over the 12 months ending in September, a pace that was faster than consumer price inflation.
Foreign economic growth appeared to have improved somewhat in the third quarter following two quarters of slow growth. Economic activity rebounded in Canada after disruptions to energy production earlier in the year, and real GDP growth jumped to 5 percent in South Korea as the effects of the MERS (Middle East Respiratory Syndrome) outbreak faded. Chinese real GDP growth remained around 7 percent on a four-quarter change basis, and information on economic activity in the euro area and the United Kingdom was consistent with continued expansion. However, indicators of economic activity in Japan and Brazil remained weak. Headline inflation was low in many countries as a result of falling energy prices. Inflation rates remained high in some South American countries whose currencies had recently depreciated sharply.
Staff Review of the Financial Situation
Continued concerns about the global economic growth outlook weighed on market sentiment in the United States and abroad early in the intermeeting period, but sentiment improved somewhat in the weeks preceding the October FOMC meeting. Following the weaker-than-expected report on the U.S. employment situation in September, market participants' expectations for the timing of the initial increase in the target range for the federal funds rate shifted out, and their expectation for the subsequent path of the federal funds rate flattened. Financing conditions for most businesses and households remained accommodative but tightened somewhat for businesses with lower credit quality.
Federal Reserve communications and economic data releases over the intermeeting period appeared to have led investors to expect a later start date for monetary policy normalization and a more gradual path for the federal funds rate thereafter. According to federal funds futures quotes just before the October FOMC meeting, as well as results from the Desk's Survey of Primary Dealers and Survey of Market Participants, market participants saw a significantly lower chance of the initial increase in the target range for the federal funds rate occurring before year-end than they perceived just before the September meeting, while the likelihood of liftoff occurring at or after the March 2016 meeting rose. The expected path for the federal funds rate implied by quotes on overnight index swap rates flattened notably over the intermeeting period.
Nominal Treasury yields declined further, reflecting FOMC communications, concerns about global economic growth, and generally weaker-than-expected U.S. economic data releases. Measures of inflation compensation based on Treasury Inflation-Protected Securities moved slightly lower on net.
Broad U.S. equity price indexes fell in the first few weeks after the September FOMC meeting but subsequently more than retraced those declines. Spreads of yields on triple-B-rated corporate bonds over comparable-maturity Treasury securities changed little, on balance, and those on speculative-grade corporate bonds widened notably across sectors. Across the credit spectrum, spreads were generally near their highest levels in several years and ended the period above their historical medians. Based on available reports and analysts' estimates, aggregate corporate earnings per share in the third quarter were expected to decrease slightly, with large declines in the energy and materials sectors. Spreads on leveraged loans increased in August and moved up, on balance, over the intermeeting period.
Overall, financing conditions for nonfinancial businesses were generally accommodative but tightened somewhat for lower-rated firms. Corporate bond issuance rebounded in September after a slowdown in August. The expansion of commercial and industrial loans on banks' books moderated slightly during the third quarter, and lending standards were little changed, on net, after several years of easing, according to the October Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS). Financing conditions for small businesses continued to improve, with loan originations maintaining their upward trend, although indicators of the optimism of small business owners declined in recent months. Financing conditions for municipalities remained accommodative on balance. Even though news reports on Puerto Rico's public-sector debt situation garnered attention of market participants, credit default swap spreads on Puerto Rico's general obligation debt were little changed over the intermeeting period.
Spreads on commercial mortgage-backed securities (CMBS) widened over the intermeeting period, while respondents in the SLOOS reported that standards on commercial real estate (CRE) loans were little changed in the third quarter. Overall, CRE financing appeared to remain broadly available. All major categories of CRE loans on banks' balance sheets expanded robustly through September, consistent with reports of stronger demand for such loans in the SLOOS.
Credit conditions for residential mortgages eased modestly, on net, in the third quarter. A moderate net fraction of SLOOS respondents continued to ease standards on loans eligible for purchase by the government-sponsored enterprises and on jumbo loans, but standards on government-backed loans tightened somewhat. Interest rates on 30-year fixed-rate mortgages declined over the intermeeting period.
Conditions in consumer credit markets remained accommodative on balance. Outstanding credit card balances expanded further in August, and a moderate net fraction of banks in the SLOOS indicated that they eased standards on such loans during the third quarter. However, credit card limits remained mostly flat overall and were fairly tight for subprime borrowers. The growth of auto and student loans stayed robust.
Continued concerns about the outlook for global economic growth weighed on commodity and foreign equity prices early in the intermeeting period. These declines subsequently were reversed, and foreign equity price indexes ended the period higher, pushed up by expectations of additional monetary policy accommodation in major foreign economies and some favorable economic indicators in China.
The broad nominal index of the dollar's foreign exchange value ended the period little changed on balance. The dollar depreciated early in the period following the weaker-than-expected U.S. employment report for September and the subsequent downward shift of the expected path for U.S. policy rates. But this decline was balanced by subsequent appreciation, in part as expectations increased for greater monetary policy accommodation abroad. These shifting expectations also contributed to a decline in sovereign yields in the advanced foreign economies.
The staff provided its latest report on potential risks to financial stability. Since the previous report in July, financial markets around the globe experienced a surge in volatility that peaked in late August amid concerns regarding slowing economic growth in emerging market economies and potential implications for advanced economies. This volatility was accompanied by sizable declines in the prices of some risky assets, and an increase in risk aversion eased valuation pressures in the corporate bond market. Issuance of speculative-grade corporate bonds and leveraged loans slowed from the rapid pace seen earlier this year. The U.S. financial system appeared to absorb the shocks without systemic strains, supported by relatively high capital positions of large banking organizations and insurance firms and by restrained use of short-term wholesale funding across the financial sector. Moreover, leverage in the nonfinancial sector remained modest overall. However, leverage of speculative-grade and unrated nonfinancial corporations stayed near record levels. Rising CRE prices, accompanied by loosening underwriting standards in CMBS markets, continued to suggest valuation pressures.
Staff Economic Outlook
In the economic forecast prepared by the staff for the October FOMC meeting, real GDP growth in the second half of this year was a little lower, on balance, than in the projection for the September meeting, largely reflecting a downward revision to estimated inventory investment. The staff's medium-term projection for real GDP growth was essentially unrevised from the previous forecast. The staff continued to project that real GDP would expand at a somewhat faster pace than potential output from 2016 through 2018, supported primarily by increases in consumer spending. The unemployment rate was expected to decline gradually and to run a little below the staff's estimate of its longer-run natural rate over this period.
The staff's forecast for inflation in the near term was revised up a little, reflecting recent data, and it was unrevised over the medium term. Energy prices and prices of non-energy imported goods were expected to begin steadily rising next year. The staff projected that inflation would increase gradually over the next several years but would still be slightly below the Committee's longer-run objective of 2 percent at the end of 2018. However, inflation was anticipated to reach 2 percent thereafter, with inflation expectations in the longer run assumed to be consistent with the Committee's objective and slack in labor and product markets projected to have waned.
The staff viewed the uncertainty around its October projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The risks to the forecast for real GDP and inflation were seen as tilted to the downside, reflecting the staff's assessment that neither monetary nor fiscal policy was well positioned to help the economy withstand substantial adverse shocks. Consistent with this downside risk to aggregate demand, the staff viewed the risks to its outlook for the unemployment rate as tilted to the upside.
Participants' Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants saw the information received over the intermeeting period as suggesting that economic activity had been expanding moderately. Household spending and business fixed investment increased at solid rates in recent months, and the housing sector improved further. However, net exports remained soft. Participants noted that the pace of job gains slowed while the unemployment rate held steady; nonetheless, a range of labor market indicators, on balance, suggested that underutilization of labor resources had diminished since early this year. With private domestic final demand expanding at a solid pace, participants generally viewed the incoming data as confirming their assessment that economic activity would continue to expand at a moderate rate, leading to further improvement in labor market conditions. However, some participants were concerned that the recent slowdown in employment growth might prove more than temporary, and that improvement in labor market conditions might not continue. Most participants saw the downside risks arising from economic and financial developments abroad as having diminished and judged the risks to the outlook for domestic economic activity and the labor market to be nearly balanced. A few participants, though, noted that downside risks from abroad were still significant. Inflation continued to run below the Committee's 2 percent longer-run objective, partly reflecting declines in energy prices and prices of non-energy imports. Market-based measures of inflation compensation moved slightly lower; survey-based measures of longer-term inflation expectations remained stable. Participants generally anticipated that inflation would rise gradually toward 2 percent as the labor market improved further and the transitory effects of earlier declines in energy and import prices dissipated.
Notwithstanding the disappointing retail sales data in September, participants were encouraged by the solid pace of consumption growth in the third quarter and generally expected consumer spending to rise moderately going forward. Gains in employment and income, low gasoline prices, and a high level of consumer confidence were viewed as factors that should support consumer spending. The available reports from District contacts in the retail and auto industries indicated solid gains in consumer spending, and contacts were optimistic about the near-term outlook.
Participants generally viewed the housing sector as continuing to recover, although a couple of participants noted that the pace of recovery was slow. Contacts in a number of Districts were upbeat about the sector, citing rising home prices and a healthy pace of construction and sales.
Participants noted that business fixed investment appeared to be increasing at a solid rate despite the sharp contraction in energy-related investment. Nonresidential construction was reported to be expanding in a number of regions. A large decline in inventory investment was expected to reduce the pace of GDP growth in the third quarter, but participants saw further outsized declines in inventory accumulation as unlikely. Participants expected net exports to continue to subtract from GDP growth in the second half of the year, reflecting weak foreign activity as well as the earlier appreciation of the dollar. However, solid underlying momentum in private domestic demand was anticipated to support economic growth going forward.
Manufacturing activity had slowed somewhat over the intermeeting period in a number of regions, importantly reflecting the weakness in exports, although the auto industry remained a bright spot. Weakness in commodity prices also continued to weigh on activity in the energy and agricultural sectors. Moreover, industry contacts remained pessimistic about the outlook for the energy sector. The substantial global supply of crude oil seemed likely to weigh on energy prices for some time, contributing to an increase in restructurings and bankruptcies in this sector. In contrast, service-sector reports were mostly positive.
Although employment growth slowed and the unemployment rate held steady in September, participants agreed that underutilization of labor resources had been reduced since earlier in the year. A number of participants expressed the view that further progress would be necessary before labor market conditions were fully consistent with maximum employment, while some others judged that there was little or no remaining underutilization of labor resources. Several participants observed that the recent employment reports had increased the uncertainty about the outlook for the labor market. They discussed whether the slowdown in job gains was merely transitory or indicative of a more persistent slowdown in which labor market conditions might no longer improve. Some other indicators, such as the labor force participation rate and data on job openings, quits, and hiring, had also been softer. Other participants viewed a broad range of recent labor market data as indicating a further reduction in slack and stressed the importance of assessing the cumulative improvement in the labor market since early in the year, which had been significant. Moreover, several participants indicated that they viewed the pace of monthly job gains in September as still above the rate consistent with stable or declining labor market slack, and a few participants interpreted slower increases in payrolls as evidence that labor markets had tightened.
The incoming information on wages and labor compensation, including recent data on average hourly earnings of employees, suggested that the pace of wage gains remained subdued. A number of participants cited staff analysis indicating that the modest pace of labor compensation growth in recent years may have reflected slower trend productivity growth that offset the upward pressure on wages from the narrowing of labor market slack. However, other participants noted that the continued subdued trend in wages was evidence of an absence of upward pressure on inflation from the current level of resource utilization. A number of participants reported that some of their business contacts were experiencing increasing challenges in hiring, resulting in upward pressure on wages in various occupations and in some geographic areas.
Participants discussed how recent economic developments influenced their expectations for reaching the FOMC's 2 percent inflation objective over the medium term. Total PCE price inflation, as measured on a 12-month basis, continued to run below the Committee's longer-run objective. Core PCE inflation also remained low, but some other measures of inflation, such as the trimmed mean PCE and trimmed mean CPI measures, continued to run at higher levels than core PCE inflation and had recently moved up modestly. Moreover, a few participants noted that the September CPI data appeared consistent with some firming in inflation. Surveys continued to suggest that longer-run inflation expectations remained stable. Participants still expected that the downward pressure on inflation from the previous declines in energy prices and the effects of past dollar appreciation would prove temporary. Several participants, however, cited downside risks to inflation, pointing, for example, to declines in market-based measures of inflation compensation. Nonetheless, participants generally continued to anticipate that, with appropriate monetary policy, inflation would move toward the Committee's objective over the medium term, reflecting the anticipated tightening of product and labor markets, the waning of downward pressures from energy and import prices, and stable inflation expectations.
Participants also discussed a range of topics related to financial market developments and financial stability. They noted that volatility in global financial markets had abated since the previous FOMC meeting, with equity prices in the United States largely retracing the declines experienced late in the summer. The U.S. financial system appeared to have weathered the turbulence in global financial markets without any sign of systemic stress. Participants commented on issues related to financial stability monitoring and the use of macroprudential tools, the assessment of valuation risks in leveraged loan and real estate markets, the widening of credit spreads on corporate bonds, and potential risks to financial stability stemming from interest rates remaining low for a prolonged period in an environment of a low neutral (or equilibrium) real rate. In addition, it was noted that Puerto Rico continued to face significant challenges servicing its debts, although the associated systemic risks for U.S. financial markets were likely to be minimal.
During their discussion of economic conditions and monetary policy, participants focused on a number of issues associated with the timing and pace of policy normalization. Some participants thought that the conditions for beginning the policy normalization process had already been met. Most participants anticipated that, based on their assessment of the current economic situation and their outlook for economic activity, the labor market, and inflation, these conditions could well be met by the time of the next meeting. Nonetheless, they emphasized that the actual decision would depend on the implications for the medium-term economic outlook of the data received over the upcoming intermeeting period. Some others, however, judged it unlikely that the information available by the December meeting would warrant raising the target range for the federal funds rate at that meeting.
A number of participants pointed to various reasons why the Committee should avoid a delay in policy firming. One concern was that such a delay, if the reasons were not well understood by market participants, could increase uncertainty in financial markets and unduly magnify the perceived importance of the beginning of the policy normalization process. Another concern mentioned was the increasing risk of a buildup of financial imbalances after a prolonged period of very low interest rates. It was also noted that a decision to defer policy firming could be interpreted as signaling lack of confidence in the strength of the U.S. economy or erode the Committee's credibility. Some participants emphasized that progress toward the Committee's objectives should be assessed in light of the cumulative gains made to date without placing excessive weight on month-to-month changes in incoming data.
Several participants indicated that, despite lessening concerns about the implications of recent global economic and financial developments for domestic economic activity and inflation, appreciable downside risks to the outlook remained. They were concerned about a potential loss of momentum in the economy and the associated possibility that inflation might fail to increase as expected. Such concerns might suggest that the initiation of the normalization process may not yet be warranted. They also noted uncertainty about whether economic growth was robust enough to withstand potential adverse shocks, given the limited ability of monetary policy to offset such shocks when the federal funds rate is near its effective lower bound, and concern that the beginning of policy normalization might be associated with an unwarranted tightening of financial conditions. They believed that in these circumstances, risk-management considerations called for a cautious approach. They judged it appropriate to wait for additional information providing evidence of further improvement in the labor market and increasing their confidence that inflation was on a path to return to 2 percent over the medium term before raising the target range for the federal funds rate. In addition, a couple of participants cited concerns that a premature tightening might damage the credibility of the Committee's inflation objective if inflation stayed below 2 percent for a prolonged period.
Several participants indicated that, in the current low interest rate environment, it would be prudent for the Committee to consider options for providing additional monetary policy accommodation if the outlook for economic activity were to weaken to a degree that seemed likely to undermine continued progress in labor market conditions and impede the movement of inflation back to the Committee's 2 percent objective over the medium term. It was also noted that the Committee would need to reformulate its communications regarding the near-term outlook for monetary policy if the economic outlook weakened significantly.
During their discussion of the likely path for the federal funds rate after the time of the first increase in the target range, participants generally agreed that it would probably be appropriate to remove policy accommodation gradually. Participants also indicated that the expected path of policy, rather than the timing of the initial increase, would be the more important influence on financial conditions and thus on the outlook for the economy and inflation, and they noted the importance of underscoring this view at the time of liftoff. It was noted that beginning the normalization process relatively soon would make it more likely that the policy trajectory after liftoff could be shallow. It was also emphasized that, while participants' most recent economic projections suggested that a gradual increase in the target range for the federal funds rate will likely be appropriate to support progress toward the Committee's dual objectives, monetary policy adjustments ultimately would be dependent on economic and financial developments. These adjustments thus could be either more or less gradual than the Committee currently anticipates, responding to the Committee's assessment of the implications of incoming information for the medium-run outlook.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the FOMC met in September indicated that economic activity had been expanding at a moderate pace. Although net exports had been soft and inventory accumulation appeared to have slowed, major domestic components of spending were increasing at solid rates. With concerns about global economic and financial developments having lessened, members continued to see the risks to the outlook for economic activity as nearly balanced, although they were still monitoring these developments. Members indicated that they expected that, with appropriate policy accommodation, economic activity would continue to expand at a moderate pace.
Almost all members agreed that, even though the pace of job gains had slowed and the unemployment rate had held steady over the intermeeting period, labor market indicators, on balance, showed that underutilization of labor resources had diminished since early in the year. Members anticipated that economic activity was likely to expand at a pace sufficient for labor market indicators to continue to move toward, or to remain at, levels the Committee judged consistent with its dual mandate. Inflation continued to run below the Committee's longer-run objective, held down in part by the effects of declines in energy prices and in prices of non-energy imports. Survey-based measures of longer-term inflation expectations had remained stable; market-based measures of inflation compensation had moved slightly lower. While inflation was anticipated to remain near its recent low level in the near term, reflecting the transitory effects of declines in energy and import prices, members continued to expect inflation to rise gradually toward 2 percent over the medium term as the labor market improved further and such transitory effects dissipated. Nonetheless, they agreed to continue monitoring inflation developments closely.
In assessing whether economic conditions and the medium-term economic outlook warranted beginning the process of policy normalization at this meeting, members noted a variety of indicators, including some weaker-than-expected readings on measures of labor market conditions, and almost all members agreed it was appropriate to wait for additional information to clarify whether the recent deceleration in the pace of progress in the labor market was transitory or reflected more persistent factors that might jeopardize further progress. They indicated that they would be assessing a range of labor market indicators over the period ahead to confirm further improvement in the labor market. Members, however, expressed a range of views regarding the extent of further progress in labor market indicators they would need to see to judge it appropriate to raise the target range for the federal funds rate in December.
Members continued to anticipate that inflation would gradually return to the Committee's 2 percent objective over the medium term, but most of them were not yet sufficiently confident of that outlook to begin the normalization process. They generally agreed that their confidence would increase if, as anticipated, economic activity continued to expand at a pace sufficient to increase resource utilization. Other factors important to the inflation outlook were the expectation that the influence of lower energy and commodities prices and the stronger dollar would subside, and that longer-term inflation expectations would remain stable. In this regard, a couple of members expressed concern about the continued decline in market-based measures of inflation compensation. Moreover, the risk was noted that downward pressures on inflation from the appreciation of the dollar could persist.
After assessing the outlook for economic activity, the labor market, and inflation and weighing the uncertainties associated with the outlook, all but one member agreed to leave the target range for the federal funds rate unchanged at this meeting. Members generally agreed that, in light of some weaker-than-expected readings on measures of labor market conditions and in the absence of greater confidence about the inflation outlook, it would be prudent to wait for additional information bearing on the medium-term outlook before initiating the process of policy normalization. One member, however, preferred to raise the target range for the federal funds rate by 25 basis points at this meeting.
In its postmeeting statement, rather than framing its near-term policy path in terms of how long to maintain the current target range, the Committee decided to indicate that, in determining whether it would be appropriate to raise the target range at its next meeting, it would assess both realized and expected progress toward its objectives of maximum employment and 2 percent inflation. Members emphasized that this change was intended to convey the sense that, while no decision had been made, it may well become appropriate to initiate the normalization process at the next meeting, provided that unanticipated shocks do not adversely affect the economic outlook and that incoming data support the expectation that labor market conditions will continue to improve and that inflation will return to the Committee's 2 percent objective over the medium term. Members saw the updated language as leaving policy options open for the next meeting. However, a couple of members expressed concern that this wording change could be misinterpreted as signaling too strongly the expectation that the target range for the federal funds rate would be increased at the Committee's next meeting. While members differed in their assessment of the likelihood that incoming information will warrant an increase in the target range for the federal funds rate when the Committee meets in December, they agreed that, in making the decision, the Committee will evaluate progress toward its objectives, taking into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. It was noted that the expected path of the federal funds rate, rather than the exact timing of the initial increase, was most important in influencing financial conditions and thus in affecting the outlook for the economy and inflation. The Committee reiterated its expectation that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
The Committee also maintained its policy of reinvesting principal payments from its agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
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 SOMA in accordance with the following domestic policy directive:
"Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions. The System Open Market Account manager and the secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."
The vote encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in September suggests that economic activity has been expanding at a moderate pace. Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. The pace of job gains slowed and the unemployment rate held steady. Nonetheless, labor market indicators, on balance, show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved slightly lower; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring global economic and financial developments. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Charles L. Evans, Stanley Fischer, Dennis P. Lockhart, Jerome H. Powell, Daniel K. Tarullo, and John C. Williams.
Voting against this action: Jeffrey M. Lacker.
Mr. Lacker dissented because he continued to believe that maintaining exceptionally low real interest rates was not appropriate for an economy with persistently strong consumption growth and tightening labor markets. Data received since the September FOMC meeting suggested that the global economic and financial developments of late summer had little effect on the medium-term outlook for U.S. growth and inflation. He remained reasonably confident that inflation would return to the Federal Reserve's 2 percent goal once temporary disinflationary impulses had passed.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, December 15-16, 2015. The meeting adjourned at 11:40 a.m. on October 28, 2015.
Notation Vote
By notation vote completed on October 7, 2015, the Committee unanimously approved the minutes of the Committee meeting held on September 16-17, 2015.
_____________________________
Brian F. Madigan
Secretary
1. Attended Tuesday morning's discussion of equilibrium real interest rates and Wednesday's session. Return to text
2. Attended Tuesday's session following the discussion of equilibrium real interest rates. Return to text
3. Attended Tuesday's session only. Return to text
4. Attended through the discussion of financial developments and open market operations. Return to text
5. Attended through the discussion of equilibrium real interest rates. Return to text |
2015-09-17T00:00:00 | 2015-09-17 | Statement | Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. Household spending and business fixed investment have been increasing moderately, and the housing sector has improved further; however, net exports have been soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, labor market indicators show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved lower; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, the Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams. Voting against the action was Jeffrey M. Lacker, who preferred to raise the target range for the federal funds rate by 25 basis points at this meeting. |
2015-09-17T00:00:00 | 2015-10-08 | Minute | Minutes of the Federal Open Market Committee
September 16-17, 2015
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Wednesday, September 16, 2015, at 1:00 p.m. and continued on Thursday, September 17, 2015, at 8:30 a.m.
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
Charles L. Evans
Stanley Fischer
Jeffrey M. Lacker
Dennis P. Lockhart
Jerome H. Powell
Daniel K. Tarullo
John C. Williams
James Bullard, Esther L. George, Loretta J. Mester, Eric Rosengren, and Michael Strine, Alternate Members of the Federal Open Market Committee
Patrick Harker, Robert S. Kaplan, and Narayana Kocherlakota, Presidents of the Federal Reserve Banks of Philadelphia, Dallas, and Minneapolis, respectively
Brian F. Madigan, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
David Altig, Thomas A. Connors, Michael P. Leahy, William R. Nelson, Daniel G. Sullivan, William Wascher, and John A. Weinberg, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Robert deV. Frierson, Secretary of the Board, Office of the Secretary, Board of Governors
Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors
Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors
James A. Clouse and Stephen A. Meyer, Deputy Directors, Division of Monetary Affairs, Board of Governors
William B. English, Senior Special Adviser to the Board, Office of Board Members, Board of Governors
David Bowman, Andrew Figura, David Reifschneider, and Stacey Tevlin, Special Advisers to the Board, Office of Board Members, Board of Governors
Trevor A. Reeve, Special Adviser to the Chair, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Christopher J. Erceg, Senior Associate Director, Division of International Finance, Board of Governors; David E. Lebow and Michael G. Palumbo, Senior Associate Directors, Division of Research and Statistics, Board of Governors
Ellen E. Meade and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors
John J. Stevens, Deputy Associate Director, Division of Research and Statistics, Board of Governors
Stephanie R. Aaronson, Assistant Director, Division of Research and Statistics, Board of Governors; Francisco Covas and Elizabeth Klee, Assistant Directors, Division of Monetary Affairs, Board of Governors
Eric C. Engstrom, Adviser, Division of Research and Statistics, Board of Governors
Penelope A. Beattie,1 Assistant to the Secretary, Office of the Secretary, Board of Governors
Katie Ross,1 Manager, Office of the Secretary, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Elmar Mertens, Senior Economist, Division of Monetary Affairs, Board of Governors
Randall A. Williams, Information Management Analyst, Division of Monetary Affairs, Board of Governors
Gregory L. Stefani, First Vice President, Federal Reserve Bank of Cleveland
Alberto G. Musalem, Executive Vice President, Federal Reserve Bank of New York
Mary Daly, Troy Davig, Evan F. Koenig, Paolo A. Pesenti, Samuel Schulhofer-Wohl, Ellis W. Tallman, and Christopher J. Waller, Senior Vice Presidents, Federal Reserve Banks of San Francisco, Kansas City, Dallas, New York, Minneapolis, Cleveland, and St. Louis, respectively
Giovanni Olivei, Keith Sill, and Douglas Tillett, Vice Presidents, Federal Reserve Banks of Boston, Philadelphia, and Chicago, respectively
Developments in Financial Markets, Open Market Operations, and Policy Normalization
The manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets. The deputy manager followed with a briefing on money market developments and System open market operations conducted by the Open Market Desk during the period since the Federal Open Market Committee (FOMC) met on July 28-29. Daily take-up in the Desk's overnight reverse repurchase agreement operations declined somewhat, apart from month-ends, likely reflecting some increase in money market interest rates. The deputy manager also discussed recent test operations of the Term Deposit Facility and updated the Committee on plans for tests of term reverse repurchase agreement operations at the end of the third quarter.
By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
System Open Market Account Reinvestment Policy
A staff briefing provided background on the macroeconomic effects of alternative approaches to ceasing reinvestments of principal on securities held in the SOMA after the Committee begins to normalize the stance of policy by increasing the target range for the federal funds rate. The briefing presented analysis that was based on an assumption that the cessation of reinvestments, once implemented, would be permanent. The briefing suggested that if economic conditions evolved in line with a modal outlook, differences in macroeconomic outcomes would be minor across approaches that ceased reinvestments soon after initial policy firming or continued reinvestments until certain levels of the federal funds rate, such as 1 percent or 2 percent, were reached. As a result, the appropriate path of the federal funds rate would be only modestly affected. However, if substantial adverse shocks occurred, continuing reinvestment until normalization of the level of the federal funds rate was well under way could help avoid situations that would warrant a larger reduction in the federal funds rate than perhaps could be accomplished given the constraint posed by the effective lower bound to nominal interest rates.
In the ensuing discussion, participants considered the advantages and disadvantages of alternative approaches to reinvestment. Participants referred to the Committee's statement on Policy Normalization Principles and Plans, which indicates that the timing of the cessation or phasing out of reinvestments will depend on how economic and financial conditions and the economic outlook evolve. Several participants emphasized that continuing reinvestments for some time after the initial policy firming could help manage potential risks, particularly by reducing the probability that the federal funds rate might return to the effective lower bound. Some participants expressed a view that, in contrast to the assumption in the staff analysis, the Committee could choose to resume reinvestments if macroeconomic conditions warranted. At the same time, it was also highlighted that a larger balance sheet could entail costs, and that the Principles and Plans indicate that, in the longer run, the SOMA portfolio should be no larger than necessary to conduct monetary policy efficiently and effectively. The Committee made no decisions regarding its strategy for ceasing or phasing out reinvestments at this meeting.
Staff Review of the Economic Situation
The information reviewed for the September 16-17 meeting suggested that real gross domestic product (GDP) was expanding at a moderate pace in the third quarter. Labor market conditions continued to improve, but labor compensation gains were modest. Consumer price inflation remained below the Committee's longer-run objective of 2 percent and was restrained by further declines in energy prices and non-energy import prices. Survey measures of longer-run inflation expectations remained stable, while market-based measures of inflation compensation moved lower.
Total nonfarm payroll employment expanded at a solid pace in July and August. The unemployment rate stayed at 5.3 percent in July but fell to 5.1 percent in August. With the labor force participation rate unchanged over this period, the employment-to-population ratio edged up. The share of workers employed part time for economic reasons remained elevated. The rate of private-sector job openings increased in July and was at a high level, while the rates of hiring and quits were little changed.
Industrial production increased, on balance, during July and August. Manufacturing production fell in August primarily because of a large drop in the output of motor vehicles and parts that reversed a substantial portion of its jump in July. Automakers scheduled further declines in assemblies over the remainder of the year, and broader indicators of manufacturing production, including readings on new orders from national and regional manufacturing surveys, generally suggested that factory output would be little changed over that period. Mining output moved up, on net, in July and August after a steep decline in the second quarter.
Real personal consumption expenditures (PCE) appeared to be rising at a moderate pace in the third quarter. The components of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimates of PCE increased at a strong rate in July and August, and sales of light motor vehicles moved up in both months. Household spending was supported by moderate growth in real disposable income in July and a wealth-to-income ratio that remained high even after recent declines in equity values. Consumer sentiment in the University of Michigan Surveys of Consumers decreased in early September, reportedly in part because of the recent decline in stock market prices, but it remained above its year-earlier level.
Activity in the housing sector remained on a gradual upward trend. Starts of new single-family homes rose further early in the third quarter and were slightly above the pace of permit issuance. In the multifamily sector, starts fell back after having been temporarily elevated in June. Sales of new and existing homes both increased in July.
Real private expenditures for business equipment and intellectual property products appeared to be rising moderately. Nominal shipments of nondefense capital goods excluding aircraft increased in July, and orders for nondefense capital goods pointed to modest gains in shipments in the coming months, consistent with recent readings from surveys of business conditions. Real spending for nonresidential structures excluding drilling and mining increased sharply in the second quarter, and nominal business expenditures for such structures rose further in July. In contrast, real business spending for drilling and mining structures fell steeply in the second quarter. Available indicators of drilling activity, such as counts of rigs in operation, suggested spending would decline less rapidly in the third quarter.
Total real government purchases appeared to be declining slightly in the third quarter. Federal government purchases likely decreased, as defense spending moved down further through August. State and local government purchases seemed to be increasing, on balance, as the payrolls of these governments expanded at a faster pace in July and August than in the second quarter, while their nominal construction expenditures edged down in July after a large gain in the second quarter.
The U.S. international trade deficit widened in June before narrowing substantially in July. Exports rose in July, supported by increased shipments of non-aircraft capital goods and automobiles, but remained subdued. In contrast, imports declined in July, reversing a June increase, as imports of consumer goods fell back.
Total U.S. consumer prices, as measured by the PCE price index, edged up over the 12 months ending in July, restrained importantly by declines in energy prices. Core PCE prices, which exclude food and energy prices, increased 1-1/4 percent over the same period, with the increase damped in part by declines in the prices of non-energy imports. Over the 12 months ending in August, total consumer prices as measured by the consumer price index (CPI) edged up, while the core CPI increased 1-3/4 percent. Measures of expected longer-run inflation from a variety of surveys, including the Michigan survey, the Survey of Professional Forecasters, and the Desk's Survey of Primary Dealers, remained stable. However, market-based measures of inflation compensation fell to near their historical lows, reportedly in response to the recent appreciation of the dollar, the decline in oil prices, and readings on realized inflation that were slightly below market expectations.
Measures of labor compensation rose faster than consumer prices over the past year, but the modest increases in compensation were similar to those seen in recent years. Over the four quarters ending in the second quarter, the employment cost index increased nearly 2 percent and compensation per hour in the nonfarm business sector rose 2-1/4 percent. Over the 12 months ending in August, average hourly earnings for all employees increased 2-1/4 percent.
Foreign economic growth remained weak in the second quarter, held back by contractions in real GDP in Canada, Japan, Brazil, and Taiwan, even as activity continued to expand at a moderate pace in the euro area and the United Kingdom. Indicators for the third quarter pointed to a slight pickup in the pace of foreign growth, particularly as recent data for Canada suggested that some of the first-half weakness there was dissipating. However, recent indicators for some other countries, most notably China, were subdued. Inflation rates continued to be quite low in the advanced foreign economies, and market-based measures of inflation compensation had recently moved down in the euro area and Japan. In contrast, inflation in the emerging market economies had risen in recent months as a result of higher food prices and widespread currency depreciation.
Staff Review of the Financial Situation
Although U.S. economic data releases generally met market expectations, domestic financial conditions tightened modestly as concerns about prospects for global economic growth, centered on China, prompted an increase in financial market volatility and a deterioration in risk sentiment during the intermeeting period. Stock market indexes in most advanced and emerging market economies ended the period sharply lower. Tighter financial market conditions and greater volatility contributed to a reduction of the odds that market participants appeared to place on the first increase in the federal funds rate occurring at the September FOMC meeting and to a flatter expected path for the policy rate thereafter. Nevertheless, yields on short- and longer-term nominal Treasury securities were modestly higher than when the Committee met in July.
Over the intermeeting period, the concerns about global economic growth and turbulence in financial markets led to greater uncertainty among market participants about the likely timing of the start of the normalization of the stance of U.S. monetary policy. Based on federal funds futures, the probability of a first increase in the target range for the federal funds rate at the September meeting fell slightly; the probabilities attached to subsequent meetings through January 2016 were generally little changed and rose for meetings later that year. Similarly, results from the Desk's September Survey of Primary Dealers and Survey of Market Participants indicated that, on average, respondents pushed out their expected timing of the first increase in the target range for the federal funds rate. Regarding the most likely meeting date for the first rate increase, survey respondents were about evenly split between September and December. Data on overnight index swap rates indicated that investors marked down the expected path of the federal funds rate, on balance, over the intermeeting period.
Despite the decline in global equity markets and the downward shift in the expected path of the federal funds rate, yields on nominal Treasury securities moved up modestly, with some market participants citing purported sales of Treasury securities by foreign government authorities to finance foreign exchange market intervention as a factor that likely put upward pressure on Treasury yields. Measures of inflation compensation based on Treasury Inflation-Protected Securities fell to near their historical lows.
Broad U.S. equity price indexes were highly correlated with foreign equity indexes over the intermeeting period and posted net declines. Although concerns about global economic growth likely contributed to the declines in domestic equity prices, investors may also have reassessed valuations and risk in equity markets. Domestic equity indexes were quite volatile in late August and early September, and one-month-ahead option-implied volatility on the S&P 500 index reached levels last seen in 2011. Spreads on 10-year triple-B-rated and speculative-grade corporate bonds over comparable-maturity Treasury securities widened slightly over the intermeeting period.
Financing conditions for nonfinancial businesses tightened modestly over the summer. Corporate bond and institutional leveraged loan issuance remained solid through July but moderated in August. The growth of commercial and industrial loans on banks' books slowed in July and August; the deceleration was concentrated in banks with greater exposures to oil and gas firms. Financing for commercial real estate (CRE) remained broadly available, with CRE loans on banks' books expanding and issuance of commercial mortgage-backed securities (CMBS) staying robust. However, spreads on investment-grade CMBS widened noticeably in August, reportedly a result of heavy issuance as well as the increased volatility in broader financial markets.
Conditions in the market for residential mortgages continued to improve slowly, with interest rates on 30-year fixed-rate mortgages declining slightly. Bank holdings of closed-end residential loans increased modestly, and the Mortgage Bankers Association's index of mortgage credit availability edged up further. However, credit availability for borrowers with low credit scores, hard-to-document income, or high debt-to-income ratios remained tight.
Financing conditions in consumer credit markets remained generally accommodative, and the performance of outstanding consumer loans was largely stable. Credit card balances expanded amid gradually easing lending standards, and student and auto loans continued to be broadly available, even to borrowers with subprime credit scores. Delinquency rates on credit card loans and auto loans stayed low through the second quarter, while delinquency rates on student loans remained elevated.
The exchange value of the U.S. dollar rose notably over the period against the currencies of most major U.S. trading partners. While the dollar depreciated against the euro and the yen, it appreciated against the Canadian dollar. The dollar also strongly appreciated against the currencies of most emerging market economies, as most Asian currencies weakened against the dollar following a depreciation of the Chinese renminbi, and as the currencies of commodity exporters fell along with declining commodity prices. Sovereign yields in the advanced foreign economies ended the period roughly unchanged. Changes in peripheral euro-area sovereign yield spreads were mixed, with Greek sovereign spreads narrowing significantly over the period as Greece and the euro area finalized Greece's third bailout package. In contrast, falling commodity prices and concerns about the pace of global growth contributed to capital outflows and generally wider spreads on dollar-denominated debt in emerging Asia and Latin America.
Staff Economic Outlook
The U.S. economic forecast prepared by the staff for the September FOMC meeting was a little weaker, on balance, than the one prepared for the July FOMC meeting. Recent information on real U.S. economic activity was generally stronger than expected, but equity prices declined, the foreign exchange value of the dollar appreciated further, and indicators of foreign economic growth were generally weak. The staff left its forecast for real GDP growth over the second half of the year little changed but lowered its projection for economic growth over the next several years. The staff also further trimmed its assumptions for the rates of increase in productivity and potential output over the medium term. On net, the level of GDP was anticipated to rise above its potential next year, and that gap was projected to widen gradually over the medium term. The unemployment rate was projected to run a little below the staff's estimate of its longer-run natural rate over this period.
The staff projected that consumer price inflation would move down over the near term by more than in the previous projection. Crude oil prices declined further over the intermeeting period and were expected to result in lower consumer energy prices, and the effects of recent dollar appreciation and lower commodity prices were anticipated to push down non-oil import prices. With energy prices and non-oil import prices expected to begin to increase steadily next year, the staff projected that inflation would rise gradually over the next several years but would still be slightly below the Committee's longer-run objective of 2 percent at the end of 2018. Inflation was anticipated to move up to 2 percent thereafter, with inflation expectations in the longer run assumed to be consistent with the Committee's objective and slack in labor and product markets projected to have waned.
The staff viewed the uncertainty around its September projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The risks to the forecast for real GDP and inflation were seen as tilted to the downside, reflecting the staff's assessment that neither monetary nor fiscal policy was well positioned to help the economy withstand substantial adverse shocks. Consistent with this downside risk to aggregate demand and with the further adjustments to the staff's supply-side assumptions, the staff viewed the risks to its outlook for the unemployment rate as tilted to the upside.
Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, members of the Board of Governors and Federal Reserve Bank presidents submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, inflation, and the federal funds rate for each year from 2015 through 2018 and over the longer run, conditional on each participant's judgment of appropriate monetary policy. The longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These projections and policy assessments are described in the Summary of Economic Projections, which is an addendum to these minutes.
In their discussion of the economic situation and the outlook, meeting participants viewed the information received over the intermeeting period as indicating that economic activity was expanding moderately. Although net exports remained soft, household spending and business fixed investment were increasing moderately, and the housing sector recovered further. The labor market continued to improve, with solid job gains and declining unemployment, and labor market indicators showed that underutilization of labor resources had diminished since early in the year.
Growth in real GDP over the first half of the year was stronger than participants expected when they prepared their June forecasts, and the unemployment rate declined somewhat more than anticipated. Participants made only small adjustments to their projections for economic activity over the medium term. They continued to anticipate that, with appropriate policy accommodation, the pace of expansion of real activity would remain somewhat above its longer-run rate over the next two years and lead to further improvement in labor market conditions. Most continued to see the risks to real activity and unemployment as nearly balanced, but many acknowledged that recent global economic and financial developments may have increased the downside risks to economic activity somewhat.
Inflation continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved lower; survey measures of longer-term inflation expectations remained stable. Participants anticipated that recent global developments would likely put further downward pressure on inflation in the near term; compared with their previous forecasts, more now saw the risks to inflation as tilted to the downside. But participants still expected that, as the labor market continued to improve and the transitory effects of declines in energy and non-oil import prices dissipated, inflation would rise gradually toward 2 percent over the medium term.
Consumer spending was rising at a solid rate after a modest increase in the first quarter. Participants noted that ongoing gains in employment and real income were providing support for the rise in spending, and this support was expected to continue going forward. Household credit performance was also favorable, with delinquency rates on credit cards and auto loans low. The available reports from District contacts in the retail and auto industries confirmed the recent solid gains in consumer spending. Contacts were generally optimistic about the outlook, although retail sales appeared to be softening in a few areas where economic activity was adversely affected by declines in the energy sector and the increase in the foreign exchange value of the dollar.
Housing activity was improving, with sales and new construction trending higher. Solid gains in employment and favorable mortgage rates were anticipated to continue to underpin the recovery in housing. Contacts in a number of Districts were upbeat about prospects for the sector, citing strengthening sales, rising home prices, an upturn in household formations, and reports that buyers had accelerated purchases in anticipation of the possibility that mortgage rates might move higher in the near term. Multifamily construction was particularly strong in a couple of Districts, but in another a shortage of lots was constraining builders' ability to meet strong demand for new single-family homes.
The information on business spending from District contacts was mixed. Nonresidential construction was reported to be expanding in a number of regions. In manufacturing, the auto industry remained a bright spot, but the appreciation of the dollar was still restraining production of goods for export. Optimism remained relatively high according to some District contacts, although a few regional activity surveys noted some caution related to uncertainty about recent economic developments abroad. The weakness in commodity prices and the appreciation of the dollar also continued to weigh on activity in the energy and agricultural sectors. Moreover, the outlook for the energy sector appeared to be worsening. The substantial global supply of crude oil seemed likely to maintain downward pressure on energy prices for some time, leading to a deterioration in credit conditions for some U.S. producers and a further reduction in their capital outlays.
Participants agreed that labor market conditions had improved considerably since earlier in the year. Payroll employment had been increasing steadily. Underutilization of labor resources had diminished along a number of dimensions: The unemployment rate had fallen to a level close to most participants' estimates of its longer-run normal rate, and the numbers of discouraged workers and those employed part time for economic reasons had moved lower. With the cumulative improvement in labor market conditions, most participants thought that the underutilization of labor resources had been substantially reduced, and a few of them expressed the view that underutilization had been eliminated. But some others believed that labor market slack in addition to that measured by the unemployment rate remained and that further progress was possible before labor market conditions were fully consistent with the Committee's objective of maximum employment. They pointed out that, even recognizing the downward trend in labor force participation, the level of the participation rate, particularly for prime-age adults, remained depressed; similarly, the number of workers on part-time schedules for economic reasons was still elevated. A number of participants noted that eliminating slack along such broader dimensions might require a temporary decline in the unemployment rate below its longer-run normal level, and that this development could speed the return of inflation to 2 percent.
The incoming information on wages and labor compensation, including an especially low reading on the employment cost index for the second quarter, showed no broad-based acceleration. To some, the continued subdued trend in wages was evidence of an absence of upward pressure on inflation from current levels of labor utilization. Several others, however, noted that weak productivity growth and low price inflation might be contributing to modest wage increases. A number of participants reported that some of their business contacts were experiencing labor shortages in various occupations and geographic areas resulting in upward pressure on wages, with a few indicating that the pickup in wages had become more widespread.
Recent readings on headline consumer price inflation reflected only small increases in core inflation and renewed weakness in consumer energy prices. As a result, the
12-month changes in both the total and core PCE price indexes for August were expected to still be well below the Committee's 2 percent objective. Participants continued to judge that a significant portion of the shortfall was the result of the transitory effects of declines in prices of oil and non-energy commodities. A few participants pointed out that since January when the steep drop in energy prices ended, core PCE prices had risen at an annual rate of 1.7 percent, closer to the Committee's objective, despite the continued decline in prices of non-energy imports. Still, almost all participants anticipated that inflation would continue to run below 2 percent in the near term, particularly in light of the further decline in oil prices and further appreciation of the dollar over the intermeeting period. Participants also discussed various measures of expectations for inflation over the longer run. Surveys continued to show stable longer-run inflation expectations, and most participants continued to anticipate that longer-run inflation expectations would remain well anchored. A few participants expressed some concern about the decline in market-based measures of inflation compensation. However, it was noted that the decline seemed to be related to the further drop in oil prices or may importantly reflect shifts in risk and liquidity premiums, and thus may not signal additional broad and persistent downward price pressures.
Participants discussed the potential implications of recent economic and financial developments abroad for U.S. economic activity and inflation. A material slowdown in economic growth in China and potential adverse spillovers to other economies were likely to depress U.S. net exports to some extent. In addition, concerns associated with developments in China and other emerging market economies had contributed to a further appreciation of the dollar and declines in prices of oil and other commodities, which were likely to hold down U.S. consumer price inflation in the near term. In the United States, equity prices fell, on balance, amid significant volatility, and risk spreads for businesses widened. Many participants judged that the effects of these developments on domestic economic activity were likely to be small, but they acknowledged the risk that they might restrain U.S. economic growth somewhat. In particular, the appreciation of the dollar since mid-2014 was still a substantial drag on net exports, and the further rise in the dollar over the intermeeting period could augment the restraint on U.S. net exports. Some participants commented that the recent decline in equity prices needed to be viewed in the context of overall valuation levels, which they saw as relatively high, and a couple noted that volatility had begun to subside.
During their discussion of economic conditions and monetary policy, participants indicated that they did not see the changes in asset prices during the intermeeting period as bearing significantly on their policy choice except insofar as they affected the outlook for achieving the Committee's macroeconomic objectives and the risks associated with that outlook. Many of them saw the likely effects of recent developments on the path of economic activity and inflation as small or transitory. Most participants continued to anticipate that, based on their assessment of current economic conditions and their outlook for economic activity, the labor market, and inflation, the conditions for policy firming had been met or would likely be met by the end of the year. However, some participants judged that the downside risks to the outlook for economic growth and inflation had increased. In their view, although the time for policy normalization might be near, it would be appropriate to wait for information, including evidence of further improvement in the labor market, confirming that the outlook for economic growth had not deteriorated significantly and that inflation was still on a path to return to 2 percent over the medium term. A few mentioned that a pickup in wage increases could bolster their confidence that resource utilization had tightened sufficiently to help move inflation toward the Committee's objective, but they did not view an acceleration in wages as a necessary condition for gaining such confidence.
Participants weighed a number of risks associated with the timing of policy firming. Some participants were concerned that the downside risks to inflation could be realized if the target range for the federal funds rate was increased before it was clear that economic growth would remain at an above-trend pace and downward pressures on inflation had abated. They also worried that such a premature tightening might erode the credibility of the Committee's inflation objective if inflation stayed at a rate below 2 percent for a prolonged period. It was noted that monetary policy was better positioned to respond effectively to unanticipated upside inflation surprises than to persistent below-objective inflation, particularly when the federal funds rate was still near its effective lower bound. Such considerations also argued for increasing the target range for the federal funds rate gradually after policy normalization was under way. Some other participants, however, expressed concerns about delaying the start of normalizing the target range for the federal funds rate much longer. For example, a significant delay risked an undesired buildup of inflationary pressures or economic and financial imbalances that would be costly to unwind and that eventually could have adverse consequences for economic growth. In addition, a prompt decision to firm policy could provide a signal of confidence in the strength of the U.S. economy that might spur rather than restrain economic activity. These participants preferred to begin policy firming soon, with most of them expecting that beginning the process before long would allow the target range for the federal funds rate to be increased gradually.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the FOMC met in July indicated that economic activity was expanding at a moderate pace. Although net exports remained soft, economic growth was broadly based. Members noted that recent global and financial market developments might restrain economic activity somewhat as a result of the higher level of the dollar and possible effects of slower economic growth in China and in a number of emerging market and commodity-producing economies. Nevertheless, they still viewed the risks to U.S. economic activity as nearly balanced, and they continued to expect that, with appropriate policy accommodation, economic activity would most likely continue to expand at a moderate pace.
Members agreed that labor market conditions had improved considerably since earlier in the year, with ongoing solid gains in payroll employment and the unemployment rate falling to a level quite close to their estimates of its longer-run normal rate. Members anticipated that economic activity was likely to continue to expand at a pace sufficient to lead to a further reduction in underutilization of labor resources. Headline inflation continued to be held down by the effects of declines in energy and commodity prices, and the year-over-year increase in core PCE inflation remained below the Committee's objective. Survey-based measures of longerâterm inflation expectations had remained stable; market-based measures of inflation compensation had moved lower. Members anticipated that the declines in oil prices and the appreciation of the dollar over the intermeeting period were likely to exert some additional downward pressure on inflation in the near term. Members expected inflation to rise gradually toward 2 percent over the medium term as the labor market improved further and the transitory effects of declines in energy and import prices dissipated, but they agreed to continue to monitor inflation developments closely.
In assessing whether economic conditions had improved sufficiently to initiate a firming in the stance of policy, many members said that the improvement in labor market conditions met or would soon meet one of the Committee's criteria for beginning policy normalization. But some indicated that their confidence that inflation would gradually return to the Committee's 2 percent objective over the medium term had not increased, in large part because recent global economic and financial developments had imparted some restraint to the economic outlook and placed further downward pressure on inflation in the near term. Most members agreed that their confidence that inflation would move to the Committee's inflation objective would increase if, as expected, economic activity continued to expand at a moderate rate and labor market conditions improved further. Many expected those conditions to be met later this year, although several members were concerned about downside risks to the outlook for real activity and inflation.
Other factors important to the Committee's assessment of the inflation outlook were the expectation that the influences of lower energy and commodity prices on headline inflation would abate, as had occurred in previous episodes, and that inflation expectations would remain stable. With energy and commodity prices expected to stabilize, members' projections of inflation incorporated a step-up in headline inflation next year. However, several members saw a risk that the additional downward pressure on inflation from lower oil prices and a higher foreign exchange value of the dollar could persist and, as a result, delay or diminish the expected upturn in inflation. And, while survey measures of longer-run inflation expectations remained stable, a couple of members expressed unease with the decline in market-based measures of inflation compensation over the intermeeting period.
After assessing the outlook for economic activity, the labor market, and inflation and weighing the uncertainties associated with the outlook, all but one member concluded that, although the U.S. economy had strengthened and labor underutilization had diminished, economic conditions did not warrant an increase in the target range for the federal funds rate at this meeting. They agreed that developments over the intermeeting period had not materially altered the Committee's economic outlook. Nevertheless, in part because of the risks to the outlook for economic activity and inflation, the Committee decided that it was prudent to wait for additional information confirming that the economic outlook had not deteriorated and bolstering members' confidence that inflation would gradually move up toward 2 percent over the medium term. One member, however, preferred to raise the target range for the federal funds rate at this meeting, indicating that the current low level of real interest rates was not appropriate in the context of current economic conditions.
The Committee agreed to maintain the target range for the federal funds rate at 0 to 1/4 percent and to reaffirm in its postmeeting statement that the Committee's decision about how long to maintain the current target range for the federal funds rate would depend on its assessment of actual and expected progress toward its objectives of maximum employment and 2 percent inflation. Members agreed that the Committee's evaluation of progress on its objectives would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. They also agreed to indicate that the Committee continued to anticipate that it would be appropriate to raise the target range for the federal funds rate when it sees some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. It was noted that the expected path of the federal funds rate, rather than the exact timing of the initial increase, was most important in influencing financial conditions and thus the outlook for the economy and inflation. The Committee reiterated its expectation that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
The Committee also maintained its policy of reinvesting principal payments from its agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
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 SOMA in accordance with the following domestic policy directive:
"Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions. The System Open Market Account manager and the secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."
The vote encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. Household spending and business fixed investment have been increasing moderately, and the housing sector has improved further; however, net exports have been soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, labor market indicators show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved lower; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, the Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Charles L. Evans, Stanley Fischer, Dennis P. Lockhart, Jerome H. Powell, Daniel K. Tarullo, and John C. Williams.
Voting against this action: Jeffrey M. Lacker.
Mr. Lacker dissented because he believed that maintaining exceptionally low real interest rates was not appropriate for an economy with persistently strong consumption growth and tightening labor markets. He viewed current disinflationary forces as likely to be transitory, and was reasonably confident that inflation would move toward 2 percent. In his view, further delay in removing monetary policy accommodation would represent a risky departure from past patterns of FOMC behavior in response to such economic conditions.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, October 27-28, 2015. The meeting adjourned at 10:55 a.m. on September 17, 2015.
Notation Vote
By notation vote completed on August 18, 2015, the Committee unanimously approved the minutes of the Committee meeting held on July 28-29, 2015.
_____________________________
Brian F. Madigan
Secretary
1. Attended Wednesday's session only. Return to text |
2015-07-29T00:00:00 | 2015-08-19 | Minute | Minutes of the Federal Open Market Committee
July 28-29, 2015
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, July 28, 2015, at 10:30 a.m. and continued on Wednesday, July 29, 2015, at 9:00 a.m.
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
Charles L. Evans
Stanley Fischer
Jeffrey M. Lacker
Dennis P. Lockhart
Jerome H. Powell
Daniel K. Tarullo
John C. Williams
James Bullard, Esther L. George, Loretta J. Mester, Eric Rosengren, and Michael Strine, Alternate Members of the Federal Open Market Committee
Patrick Harker and Narayana Kocherlakota, Presidents of the Federal Reserve Banks of Philadelphia and Minneapolis, respectively
Helen E. Holcomb, First Vice President, Federal Reserve Bank of Dallas
Brian F. Madigan, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Thomas C. Baxter, Deputy General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
David Altig, Thomas A. Connors, Michael P. Leahy, William R. Nelson, Daniel G. Sullivan, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Robert deV. Frierson,1 Secretary of the Board, Office of the Secretary, Board of Governors
Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors
Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors
James A. Clouse and Stephen A. Meyer, Deputy Directors, Division of Monetary Affairs, Board of Governors
Andreas Lehnert, Deputy Director, Office of Financial Stability Policy and Research, Board of Governors
Andrew Figura, David Reifschneider, and Stacey Tevlin, Special Advisers to the Board, Office of Board Members, Board of Governors
Trevor A. Reeve, Special Adviser to the Chair, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
David E. Lebow, Senior Associate Director, Division of Research and Statistics, Board of Governors
Michael T. Kiley, Senior Adviser, Division of Research and Statistics, and Senior Associate Director, Office of Financial Stability Policy and Research, Board of Governors
Ellen E. Meade2 and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors; Jeremy B. Rudd, Senior Adviser, Division of Research and Statistics, Board of Governors
Fabio M. Natalucci,3 Associate Director, Division of Monetary Affairs, Board of Governors
Jane E. Ihrig,2 Deputy Associate Director, Division of Monetary Affairs, Board of Governors
Glenn Follette and Steven A. Sharpe, Assistant Directors, Division of Research and Statistics, Board of Governors; Elizabeth Klee, Assistant Director, Division of Monetary Affairs, Board of Governors
Burcu Duygan-Bump, Adviser, Division of Monetary Affairs, Board of Governors
Penelope A. Beattie,1 Assistant to the Secretary, Office of the Secretary, Board of Governors
Dana L. Burnett, Section Chief, Division of Monetary Affairs, Board of Governors
Katie Ross,1 Manager, Office of the Secretary, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Etienne Gagnon, Senior Economist, Division of Monetary Affairs, Board of Governors
Marie Gooding, First Vice President, Federal Reserve Bank of Atlanta
Jeff Fuhrer, Executive Vice President, Federal Reserve Bank of Boston
Troy Davig, Michael Dotsey, Evan F. Koenig, Julie Ann Remache, Samuel Schulhofer-Wohl, and Ellis W. Tallman, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Philadelphia, Dallas, New York, Minneapolis, and Cleveland, respectively
Todd E. Clark,2 AyÅegül Åahin, Mark Spiegel, and Stephen Williamson, Vice Presidents, Federal Reserve Banks of Cleveland, New York, San Francisco, and St. Louis, respectively
Matthew Nemeth,4 Assistant Vice President, Federal Reserve Bank of New York
Robert L. Hetzel and Carlo Rosa, Senior Economists, Federal Reserve Banks of Richmond and New York, respectively
In the agenda for this meeting, it was reported that Michael Strine had been elected an alternate member of the Federal Open Market Committee and that he had executed his oath of office.
Developments in Financial Markets, Open Market Operations, and Policy Normalization
In a joint session of the Federal Open Market Committee (FOMC) and the Board of Governors of the Federal Reserve System, the manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets. The deputy manager followed with a discussion of System open market operations conducted by the Open Market Desk during the period since the Committee met on June 16-17. The Desk's overnight reverse repurchase agreement (ON RRP) operations continued to provide a soft floor for money market interest rates. The deputy manager also updated the Committee on plans for tests of the Term Deposit Facility in August and of term RRPs at the end of the third quarter.
The staff next summarized some of the recent steps the System had taken to prepare further for the process of normalization of monetary policy. The staff also proposed that future changes in the FOMC's target federal funds rate range as well as associated changes in related administered interest rates--including the interest rates on excess and required reserves, the ON RRP rate, and the primary credit rate--all be effective on the day after the Committee's policy decision. Making all such rate changes effective on the same day would enhance the clarity of Federal Reserve communications. It would also help promote federal funds trading within the new target range, partly by enabling the Desk to conduct ON RRP operations at the new rate specified by the Committee on the same day that the new target range becomes effective. Participants supported the staff proposal.
By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
The Board meeting concluded at the end of the discussion of financial markets, open market operations, and policy normalization issues.
System Open Market Account Reinvestment Policy
In the Policy Normalization Principles and Plans adopted at its September 16-17, 2014 meeting, the Committee indicated that it expects to cease or commence phasing out reinvestments of principal on securities held in the SOMA after it begins increasing the target range for the federal funds rate; the timing of this decision will depend on how economic and financial conditions and the economic outlook evolve. A staff briefing at this meeting provided background on alternative strategies the Committee could employ with respect to reinvestments. These strategies included either characterizing qualitatively or specifying numerically the economic conditions under which reinvestments would cease, or establishing a date or time interval following the initial firming of the federal funds rate for the new policy on reinvestments to begin. The briefing also noted that the Committee could phase out reinvestments gradually or end reinvestments all at once.
In their discussion, most participants expressed a preference that the timing of the cessation of reinvestments be based on a qualitative assessment of economic conditions and the outlook. Participants generally favored continuing reinvestments during the early stages of normalization, initially using only increases in the target range for the federal funds rate to reduce monetary policy accommodation. This approach was viewed as consistent with the Committee's plans to rely on changes in the target range for the federal funds rate as the primary indicator of the stance of monetary policy. Most participants thought that it might be best either to wind down reinvestments or to manage them in a manner that would smooth the decline in the balance sheet in a predictable way. However, some participants supported ceasing reinvestments all at once at the appropriate time. Participants indicated a range of views on various issues specific to agency mortgage-backed securities (MBS) and Treasury markets. Using the same strategy for both agency MBS and Treasury maturities was viewed as simpler to communicate, but a number of market-specific considerations might suggest employing different strategies for each asset class. No decisions regarding the Committee's strategy for ceasing or phasing out reinvestments were made at this meeting. Participants requested additional analysis from the staff related to alternative approaches to halting or phasing out reinvestments, including consideration of the possible market effects, and agreed that it would be helpful to continue to discuss these issues at upcoming meetings.
Potential Enhancements to the Summary of Economic Projections
Next, participants considered a proposal by the subcommittee on communications for a few modest modifications to the Summary of Economic Projections (SEP) that could provide further information to the public. A staff briefing reviewed the subcommittee's proposal for publishing median values of the projections starting at the time of the September meeting, noting that public commentary frequently focuses on the midpoint of the central tendency of the projections and that medians would provide a more robust summary measure of the distribution of participants' views. The subcommittee also proposed the removal of the histogram depicting participants' preferred year of liftoff from the SEP exhibits at the time that the Committee decides to commence the normalization process or in the first SEP thereafter. In their comments, participants noted that the inclusion of medians would provide an additional useful summary statistic of participants' perspectives; however, they also emphasized that the medians would not represent a collective view or Committee forecast. Participants unanimously supported the addition of medians for all variables--economic growth, the unemployment rate, total and core inflation, and individual assessments of the projected appropriate federal funds rate--to the September SEP and the removal of the histogram of preferred liftoff years following the commencement of normalization. The briefing also raised the possibility of eventually including graphs in the SEP that would illustrate the uncertainty that attends participants' macroeconomic projections, but noted that further work was needed before a specific proposal could be presented to the Committee. The Chair asked the subcommittee on communications to continue to investigate the possibility of incorporating a graphical depiction of uncertainty into the SEP.
Staff Review of the Economic Situation
The information reviewed for the July 28-29 meeting suggested that real gross domestic product (GDP) rose moderately in the second quarter after edging down in the first quarter, and that labor market conditions continued to improve. Consumer price inflation continued to run below the FOMC's longer-run objective of 2 percent, restrained by earlier declines in energy prices and further decreases in non-energy import prices. Survey measures of longer-term inflation expectations remained stable, while market-based measures of inflation compensation were still low.
Total nonfarm payroll employment continued to expand at a solid pace in June. The unemployment rate declined to 5.3 percent, its lowest reading so far this year, and the share of workers employed part time edged lower; however, the labor force participation rate and the employment-to-population ratio both moved down. The rate of private-sector job openings was unchanged in May at a high level, and the rates of hiring and quits were also little changed. On balance, labor market indicators suggested that underutilization of labor resources had diminished since early this year.
After declining for five consecutive months, industrial production rose in June, partly reflecting an increase in the output of mines. Nonetheless, for the second quarter as a whole, mining output contracted sharply and manufacturing production rose only modestly; both sectors were weak over the first half of the year, likely reflecting the continuing effects of earlier increases in the foreign exchange value of the dollar and lower crude oil prices. Automakers' assembly schedules pointed to a solid gain in light motor vehicle production in the third quarter, but broader indicators of manufacturing production, including readings on new orders from national and regional manufacturing surveys, generally suggested only modest increases in factory output in the coming months.
Real personal consumption expenditures (PCE) appeared to have risen at a solid pace in the second quarter. The components of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimate of PCE edged down in June, but the decline for that group of components followed a strong reading in May. Similarly, light vehicle sales in June partly reversed a large increase in May but remained robust. Among the factors that influence household spending, real disposable income rose in May and gains in households' net worth were supported by further advances in home values. Moreover, consumer sentiment in the University of Michigan Surveys of Consumers in early July remained near its highest level since before the most recent recession.
Activity in the housing sector improved somewhat in recent months but remained slow. Starts of new single-family houses declined in June but rose for the quarter as a whole, and the level of permit issuance pointed to increases in starts in subsequent months. In the multifamily sector, starts and permits increased sharply in June, likely reflecting in large part a pull-forward of activity due to an expiring tax credit in New York City. Sales of new homes declined in June; in contrast, existing home sales increased and pending home sales were at a level consistent with little change in closed sales over the next couple of months.
Real private expenditures for business equipment and intellectual property products appeared to rise at a modest rate in the second quarter. Nominal shipments of nondefense capital goods excluding aircraft were little changed in June. Forward-looking indicators, such as new orders for these capital goods along with national and regional surveys of business conditions, pointed to further modest increases in business equipment spending in the near term. Real spending for nonresidential structures excluding drilling and mining appeared to rise solidly in the second quarter, as firms' nominal outlays for such structures increased at a robust pace again in May. In contrast, real business spending for drilling and mining structures likely fell sharply last quarter, consistent with the drop in the number of oil rigs in operation. However, the rig count appeared to be bottoming out in recent weeks.
Nominal federal spending data through June indicated that real federal government purchases likely decreased in the second quarter. However, real state and local government purchases appeared to have risen last quarter, as nominal construction spending rebounded following a decline in the first quarter and payrolls for these governments were little changed.
After narrowing in April, the U.S. international trade deficit widened in May, as exports decreased more than imports. The decrease in exports largely reflected a fall in aircraft shipments. The decline in imports was driven by reductions in imports of capital goods, particularly computers and oilfield equipment. By contrast, imports of automotive products increased to a record level. While real net exports made a large negative contribution to the change in real GDP in the first quarter of 2015, the available trade data indicated that the drag on GDP growth exerted by net exports in the second quarter was considerably smaller.
Total U.S. consumer prices, as measured by the PCE price index, only edged up over the 12 months ending in May, held down primarily by earlier large declines in energy prices. Core PCE inflation, which excludes food and energy prices, was 1-1/4 percent over the same period, restrained in part by declines in the prices of non-energy imports. Over the 12 months ending in June, total consumer prices as measured by the consumer price index (CPI) were little changed, while the core CPI increased 1-3/4 percent. Measures of expected longer-run inflation from a variety of surveys, including the Michigan survey and the Desk's Survey of Primary Dealers, remained stable. However, market-based measures of inflation compensation were still low, although they were somewhat higher than early in the year. Over the 12 months ending in June, nominal average hourly earnings for all employees increased 2 percent.
Foreign economic growth appeared to remain subdued in the second quarter. In Canada, indicators suggested that low oil prices weighed on investment in the energy sector, and energy production in April was curtailed by wildfires and maintenance shutdowns. Economic activity also weakened in some Latin American countries. By contrast, second-quarter economic growth was strong in China and in the United Kingdom, and euro-area indicators were consistent with continued moderate economic expansion. Headline foreign inflation remained low, importantly reflecting past oil price declines.
Staff Review of the Financial Situation
Financial conditions were affected by developments abroad over the intermeeting period but were little changed on balance. Federal Reserve communications and economic data releases, including the June employment report and retail sales data, put some downward pressure on the path of expected future short-term interest rates. On net, 5-year and 10-year Treasury yields were somewhat lower, measures of inflation compensation over the next 5 years based on Treasury Inflation-Protected Securities declined, equity prices were little changed, and the foreign exchange value of the dollar rose modestly.
The expected path of the federal funds rate moved down following the June FOMC statement and the Chair's postmeeting press conference. Market participants reportedly saw as notable the downward revisions in the June SEP to FOMC participants' projections of the appropriate level of the federal funds rate at the end of 2015. Results from the Desk's July Survey of Primary Dealers and Survey of Market Participants indicated that a majority of respondents to both surveys continued to view the September 2015 meeting as the most likely time for the first increase in the target range for the federal funds rate; however, respondents to both surveys continued to place significant probability on scenarios in which the first increase in the target range occurred at subsequent meetings. As in the June survey, after the initial increase, respondents expected the target range for the federal funds rate to rise only gradually.
Over the intermeeting period, market yields fluctuated in response to news about developments abroad, including Greek debt negotiations. Yields on 5- and 10-year nominal Treasury securities fell somewhat on net. Market-based measures of inflation compensation over the next 5 years moved lower amid a decline in oil prices,whereas inflation compensation 5 to 10 years ahead was relatively stable.
On balance, broad U.S. equity price indexes were little changed over the intermeeting period. Option-implied volatility on the S&P 500 index over the next month increased for a time in response to foreign developments before falling back to the lower end of its range over recent years. Based on reports from about 40 percent of firms in the S&P 500 index, earnings per share in the second quarter were about unchanged or slightly higher than their first-quarter levels. Spreads on 10-year triple-B-rated and speculative-grade corporate bonds over comparable-maturity Treasury securities widened somewhat over the period.
Financing conditions for nonfinancial firms continued to be accommodative. Corporate bond issuance remained strong in the second quarter; issuance of institutional leveraged loans picked up noticeably, likely due in part to tighter loan spreads as compared with the beginning of the year. Commercial and industrial loans on banks' balance sheets continued to expand.
Financing for commercial real estate (CRE) remained broadly available. CRE loans on banks' books expanded in the second quarter, consistent with stronger loan demand reported in the July Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS). Issuance of commercial mortgage-backed securities continued to be robust.
According to available measures, residential mortgage lending conditions stayed accommodative for many consumers. However, credit conditions remained tight for riskier borrowers, such as those with low credit scores, undocumented income, or high debt-to-income ratios. Interest rates on 30-year fixed-rate mortgages were little changed, in line with MBS yields and other longer-term interest rates.
Outstanding balances of auto and student loans continued to expand at a robust pace through May. Banks indicated in the July SLOOS that their lending standards for credit card loans had eased somewhat relative to the past few years. However, a number of indicators suggested that terms on credit card loans remained tight, especially for subprime borrowers.
Credit conditions in municipal bond markets were stable over the intermeeting period. Despite the announcement that Puerto Rico might seek to restructure at least part of its debt, spreads on an index of 20-year general obligation municipal bonds over comparable-maturity Treasury securities changed little, and the pace of issuance of long-term municipal bonds remained robust.
After having widened amid concerns about the difficult negotiations between Greece and its creditors, Greek and other peripheral euro-area sovereign spreads narrowed, on net, over the intermeeting period as news emerged of progress toward an agreement. In China, stock prices fell substantially, prompting a number of policy and regulatory actions by Chinese officials to support the stock market. While these developments attracted investor attention, reaction in asset markets outside Greece and China was limited on balance.
Sovereign bond yields and monetary policy expectations in the United Kingdom changed little, on net, over the intermeeting period. By contrast, yields in Canada, New Zealand, Norway, and Sweden decreased following weaker-than-expected macroeconomic data releases and additional monetary policy accommodation. The foreign exchange value of the U.S. dollar increased during the intermeeting period against the currencies of major U.S. trading partners. Stock markets in most advanced foreign economies ended the period higher. Equity prices in emerging market economies, however, generally moved lower on net.
The staff provided its latest report on potential risks to financial stability. The strong capital position of the U.S. banking sector, low to moderate use of leverage elsewhere in the financial system, stability in the level of maturity transformation by financial institutions, and still-moderate rates of borrowing by the private nonfinancial sector were seen as factors supporting overall financial stability. However, rising debt burdens for riskier businesses as well as somewhat elevated valuations and loosening lending standards for many asset classes pointed to some increasing concerns. The effect of financial stresses related to Greece and China on the largest U.S. financial firms was limited to date, perhaps reflecting the relatively strong financial positions and low direct exposures among such firms and a view among market participants that foreign authorities would take actions to stem spillovers.
Staff Economic Outlook
The U.S. economic forecast prepared by the staff for the July FOMC meeting was broadly similar to that prepared for the June FOMC meeting. Real GDP was again expected to increase faster in the second half of this year than in the first half and to expand more rapidly than potential output in 2016 and 2017, even as the normalization of the stance of monetary policy was assumed to proceed. However, real GDP growth over the medium term was revised down a small amount, in part because of a slightly stronger forecast for the exchange value of the dollar. The staff also made two small adjustments to its supply-side assumptions. First, the projected rates of productivity gains and potential output growth over the medium term were trimmed. With actual and potential GDP growth both a bit weaker, the projected narrowing of the output gap over the medium term was little revised. Second, the staff lowered slightly its estimate of the longer-run natural rate of unemployment. The unemployment rate was expected to decline gradually to this revised estimate.
The staff's forecast for inflation was revised down, particularly in the near term, as the decline in crude oil prices over the intermeeting period was expected to result in lower consumer energy prices. Although energy prices and non-oil import prices were expected to begin rising steadily next year, the staff continued to project that inflation would be below the Committee's longer-run objective of 2 percent over 2016 and 2017. Inflation was anticipated to move up gradually to 2 percent thereafter, with inflation expectations in the longer run assumed to be consistent with the Committee's objective and slack in labor and product markets projected to have waned.
The staff viewed the uncertainty around its July projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The risks to the forecast for real GDP and inflation were seen as tilted to the downside, reflecting the staff's assessment that neither monetary nor fiscal policy was well positioned to help the economy withstand substantial adverse shocks. At the same time, the staff viewed the risks around its outlook for the unemployment rate as roughly balanced.
Participants' Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants viewed the information received over the intermeeting period as suggesting that economic activity had been expanding moderately in recent months. The pace of job gains had been solid and the unemployment rate had declined, with a range of labor market indicators suggesting that underutilization of labor resources had continued to diminish. Participants generally viewed the incoming data as confirming their earlier assessment that the weak report on real GDP in the first quarter reflected transitory factors and expected that real economic activity would continue to expand at a moderate pace over the balance of the year, leading to further improvement in labor market conditions. However, a few participants observed that although GDP growth appeared to have picked up in recent months relative to the first-quarter pace, the level of GDP remained lower than had been projected earlier in the year. Inflation continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and further decreases in prices of non-energy imports. Market-based measures of inflation compensation remained low, while survey-based measures of longer-term inflation expectations remained stable. Participants generally anticipated that inflation would rise gradually toward 2 percent as the labor market improved further and the transitory effects of earlier declines in energy and import prices dissipated. Although many continued to see some downside risks arising from economic and financial developments abroad, participants generally viewed the risks to the outlook for domestic economic activity and the labor market as nearly balanced.
With respect to consumer spending, the incoming data had been uneven but participants cited reports from contacts suggesting a pickup since the first quarter. Participants generally expected consumer spending to rise moderately over the near term. Continued gains in employment and income, high household net worth, and low gasoline prices were viewed as factors that should support consumer spending in coming months. Consumer credit conditions were also seen as favorable, with business contacts pointing to steady loan growth, especially for auto loans and credit cards. However, a couple of participants were concerned about the outlook for consumer spending, noting that spending had been disappointing in recent months even though real income had already been boosted by the lower gasoline prices and the improved labor market.
Participants viewed the recent data on housing starts and permits as well as the higher levels of sales and prices as indicative of continued recovery in the housing sector. The easing of lending standards for residential mortgages evidenced in the most recent SLOOS was cited as a factor likely to support further progress. However, a couple of participants noted that they did not expect this sector to be a major contributor to economic growth over the remainder of the year.
Participants also observed that activity in other sectors of the economy continued to be subdued. Business fixed investment remained soft even as the drag from the sharp contraction in drilling rigs over the first half of this year appeared to be fading. Although investment spending was expected to pick up over the second half of this year, a few participants were concerned that the further decline in oil prices that had occurred in recent weeks might continue to hold down energy-related investment. In addition, government spending was expected to add very little to growth in aggregate spending this year. Participants also expected net exports to continue to subtract from GDP growth over the second half of the year, reflecting in part the damping influence of the dollar's earlier appreciation.
Industry contacts pointed to generally solid business conditions, with firms in many parts of the country continuing to report positive assessments of current activity and optimism about future sales. Manufacturing activity had slowed somewhat over the intermeeting period, but conditions were mixed across different industries. Those firms connected to the auto, aerospace, and construction industries, for example, reported strong demand. However, businesses particularly exposed to the appreciation of the dollar or falling commodity prices--including those in the heavy equipment and steel, oil and gas extraction, and petrochemical industries--reported slower activity. The service sector reports were mostly positive. Overall, most contacts viewed the recent slowdown in manufacturing as likely to prove temporary and remained optimistic about future demand, even though the recent decreases in oil prices and the possibility of adverse spillovers from slower economic growth in China raised some concerns. Regarding the agricultural sector, a very wet spring had significantly reduced the percentage of crops in good condition, and declining commodity prices had further reduced expectations for farm income.
In their discussion of the foreign economic outlook, participants generally viewed the risks from the fiscal and financial problems in Greece as having diminished somewhat, although it was observed that Greece still faced many challenges and that Greek economic progress was likely to be limited over the near term. While the recent Chinese stock market decline seemed to have had limited implications to date for the growth outlook in China, several participants noted that a material slowdown in Chinese economic activity could pose risks to the U.S. economic outlook. Some participants also discussed the risk that a possible divergence in interest rates in the United States and abroad might lead to further appreciation of the dollar, extending the downward pressure on commodity prices and the weakness in net exports.
Participants agreed that labor market conditions had improved further, citing increases in payroll employment and job openings, the decrease in the unemployment rate, and some further reduction in broader measures of labor market underutilization. Although the labor force participation rate declined in June and the national hiring and quits rates were little changed in May, several participants noted that reports from business contacts in their Districts pointed to continued job gains and relatively strong labor markets. They cited anecdotal reports of firms having concerns about retaining workers and facing difficulties in filling even medium- and lower-skilled jobs. However, several participants contended that, despite the progress over the past few years, some noticeable margins of slack remained, citing as evidence the high number of workers not actively searching for jobs but available and interested in work as well as the high share of employees working part time for economic reasons compared with pre-recession levels.
The ongoing rise in labor demand still appeared not to have led to a broad-based firming of wage increases. While business contacts in a number of Districts continued to report that the pace of wage increases had picked up, recent national readings on hourly compensation and average hourly earnings of employees had remained subdued. The most recent employment cost index, released in April, had suggested an increase in wage gains. However, questions were raised about how to interpret this reading because the pickup was concentrated in the Northeast and might have resulted from particular factors that were not associated solely with a general tightening of labor market conditions, such as minimum wage adjustments and market conditions in certain occupations. In addition, it was noted that considerable uncertainty remained about when wages might begin to accelerate and whether that development might translate into increased price inflation.
Participants discussed how recent developments influenced their expectations for reaching the FOMC's 2 percent inflation objective over the medium term. Total PCE inflation continued to run below the Committee's longer-run objective. Core PCE price inflation, as measured on a 12-month change basis, also remained low, but other measures, such as the trimmed mean PCE and median CPI, continued to run at higher levels than core PCE inflation. Moreover, core CPI inflation had picked up over recent months. Some participants cited downside risks to inflation, pointing to the absence of any noticeable response of inflation to the reduction in resource slack over the past several years, risks of further declines in oil and commodity prices, and the possibility of further appreciation in the dollar. Although most readings on longer-term inflation expectations were little changed recently, participants discussed how to interpret downward movements in some survey and market-based measures of inflation expectations over the past few years. Most participants still expected that the downward pressure on inflation from the previous declines in energy prices and the effects of past dollar appreciation would prove to be temporary. Participants generally continued to anticipate that, with appropriate monetary policy, inflation would move up to the Committee's objective over the medium term, reflecting the anticipated tightening of product and labor markets and stable longer-term inflation expectations.
Participants discussed a range of topics associated with financial market developments and financial stability. They commented on issues related to the deterioration in bond market liquidity reported by market participants, the potential migration of leveraged loan underwriting to the nonbank sector in light of current supervisory guidance, and the assessment of valuation risks when term premiums were narrow while most other risk premiums were not. In addition, it was observed that Puerto Rico faced significant challenges servicing its debts, though the risks of contagion to other U.S. financial markets were judged to be low. Participants also noted the challenges associated with identifying newly emerging risks as well as the implications for monetary policy of a hypothetical future situation in which financial imbalances were increasing.
During their discussion of economic conditions and monetary policy, participants mentioned a number of considerations associated with the timing and pace of policy normalization. Most judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point. Participants observed that the labor market had improved notably since early this year, but many saw scope for some further improvement. Many participants indicated that their outlook for sustained economic growth and further improvement in labor markets was key in supporting their expectation that inflation would move up to the Committee's 2 percent objective, and that they would be looking for evidence that the economic outlook was evolving as they anticipated. However, some participants expressed the view that the incoming information had not yet provided grounds for reasonable confidence that inflation would move back to 2 percent over the medium term and that the inflation outlook thus might not soon meet one of the conditions established by the Committee for initiating a firming of policy. Several of these participants cited evidence that the response of inflation to the elimination of resource slack might be attenuated and expressed concern about risks of further downward pressure on inflation from international developments. Another concern related to the risk of premature policy tightening was the limited ability of monetary policy to offset downside shocks to inflation and economic activity when the federal funds rate was near its effective lower bound.
Some participants, however, emphasized that the economy had made significant progress over the past few years and viewed the economic conditions for beginning to increase the target range for the federal funds rate as having been met or were confident that they would be met shortly. A few of these participants judged that the stance of monetary policy, including the extraordinarily low level of the federal funds rate and the current size of the Federal Reserve balance sheet, was very accommodative. A couple of others thought that an appreciable delay in beginning the process of normalization might result in an undesirable increase in inflation or have adverse consequences for financial stability. Some participants advised that progress toward the Committee's objectives should be viewed in light of the cumulative gains made to date without overemphasizing month-to-month changes in incoming data. It was also noted that a prompt start to normalization would likely convey the Committee's confidence in prospects for the economy.
In their discussion of the appropriate path for the federal funds rate and associated communications at and after the time of the first increase in the target range, participants expressed support for emphasizing that the course of policy would remain conditional on the Committee's assessment of economic developments and the outlook relative to its objectives. It was also noted that the Committee's communications around the time of the first rate increase should emphasize that the expected path for policy, not the initial increase, would be the most important determinant of financial conditions and should acknowledge that policy would continue to be accommodative to support progress toward the Committee's dual objectives. While monetary policy adjustments ultimately would be data dependent, some participants expressed the view that, in light of their current outlook, it likely would be appropriate to adjust the federal funds rate gradually after the first increase to help ensure that the economy would be able to absorb higher interest rates and that inflation was moving toward the Committee's objective.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the FOMC met in June indicated that economic activity had been expanding moderately in recent months. The labor market had also continued to improve, with solid job gains and declining unemployment. A range of labor market indicators, on balance, suggested that underutilization of labor resources had diminished since early this year. Members generally viewed these developments, together with appropriate monetary policy accommodation, as supporting their expectations for moderate economic growth in the medium term and for further improvement in labor market conditions. They also continued to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation had continued to run below the Committee's longer-run objective, but members expected it to rise gradually toward 2 percent over the medium term as the labor market improved further and the transitory effects of earlier declines in energy and import prices dissipated.
In assessing whether economic conditions had improved sufficiently to initiate a firming in the stance of monetary policy, the Committee noted that, on balance, a range of labor market indicators suggested that underutilization of labor resources had diminished further. Most members saw room for some additional progress in reducing labor market slack, although several viewed current labor market conditions as at or very close to those consistent with maximum employment. Many members thought that labor market underutilization would be largely eliminated in the near term if economic activity evolved as they expected. However, several were concerned that labor market conditions consistent with maximum employment could take longer to achieve, noting, for example, the lack of convincing signs of accelerating wages, which might be signaling that the natural rate of unemployment could currently be lower than they previously thought.
In considering the Committee's criteria with respect to inflation for beginning policy normalization, most members viewed the incoming data as reinforcing their earlier assessment that, although inflation continued to run below the Committee's objective, the downward pressure on inflation from the previous decreases in energy prices and the effects of past dollar appreciation would abate. However, core inflation on a year-over-year basis also was still below 2 percent. Moreover, some members continued to see downside risks to inflation from the possibility of further dollar appreciation and declines in commodity prices. In addition, several members noted that higher rates of resource utilization appeared to have had only very limited effects to date on wages and prices, and underscored the uncertainty surrounding the inflation process as well as the role and dynamics of inflation expectations. The Committee agreed to continue to monitor inflation developments closely, with almost all members indicating that they would need to see more evidence that economic growth was sufficiently strong and labor markets conditions had firmed enough for them to feel reasonably confident that inflation would return to the Committee's longer-run objective over the medium term.
The Committee concluded that, although it had seen further progress, the economic conditions warranting an increase in the target range for the federal funds rate had not yet been met. Members generally agreed that additional information on the outlook would be necessary before deciding to implement an increase in the target range. One member, however, indicated a readiness to take that step at this meeting but was willing to wait for additional data to confirm a judgment to raise the target range.
In their discussion of language for the postmeeting statement, members agreed that the wording should reflect their assessment that economic conditions showed continued progress toward the Committee's objectives. The Committee updated the statement to indicate that economic activity had been expanding moderately in recent months and that it had seen further improvement in labor market conditions over the intermeeting period, pointing specifically to solid job gains and declining unemployment. In addition, the Committee agreed to state that a range of labor market indicators suggested that underutilization of labor resources had diminished since early this year, acknowledging the cumulative progress that had been made in the labor market. The Committee also modified the discussion of inflation developments slightly to recognize the more recent declines in energy prices while restating the expectation that inflation would rise gradually toward 2 percent over the medium term as the labor market improved further and the transitory effects of earlier declines in energy and import prices dissipated.
The Committee agreed to maintain the target range for the federal funds rate at 0 to 1/4 percent and to reaffirm in the statement that the Committee's decision about how long to maintain the current target range for the federal funds rate would depend on its assessment of actual and expected progress toward its objectives of maximum employment and 2 percent inflation. Members also agreed that their evaluation of progress on their objectives would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. To further reflect the Committee's assessment that economic conditions had continued to progress toward its objectives, the Committee slightly altered its characterization of when it anticipates that it will be appropriate to begin the process of policy normalization. Specifically, members agreed to indicate the Committee's anticipation that it would be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
The Committee also maintained its policy of reinvesting principal payments from agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. The Committee reiterated its expectation that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
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 SOMA in accordance with the following domestic policy directive:
"Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions. The System Open Market Account manager and the secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."
The vote encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in June indicates that economic activity has been expanding moderately in recent months. Growth in household spending has been moderate and the housing sector has shown additional improvement; however, business fixed investment and net exports stayed soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, a range of labor market indicators suggests that underutilization of labor resources has diminished since early this year. Inflation continued to run below the Committee's longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Charles L. Evans, Stanley Fischer, Jeffrey M. Lacker, Dennis P. Lockhart, Jerome H. Powell, Daniel K. Tarullo, and John C. Williams.
Voting against this action: None.
Long-Run Monetary Policy Implementation Framework
At the conclusion of the meeting, the Chair noted that the staff would soon begin an extended effort to evaluate potential long-run monetary policy implementation frameworks. In view of the likely time frames for normalization of the stance of monetary policy and the System's balance sheet, the Committee probably would not need to reach any final decisions regarding such a framework for several years. Moreover, the process of normalization will likely provide a great deal of information about money markets and the Federal Reserve's policy tools that will help inform the Committee's judgment about a long-run implementation framework. Nonetheless, because the analysis will likely address a wide range of topics, it seemed appropriate to begin now to organize and undertake the work.
Previous staff work on implementation frameworks was presented to the Committee in April 2008 and focused largely on alternative frameworks that could be used to target the federal funds rate. Those topics would be an important part of the current undertaking as well. However, in light of experience over recent years, policymakers agreed that a number of related issues warranted attention, including topics such as the effectiveness of alternative implementation frameworks in scenarios that could require a return to the zero lower bound, regulatory and other structural developments that could affect financial institutions and markets in ways that would affect monetary policy implementation, and the long-run structure of the Federal Reserve's assets and liabilities that best supports the System's macroeconomic objectives and financial stability. In discussing the range of issues contemplated for study under this project, it was noted that the Policy Normalization Principles and Plans reflect the Committee's intention that, in the longer run, the Federal Reserve will hold no more securities than necessary to implement monetary policy efficiently and effectively and that the Federal Reserve will hold primarily Treasury securities.
Policymakers agreed that it would be important to draw on the perspectives of staff across the Federal Reserve System and to consult widely with other central banks, academics, and other experts on markets, financial institutions, and monetary policy. The project was expected to run through the end of 2016. Policymakers will review progress and provide input as the work proceeds.
It was agreed that the next meeting of the Committee would be held on Wednesday-Thursday, September 16-17, 2015. The meeting adjourned at 10:45 a.m. on July 29, 2015.
Notation Vote
By notation vote completed on July 7, 2015, the Committee unanimously approved the minutes of the Committee meeting held on June 16-17, 2015.
_____________________________
Brian F. Madigan
Secretary
1. Attended the joint session of the Federal Open Market Committee and the Board of Governors. Return to text
2. Attended through the discussion on potential enhancements to the Summary of Economic Projections. Return to text
3. Attended the discussion of the economic and financial situation through the close of the meeting. Return to text
4. Attended through the discussion on System Open Market Account reinvestment policy. Return to text |
2015-07-29T00:00:00 | 2015-07-29 | Statement | Information received since the Federal Open Market Committee met in June indicates that economic activity has been expanding moderately in recent months. Growth in household spending has been moderate and the housing sector has shown additional improvement; however, business fixed investment and net exports stayed soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, a range of labor market indicators suggests that underutilization of labor resources has diminished since early this year. Inflation continued to run below the Committee's longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports. Market-based measures of inflation compensation remain low; survey‑based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams. |
2015-06-17T00:00:00 | 2015-06-17 | Statement | Information received since the Federal Open Market Committee met in April suggests that economic activity has been expanding moderately after having changed little during the first quarter. The pace of job gains picked up while the unemployment rate remained steady. On balance, a range of labor market indicators suggests that underutilization of labor resources diminished somewhat. Growth in household spending has been moderate and the housing sector has shown some improvement; however, business fixed investment and net exports stayed soft. Inflation continued to run below the Committee's longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports; energy prices appear to have stabilized. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams. |
2015-06-17T00:00:00 | 2015-07-08 | Minute | Minutes of the Federal Open Market Committee
June 16-17, 2015
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, June 16, 2015, at 1:00 p.m. and continued on Wednesday, June 17, 2015, at 9:00 a.m.
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
Charles L. Evans
Stanley Fischer
Jeffrey M. Lacker
Dennis P. Lockhart
Jerome H. Powell
Daniel K. Tarullo
John C. Williams
James Bullard, Esther L. George, Loretta J. Mester, and Eric Rosengren, Alternate Members of the Federal Open Market Committee
Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis
Helen E. Holcomb and Blake Prichard, First Vice Presidents, Federal Reserve Banks of Dallas and Philadelphia, respectively
Brian F. Madigan, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Thomas C. Baxter, Deputy General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
David Altig, Eric M. Engen,1 Michael P. Leahy, Jonathan P. McCarthy, William R. Nelson, Glenn D. Rudebusch, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Robert deV. Frierson,2 Secretary of the Board, Office of the Secretary, Board of Governors
Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors
James A. Clouse and Stephen A. Meyer, Deputy Directors, Division of Monetary Affairs, Board of Governors; Daniel M. Covitz, Deputy Director, Division of Research and Statistics, Board of Governors
Andreas Lehnert, Deputy Director, Office of Financial Stability Policy and Research, Board of Governors
William B. English, Senior Special Adviser to the Board, Office of Board Members, Board of Governors
David Bowman, Andrew Figura, David Reifschneider, and Stacey Tevlin, Special Advisers to the Board, Office of Board Members, Board of Governors
Trevor A. Reeve, Special Adviser to the Chair, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Christopher J. Erceg and Beth Anne Wilson, Senior Associate Directors, Division of International Finance, Board of Governors; David E. Lebow and Michael G. Palumbo, Senior Associate Directors, Division of Research and Statistics, Board of Governors
Ellen E. Meade and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors
Gretchen C. Weinbach,Associate Director, Division of Monetary Affairs, Board of Governors
Jane E. Ihrig, Deputy Associate Director, Division of Monetary Affairs, Board of Governors
Glenn Follette and Paul A. Smith, Assistant Directors, Division of Research and Statistics, Board of Governors
Robert J. Tetlow, Adviser, Division of Monetary Affairs, Board of Governors
Penelope A. Beattie,2 Assistant to the Secretary, Office of the Secretary, Board of Governors
Katie Ross,2 Manager, Office of the Secretary, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Stephen Lin, Senior Economist, Division of International Finance, Board of Governors; Deborah J. Lindner, Senior Economist, Division of Research and Statistics, Board of Governors
Benjamin K. Johannsen, Marcel A. Priebsch, and Francisco Vazquez-Grande,3 Economists, Division of Monetary Affairs, Board of Governors
Randall A. Williams, Information Management Analyst, Division of Monetary Affairs, Board of Governors
Mark A. Gould, First Vice President, Federal Reserve Bank of San Francisco
Michael Strine, Executive Vice President, Federal Reserve Bank of New York
Kartik B. Athreya, Evan F. Koenig, Susan McLaughlin,3 Samuel Schulhofer-Wohl, Ellis W. Tallman, Geoffrey Tootell, and Christopher J. Waller, Senior Vice Presidents, Federal Reserve Banks of Richmond, Dallas, New York, Minneapolis, Cleveland, Boston, and St. Louis, respectively
Roc Armenter, Deborah L. Leonard, Anna Paulson, Douglas Tillett, and Jonathan L. Willis, Vice Presidents, Federal Reserve Banks of Philadelphia, New York, Chicago, Chicago, and Kansas City, respectively
Developments in Financial Markets and the Federal Reserve's Balance Sheet
In a joint session of the Federal Open Market Committee (FOMC) and the Board of Governors of the Federal Reserve System, the manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets. The manager also discussed System open market operations conducted by the Open Market Desk during the period since the Committee met on April 28-29. The Desk's overnight reverse repurchase agreement (RRP) operations continued to provide a soft floor for money market interest rates. The manager updated the Committee on plans for term RRP operations at the end of the second quarter and noted that testing of the Federal Reserve's Term Deposit Facility continued. The manager also reviewed the reinvestment policy for maturing Treasury securities. Specifically, at Treasury auctions, the Desk rolls over the maturing securities held in the SOMA into newly issued securities in proportion to the issue amounts of the new securities, and the Federal Reserve receives the interest rate determined competitively in the public auction of the newly issued securities.
The manager updated the Committee on tentative plans to improve the calculation of the effective federal funds rate published by the Federal Reserve Bank of New York. The effective federal funds rate, currently defined as the volume-weighted mean of interest rates on federal funds transactions, would be redefined as the volume-weighted median. Staff analysis suggested that the volume-weighted median would usually differ little from the volume-weighted mean, but that the median would be a more robust statistic when some trades occur at interest rates that are unrepresentative of general market conditions or when there are data problems such as reporting errors. The change in approach would be implemented next year in conjunction with the transition to the Report of Selected Money Market Rates (FR 2420) as the data source for the calculation of the effective federal funds rate. A volume-weighted median would also be used to construct a representative measure of conditions in the broader set of markets covered by the new overnight bank funding rate.4 The manager noted that additional background information on these changes would be published by the Desk shortly following the release of the minutes from this meeting. Participants expressed no objections to the proposal.
The staff also provided an update to the Committee on a review of the current system of primary dealers and the Desk's overall framework for establishing, maintaining, and publishing information on the Federal Reserve's counterparty relationships for operations in both domestic and foreign financial markets. While the current sets of counterparties were performing well and meeting the Desk's needs, the staff noted that it would report back to the Committee in the future should potential enhancements to the counterparty framework be identified. The Desk anticipated that it would conduct regular reviews of the counterparty framework approximately every three years in the future.
By unanimous vote, the Committee ratified the Open Market Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
The Board meeting concluded at the end of the discussion of developments in financial markets and the Federal Reserve's balance sheet.
Staff Review of the Economic Situation
The information reviewed for the June 16-17 meeting suggested that real gross domestic product (GDP) was increasing moderately in the second quarter after edging down in the first quarter. Labor market conditions improved somewhat further in recent months. Consumer price inflation continued to run below the FOMC's longer-run objective of 2 percent and was restrained significantly by earlier declines in energy prices and decreases in prices of non-energy imports. Survey measures of longerârun inflation expectations remained stable, while market-based measures of inflation compensation were still low.
Total nonfarm payroll employment expanded at a faster pace in April and May than in the first quarter. The unemployment rate was 5.5 percent in May, about the same as its first-quarter average. The labor force participation rate and the employment-to-population ratio rose a bit over April and May, and the share of workers employed part time for economic reasons edged down on net. The rate of private-sector job openings moved up a little, on balance, in March and April, while the rates of hiring and quits were essentially unchanged.
Industrial production decreased during April and May after declining in the first quarter. The output of both the manufacturing and mining sectors fell over the past two months, likely reflecting the continuing effects of earlier increases in the foreign exchange value of the dollar and lower crude oil prices. Automakers' assembly schedules suggested that light motor vehicle production would increase at a solid pace in the near term, but broader indicators of manufacturing production, such as the readings on new orders from national and regional manufacturing surveys, generally pointed to modest gains in factory output in the coming months.
Growth in real personal consumption expenditures (PCE) appeared to pick up early in the second quarter from its modest pace in the previous quarter. The components of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimate of PCE increased in May, and the data for sales in the previous two months were revised up. Sales of light motor vehicles were much higher in May than in April. Among the factors that influence household spending, real disposable income rose in April and gains in households' net worth were supported by further advances in home values. Moreover, consumer sentiment in the University of Michigan Surveys of Consumers in early June remained near its highest level since prior to the most recent recession.
Activity in the housing sector improved somewhat in recent months but continued to be slow. Starts and building permits of both new single-family homes and multifamily units increased, on balance, in April and May. Sales of new homes rose in April; existing home sales moved down, although pending home sales increased.
Growth in real private expenditures for business equipment and intellectual property products appeared to remain relatively slow in the second quarter. Nominal shipments of nondefense capital goods excluding aircraft rose in April. Forward-looking indicators, such as new orders for these capital goods along with national and regional surveys of business conditions, pointed to only modest increases in business equipment spending in the near term. Firms' nominal spending for nonresidential structures excluding drilling and mining rose in April. In contrast, the number of oil rigs in operation continued to fall through early June, suggesting a further decline in real business spending for drilling and mining structures in the second quarter.
Nominal federal spending data for April and May pointed toward a further decline in real federal government purchases in the second quarter. Real state and local government purchases appeared to be rising in the second quarter, with increases in both payrolls and nominal construction spending in recent months.
The U.S. international trade deficit widened substantially in March but narrowed in April, leaving the deficit modestly wider than in February. After decreasing for four straight months, exports increased in both March and April, as shipments to Asia picked up following the resolution in February of labor disputes at West Coast ports. Imports rebounded in March from the depressed levels in January and February but fell back in April, close to the first-quarter average. While real net exports made a large negative contribution to the change in real GDP in the first quarter of 2015, April data suggested that net exports might be a considerably smaller drag on GDP growth in the second quarter of the year.
Total U.S. consumer prices, as measured by the PCE price index, only edged up over the 12 months ending in April, held down primarily by earlier large declines in energy prices. Core PCE inflation, which excludes food and energy prices, was 1-1/4 percent over the same 12-month period, restrained in part by declines in the prices of non-energy imports. Measures of expected longer-run inflation from a number of surveys, including the Michigan survey, the Survey of Professional Forecasters, and the Desk's Survey of Primary Dealers, remained stable. However, market-based measures of inflation compensation were still low, although somewhat higher than early in the year. Measures of labor compensation rose at moderate rates, outpacing the rise in consumer prices over the past year. The employment cost index increased 2-3/4 percent over the four quarters ending in the first quarter, while compensation per hour in the nonfarm business sector rose 1-3/4 percent over the same period. Average hourly earnings for all employees increased 2-1/4 percent over the 12 months ending in May. There were some tentative signs that these labor compensation measures were accelerating a little in the first quarter.
Economic growth in many foreign economies slowed in the first quarter. Real GDP contracted in Canada, where lower oil prices depressed investment, and in Brazil, where business and consumer confidence weakened and high inflation prompted a significant tightening of monetary policy. In addition, real GDP growth slowed in China and Mexico. By contrast, the euro-area economy continued its recovery, and real GDP growth in Japan increased sharply. Inflation rates turned positive in recent months in many foreign economies following the trough in oil prices earlier this year.
Staff Review of the Financial Situation
Over the intermeeting period, longer-term Treasury yields increased notably amid heightened volatility, apparently boosted by a rise in yields on core euro-area sovereign bonds and, to a lesser extent, stronger-than-anticipated news about the U.S. labor market late in the period. The sharp rise in yields on core euro-area sovereign bonds seemed to reflect a notable rise in term premiums from significantly compressed levels as well as an increase in the path of expected future short-term rates following some positive data for the European economy.
The nominal Treasury yield curve steepened appreciably, on net, with 2-, 5-, and 10-year yields ending the intermeeting period about 15 to 35 basis points higher. Most of the increase in nominal yields was attributable to a rise in real yields, as measures of inflation compensation were relatively stable.
Various measures typically used to assess liquidity in Treasury and mortgage-backed securities (MBS) markets were little changed over the intermeeting period; they have generally pointed to relatively stable market functioning over the past several years. However, the majority of respondents to the June Senior Credit Officer Opinion Survey on Dealer Financing Terms indicated that, over the past five years, liquidity and functioning in these markets, especially in Treasury markets, have deteriorated. Respondents attributed the deterioration primarily to securities dealers' decreased willingness to provide balance sheet resources for market making as a result of both regulatory changes and changes in internal risk-management practices.
On balance, the expected path of the federal funds rate implied by futures contracts steepened noticeably beyond 2015, with a portion of this shift coming after the May employment report. Some evidence suggested that a significant part of the increase may have reflected higher term premiums. By contrast, Federal Reserve communications following the April FOMC meeting were characterized by investors as generally in line with expectations and elicited limited market reaction.
Results from the June Survey of Primary Dealers and the June Survey of Market Participants indicated little change since the April survey in modal forecasts of the federal funds rate through 2018. Respondents again saw the September 2015 FOMC meeting as the most likely time for the first increase in the target range for the federal funds rate. The expected pace of tightening after the initial increase in the target range for the federal funds rate, whenever that might occur, was similar to that reported in the April survey.
Over the intermeeting period, most broad U.S. equity price indexes moved down a bit, on net, amid mixed macroeconomic news and little information on earnings. Option-implied volatility on the S&P 500 index over the next month increased, on balance, but remained near the lower end of its historical range. Spreads on 10-year triple-B-rated corporate bonds over comparable-maturity Treasury securities widened somewhat, on net, while spreads on speculative-grade corporate bonds narrowed slightly.
Financing conditions for large nonfinancial businesses continued to be accommodative. Gross corporate bond issuance remained quite strong, and institutional leveraged loan issuance picked up significantly. Commercial and industrial loans on banks' balance sheets continued to increase at a solid pace. Meanwhile, financing conditions for small businesses continued to improve, though the growth of small business loans on banks' books remained subdued, partly reflecting still-tepid demand for credit from owners of small businesses.
Financing for commercial real estate remained broadly available, although the expansion of commercial real estate loans on banks' books slowed in April and May, reportedly because of sales of loans secured by nonfarm nonresidential properties into pools of commercial mortgage-backed securities. Measures of residential mortgage credit availability continued to improve gradually over the intermeeting period. Nevertheless, credit remained tight for borrowers with lower credit scores. Interest rates on 30-year fixed-rate mortgages increased about 30 basis points, broadly in line with MBS yields and other longer-term rates. Financing conditions in consumer credit markets stayed accommodative in March and April. Auto and student loans expanded at a robust pace through April, while revolving credit picked up in March and April after a slow start at the beginning of the year.
Sovereign bond yields in foreign economies rose notably during the intermeeting period, especially in the advanced economies, led by a substantial increase in German bund yields. A number of factors may have contributed to the increase in yields, including a reappraisal of term premiums, which appeared to have fallen to very low levels in April. The rise in yields was also supported by the release of some stronger-than-expected inflation data in the euro area and by European Central Bank communications that volatility in yields was to be expected. Against this backdrop and with a step-up in concerns about developments in Greece, equity prices declined in most countries. Stock prices in Japan and especially in China were the main exceptions. The foreign exchange value of the dollar increased a bit, on balance, during the intermeeting period against the currencies of major U.S. trading partners. While the dollar declined against the euro and other European currencies, it rose against the Canadian dollar, the yen, and many emerging market currencies, boosted in part by the strong U.S. employment report for May.
Staff Economic Outlook
In the economic forecast prepared by the staff for the June FOMC meeting, real GDP growth in the second half of this year was expected to step up from its pace in the first half. However, economic growth in the second half was projected to be a little lower than in the projection prepared for the April meeting, largely reflecting a small downward revision to the forecast for household spending. The staff's medium-term projection for real GDP growth was essentially unrevised from the previous forecast. The staff continued to project that real GDP would expand at a faster pace than potential output in 2016 and 2017, supported primarily by increases in consumer spending, even as the normalization of the stance of monetary policy was assumed to proceed. The expansion in economic output over the medium term was anticipated to trim resource slack; the unemployment rate was expected to decline gradually to the staff's estimate of its longer-run natural rate.
The staff's forecast for inflation in the near term was little changed, and it was unrevised over the medium term. Energy prices and non-oil import prices were expected to begin steadily rising next year, but the staff projected that inflation would continue to be below the Committee's longer-run objective of 2 percent over 2016 and 2017. However, inflation was anticipated to reach 2 percent thereafter, with inflation expectations in the longer run assumed to be consistent with the Committee's objective and slack in labor and product markets projected to have waned.
The staff viewed the extent of uncertainty around its June projections for real GDP growth, the unemployment rate, and inflation as similar to the average over the past 20 years. The risks to the forecasts for real GDP growth and inflation were seen as tilted a little to the downside, reflecting the staff's assessment that neither monetary policy nor fiscal policy was well positioned to help the economy withstand substantial adverse shocks. At the same time, the staff saw the risks around its outlook for the unemployment rate as roughly balanced.
Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, members of the Board of Governors and Federal Reserve Bank presidents submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, inflation, and the federal funds rate for each year from 2015 through 2017 and over the longer run, conditional on each participant's judgment of appropriate monetary policy.5 The longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These projections and policy assessments are described in the Summary of Economic Projections, which is an addendum to these minutes.
In their discussion of the economic situation and the outlook, meeting participants viewed the information received over the intermeeting period as indicating that economic activity was expanding moderately after little change in the first quarter of the year. Early in 2015, a number of factors--including unfavorable weather in parts of the country and labor disputes at West Coast ports--temporarily held down real GDP; several analy-ses also suggested that difficulties with seasonal adjustment likely contributed to an underestimate of first-quarter real GDP. The unemployment rate was unchanged over the period between the April and June meetings, but payroll employment posted solid gains, and, on balance, a range of labor market indicators suggested that underutilization of labor resources diminished somewhat. Although participants marked down their expectations for the rate of increase in real GDP over the first half of the year, their projections for economic growth in the second half of 2015 and over 2016 and 2017 were broadly similar to those prepared for the March meeting. Under their respective assumptions about appropriate monetary policy, participants generally expected real GDP to expand at a rate sufficient to continue to move labor market conditions toward levels judged consistent with the Committee's dual mandate. Inflation readings available since the April meeting continued to run below the Committee's longer-run objective, partly reflecting earlier declines in energy prices and continued decreases in prices of non-energy imports. However, energy prices appeared to have stabilized. Participants continued to project a gradual rise in inflation toward 2 percent over the medium term as the labor market improved further and the transitory effects of earlier declines in energy and import prices dissipated.
In discussing how to interpret the reported weakness in real GDP during the first quarter, participants considered alternative estimates of real economic activity based on various data-filtering models maintained by Board and Reserve Bank staff. These models yielded a range of estimates, but, overall, they suggested that real activity in the first quarter was likely stronger than the then-current official estimate of real GDP. Some participants indicated that the higher alternative estimates seemed more consistent with the increases in real gross domestic income and private domestic final purchases in the first quarter as well as the strength in employment and hours worked. However, the alternative estimates left open the question of when and to what extent the seasonal adjustment and other measurement issues associated with official estimates of GDP in the first quarter might unwind.
While participants generally saw the risks to their projections of economic activity and the labor market as balanced, they gave a number of reasons to be cautious in assessing the outlook. Some pointed to the risk that the weaker-than-anticipated rise in economic activity over the first half of the year could reflect factors that might continue to restrain sales and production, and that economic activity might not have sufficient momentum to sustain progress toward the Committee's objectives. In particular, they were concerned that consumers could remain cautious or that the drag on sectors affected by lower energy prices and the higher dollar could persist. Others, however, viewed the strength in the labor market in recent months as potentially signaling a stronger-than-expected bounceback in economic activity. Several mentioned their uncertainty about whether Greece and its official creditors would reach an agreement and about the likely pace of economic growth abroad, particularly in China and other emerging market economies. Other concerns were related to whether the apparent weakness in productivity growth recently would be reversed or continue. On the one hand, a rebound in productivity growth in coming quarters might restrain hiring and slow the improvement in labor market conditions. On the other hand, if productivity growth remained weak, the labor market might tighten more quickly and inflation might rise more rapidly than anticipated.
At the time of the April meeting, the increase in consumer spending was estimated to have been unexpectedly weak in the first quarter following strong gains in the second half of 2014. The additional information that had become available since then, including more complete estimates of outlays for services and revised data on retail sales, indicated that consumer spending was somewhat better than previously reported, rising at a moderate pace in the first quarter. In addition, the strong rebound in motor vehicle sales and the solid gain in retail sales in May suggested that the pace of consumer spending was picking up in the current quarter. Moreover, a number of fundamental factors determining consumer spending remained positive, including the boost to real income from the earlier decline in energy prices, low interest rates, sustained moderate gains in wage and salary income, stronger household balance sheets, and the high levels of households' confidence about the economic outlook and about their income prospects. Many participants anticipated that these factors would support a solid pace of consumer spending going forward. However, others remained concerned that consumers had not increased their spending as much as expected in response to the drop in energy prices, and that the rise in the saving rate since last fall may signal more cautious behavior among households that might last for some time.
A number of participants noted that housing starts and permits rose considerably in recent months, and indicators of sales activity turned more positive. Nonetheless, home construction was still below the trend that would appear consistent with population growth, sales remained at low levels, and credit availability was still relatively tight.
Reports on manufacturing in a number of regions offered some signs that the sector was no longer weakening, with a couple of Districts' diffusion indexes turning up. Still, cutbacks in spending on drilling and mining equipment, slow demand for other business equipment, and the drag on exports from slow foreign demand and previous increases in the dollar continued to weigh on industrial production. Motor vehicle production was highlighted as a bright spot. In those Districts in which activity had been adversely affected by the drop in energy prices, drilling activity was either contracting less rapidly or was stabilizing. Higher oil production could continue to hold down energy prices in the near term, but industry contacts anticipated some recovery in prices over the coming year, which should stem layoffs and cuts in capital spending in the energy sector. Agricultural production in several Districts appeared likely to benefit from wet weather, but weak farm income continued to weigh on the sector. Several participants reported that the services sector was a relative source of strength in their Districts. In general, business contacts continued to express optimism about stronger sales and production in the second half of the year.
In their discussion of labor market conditions, participants offered their views on recent developments and the progress that had occurred in reducing underutilization of labor resources. They generally agreed that labor market conditions had improved somewhat over the intermeeting period, variously citing solid increases in payroll employment and job openings; low levels of unemployment insurance claims; and, despite an unchanged unemployment rate, some further reduction in broader measures of underutilization, particularly among those not actively searching for jobs, but available and interested in work. Several participants pointed to some favorable trends that had developed over a longer period, such as the flattening out of the labor force participation rate and a shift in the flow of workers into more stable and higher-skilled jobs. A number of participants noted that the outlook for continued job gains was evident in reports on hiring intentions from business contacts in their Districts who indicated that more firms planned additions to their payrolls over the coming year than a year earlier. While the cumulative improvements in labor market conditions over the past year had been substantial, most participants judged that further progress would be required to eliminate underutilization of labor resources; some of them anticipated that the utilization gap would close around the end of the year. Several other participants indicated that, in their view, labor market slack had already been largely eliminated.
The ongoing rise in labor demand appeared to have begun to result in a firming of wage increases. Recent readings on the employment cost index, hourly compensation, and average hourly earnings of employees suggested some acceleration in wages. According to business contacts in a number of Districts, many firms looking for new workers said they had been raising wages selectively to attract them; some had also begun to raise wages more generally. However, several participants pointed out that, even with the recent upturn, wage increases remain subdued.
Participants discussed how the incoming information regarding inflation influenced their expectations for reaching the FOMC's 2 percent inflation objective over the medium term. Total PCE inflation continued to run below the Committee's objective. However, participants noted that the apparent stabilization of crude oil prices and the foreign exchange value of the dollar would reduce the downward pressure on inflation from falling prices of energy and imported goods. Core PCE price inflation, as measured on a 12-month change basis, had slowed slightly from an already low rate. However, several participants pointed out that the 3-month change in that index had firmed recently, signaling some improvement in the inflation outlook. In addition, some cited alternative measures of inflation, such as the trimmed mean and median consumer price indexes (CPIs) and the trimmed mean PCE, which continued to run at higher levels than overall PCE inflation. Survey measures of longer-term inflation expectations remained stable, and market-based measures of inflation compensation, while still low, were higher than earlier in the year. Nonetheless, a couple of participants continued to be concerned that the extended period of low inflation might persist and feed through to inflation expectations, citing estimates from various inflation forecasting models and the downtrend in the 10-year CPI projections in the Survey of Professional Forecasters. Participants continued to anticipate that, with appropriate monetary policy, inflation would move up to or toward the Committee's objective over the medium term. Among the factors influencing the trajectories of their inflation forecasts were their outlooks for the pace of real activity, labor market conditions and wage developments, and inflation expectations.
In their discussion of financial market developments over the intermeeting period, several participants commented on the rise in the 10-year Treasury yield, which accompanied a steeper run-up in the 10-year German yield. The sharp rise in German yields appeared to reflect a retracing of the earlier decline in German rates to unsustainably low levels. It was noted that the increase in U.S. yields was not especially large in a historical context and that volatility in U.S. fixed-income markets was still somewhat below pre-crisis levels. However, many participants expressed concern that a failure of Greece and its official creditors to resolve their differences could result in disruptions in financial markets in the euro area, with possible spillover effects on the United States. And some participants reiterated the importance of effective Committee communications in reducing the likelihood of an outsized financial market reaction around the time that policy normalization begins.
During their discussion of economic conditions and monetary policy, participants commented on a number of considerations associated with the timing and pace of policy normalization. Most participants judged that the conditions for policy firming had not yet been achieved; a number of them cautioned against a premature decision. Many participants emphasized that, in order to determine that the criteria for beginning policy normalization had been met, they would need additional information indicating that economic growth was strengthening, that labor market conditions were continuing to improve, and that inflation was moving back toward the Committee's objective. Other concerns that were mentioned were the potential erosion of the Committee's credibility if inflation were to persist below 2 percent and the limited ability of monetary policy to offset downside shocks to inflation and economic activity when the federal funds rate was at its effective lower bound. Some participants viewed the economic conditions for increasing the target range for the federal funds rate as having been met or were confident that they would be met shortly. They identified several possible risks associated with delaying the start of policy firming. One such risk was the possibility that the Committee might need to tighten more rapidly than financial markets currently anticipate--an outcome that could be associated with a significant rise in longer-term interest rates or heightened financial market volatility. Another was that prolonging a high degree of monetary policy accommodation might result in an undesirable increase in inflation or might have adverse consequences for financial and macroeconomic stability. It was also pointed out that a prompt start to normalization would likely convey the Committee's confidence in prospects for the economy. During the discussion, a number of participants recommended that, around the time of the first increase in the target range, the Committee consider how it would update its communications regarding the likely path of the federal funds rate, with several indicating that the Committee should remain data dependent in making adjustments to the target range.
Participants also discussed plans for publishing operational details regarding the implementation of monetary policy around the time of the first increase in the target range. All participants supported a staff proposal for the Federal Reserve to issue an implementation note that would communicate separately from the Committee's postmeeting policy statement the specific measures to be employed to implement the FOMC's decision about the stance of policy. Following scheduled FOMC meetings, this implementation note would be released at the same time as the Committee's postmeeting statement; it would convey operational details regarding the settings of the policy tools and the changes in administered rates being employed to achieve the Committee's desired stance of policy, and it would include the FOMC's domestic policy directive to the Desk. If adjustments to policy tools or administered rates subsequently proved necessary to implement an unchanged policy stance, the implementation note could be revised without altering the Committee's policy statement. Participants agreed that this strategy provided a number of advantages, including focusing the Committee's postmeeting statement on information about economic conditions and the stance of monetary policy; communicating the details of policymakers' operational decisions, including the FOMC's domestic policy directive, in one place; reducing the risk that Federal Reserve communications regarding any technical adjustments to the operation of its policy tools after the commencement of policy firming might be mistaken as conveying information about the stance of policy; and emphasizing that operational decisions regarding the Federal Reserve's policy tools will be made in concert by the Federal Reserve Board and the FOMC with the aim of maintaining the federal funds rate in the range established by the FOMC. Participants also discussed how the language of the domestic policy directive could be revised when the first increase in the target range for the federal funds rate becomes appropriate. It was noted that the Committee might, in addition to providing specific instructions to the Desk regarding operations at that time, update other language in the directive.
Committee Policy Action
In its discussion of monetary policy for the period ahead, the Committee agreed that the weakness in the first quarter was at least in part the result of transitory factors, and members anticipated that economic growth would resume in the second quarter. Although they expressed some uncertainty about the extent of the likely near-term pickup, members expected moderate economic growth over the medium term. Labor market conditions had improved somewhat further, and members anticipated further progress in coming months. Ongoing gains in employment and wages along with a high level of consumer confidence were expected to provide support to household spending. Signs of stronger housing activity were encouraging. However, the outlook for business investment remained soft, and net exports were likely to continue to be restrained by the earlier appreciation of the dollar. Inflation had been well below the Committee's longer-run objective, but, with oil prices and the foreign exchange value of the dollar stabilizing, members expected that inflation would gradually rise toward 2 percent over the medium term. Members thus saw economic conditions as continuing to approach those consistent with warranting a start to the normalization of the stance of monetary policy. In these circumstances, members agreed to continue making decisions about the appropriate target range for the federal funds rate on a meeting-by-meeting basis, with their decisions depending on the implications of economic and financial developments for the prospects for labor markets and inflation.
With respect to its objective of maximum employment, the Committee judged that, on balance, a range of labor market indicators suggested that underutilization of labor resources had diminished somewhat over the intermeeting period. Most members saw room for additional progress in reducing labor market slack, while a couple of members indicated that they viewed the unemployment rate as very close or essentially identical to its mandate-consistent level. Many expected that labor market underutilization would be largely eliminated around year-end if economic activity strengthened as they expected. However, some members were more uncertain about the extent of progress in the labor market to date or were concerned that if the pace of economic growth remained slow, labor market conditions might improve only gradually. Most agreed that they would need more information on developments in the labor market to establish a solid basis for assessing whether labor market conditions had improved sufficiently to initiate tightening.
Inflation had continued to run below the Committee's 2 percent objective. Most members agreed that the recent stability in crude oil prices had increased their confidence that the downward pressure on inflation from earlier declines in energy prices was abating, and some noted the recent stability of the foreign exchange value of the dollar, which could eventually stem the decline in prices of imports. Market-based measures of inflation compensation remained low, but they had risen some from their levels earlier in the year, and survey measures of inflation expectations continued to be stable. However, core inflation was still well below 2 percent. The Committee agreed to continue to monitor inflation developments closely. In considering the Committee's criteria for beginning policy normalization, all members but one indicated that they would need to see more evidence that economic growth was sufficiently strong and labor market conditions had firmed enough to return inflation to the Committee's longer-run objective over the medium term; one member was already reasonably confident of such an outcome.
The Committee concluded that, although it had seen some progress, the conditions warranting an increase in the target range for the federal funds rate had not yet been met, and that additional information on the outlook, particularly for labor markets and inflation, would be necessary before deciding to implement such an increase. One member, however, indicated a readiness to take that step at this meeting but also expressed a willingness to wait another meeting or two for additional data before raising the target range.
In considering how to communicate the rationale for the Committee's policy decision, members discussed the importance of adjusting the language in the postmeeting statement to acknowledge the evolution of progress toward the Committee's objectives. The Committee judged it appropriate to communicate that it had seen some further improvement in labor market conditions over the intermeeting period, stating that a range of labor market indicators suggested that underutilization of labor resources diminished somewhat. It also decided to indicate the likelihood that energy prices might soon exert less downward influence on inflation, saying that energy prices appeared to have stabilized, and to restate its expectation that inflation would rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate.
The Committee agreed to maintain the target range for the federal funds rate at 0 to 1/4 percent and to reaffirm in the statement that the Committee's decision about how long to maintain the current target range for the federal funds rate would depend on its assessment of actual and expected progress toward its objectives of maximum employment and 2 percent inflation. Members continued to judge that their evaluation of progress on their objectives would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Members agreed to retain the indication that the Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
The Committee also maintained its policy of reinvesting principal payments from agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. The Committee agreed to reiterate its expectation that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
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 SOMA in accordance with the following domestic policy directive:
"Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions. The System Open Market Account manager and the secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."
The vote encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in April suggests that economic activity has been expanding moderately after having changed little during the first quarter. The pace of job gains picked up while the unemployment rate remained steady. On balance, a range of labor market indicators suggests that underutilization of labor resources diminished somewhat. Growth in household spending has been moderate and the housing sector has shown some improvement; however, business fixed investment and net exports stayed soft. Inflation continued to run below the Committee's longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports; energy prices appear to have stabilized. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Charles L. Evans, Stanley Fischer, Jeffrey M. Lacker, Dennis P. Lockhart, Jerome H. Powell, Daniel K. Tarullo, and John C. Williams.
Voting against this action: None.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, July 28-29, 2015. The meeting adjourned at 10:40 a.m. on June 17, 2015.
Notation Votes
By notation vote completed on May 19, 2015, the Committee unanimously approved the minutes of the Committee meeting held on April 28-29, 2015.
By notation vote completed on June 3, 2015, the Committee unanimously approved the selection of Brian F. Madigan to serve as secretary, effective June 4, 2015, until the selection of a successor at the first regularly scheduled meeting of the Committee in 2016.
_____________________________
Brian F. Madigan
Secretary
1. Attended Wednesday's session only. Return to text
2. Attended the joint session of the Federal Open Market Committee and the Board of Governors. Return to text
3. Attended Tuesday's session only. Return to text
4. On February 2, 2015, in addition to announcing preliminary plans to improve the calculation of the effective federal funds rate, the Federal Reserve Bank of New York indicated that it planned to begin to publish an additional interest rate, the overnight bank funding rate, which will be based on both federal funds transactions and the Eurodollar transactions of U.S.-managed banking offices. Return to text
5. The incoming president of the Federal Reserve Bank of Philadelphia assumed office after the June FOMC meeting, on July 1, and a new president of the Federal Reserve Bank of Dallas has yet to be selected. Blake Prichard and Helen E. Holcomb, first vice presidents of the Federal Reserve Banks of Philadelphia and Dallas, respectively, submitted economic projections. Return to text |
2015-04-29T00:00:00 | 2015-04-29 | Statement | Information received since the Federal Open Market Committee met in March suggests that economic growth slowed during the winter months, in part reflecting transitory factors. The pace of job gains moderated, and the unemployment rate remained steady. A range of labor market indicators suggests that underutilization of labor resources was little changed. Growth in household spending declined; households' real incomes rose strongly, partly reflecting earlier declines in energy prices, and consumer sentiment remains high. Business fixed investment softened, the recovery in the housing sector remained slow, and exports declined. Inflation continued to run below the Committee's longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Although growth in output and employment slowed during the first quarter, the Committee continues to expect that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams. |
2015-04-29T00:00:00 | 2015-05-20 | Minute | Minutes of the Federal Open Market Committee
April 28-29, 2015
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, April 28, 2015, at 1:00 p.m. and continued on Wednesday, April 29, 2015, at 9:00 a.m.
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
Charles L. Evans
Stanley Fischer
Jeffrey M. Lacker
Dennis P. Lockhart
Jerome H. Powell
Daniel K. Tarullo
John C. Williams
James Bullard, Christine Cumming, Esther L. George, Loretta J. Mester, and Eric Rosengren, Alternate Members of the Federal Open Market Committee
Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis
Helen E. Holcomb and Blake Prichard, First Vice Presidents, Federal Reserve Banks of Dallas and Philadelphia, respectively
Thomas Laubach, Secretary and Economist
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Steven B. Kamin, Economist
David W. Wilcox, Economist
David Altig, Thomas A. Connors, Eric M. Engen, Michael P. Leahy, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Robert deV. Frierson,1 Secretary of the Board, Office of the Secretary, Board of Governors
Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors
Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors
James A. Clouse and Stephen A. Meyer, Deputy Directors, Division of Monetary Affairs, Board of Governors
William B. English, Senior Special Adviser to the Board, Office of Board Members, Board of Governors
Andrew Figura, David Reifschneider, and Stacey Tevlin, Special Advisers to the Board, Office of Board Members, Board of Governors
Trevor A. Reeve, Special Adviser to the Chair, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Michael T. Kiley, Senior Adviser, Division of Research and Statistics, and Senior Associate Director, Office of Financial Stability Policy and Research, Board of Governors
Ellen E. Meade and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors; Jeremy B. Rudd, Senior Adviser, Division of Research and Statistics, Board of Governors
Joshua Gallin, Associate Director, Division of Research and Statistics, Board of Governors; Fabio M. Natalucci,2 Associate Director, Division of Monetary Affairs, Board of Governors; Beth Anne Wilson, Associate Director, Division of International Finance, Board of Governors
Jane E. Ihrig1 and David López-Salido, Deputy Associate Directors, Division of Monetary Affairs, Board of Governors
Edward Nelson, Assistant Director, Division of Monetary Affairs, Board of Governors
Burcu Duygan-Bump, Adviser, Division of Monetary Affairs, Board of Governors; Eric C. Engstrom, Adviser, Division of Research and Statistics, Board of Governors
Penelope A. Beattie,1 Assistant to the Secretary, Office of the Secretary, Board of Governors
Dana L. Burnett, Section Chief, Division of Monetary Affairs, Board of Governors
Katie Ross,1 Manager, Office of the Secretary, Board of Governors
Jonathan E. Goldberg, Economist, Division of Monetary Affairs, Board of Governors
James M. Lyon, First Vice President, Federal Reserve Bank of Minneapolis
James J. McAndrews, Executive Vice President, Federal Reserve Bank of New York
Troy Davig, Michael Dotsey, Evan F. Koenig, and Spencer Krane, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Philadelphia, Dallas, and Chicago, respectively
Todd E. Clark, Sylvain Leduc, Giovanni Olivei, Douglas Tillett, and David C. Wheelock, Vice Presidents, Federal Reserve Banks of Cleveland, San Francisco, Boston, Chicago, and St. Louis, respectively
Kei-Mu Yi, Special Policy Advisor to the President, Federal Reserve Bank of Minneapolis
Matthew D. Raskin, Assistant Vice President, Federal Reserve Bank of New York
Andreas L. Hornstein, Senior Advisor, Federal Reserve Bank of Richmond
James M. Egelhof,1 Markets Officer, Federal Reserve Bank of New York
Developments in Financial Markets and the Federal Reserve's Balance Sheet
In a joint session of the Federal Open Market Committee (FOMC) and the Board of Governors of the Federal Reserve System, the manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets. The deputy manager followed with a review of System open market operations conducted during the period since the Committee met on March 17-18, 2015. The deputy manager also discussed the outcomes of continued testing of the Federal Reserve's term and overnight reverse repurchase agreement operations (term RRP operations and ON RRP operations, respectively). The Open Market Desk conducted two term RRP operations over the March quarter-end. The combination of term and ON RRP operations continued to provide a soft floor for money market rates over the intermeeting period, including around quarter-end. Based on experience around recent quarter-ends, the deputy manager discussed possible plans for June test RRP operations. The manager summarized ongoing staff work related to improved data collection for, and possible adjustments to, the calculation of the effective federal funds rate that were intended to provide a more robust measure of trading conditions in the federal funds market over time.
The Committee voted to renew the reciprocal currency arrangements with the Bank of Canada and the Bank of Mexico; these arrangements are associated with the Federal Reserve's participation in the North American Framework Agreement of 1994. In addition, the Committee voted to renew the dollar and foreign currency liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank. The votes to renew the Federal Reserve's participation in these standing arrangements are taken annually at the April meeting. Mr. Lacker dissented on both votes because of his opposition, as indicated at the January meeting, to foreign exchange market intervention by the Federal Reserve, which such swap arrangements might facilitate, and because, in his view, such arrangements were best left to fiscal authorities.
By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
Normalization Procedures
The staff provided a briefing on issues related to the implementation of monetary policy during the period immediately following the first increase in the target range for the federal funds rate, when it becomes appropriate. In their subsequent discussion, participants agreed that the Committee's testing of normalization tools, in conjunction with its other planning, had created conditions under which policy normalization would likely proceed smoothly once it commences. Nonetheless, as part of prudent contingency planning, participants agreed to have the staff provide more frequent updates on financial market developments for a period after firming begins. Such updates would ensure that, if adjustments to policy normalization tools prove necessary to maintain appropriate control over money market rates, policymakers could make such changes in a timely manner. Participants also considered whether it might be appropriate, when the Committee first raises the target range for the federal funds rate, to increase the spread between the primary credit rate and the top of the federal funds rate target range. One participant argued for such a step in order to bring the spread up to a level closer to that prevailing prior to the financial crisis, but several participants favored maintaining the current spread at least until the process of policy normalization was well under way and policymakers had considered carefully the potential benefits and costs of such a change. In part, that view reflected concerns that an increase in the spread that coincided with the initial step in policy normalization could complicate communications regarding the Committee's policy intentions.
The Board meeting concluded at the end of the discussion of normalization procedures.
Staff Review of the Economic Situation
The information reviewed for the April 28-29 meeting indicated that real gross domestic product (GDP) only edged up in the first quarter, with growth likely held down, in part, by transitory factors. The pace of improvement in labor market conditions moderated somewhat, and the unemployment rate was unchanged over the intermeeting period. Consumer price inflation continued to run below the FOMC's longer-run objective of 2 percent, partly restrained by earlier declines in energy prices along with further decreases in non-energy import prices. Market-based measures of inflation compensation were still low, while survey measures of longer-run inflation expectations remained stable.
Payroll employment expanded at a solid pace in the first quarter, on average, but the gain in March was smaller than in earlier months. The unemployment rate remained at 5.5 percent in March, the labor force participation rate edged down, and the employment-to- population ratio was little changed. The share of workers employed part time for economic reasons was also little changed. In the private sector, the rate of job openings edged up in February and was well above its pre-recession level, while the rates of hiring and of quits were about flat and remained slightly above their levels of a year ago.
Industrial production fell in the first quarter, with another drop in the drilling of new oil and gas wells as well as a decrease in manufacturing output that appeared to reflect, in part, the effects of the labor dispute at West Coast ports. Automakers' assembly schedules suggested that light motor vehicle production would increase at a solid pace in the second quarter, but broader indicators of manufacturing activity, such as the readings on new orders from national and regional manufacturing surveys, pointed to only modest gains in factory output over the next several months.
Real personal consumption expenditures (PCE) increased in the first quarter, albeit at a much slower pace than in the fourth quarter of 2014. Light motor vehicle sales, as well as the components of nominal retail sales used by the Bureau of Economic Analysis (BEA) to construct its estimate of PCE, rebounded in March after declining in February, suggesting that unusually severe winter weather in February likely held down spending. Among the factors that influence household spending, real disposable income rose strongly, on net, in the first quarter, buoyed in part by earlier declines in energy prices. In addition, further gains in house values and equity prices likely raised households' net worth, and the index of consumer sentiment in the University of Michigan Surveys of Consumers remained near its highest level since prior to the most recent recession.
Residential investment increased at a slow pace in the first quarter, and other indicators of housing-sector activity remained weak. Starts and building permits for single-family homes decreased during the first quarter despite small gains in March; starts of multifamily units also declined during the first quarter. Sales of new homes were little changed, on average, over February and March, while existing home sales edged up on net.
Real private expenditures on business equipment and intellectual property products rose modestly in the first quarter, and forward-looking indicators--including data on orders and shipments of nondefense capital goods and the national and regional surveys of business conditions--were generally consistent with only small further gains in the near term. Real spending for nonresidential structures fell considerably in the first quarter, as outlays for drilling and mining structures dropped sharply and outlays for other structures declined.
Real government purchases moved down in the first quarter. Federal spending was flat. But construction expenditures by state and local governments contracted, while these governments' payrolls were unchanged.
The U.S. international trade deficit narrowed sharply in February, as imports fell more than exports. Imports of all major categories of goods moved lower as imports from several major trading partners--including Canada, China, Japan, and Korea--registered declines. Disruptions related to the West Coast port labor disputes likely contributed to the decline in imports in February. The reduction in exports was largest for durable goods and industrial supplies, with exports to Canada and China accounting for most of the drop. Despite the narrowing of the nominal trade deficit in February, the BEA estimated that real net exports were a substantial drag on the growth of real GDP in the first quarter.
Total U.S. consumer prices in the first quarter, as measured by the PCE price index, were only 1/4 percent higher than a year earlier, importantly reflecting the decrease in consumer energy prices. The core PCE price index, which excludes food and energy prices, increased 1-1/4 percent over the same four-quarter period, partly restrained by the declines in prices of non-energy imported goods. The PCE price index in February and the consumer price index (CPI) in March rose at a faster pace than in previous months, as energy prices reversed a small part of their earlier declines. Survey-based measures of expected long-run inflation were stable, with the measure from the Desk's Survey of Primary Dealers unchanged and the Michigan survey measure down a little but still in the range seen over recent years. Market-based measures of inflation compensation at longer horizons increased somewhat but were still low. Over the 12 months ending in March, nominal average hourly earnings for all employees increased 2 percent, somewhat faster than the increase in core consumer prices over the same period.
Economic growth in both advanced foreign and emerging market economies appeared to slow, on balance, in the first quarter of 2015. Global trade and industrial production weakened. Among advanced economies, output growth declined in the United Kingdom and economic indicators for Canada and Japan also pointed to slower growth in the first quarter. In contrast, real GDP growth seemed to have increased in the euro area. In emerging market economies, real GDP growth slowed sharply in China and indicators of activity weakened in Mexico and Brazil, but real GDP growth picked up in some emerging Asian economies. Inflation remained low in most economies, partly as a result of earlier declines in oil prices.
Staff Review of the Financial Situation
Financial conditions eased, on balance, over the intermeeting period. Federal Reserve communications that were reportedly viewed as more accommodative than anticipated put downward pressure on interest rates. A number of weaker-than-expected U.S. economic data releases, including the March employment report, also pushed interest rates lower. On net, measures of inflation compensation rose, equity prices increased somewhat, and the foreign exchange value of the dollar declined.
The expected path of the federal funds rate moved down following the March FOMC statement and the Chair's postmeeting press conference. Investors reportedly took note of changes in the Summary of Economic Projections, including downward revisions to FOMC participants' projections of the appropriate level of the federal funds rate at the end of 2015, 2016, and 2017. During the remainder of the intermeeting period, the expected policy rate path implied by financial market quotes shifted down further, in part because U.S. economic data were weaker, on net, than anticipated. Results from the Survey of Primary Dealers and Survey of Market Participants for April indicated that respondents saw the September 2015 meeting as the most likely time for the first increase in the target range for the federal funds rate; the probabilities attached to scenarios in which policy firming did not begin until after the July 2015 meeting were higher than the corresponding probabilities in the surveys conducted before the March meeting.
Over the intermeeting period, 5- and 10-year nominal Treasury yields decreased, but yields on Treasury Inflation-Protected Securities declined by a greater amount. Measures of inflation compensation over the next 5 years rose significantly, consistent with increases in oil prices and somewhat higher-than-expected February and March consumer price inflation data. Inflation compensation 5 to 10 years ahead also increased but remained at the lower end of its range over the past few years.
On balance, U.S. equity price indexes rose somewhat and option-implied volatility for the S&P 500 index over the next month declined. Energy firms' stock prices retraced a small portion of their substantial drop since mid-2014. Spreads of yields on 10-year speculative-grade corporate bonds over those on comparable-maturity Treasury securities narrowed, in part because of a further decrease in spreads on speculative-grade bonds issued by energy firms. About 40 percent of firms in the S&P 500 index had reported earnings for the first quarter, with those reports generally viewed as better than anticipated. Nonetheless, first-quarter earnings per share were expected to be lower than in the previous quarter.
Financing conditions for nonfinancial firms remained accommodative. Corporate bond issuance was strong in the first quarter, and seasoned equity offerings rose. Commercial and industrial loans on banks' books again expanded briskly. In the leveraged loan market, issuance of new money loans to institutional investors slowed in the first quarter but stayed robust, supported by continued strong issuance of collateralized loan obligations.
Financing for commercial real estate (CRE) remained broadly available. CRE loans on banks' books increased appreciably in the first quarter, consistent with stronger loan demand reported in the April Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS). Issuance of commercial mortgage-backed securities continued to be robust.
Measures of residential mortgage lending conditions were generally little changed over the intermeeting period, and lending volumes remained light. In the April SLOOS, some large banks reported having eased lending standards for a number of categories of residential mortgage loans in the first quarter. House prices continued to rise moderately in February. Nonetheless, estimates of the share of mortgages in a negative equity position were little changed in recent quarters, and they remained elevated when judged against levels prevailing prior to the crisis.
Financing conditions in consumer credit markets stayed generally accommodative. Auto and student loan balances expanded robustly through February. Growth in credit card loans slowed a bit on a year-over-year basis, likely reflecting weaker retail activity.
The U.S. dollar depreciated during the intermeeting period, as U.S. macroeconomic data generally came in weaker than expected, and as market participants appeared to mark down somewhat their expectations for the path of the federal funds rate. Nonetheless, the cumulative appreciation of the dollar since mid-2014 remained substantial. Government bond yields in most advanced foreign economies declined modestly, pushing some yields, particularly in Europe, further into negative territory. By contrast, Greek sovereign yields stayed elevated as the difficult negotiations between Greece and its official creditors continued. Spillovers from Greek markets into other peripheral financial markets remained limited. Equity prices in most advanced foreign economies moved higher, buoyed in part by ongoing monetary policy accommodation. Equity prices also rose in most emerging market economies, with the stock market in China outperforming.
The staff provided its latest report on potential risks to financial stability. A number of factors appeared to limit the vulnerability of the U.S. financial system to adverse shocks. Leverage in the banking system remained relatively low, and increases in household debt stayed modest and continued to be associated primarily with borrowers with strong credit scores. However, some indicators suggested that valuations remained stretched for some asset classes. An estimate of the expected real return on equities moved down, reflecting an increase in stock prices and downward revisions to forecasts of corporate earnings, and corporate bond spreads declined somewhat. The staff also noted changes in the structure of some fixed-income markets that could increase volatility. In addition, the staff discussed the risks to financial stability associated with the possibility of substantial unanticipated changes in longer-term U.S. interest rates, including the scope for a sharp increase in such rates to affect financial conditions in emerging market economies. A number of other risks were noted, including geopolitical tensions and the potential for an increase in financial strains related to the negotiations between Greece and its official creditors.
Staff Economic Outlook
In the U.S. economic forecast prepared by the staff for the April FOMC meeting, real GDP growth in the first half of the year was lower than in the projection prepared for the March meeting, as the data on economic activity received during the intermeeting period were generally weaker than the staff had expected. However, much of this weakness was attributed to transitory factors or statistical noise, with little implication for the pace of expansion beyond the near term. Indeed, the medium-term projection for real GDP growth was revised up modestly, as monetary policy was assumed to be a little more accommodative in this projection and the projected path for the foreign exchange value of the dollar was a little lower. The staff continued to project that real GDP would expand at a faster pace than potential output in 2015 and 2016, supported by increases in consumer and business confidence and a small pickup in foreign economic growth, even as the normalization of monetary policy was assumed to begin. In 2017, real GDP growth was projected to slow toward, but to remain above, the rate of growth of potential output. The expansion in economic activity over the medium term was expected to lead to a gradual reduction in resource slack; the unemployment rate was projected to decline slowly and to move a little below the staff's estimate of its longer-run natural rate for a time.
The staff's forecast for inflation in the near term was revised up a little, reflecting the slightly higher-than-expected recent monthly data on core consumer prices and a path for crude oil prices that was a bit higher than in the previous projection. The medium-term forecast for inflation was little changed, with inflation in 2016 and 2017 projected to move closer to, but remain below, the Committee's longer-run objective of 2 percent, as energy prices were expected to rise, import prices to turn up, and resource utilization to tighten further. Thereafter, inflation was anticipated to move back to 2 percent, with inflation expectations in the longer run assumed to be consistent with the Committee's objective and slack in labor and product markets projected to have waned.
The staff viewed the uncertainty around its April projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The risks to the forecast for real GDP and inflation were seen as tilted to the downside, reflecting the staff's assessment that neither monetary nor fiscal policy appeared well positioned to help the economy withstand substantial adverse shocks. At the same time, the staff viewed the risks around its outlook for the unemployment rate as roughly balanced.
Participants' Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants regarded the information received over the intermeeting period as suggesting that economic growth had slowed during the winter months, in part reflecting transitory factors. The pace of job gains had moderated, and the unemployment rate had remained steady, with a range of labor market indicators suggesting that underutilization of labor resources was little changed. Most participants expected that, following the slowdown in the first quarter, real economic activity would resume expansion at a moderate pace, and that labor market conditions would improve further. Inflation continued to run below the Committee's longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports. Market-based measures of inflation compensation remained low, while survey-based measures of longer-term inflation expectations had remained stable. Participants generally anticipated that inflation would rise gradually toward the Committee's 2 percent objective as the labor market improved further and the transitory effects of declines in energy prices and non-energy import prices dissipated. Participants judged that recent domestic economic developments had increased uncertainty regarding the economic outlook. While participants continued to see potential downside risks resulting from foreign economic and financial developments, most still viewed the risks to the outlook for economic growth and the labor market as nearly balanced.
Participants generally agreed that data on private spending for the first quarter had been disappointing, with unexpectedly weak household expenditures and investment spending. Retail sales had continued to be tepid, although consumer sentiment stayed high and auto sales rebounded in March. The recovery in the housing sector remained slow. Business fixed investment softened, in part reflecting sizable reductions in capital expenditures in the energy sector. Exports contracted, likely reflecting the damping influence of the dollar's appreciation. In combination with a decline in government spending, the weakness of private spending had led to a substantial slowing in economic growth in the first quarter.
Participants discussed whether the weakness of spending in the first quarter primarily reflected temporary factors or instead suggested a longer-lasting loss of momentum for the economy. A number of reasons were advanced for believing that the weakness in spending observed during the first quarter was partly or even largely transitory. Most notably, the severe winter weather in some regions had reportedly weighed on economic activity, and the labor dispute at West Coast ports temporarily disrupted some supply chains. Furthermore, a pattern observed in previous years of the current expansion was that the first quarter of the year tended to have weaker seasonally adjusted readings on economic growth than did the subsequent quarters. This tendency supported the expectation that economic growth would return to a moderate pace over the rest of this year. Participants also pointed to other reasons for anticipating that the weakness seen in the first quarter would not endure. A number of the fundamental factors that drive consumer spending remained favorable, among them low interest rates, high consumer confidence, and rising household real income. In addition, business contacts in several parts of the country continued to be optimistic and expected sales, investment, and hiring to expand over the rest of the year. In the agricultural sector, drought effects had worsened in some parts of the country, but effects on production were limited and planting intentions remained strong. Finally, if the decline in oil prices and the rise in the foreign exchange value of the dollar did not continue, then their influence on the growth rate of investment and the change in net exports would likely recede.
Various reasons were also advanced for believing that some of the recent weakness in the pace of economic activity might persist. A number of participants suggested that the damping effects of the earlier appreciation of the dollar on net exports or of the earlier decline in oil prices on firms' investment spending might be larger and longer-lasting than previously anticipated. In addition, the expected boost to household spending from lower energy prices had apparently so far not materialized, highlighting the possibility of less underlying momentum in consumer expenditures than participants had previously judged. Some participants expressed particular concern about this prospect, as their expectations of a moderate expansion of economic activity in the medium term, combined with further improvements in labor market conditions, rested largely on a scenario in which consumer spending grows robustly despite softness in other components of aggregate demand. Participants discussed downside risks to economic growth, and a few indicated that, in their assessment, such risks had risen since the March meeting. However, most participants continued to see the risks to the outlook for economic growth and the labor market as nearly balanced.
In their discussion of the foreign economic outlook, several participants noted that the foreign exchange value of the U.S. dollar had fallen back somewhat over the intermeeting period. Nonetheless, the value of the dollar had increased significantly since the middle of last year, and it was seen as likely to continue to be a factor restraining U.S. net exports and economic growth for a time. It was suggested that one element underpinning the strength of the U.S. dollar was the increasing prevalence of negative interest rates on sovereign debt in some key European economies. Participants also pointed to a number of risks to the international economic outlook, including the slowdown in growth in China and fiscal and financial problems in Greece.
Many participants judged that the pace of improvement in labor market conditions had slowed. The March increase in payrolls had been smaller than expected, and the unemployment rate had remained steady. However, it was noted that the intermeeting period had also witnessed some more-positive news on labor market conditions, including a further increase in the rate of job openings. Various business contacts in energy-related sectors reported layoffs in response to low oil prices, but some information received from business contacts suggested a tightening in labor markets, with shortages of skilled labor reported in some areas and sectors; there had also been an increase in transitions of workers to better-paying jobs. Larger wage gains were also reported in some regions, although in other parts of the country wage pressures reportedly remained muted. One participant suggested that a significant rise in aggregate nominal wage growth should be a criterion in assessing the Committee's degree of confidence regarding the return of inflation to the Committee's 2 percent longer-run objective. However, a couple of other participants argued that the behavior of nominal wage growth should not play a significant role in that assessment, on the grounds that there was only a loose relationship between nominal wage growth and inflation in the United States.
Many participants noted that measures of inflation averaged over several months or more continued to run below the Committee's longer-run objective. However, this shortfall partly reflected the earlier declines in energy prices and decreasing prices of non-energy imports, and some participants pointed out that, by some measures, the most recent monthly inflation readings had firmed a bit. Although participants expected that inflation would continue, in the near term, to be below the Committee's 2 percent longer-run objective, energy prices were no longer declining and most participants continued to expect that inflation would move up toward the Committee's 2 percent objective over the medium term as the effects of the transitory factors waned and conditions in the labor market and the overall economy improved further. Survey-based measures of inflation expectations had remained broadly stable. Market-based measures of inflation compensation had risen slightly but remained low. One participant suggested that, in the past, market-based measures of inflation compensation had been of little value in predicting inflation one to two years ahead, and that measures of inflation expectations from surveys of professional forecasters were more useful for forecasting inflation. Another participant argued that low values for market-based measures of inflation compensation should concern policymakers, on the grounds that these low values reflected investors placing at least some likelihood on adverse outcomes in which low inflation was accompanied by weak economic activity.
In their discussion of financial market developments and financial stability issues, policymakers highlighted possible risks related to the low level of term premiums. Some participants noted the possibility that, at the time when the Committee decides to begin policy firming, term premiums could rise sharply--in a manner similar to the increase observed in the spring and summer of 2013--which might drive longer-term interest rates higher. In this connection, it was suggested that the tendency for bond prices to exhibit volatility may be greater than it had been in the past, in view of the increased role of high-frequency traders, decreased inventories of bonds held by broker-dealers, and elevated assets of bond funds. A couple of participants underscored the need for a better understanding of the structure of the bond market in the current environment, including the effect on bond market behavior of regulatory changes. Some participants noted that careful Committee communications regarding its policy intentions could help damp any resulting increase in market volatility around the time of the commencement of normalization. It was also noted that financial stability and the Committee's macroeconomic goals were likely to be complementary objectives, but different views were expressed about the potential implications for financial stability of monetary policy tightening in current economic conditions.
In their discussion of communications regarding the path of the federal funds rate over the medium term, participants expressed a range of views about when economic conditions were likely to warrant an increase in the target range for the federal funds rate. Participants continued to judge that it would be appropriate to raise the target range for the federal funds rate when they had seen further improvement in the labor market and were reasonably confident that inflation would move back to its 2 percent objective over the medium term. Although participants expressed different views about the likely timing and pace of policy firming, they agreed that the Committee's decision to begin firming would appropriately depend on the incoming data and their implications for the economic outlook. A few anticipated that the information that would accrue by the time of the June meeting would likely indicate sufficient improvement in the economic outlook to lead the Committee to judge that its conditions for beginning policy firming had been met. Many participants, however, thought it unlikely that the data available in June would provide sufficient confirmation that the conditions for raising the target range for the federal funds rate had been satisfied, al-though they generally did not rule out this possibility. Participants discussed the merits of providing an explicit indication, in postmeeting statements released prior to the commencement of policy firming, that the target range for the federal funds rate would likely be raised in the near term. However, most participants felt that the timing of the first increase in the target range for the federal funds rate would appropriately be determined on a meeting-by-meeting basis and would depend on the evolution of economic conditions and the outlook. In keeping with this data-dependent approach, some participants further suggested that the postmeeting statement's description of the economic situation and outlook, and of progress toward the Committee's goals, provided the appropriate means by which the Committee could help the public assess the likely timing of the initial increase in the target range for the federal funds rate.
During their discussion of economic conditions and monetary policy, participants also commented on different concepts of the equilibrium real federal funds rate--that is, a reference value of the inflation-adjusted federal funds rate consistent with the economy achieving, over a specified time horizon, maximum employment and price stability. Estimates of such equilibrium real interest rates were highly uncertain, but some participants reported that their estimates were currently unusually low by historical standards, reflecting, for example, factors weighing persistently on aggregate demand. In light of their low estimates, afew of these participants questioned whether the Committee was providing sufficient accommodation at the present time and cautioned against initiating policy firming in the near future. However, other participants cited factors, including the current low level of term premiums, that might cast doubt on the notion that the equilibrium real federal funds rate was particularly low. Some participants observed that more discussion of this topic was likely to be helpful in assessing these issues. One participant suggested that, in part because of the evidence that the equilibrium real interest rate was low by historical standards, the Committee should discuss the possibility of increasing its longer-run inflation objective. This participant and a few others thought such a discussion could be useful but emphasized that any decision to change the Committee's longer-run goals and policy strategy should not be made lightly. One of these participants noted, in particular, that a decision to raise the Committee's longer-run inflation objective might work against the achievement of maximum employment and price stability because such a change could undermine the Committee's credibility and, in addition, lead to adverse changes in inflation dynamics that could pose significant challenges for policymakers.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the FOMC met in March suggested that economic growth slowed during the winter months, in part reflecting transitory factors. The pace of job gains moderated, and the unemployment rate remained steady. A range of labor market indicators suggested that underutilization of labor resources was little changed. Although growth in household spending declined, households' real incomes rose strongly, partly reflecting earlier declines in energy prices, and consumer sentiment remained high. Business fixed investment softened, the recovery in the housing sector remained slow, and exports declined. Inflation continued to run below the Committee's longer-run objective, but this partly reflected earlier declines in energy prices and decreasing prices of non-energy imports. Market-based measures of inflation compensation remained low, while survey-based measures of longer-term inflation expectations had remained stable. Despite the slower growth in output and employment observed of late, members continued to expect that, with appropriate policy accommodation, economic activity would expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judged consistent with its dual mandate. Members generally continued to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation was anticipated to remain near its recent low level in the near term, but members expected inflation to rise gradually toward 2 percent over the medium term as further improvement in the labor market occurred and the transitory effects of declines in energy and import prices dissipated. In light of the uncertainties associated with the outlook for inflation, the Committee agreed that it would continue to monitor inflation developments closely.
In their discussion of language for the postmeeting statement, members agreed that the wording should reflect their assessment that economic conditions had progressed to a stage at which the Committee's decision to begin normalizing policy would appropriately be determined on a meeting-by-meeting basis. The Committee agreed that the statement should indicate that the data received over the intermeeting period suggested that economic growth had slowed and to note that this partly reflected transitory factors. The Committee also agreed to change the statement's characterization of the labor market data to note that the pace of job growth slowed over the intermeeting period and that a number of labor market indicators suggested that there was little change in underutilization of labor resources, and to update the statement's description of investment and export behavior in light of the recent weaker readings. In addition, members agreed to modify the discussion of inflation developments to indicate that inflation, although no longer declining, was still below the Committee's longer-term objective and was likely to remain so in the near term, partly because of transitory factors such as earlier declines in energy prices and decreasing prices of non-energy imports. The Committee altered its characterization of the economic outlook to indicate that, while economic growth slowed in the first quarter, the Committee continued to expect that, with appropriate policy accommodation, economic activity would expand at a moderate pace, and that it anticipated that labor market indicators would resume their movement toward levels that the Committee judged consistent with its dual mandate. With respect to the outlook for inflation, members expected inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate.
The Committee agreed to maintain the target range for the federal funds rate at 0 to 1/4 percent and to reaffirm in the statement that the Committee's decision about how long to maintain the current target range for the federal funds rate would depend on its assessment of actual and expected progress toward its objectives of maximum employment and 2 percent inflation. Members continued to judge that this assessment of progress would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Members agreed to retain the indication that the Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
The Committee also decided to maintain its policy of reinvesting principal payments from agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. The Committee agreed to reiterate its expectation that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
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 SOMA in accordance with the following domestic policy directive:
"Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions. The System Open Market Account manager and the secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."
The vote encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in March suggests that economic growth slowed during the winter months, in part reflecting transitory factors. The pace of job gains moderated, and the unemployment rate remained steady. A range of labor market indicators suggests that underutilization of labor resources was little changed. Growth in household spending declined; households' real incomes rose strongly, partly reflecting earlier declines in energy prices, and consumer sentiment remains high. Business fixed investment softened, the recovery in the housing sector remained slow, and exports declined. Inflation continued to run below the Committee's longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Although growth in output and employment slowed during the first quarter, the Committee continues to expect that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Charles L. Evans, Stanley Fischer, Jeffrey M. Lacker, Dennis P. Lockhart, Jerome H. Powell, Daniel K. Tarullo, and John C. Williams.
Voting against this action: None.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, June 16-17, 2015. The meeting adjourned at 11:00 a.m. on April 29, 2015.
Notation Vote
By notation vote completed on April 7, 2015, the Committee unanimously approved the minutes of the Committee meeting held on March 17-18, 2015.
_____________________________
Thomas Laubach
Secretary
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1. Attended the joint session of the Federal Open Market Committee and the Board of Governors. Return to text
2. Attended the portion of the meeting following the joint session of the Federal Open Market Committee and the Board of Governors. Return to text |
2015-03-18T00:00:00 | 2015-04-08 | Minute | Minutes of the Federal Open Market Committee
March 17-18, 2015
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, March 17, 2015, at 10:30 a.m. and continued on Wednesday, March 18, 2015, at 9:00 a.m.
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
Charles L. Evans
Stanley Fischer
Jeffrey M. Lacker
Dennis P. Lockhart
Jerome H. Powell
Daniel K. Tarullo
John C. Williams
James Bullard, Christine Cumming, Esther L. George, Loretta J. Mester, and Eric Rosengren, Alternate Members of the Federal Open Market Committee
Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis
Helen E. Holcomb and Blake Prichard, First Vice Presidents, Federal Reserve Banks of Dallas and Philadelphia, respectively
Thomas Laubach, Secretary and Economist
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Thomas C. Baxter, Deputy General Counsel
Steven B. Kamin, Economist
David W. Wilcox, Economist
David Altig, Thomas A. Connors, Michael P. Leahy, William R. Nelson, Glenn D. Rudebusch, Daniel G. Sullivan, William Wascher, and John A. Weinberg, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Robert deV. Frierson,1 Secretary of the Board, Office of the Secretary, Board of Governors
Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors
James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors
William B. English, Senior Special Adviser to the Board, Office of Board Members, Board of Governors
Andrew Figura, David Reifschneider, and Stacey Tevlin, Special Advisers to the Board, Office of Board Members, Board of Governors
Trevor A. Reeve, Special Adviser to the Chair, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
David E. Lebow and Michael G. Palumbo, Senior Associate Directors, Division of Research and Statistics, Board of Governors
Michael T. Kiley, Senior Adviser, Division of Research and Statistics, and Senior Associate Director, Office of Financial Stability Policy and Research, Board of Governors
Ellen E. Meade and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors
Fabio M. Natalucci2 and Gretchen C. Weinbach,1 Associate Directors, Division of Monetary Affairs, Board of Governors
Jane E. Ihrig and David López-Salido, Deputy Associate Directors, Division of Monetary Affairs, Board of Governors; John J. Stevens, Deputy Associate Director, Division of Research and Statistics, Board of Governors
Glenn Follette, Assistant Director, Division of Research and Statistics, Board of Governors; Elizabeth Klee, Assistant Director, Division of Monetary Affairs, Board of Governors
Penelope A. Beattie,1 Assistant to the Secretary, Office of the Secretary, Board of Governors
Dana L. Burnett and Don Kim, Section Chiefs, Division of Monetary Affairs, Board of Governors
Katie Ross,1 Manager, Office of the Secretary, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Zeynep Senyuz, Economist, Division of Monetary Affairs, Board of Governors
Kenneth C. Montgomery, First Vice President, Federal Reserve Bank of Boston
Ron Feldman, Executive Vice President, Federal Reserve Bank of Minneapolis
Michael Dotsey, Craig S. Hakkio, Evan F. Koenig, and Paolo A. Pesenti, Senior Vice Presidents, Federal Reserve Banks of Philadelphia, Kansas City, Dallas, and New York, respectively
David Andolfatto, Todd E. Clark, Antoine Martin, Joe Peek, and Douglas Tillett, Vice Presidents, Federal Reserve Banks of St. Louis, Cleveland, New York, Boston, and Chicago, respectively
Developments in Financial Markets and the Federal Reserve's Balance Sheet
In a joint session of the Federal Open Market Committee (FOMC) and the Board of Governors of the Federal Reserve System, the manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets. The deputy manager followed with a review of System open market operations conducted during the period since the Committee met on January 27-28, 2015. The deputy manager also discussed the outcomes of recent tests of supplementary normalization tools--namely, the Term Deposit Facility (TDF) and term and overnight reverse repurchase agreement operations (term RRP operations and ON RRP operations, respectively). The TDF operations were executed as three overlapping 21-day term operations with same-day settlement; the total amount of term deposits outstanding peaked at roughly the same level as in the largest operation conducted in prior testing. The term RRP operations were executed as a series of four one-week operations and conducted away from quarter-end; take-up primarily represented substitution away from ON RRP operations. The combination of these term and ON RRP test operations continued to provide a soft floor for money market rates over the intermeeting period.
By unanimous vote, the Committee ratified the Open Market Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
Normalization Tools
A staff briefing provided background on options for setting the aggregate capacity of the ON RRP facility in the early stages of the normalization process. Two options were discussed: initially setting a temporarily elevated aggregate cap or suspending the aggregate cap for a time. The briefing noted that, as the balance sheet normalizes and reserve balances decline, usage of the ON RRP facility should diminish, allowing the facility to be phased out over time. In addition, the briefing outlined strategies for actively reducing take-up at the ON RRP facility after policy normalization is under way, while maintaining an appropriate degree of monetary control, if take-up is larger than the FOMC desires. These strategies included adjusting the values of the interest on excess reserves (IOER) and ON RRP rates associated with a given target range for the federal funds rate, relying on tools such as term RRPs and the TDF to broaden arbitrage opportunities and to drain reserve balances, and selling shorter-term Treasury securities to reduce the size of the balance sheet at a faster pace. In addition, the briefing presented some information on specific calibrations of policy tools that could be used during the early stages of policy normalization.
In their discussion of the options and strategies surrounding the use of tools at liftoff and the potential subsequent reduction in aggregate ON RRP capacity, participants emphasized that during the early stages of policy normalization, it will be a priority to ensure appropriate control over the federal funds rate and other short-term interest rates. Against this backdrop, participants generally saw some advantages to a temporarily elevated aggregate cap or a temporary suspension of the cap to ensure that the facility would have sufficient capacity to support policy implementation at the time of liftoff, but they also indicated that they expected that it would be appropriate to reduce ON RRP capacity fairly soon after the Committee begins firming the stance of policy. A couple of participants stated their view that the risks to financial stability that might arise from a temporarily elevated aggregate ON RRP capacity were likely to be small, and it was noted that there might be little potential for a temporarily large Federal Reserve presence in money markets to affect the structure of those markets if plans for reducing the facility's capacity were clearly communicated and well understood. However, a couple of participants expressed financial stability concerns, and one stressed that more planning was needed to address the potential risks before the Committee decides on the appropriate level of ON RRP capacity at the time of liftoff.
In their discussion regarding strategies for reducing ON RRP usage, should it become undesirably large during the early stages of normalization, most participants viewed raising the IOER rate, thereby widening the spread between the IOER and ON RRP rates, as an appropriate initial step. A majority of participants thought term reserve draining tools could be useful in reducing ON RRP usage, although a couple of participants questioned their effectiveness in placing upward pressure on market interest rates, and a few did not see term RRPs as reducing the Federal Reserve's presence in money markets, arguing that investors view term and overnight RRPs as close substitutes. Many participants mentioned that selling assets that will mature in a relatively short time could be considered at some stage, if necessary to reduce ON RRP usage. However, a number of participants noted that it could be difficult to communicate the reason for such sales to the public, and, in particular, that the announcement of such sales would risk an outsized market reaction, as the public could view the sales as a signal of a tighter overall stance of monetary policy than they had anticipated or as an indication that the Committee might be more willing than had been thought to sell longer-term assets. Some participants pointed out that an earlier end to reinvestments of principal on maturing or prepaying securities would help reduce the level of reserve balances, thereby increasing the effectiveness of the IOER rate and allowing a more rapid reduction in the size of the ON RRP facility. A number of participants suggested that it would be useful to consider specific plans for these and other details of policy normalization under a range of post-liftoff scenarios.
Participants also discussed whether to communicate to the public additional details regarding the approach they intend to take when it becomes appropriate to begin the normalization process, including the width of the target range for the federal funds rate, the settings of the IOER and ON RRP rates, and the use of supplementary tools. A couple of participants suggested communicating a specific commitment to reducing ON RRP capacity soon after liftoff. However, a number of participants emphasized that maintaining control of short-term interest rates would be paramount in the initial stages of policy normalization, and that it was difficult to know in advance when a reduction would be appropriate. They therefore desired to retain some flexibility over the timing of any reduction. That said, many participants agreed that an elevated aggregate capacity for the facility would likely be appropriate only for a short period after liftoff.
At the conclusion of their discussion, all participants agreed to augment the Committee's Policy Normalization Principles and Plans by providing the following additional details regarding the operational approach the FOMC intends to use when it becomes appropriate to begin normalizing the stance of monetary policy.3
When economic conditions warrant the commencement of policy firming, the Federal Reserve intends to:
Continue to target a range for the federal funds rate that is 25 basis points wide.
Set the IOER rate equal to the top of the target range for the federal funds rate and set the offering rate associated with an ON RRP facility equal to the bottom of the target range for the federal funds rate.
Allow aggregate capacity of the ON RRP facility to be temporarily elevated to support policy implementation; adjust the IOER rate and the parameters of the ON RRP facility, and use other tools such as term operations, as necessary for appropriate monetary control, based on policymakers' assessments of the efficacy and costs of their tools. The Committee expects that it will be appropriate to reduce the capacity of the facility fairly soon after it commences policy firming.
A staff briefing outlined some options for further testing of term RRP operations over future quarter-ends. While the tests of term RRPs to date had been informative, the staff suggested that if the Committee envisioned using term RRPs as part of its strategy at liftoff, or potentially at some other point during normalization, continued testing may be useful. Participants discussed whether a resolution that authorized term RRP test operations at quarter-ends through the end of 2015 might reduce the probability that market participants mistakenly interpret future decisions about testing term RRPs over quarter-ends as containing information about the likely timing of liftoff. It was noted that such a resolution would be more efficient from an administrative and communications standpoint, as it would simply allow a continuation of recent quarter-end testing of term RRPs. Moreover, the resolution would not convey any information regarding either the timing of the start of policy normalization or whether term RRP operations might be employed at the time of liftoff and, if so, for how long.
Following the discussion of the testing of term RRP operations, the Committee approved the following resolution on term RRP testing over quarter-ends through January 29, 2016:
"During each of the periods of June 18 to 29, 2015; September 18 to 29, 2015; and December 17 to 30, 2015, the Federal Open Market Committee (FOMC) authorizes the Federal Reserve Bank of New York to conduct a series of term reverse repurchase operations involving U.S. government securities. Such operations shall: (i) mature no later than July 8, 2015, October 7, 2015, and January 8, 2016, respectively; (ii) be subject to an overall size limit of $300 billion outstanding at any one time; (iii) be subject to a maximum bid rate of five basis points above the ON RRP offering rate in effect on the day of the operation; (iv) be awarded to all submitters: (A) at the highest submitted rate if the sum of the bids received is less than or equal to the preannounced size of the operation, or (B) at the stop-out rate, determined by evaluating bids in ascending order by submitted rate up to the point at which the total quantity of bids equals the preannounced size of the operation, with all bids below this rate awarded in full at the stop-out rate and all bids at the stop-out rate awarded on a pro rata basis, if the sum of the counterparty offers received is greater than the preannounced size of the operation. Such operations may be for forward settlement. The System Open Market Account manager will inform the FOMC in advance of the terms of the planned operations. The Chair must approve the terms of, timing of the announcement of, and timing of the operations. These operations shall be conducted in addition to the authorized overnight reverse repurchase agreements, which remain subject to a separate overall size limit authorized by the FOMC."
Mr. Lacker dissented in the vote on the resolution because the March end-of-quarter testing had not yet been completed and he felt that there was no need to authorize additional testing before then.
The Board meeting concluded at the end of the discussion of normalization tools.
Staff Review of the Economic Situation
The information reviewed for the March 17â18 meeting suggested that real gross domestic product (GDP) growth moderated in the first quarter and that labor market conditions improved further. Consumer price inflation was restrained significantly by declines in energy prices and continued to run below the FOMC's longer-run objective of 2 percent. Market-based measures of inflation compensation were still low, while survey measures of longerârun inflation expectations remained stable.
Nonfarm payroll employment continued to expand strongly in January and February. The unemployment rate declined to 5.5 percent in February. Both the labor force participation rate and the employment-to- population ratio rose slightly over the first two months of the year, and the share of workers employed part time for economic reasons edged down. The rate of private-sector job openings moved up in January and was at an elevated level; the rate of quits remained the same as in the fourth quarter, but the rate of hiring stepped down.
Industrial production decreased a little, on net, in January and February, as declines in the output of the manufacturing and mining sectors more than offset an increase in utilities production. Some indicators of mining activity, such as counts of drilling rigs in operation, dropped further. However, automakers' assembly schedules and broader indicators of manufacturing production, such as the readings on new orders from national and regional manufacturing surveys, generally pointed to modest gains in factory output in coming months.
Real personal consumption expenditures (PCE) appeared to decelerate somewhat going into the first quarter after rising markedly in the fourth quarter. The components of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimate of PCE declined slightly in January and February, and light motor vehicle sales stepped down; unusually severe weather in some regions in February may have accounted for a small part of the slowing in consumer spending in that month. Recent information about key factors that influence household spending pointed toward a pickup in PCE in the coming months. The purchasing power of households' income continued to be supported by low energy prices, and real disposable income rose briskly in January. Moreover, households' net worth likely increased as equity prices and home values advanced further, and consumer sentiment in the University of Michigan Surveys of Consumers was still near its highest level since prior to the most recent recession.
The pace of activity in the housing sector remained slow. Both starts and building permits for new single-family homes declined over January and February. Starts of multifamily units also decreased, on net, over the past two months. Sales of new and existing homes moved down in January, although pending home sales increased somewhat.
Real private expenditures for business equipment and intellectual property products appeared to be expanding in the first quarter at about the same modest pace as in the previous quarter. Both nominal orders and shipments of nondefense capital goods excluding aircraft rose in January. New orders for these capital goods remained above the level of shipments, indicating that shipments may increase in subsequent months. Other forward-looking indicators, such as national and regional surveys of business conditions, were generally consistent with modest increases in business equipment spending in the near term. Firms' nominal spending for nonresidential structures moved down in January after rising in the fourth quarter.
Federal spending data for January and February pointed toward a further decline in real federal government purchases in the first quarter. Real state and local government purchases appeared to be rising modestly in the first quarter as their payrolls increased in recent months, although their construction expenditures decreased a little in January.
The U.S. international trade deficit widened substantially in December before narrowing somewhat in January. Exports declined in both December and January, reflecting weak agricultural goods exports, the lower price of petroleum products, and falling or flat exports of most other categories of goods. Imports rose in December, with an increased volume of petroleum imports, but declined in January, driven by lower prices and volumes for petroleum.
Total U.S. consumer prices, as measured by the PCE price index, edged up only 1/4 percent over the 12 months ending in January, as energy prices declined significantly. The core PCE price index, which excludes food and energy prices, rose 1-1/4 percent over the same 12-month period. Measures of expected long-run inflation from a variety of surveys, including the Michigan survey, the Blue Chip Economic Indicators, the Survey of Professional Forecasters, and the Desk's Survey of Primary Dealers, remained stable. Market-based measures of inflation compensation were still low. Measures of labor compensation continued to increase at a modest pace, although faster than consumer prices. Both compensation per hour in the nonfarm business sector and the employment cost index rose 2-1/4 percent over the year ending in the fourth quarter. Average hourly earnings for all employees increased 2 percent over the 12 months ending in February.
Foreign real GDP appeared to expand at a moderate pace in the fourth quarter. While GDP growth stepped down in several economies, including Canada and China, it picked up in the euro area, Japan, and Mexico. Indicators for the first quarter suggested continued firming in the euro area and further slowing in China and Canada. Consumer prices in many foreign economies declined further in the first months of this year, reflecting the falls in energy prices as well as decreases in food prices in some emerging market economies. Many central banks took steps to ease monetary policy during the period, including the European Central Bank (ECB), which began purchasing sovereign bonds under its public sector purchase program (PSPP), and the People's Bank of China, which lowered required reserve ratios for banks. A number of other central banks in advanced and emerging market economies cut policy interest rates.
Staff Review of the Financial Situation
Movements in asset prices over the intermeeting period largely seemed to reflect receding concerns about downside risks to the global economic outlook. Two strong U.S. employment reports and the January consumer price index release, all of which were above market expectations; the start of sovereign bond purchases by the ECB; and the somewhat more encouraging economic news from Europe all appeared to contribute to the improved sentiment in financial markets. Equity prices were higher, on net, although they declined later in the period.
Federal Reserve communications over the intermeeting period, including the minutes of the January FOMC meeting, reportedly were perceived as slightly more accommodative than expected on balance. Market commentary also highlighted Chair Yellen's statement at the Monetary Policy Report testimony that the eventual removal of the language in the policy statement noting that "the Committee judges that it can be patient in beginning to normalize the stance of monetary policy" should not be viewed as indicating that the federal funds rate would necessarily be increased within a couple of meetings. However, the effects of these communications on the expected path for the federal funds rate were more than offset by reactions to stronger-than-expected data for the labor market and consumer inflation, along with perceptions of receding downside risks to the foreign economic outlook. On net, the expected path for the federal funds rate implied by financial market quotes shifted up over the period.
Yields on nominal Treasury securities increased across the maturity spectrum, and the Treasury yield curve steepened. Measures of inflation compensation based on Treasury Inflation-Protected Securities increased early in the intermeeting period amid rising oil prices but ended the period little changed, on net, after oil prices dropped back.
Broad U.S. equity price indexes moved up, on balance, over the intermeeting period, and one-month option-implied volatility on the S&P 500 index moved down on net. Spreads of 10-year corporate bond yields over those on comparable-maturity Treasury securities for both BBB-rated and speculative-grade issuers narrowed notably, likely reflecting increased appetite for riskier investments. While the tightening of spreads was broad based, the declines in short- and intermediate-term spreads for speculative-grade energy firms were particularly pronounced, retracing most of their strong run-up approaching the end of last year.
Results from the Desk's Survey of Primary Dealers and Survey of Market Participants for March indicated that the respondents attached the greatest probabilities to the first increase in the target range for the federal funds rate occurring at either the June or September FOMC meeting; those probabilities were marked up relative to the January survey. In addition, survey respondents widely expected the "patient" language to be removed from the FOMC statement following the March meeting. Conditional on this change in the statement, respondents assigned a roughly 40 percent probability, on average, to liftoff occurring two meetings ahead and assigned most of the remaining probability to later dates.
Credit conditions faced by large nonfinancial firms remained generally accommodative. Corporate bond issuance increased in February, mostly reflecting activity by investment-grade firms. Commercial and industrial loans on banks' books continued to expand strongly, reportedly in part to fund increased merger and acquisition activity. Institutional leveraged loan issuance during January and February was supported by strong issuance of new money loans, while refinancing activity effectively came to a stop, likely reflecting elevated loan spreads. On net, issuance of collateralized loan obligations was only modestly below the strong pace registered in the fourth quarter of 2014.
Financing for the commercial real estate (CRE) sector stayed broadly available over the intermeeting period. Growth of CRE loans on banks' books remained solid, in part supported by loans to finance construction activity. The issuance of commercial mortgage-backed securities (CMBS) was still robust so far this year, and spreads continued to be low. After taking into account deals in the pipeline for March, issuance in the first quarter of 2015 was expected to be the strongest since the financial crisis. According to the March Senior Credit Officer Opinion Survey on Dealer Financing Terms, dealers' willingness to provide warehouse financing for loans intended for inclusion in CMBS increased since the beginning of 2014. In addition, demand for funding of CMBS by hedge funds and real estate investment trusts reportedly rose over the same period.
Credit conditions for mortgages remained tight for riskier borrowers, with relatively few mortgages originated to borrowers in the lower portion of the credit score distribution. For borrowers who qualify for a mortgage, the cost of credit stayed low by historical standards.
Consumer credit rose further over the intermeeting period. Auto and student loan balances continued to expand robustly through January, while credit card balances decelerated slightly. Issuance of consumer asset-backed securities remained robust.
The dollar appreciated against most other currencies over the intermeeting period, as policymakers in the euro area, Sweden, Denmark, and many emerging market economies eased monetary policy even as market participants anticipated monetary policy tightening in the United States. Central bank policymakers in Sweden and Denmark lowered the rates on their respective deposit facilities further below zero. In addition, in Sweden, the benchmark repurchase agreement (or repo) rate was reduced in February to below zero for the first time, and a further cut was announced in March. Equity prices rose in most of the advanced foreign economies, with euro-area stocks rallying both before and after the early March commencement of sovereign bond purchases by the ECB under its PSPP. Stock market performance in the emerging market economies was more varied, with net losses in some and net gains in others. Yields on German government securities declined, with negative yields extending to longer maturities than at the time of the January meeting, likely in reaction to the PSPP, and yield spreads of most other euro-area sovereign bonds over German bonds narrowed. The main exception was Greek bonds, spreads on which widened, on net, amid heightened volatility as negotiations between Greece and its official creditors over support for the country's public finances continued. Yields on the long-term sovereign bonds of many other countries, including Japan and the United Kingdom, rose during the period.
Staff Economic Outlook
In the U.S. economic forecast prepared by the staff for the March FOMC meeting, projected real GDP growth in the first half of this year was lower than in the forecast prepared for the January meeting, largely reflecting downward revisions to the near-term forecasts for household spending, net exports, and residential investment. The staff's medium-term forecast for real GDP growth also was revised down, mostly because of the effects of a higher projected path for the foreign exchange value of the dollar. Nonetheless, the staff continued to forecast that real GDP would expand at a faster pace than potential output in 2015 and 2016, supported by increases in consumer and business confidence and a small pickup in foreign economic growth, even as the normalization of monetary policy was assumed to begin. In 2017, real GDP growth was projected to slow toward, but to remain above, the rate of potential output growth. The expansion in economic activity over the medium term was anticipated to gradually reduce resource slack; the unemployment rate was expected to decline slowly and to temporarily move a little below the staff's estimate of its longer-run natural rate. In its medium-term and longer-run projections, the staff slightly lowered its assumptions for potential GDP growth and real equilibrium interest rates.
The staff's forecast for inflation in the near term was little changed, with the large declines in energy prices since last June still anticipated to lead to a temporary decrease in the 12-month change in total PCE prices in the first half of this year. The staff's forecast for inflation in 2016 and 2017 was unchanged, as energy prices and non-oil import prices were still expected to bottom out and begin rising later this year; inflation was projected to move closer to, but remain below, the Committee's longer-run objective of 2 percent over those years. Inflation was anticipated to move back to 2 percent thereafter, with inflation expectations in the longer run assumed to be consistent with the Committee's objective and slack in labor and product markets projected to have waned.
The staff viewed the extent of uncertainty around its March projections for real GDP growth, the unemployment rate, and inflation as similar to the average over the past 20 years. The risks to the forecasts for real GDP growth and inflation were viewed as tilted a little to the downside, reflecting the staff's assessment that neither monetary policy nor fiscal policy was well positioned to help the economy withstand adverse shocks. At the same time, the staff viewed the risks around its outlook for the unemployment rate as roughly balanced.
Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, members of the Board of Governors and participating Federal Reserve Bank presidents submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, inflation, and the federal funds rate for each year from 2015 through 2017 and over the longer run, conditional on each participant's judgment of appropriate monetary policy.4 The longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These economic projections and policy assessments are described in the Summary of Economic Projections, which is attached as an addendum to these minutes.
In their discussion of the economic situation and the outlook, meeting participants regarded the information received over the intermeeting period as indicating that the pace of economic activity had moderated somewhat. Labor market conditions continued to improve, with strong job gains and a lower unemployment rate, and participants judged that underutilization of labor resources was continuing to diminish. A number of participants noted that slow growth of productivity or the labor force could reconcile the moderation in economic growth with the solid performance of some labor market indicators. Participants expected that, over the medium term, real economic activity would expand at a moderate pace and there would be additional improvements in labor market conditions. Participants generally regarded the net effect of declines in energy prices as likely to be positive for economic activity and employment in the United States, although a couple noted that physical limits on the accumulation of stocks of crude oil could result in further downward pressure on prices and reduce U.S. oil and gas production and investment. Inflation had declined further below the Committee's longer-run objective, largely reflecting declines in energy prices, and was expected to stay near its recent low level in the near term. Market-based measures of inflation compensation 5 to 10 years ahead remained low, while survey-based measures of longer-term inflation expectations had remained stable. Participants generally anticipated that inflation would rise gradually toward the Committee's 2 percent objective as the labor market improved further and the transitory effects of energy price declines and other factors dissipated. While almost all participants noted potential risks to the economic outlook resulting from foreign economic and financial developments, most saw the risks to the outlook for economic growth and the labor market as nearly balanced.
Household spending appeared to have slowed somewhat over the intermeeting period, with some participants suggesting that the recent softness in spending indicators was likely due in part to transitory factors, such as unseasonably cold winter weather in parts of the country. Some participants expressed the view that growth in consumer spending over the medium term would be supported by the strong labor market and rising income, increases in wealth and improvements in household balance sheets, lower gasoline prices, and gains in consumer confidence. Although activity in the housing sector remained sluggish, a few participants were cautiously optimistic that recent higher rates of household formation, together with low mortgage rates, would enable a faster pace of recovery.
Business contacts in many parts of the country continued to express optimism about prospects for future sales or investment. However, there were widespread reports of a slowdown in growth during the first quarter across a range of industries, partly reflecting severe winter weather in some regions as well as labor disputes at West Coast ports that temporarily disrupted some supply chains. In several parts of the country, persistently low oil prices had resulted in declines in drilling and delays in planned capital expenditures in the energy sector, and had negatively affected state government revenues. Manufacturing contacts in a couple of regions reported a softening in export sales. In contrast, service-sector activity had been reasonably strong in several parts of the country, as had auto sales, and the increase in household purchasing power from lower gasoline prices was expected to boost retail sales. Labor market conditions continued to improve in most regions, with wage pressures generally reported to be modest.
In their discussion of the foreign economic outlook, several participants noted that the dollar's further appreciation over the intermeeting period was likely to restrain U.S. net exports and economic growth for a time. A few participants suggested that accommodative policy actions by a number of foreign central banks could lead to a further appreciation of the dollar, but another noted that such actions had also strengthened the outlook for growth abroad, which would bolster U.S. exports. Participants pointed to a number of risks to the international economic outlook, including the slowdown in growth in China, fiscal and financial problems in Greece, and geopolitical tensions.
Participants saw broad-based improvement in labor market conditions over the intermeeting period, including strong gains in payroll employment and a further reduction in the unemployment rate. Several participants judged, based on the improvement in a variety of labor market indicators, that the economy was making further progress toward the Committee's goal of maximum employment. Nonetheless, many judged that some degree of labor market slack remained, as evidenced by the low rate of labor force participation, still-elevated involuntary part-time employment, or subdued growth in wages. A few of them noted that continued modest wage growth could prompt them to reduce their estimates of the longer-run normal rate of unemployment. A few participants observed that the absence of a notable pickup in wages might not be a useful yardstick for evaluating the degree of remaining slack because of the long lags between declines in unemployment and the response of wages or uncertainty about trend productivity growth. One participant, however, saw some evidence of rising wage growth and suggested that compositional changes in the labor force could be masking underlying wage pressures, particularly as measured by average hourly earnings.
Many participants judged that the inflation data received over the intermeeting period had been about in line with their expectations that inflation would move temporarily further below the Committee's goal, largely reflecting declines in energy prices and lower prices of non-oil imports. They continued to expect that inflation would move up toward the Committee's 2 percent objective over the medium term as the effects of these transitory factors waned and conditions in the labor market improved further. Survey-based measures of inflation expectations had remained stable, and market-based measures of inflation compensation over the longer term were about unchanged from the time of the January meeting, although they had exhibited some volatility over the intermeeting period. It was noted that the market-based measures had tracked quite closely the movements in crude oil prices over the period, first rising and then falling back. Participants offered various explanations for this correlation, including that market-based measures of inflation compensation were responding to the same global developments as oil prices, that these measures were capturing changes in risk or liquidity premiums, or that inflation-indexed securities were subject to mispricing. A couple of participants pointed out that the movements in crude oil prices and market-based inflation compensation measures had not been particularly well aligned over a longer historical period, or that information gleaned from inflation derivatives suggested a substantial increase in the probability that inflation would remain well below the Committee's target over the next decade. One of them judged that the low level of inflation compensation could reflect increased concern on the part of investors about adverse outcomes in which low inflation was accompanied by weak economic activity, and that it was important not to dismiss this possible interpretation.
In their discussion of communications regarding the path of the federal funds rate over the medium term, almost all participants favored removing from the forward guidance in the Committee's postmeeting statement the indication that the Committee would be patient in beginning to normalize the stance of monetary policy. These participants continued to think that an increase in the target range for the federal funds rate was unlikely in April. But, with continued improvement in economic conditions, they preferred language that would provide the Committee with the flexibility to subsequently adjust the target range for the federal funds rate on a meeting-by-meeting basis. It was noted that eliminating the reference to being patient would be appropriate in light of the considerable progress achieved toward the Committee's objective of maximum employment, and that such a change would not indicate that the Committee had decided on the timing of the initial increase in the target range for the federal funds rate. Participants generally judged that the appropriate timing of liftoff would depend on their assessment of improvement in the labor market and their degree of confidence that inflation would move back to the Committee's 2 percent objective over the medium term, and that it would be helpful to convey to the public this data-dependent approach to monetary policy. A few participants emphasized that the decision regarding the appropriate timing of liftoff should take account of the risks that could be associated with departing from the effective lower bound later and those that could be associated with departing earlier. One participant did not favor the change to the forward guidance because, with inflation well below the Committee's 2 percent longer-run target, the announcement of a meeting-by-meeting approach to policy could lead to a tightening of financial conditions that would slow progress toward the Committee's objectives.
Participants expressed a range of views about how they would assess the outlook for inflation and when they might deem it appropriate to begin removing policy accommodation. It was noted that there were no simple criteria for such a judgment, and, in particular, that, in a context of progress toward maximum employment and reasonable confidence that inflation will move back to 2 percent over the medium term, the normalization process could be initiated prior to seeing increases in core price inflation or wage inflation. Further improvement in the labor market, a stabilization of energy prices, and a leveling out of the foreign exchange value of the dollar were all seen as helpful in establishing confidence that inflation would turn up. Several participants judged that the economic data and outlook were likely to warrant beginning normalization at the June meeting. However, others anticipated that the effects of energy price declines and the dollar's appreciation would continue to weigh on inflation in the near term, suggesting that conditions likely would not be appropriate to begin raising rates until later in the year, and a couple of participants suggested that the economic outlook likely would not call for liftoff until 2016. With regard to communications about the timing of the first increase in the target range for the federal funds rate, two participants thought that the Committee should seek to signal its policy intentions at the meeting before liftoff appeared likely, but two others judged that doing so would be inconsistent with a meeting-by-meeting approach. Finally, many participants commented that it would be desirable to provide additional information to the public about the Committee's strategy for policy after the beginning of normalization. Some participants emphasized that the stance of policy would remain highly accommodative even after the first increase in the target range for the federal funds rate, and several noted that they expected economic developments would call for a fairly gradual pace of normalization or that a data-dependent approach would not necessarily dictate increases in the target range at every meeting.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the FOMC met in January indicated that economic growth had moderated somewhat. Labor market conditions had improved further, with strong job gains and a lower unemployment rate; a variety of labor market indicators suggested that the underutilization of labor resources continued to diminish. Household spending was rising moderately, with declines in energy prices boosting household purchasing power. Business fixed investment was advancing, although the recovery in the housing sector remained slow and export growth had weakened. Inflation had declined further below the Committee's longer-run objective, largely reflecting the declines in energy prices. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations had been stable. The Committee expected that, with appropriate monetary policy accommodation, economic activity would expand at a moderate pace and labor market indicators would continue to move toward levels the Committee judges consistent with its dual mandate. The Committee also expected that inflation would remain near its recent low level in the near term but rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of energy price declines and other factors dissipate. In light of the uncertainties attending the outlook for inflation, the Committee agreed that it should continue to monitor inflation developments closely.
In their discussion of language for the postmeeting statement, the Committee agreed that the data received over the intermeeting period suggested that economic growth had moderated somewhat. One factor behind that moderation was a slowdown in the growth of exports, and members decided that the statement should explicitly note that factor. In addition, data received over the intermeeting period indicated that inflation had declined, as the Committee had anticipated, and members agreed to update the statement to reflect their judgment that inflation was likely to remain near its recent low level in the near term. Members also judged that it was appropriate to note that market-based measures of inflation compensation remained near levels registered at the time of the January FOMC meeting.
The Committee agreed to maintain the target range for the federal funds rate at 0 to 1/4 percent and to reaffirm in the statement that the Committee's decision about how long to maintain the current target range for the federal funds rate would depend on its assessment of actual and expected progress toward its objectives of maximum employment and 2 percent inflation. Members continued to judge that this assessment of progress would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the considerable progress to date toward the Committee's maximum-employment objective and the implications of that progress for the outlook for inflation, members agreed to remove from the forward guidance in the postmeeting statement the indication that the Committee judges that it can be patient in beginning to normalize the stance of monetary policy and to indicate instead that the Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. Members viewed the new guidance as consistent with the outlook for policy that the Committee had expressed in January, and they agreed that the postmeeting statement should note that an increase in the target range for the federal funds rate remained unlikely at the April FOMC meeting; in addition, they generally saw the new language as providing the Committee with the flexibility to begin raising the target range for the federal funds rate in June or at a subsequent meeting. Members noted that the timing of the first increase would depend on the evolution of economic conditions and the outlook, and that the change in the forward guidance was not intended to indicate that the Committee had decided on the timing of the initial increase in the target range for the federal funds rate.
The Committee also decided to maintain its policy of reinvesting principal payments from agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. The Committee agreed to reiterate its expectation that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
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 SOMA in accordance with the following domestic policy directive:
"Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions. The System Open Market Account manager and the secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."
The vote encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in January suggests that economic growth has moderated somewhat. Labor market conditions have improved further, with strong job gains and a lower unemployment rate. A range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately; declines in energy prices have boosted household purchasing power. Business fixed investment is advancing, while the recovery in the housing sector remains slow and export growth has weakened. Inflation has declined further below the Committee's longer-run objective, largely reflecting declines in energy prices. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of energy price declines and other factors dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Consistent with its previous statement, the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Charles L. Evans, Stanley Fischer, Jeffrey M. Lacker, Dennis P. Lockhart, Jerome H. Powell, Daniel K. Tarullo, and John C. Williams.
Voting against this action: None.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, April 28-29, 2015. The meeting adjourned at 10:45 a.m. on March 18, 2015.
Notation Vote
By notation vote completed on February 17, 2015, the Committee unanimously approved the minutes of the Committee meeting held on January 27-28, 2015.
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Thomas Laubach
Secretary
1. Attended the joint session of the Federal Open Market Committee and the Board of Governors. Return to text
2. Attended the portion of the meeting following the joint session of the Federal Open Market Committee and the Board of Governors. Return to text
3. The statement titled Policy Normalization Principles and Plans is available on the Board's website at www.federalreserve.gov/newsevents/press/monetary/20140917c.htm. Return to text
4. The president of the Federal Reserve Bank of Dallas did not participate in this FOMC meeting, and the incoming president of the Federal Reserve Bank of Philadelphia is scheduled to assume office on July 1. Helen E. Holcomb and Blake Prichard, First Vice Presidents of the Federal Reserve Banks of Dallas and Philadelphia, respectively, submitted economic projections. Return to text |
2015-03-18T00:00:00 | 2015-03-18 | Statement | Information received since the Federal Open Market Committee met in January suggests that economic growth has moderated somewhat. Labor market conditions have improved further, with strong job gains and a lower unemployment rate. A range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately; declines in energy prices have boosted household purchasing power. Business fixed investment is advancing, while the recovery in the housing sector remains slow and export growth has weakened. Inflation has declined further below the Committee's longer-run objective, largely reflecting declines in energy prices. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of energy price declines and other factors dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Consistent with its previous statement, the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams. |
2015-01-28T00:00:00 | 2015-02-18 | Minute | Minutes of the Federal Open Market Committee
January 27-28, 2015
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, January 27, 2015, at 10:00 a.m. and continued on Wednesday, January 28, 2015, at 9:00 a.m.
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
Charles L. Evans
Stanley Fischer
Jeffrey M. Lacker
Dennis P. Lockhart
Jerome H. Powell
Daniel K. Tarullo
John C. Williams
James Bullard, Esther L. George, Loretta J. Mester, and Eric Rosengren, Alternate Members of the Federal Open Market Committee
Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, Presidents of the Federal Reserve Banks of Dallas, Minneapolis, and Philadelphia, respectively
Thomas Laubach, Secretary and Economist
Matthew M. Luecke, Deputy Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Thomas C. Baxter, Deputy General Counsel
Steven B. Kamin, Economist
David W. Wilcox, Economist
David Altig, Thomas A. Connors, Michael P. Leahy, Jonathan P. McCarthy, William R. Nelson, Glenn D. Rudebusch, Daniel G. Sullivan, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Robert deV. Frierson,1 Secretary of the Board, Office of the Secretary, Board of Governors
Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors
Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors
James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors
William B. English, Senior Special Adviser to the Board, Office of Board Members, Board of Governors
Andrew Figura, David Reifschneider, and Stacey Tevlin, Special Advisers to the Board, Office of Board Members, Board of Governors
Trevor A. Reeve, Special Adviser to the Chair, Office of Board Members, Board of Governors
David E. Lebow, Senior Associate Director, Division of Research and Statistics, Board of Governors
Michael T. Kiley, Senior Adviser, Division of Research and Statistics, and Senior Associate Director, Office of Financial Stability Policy and Research, Board of Governors
Jeremy B. Rudd, Senior Adviser, Division of Research and Statistics, Board of Governors; Joyce K. Zickler, Senior Adviser, Division of Monetary Affairs, Board of Governors
Fabio M. Natalucci2 and Gretchen C. Weinbach,3 Associate Directors, Division of Monetary Affairs, Board of Governors
Joseph W. Gruber, Deputy Associate Director, Division of International Finance, Board of Governors; David López-Salido, Deputy Associate Director, Division of Monetary Affairs, Board of Governors
Jennifer Gallagher, Special Assistant to the Board, Office of Board Members, Board of Governors
Edward Nelson, Assistant Director, Division of Monetary Affairs, Board of Governors; Shane M. Sherlund, Assistant Director, Division of Research and Statistics, Board of Governors
Burcu Duygan-Bump and Robert J. Tetlow,2 Advisers, Division of Monetary Affairs, Board of Governors; Eric C. Engstrom, Adviser, Division of Research and Statistics, Board of Governors
Penelope A. Beattie,1 Assistant to the Secretary, Office of the Secretary, Board of Governors
Dana L. Burnett and Christopher J. Gust, Section Chiefs, Division of Monetary Affairs, Board of Governors
Katie Ross,1 Manager, Office of the Secretary, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Carlos O. Arteta, Senior Economist, Division of International Finance, Board of Governors; Kimberly Bayard, Senior Economist, Division of Research and Statistics, Board of Governors; Elmar Mertens, Senior Economist, Division of Monetary Affairs, Board of Governors
Bernd Schlusche and Emre Yoldas, Economists, Division of Monetary Affairs, Board of Governors
Peter M. Garavuso, Information Management Analyst, Division of Monetary Affairs, Board of Governors
Blake Prichard, First Vice President, Federal Reserve Bank of Philadelphia
Jeff Fuhrer and Alberto G. Musalem, Executive Vice Presidents, Federal Reserve Banks of Boston and New York, respectively
Troy Davig, Michael Dotsey, Joshua L. Frost,4 Evan F. Koenig, Samuel Schulhofer-Wohl, and Christopher J. Waller, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Philadelphia, New York, Dallas, Minneapolis, and St. Louis, respectively
Todd E. Clark and Douglas Tillett, Vice Presidents, Federal Reserve Banks of Cleveland and Chicago, respectively
Robert L. Hetzel, Senior Economist, Federal Reserve Bank of Richmond
Annual Organizational Matters5
In the agenda for this meeting, it was reported that advices of the election of the following members and alternate members of the Federal Open Market Committee (the "Committee") for a term beginning January 27, 2015, had been received and that these individuals had executed their oaths of office.
The elected members and alternate members were as follows:
William C. Dudley, President of the Federal Reserve Bank of New York, with Christine Cumming, First Vice President of the Federal Reserve Bank of New York, as alternate
Jeffrey M. Lacker, President of the Federal Reserve Bank of Richmond, with Eric Rosengren, President of the Federal Reserve Bank of Boston, as alternate
Charles L. Evans, President of the Federal Reserve Bank of Chicago, with Loretta J. Mester, President of the Federal Reserve Bank of Cleveland, as alternate
Dennis P. Lockhart, President of the Federal Reserve Bank of Atlanta, with James Bullard, President of the Federal Reserve Bank of St. Louis, as alternate
John C. Williams, President of the Federal Reserve Bank of San Francisco, with Esther L. George, President of the Federal Reserve Bank of Kansas City, as alternate
By unanimous vote, the following officers of the Committee were selected to serve until the selection of their successors at the first regularly scheduled meeting of the Committee in 2016:
Janet L. Yellen
Chairman
William C. Dudley
Vice Chairman
Thomas Laubach
Secretary and Economist
Matthew M. Luecke
Deputy Secretary
David W. Skidmore
Assistant Secretary6
Michelle A. Smith
Assistant Secretary
Scott G. Alvarez
General Counsel
Thomas C. Baxter
Deputy General Counsel
Richard M. Ashton
Assistant General Counsel
Steven B. Kamin
Economist
David W. Wilcox
Economist
David Altig
Thomas A. Connors
Eric M. Engen
Michael P. Leahy
Jonathan P. McCarthy
William R. Nelson
Glenn D. Rudebusch
Daniel G. Sullivan
John A. Weinberg
William Wascher
Associate Economists
By unanimous vote, the Federal Reserve Bank of New York was selected to execute transactions for the System Open Market Account ("SOMA").
By unanimous vote, the Committee selected Simon Potter and Lorie K. Logan to serve at the pleasure of the Committee as manager and deputy manager of the SOMA, respectively, on the understanding that their selection was subject to their being satisfactory to the Federal Reserve Bank of New York.
Secretary's note: Advice subsequently was received that the manager and deputy manager selections indicated above were satisfactory to the Federal Reserve Bank of New York.
By unanimous vote, the Authorization for Domestic Open Market Operations was approved with two sets of amendments. The first set of amendments aimed at simplifying the language by defining common terms, eliminating duplication of language, and standardizing references to the Committee.7 The second set of amendments clarified or modified existing authority, in particular by introducing the defined term "Selected Bank" as part of prudent planning to simplify transfer of authority from the Federal Reserve Bank of New York to another Federal Reserve Bank selected by the Committee in the event of a significant contingency, removing the authorization to use agents for agency mortgage-backed securities ("MBS") transactions, defining the types of collateral accepted in securities lending operations described in paragraph 3, and updating the language relating to the Chair's authority to act in exceptional circumstances.8 The Guidelines for the Conduct of System Open Market Operations in Federal-Agency Issues remained suspended.
AUTHORIZATION FOR DOMESTIC OPEN MARKET OPERATIONS
(As amended effective January 27, 2015)
1. The Federal Open Market Committee (the "Committee") authorizes and directs the Federal Reserve Bank selected by the Committee to execute open market transactions (the "Selected Bank"), to the extent necessary to carry out the most recent domestic policy directive adopted by the Committee:
A. To buy or sell in the open market securities that are direct obligations of, or fully guaranteed as to principal and interest by, the United States, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, that are eligible for purchase or sale under Section 14(b) of the Federal Reserve Act ("Eligible Securities") for the System Open Market Account ("SOMA"):
i. As an outright operation with securities dealers and foreign and international accounts maintained at the Selected Bank: on a same-day or deferred delivery basis (including such transactions as are commonly referred to as dollar rolls and coupon swaps) at market prices; or
ii. As a temporary operation: on a same-day or deferred delivery basis, to purchase such Eligible Securities subject to an agreement to resell ("repo transactions") or to sell such Eligible Securities subject to an agreement to repurchase ("reverse repo transactions") for a term of 65 business days or less, at rates that, unless otherwise authorized by the Committee, are determined by competitive bidding, after applying reasonable limitations on the volume of agreements with individual counterparties;
B. To allow Eligible Securities in the SOMA to mature without replacement;
C. To exchange, at market prices, in connection with a Treasury auction, maturing Eligible Securities in the SOMA with the Treasury, in the case of Eligible Securities that are direct obligations of the United States or that are fully guaranteed as to principal and interest by the United States; and
D. To exchange, at market prices, maturing Eligible Securities in the SOMA with an agency of the United States, in the case of Eligible Securities that are direct obligations of that agency or that are fully guaranteed as to principal and interest by that agency.
2. The Committee authorizes the Selected Bank to undertake transactions of the type described in paragraph 1 from time to time for the purpose of testing operational readiness, subject to the following limitations:
A. All transactions authorized in this paragraph 2 shall be conducted with prior notice to the Committee;
B. The aggregate par value of the transactions authorized in this paragraph 2 that are of the type described in paragraph 1.A.i shall not exceed $5 billion per calendar year; and
C. The outstanding amount of the transactions described in paragraph 1.A.ii shall not exceed $5 billion at any given time.
3. In order to ensure the effective conduct of open market operations, the Committee authorizes the Selected Bank to operate a program to lend Eligible Securities held in the SOMA to dealers on an overnight basis (except that the Selected Bank may lend Eligible Securities for longer than an overnight term to accommodate weekend, holiday, and similar trading conventions).
A. Such securities lending must be:
i. At rates determined by competitive bidding;
ii. At a minimum lending fee consistent with the objectives of the program;
iii. Subject to reasonable limitations on the total amount of a specific issue of Eligible Securities that may be auctioned; and
iv. Subject to reasonable limitations on the amount of Eligible Securities that each borrower may borrow.
B. The Selected Bank may:
i. Reject bids that, as determined in its sole discretion, could facilitate a bidder's ability to control a single issue;
ii. Accept Treasury securities or cash as collateral for any loan of securities authorized in this paragraph 3; and
iii. Accept agency securities as collateral only for a loan of agency securities authorized in this paragraph 3.
4. In order to ensure the effective conduct of open market operations, while assisting in the provision of short-term investments or other authorized services for foreign central bank and international accounts maintained at a Federal Reserve Bank (the "Foreign Accounts") and accounts maintained at a Federal Reserve Bank as fiscal agent of the United States pursuant to section 15 of the Federal Reserve Act (together with the Foreign Accounts, the "Customer Accounts"), the Committee authorizes the following when undertaken on terms comparable to those available in the open market:
A. The Selected Bank, for the SOMA, to undertake reverse repo transactions in Eligible Securities held in the SOMA with the Customer Accounts for a term of 65 business days or less; and
B. Any Federal Reserve Bank that maintains Customer Accounts, for any such Customer Account, when appropriate and subject to all other necessary authorization and approvals, to:
i. Undertake repo transactions in Eligible Securities with dealers with a corresponding reverse repo transaction in such Eligible Securities with the Customer Accounts; and
ii. Undertake intraday reverse repo transactions in Eligible Securities with Foreign Accounts.
Transactions undertaken with Customer Accounts under the provisions of this paragraph 4 may provide for a service fee when appropriate. Transactions undertaken with Customer Accounts are also subject to the authorization or approval of other entities, including the Board of Governors of the Federal Reserve System and, when involving accounts maintained at a Federal Reserve Bank as fiscal agent of the United States, the United States Department of the Treasury.
5. The Committee authorizes the Chairman of the Committee, in fostering the Committee's objectives during any period between meetings of the Committee, to instruct the Selected Bank to act on behalf of the Committee to:
A. Adjust somewhat in exceptional circumstances the stance of monetary policy and to take actions that may result in material changes in the composition and size of the assets in the SOMA; or
B. Undertake transactions with respect to Eligible Securities in order to appropriately address temporary disruptions of an operational or highly unusual nature in U.S. dollar funding markets.
Any such adjustment described in subparagraph A of this paragraph 5 shall be made in the context of the Committee's discussion and decision about the stance of policy at its most recent meeting and the Committee's long-run objectives to foster maximum employment and price stability, and shall be based on economic, financial, and monetary developments since the most recent meeting of the Committee. The Chairman, whenever feasible, will consult with the Committee before making any instruction under this paragraph 5.
The Committee voted to amend the Authorization for Foreign Currency Operations and the Procedural Instructions with Respect to Foreign Currency Operations, and to reaffirm the Foreign Currency Directive in the form shown below. The approval of these documents included approval of the System's warehousing agreement with the U.S. Treasury. A change was made to the Authorization for Foreign Currency Operations to increase the duration limit of the foreign currency portfolio to 24 months from 18 months. This change was made to provide greater flexibility in the management of the foreign currency portfolio, in an environment in which interest rates are low in many major economies. Mr. Lacker dissented in the votes on the Authorization for Foreign Currency Operations and the Foreign Currency Directive to indicate his opposition to foreign currency intervention by the Federal Reserve. In his view, such intervention would be ineffective if it did not also signal a shift in domestic monetary policy; and if it did signal such a shift, it could potentially compromise the Federal Reserve's monetary policy independence.
AUTHORIZATION FOR FOREIGN CURRENCY OPERATIONS
(As amended effective January 27, 2015)
1. The Federal Open Market Committee (the "Committee") authorizes and directs the Federal Reserve Bank selected by the Committee to execute open market transactions (the "Selected Bank"), for the System Open Market Account, to the extent necessary to carry out the Committee's foreign currency directive and express authorizations by the Committee pursuant thereto, and in conformity with such procedural instructions as the Committee may issue from time to time:
A. To purchase and sell the following foreign currencies in the form of cable transfers through spot or forward transactions on the open market at home and abroad, including transactions with the U.S. Treasury, with the U.S. Exchange Stabilization Fund established by section 10 of the Gold Reserve Act of 1934, with foreign monetary authorities, with the Bank for International Settlements, and with other international financial institutions:
Australian dollars
Brazilian reais
Canadian dollars
Danish kroner
euro
Japanese yen
Korean won
Mexican pesos
New Zealand dollars
Norwegian kroner
Pounds sterling
Singapore dollars
Swedish kronor
Swiss francs
B. To hold balances of, and to have outstanding forward contracts to receive or to deliver, the foreign currencies listed in paragraph A above.
C. To draw foreign currencies and to permit foreign banks to draw dollars under the arrangements listed in paragraph 2 below, in accordance with the Procedural Instructions with Respect to Foreign Currency Operations.
D. To maintain an overall open position in all foreign currencies not exceeding $25.0 billion. For this purpose, the overall open position in all foreign currencies is defined as the sum (disregarding signs) of net positions in individual currencies, excluding changes in dollar value due to foreign exchange rate movements and interest accruals. The net position in a single foreign currency is defined as holdings of balances in that currency, plus outstanding contracts for future receipt, minus outstanding contracts for future delivery of that currency, i.e., as the sum of these elements with due regard to sign.
2. The Committee directs the Selected Bank to maintain for the System Open Market Account (subject to the requirements of section 214.5 of Regulation N, Relations with Foreign Banks and Bankers):
A. Reciprocal currency arrangements with the following foreign banks:
Foreign bank
Amount of arrangement
(millions of dollars equivalent)
Bank of Canada
2,000
Bank of Mexico
3,000
B. Standing dollar liquidity swap arrangements with the following foreign banks:
Bank of Canada
Bank of England
Bank of Japan
European Central Bank
Swiss National Bank
C. Standing foreign currency liquidity swap arrangements with the following foreign banks:
Bank of Canada
Bank of England
Bank of Japan
European Central Bank
Swiss National Bank
Dollar and foreign currency liquidity swap arrangements have no pre-set size limits. Any new swap arrangements shall be referred for review and approval to the Committee. All swap arrangements are subject to annual review and approval by the Committee.
3. All transactions in foreign currencies undertaken under paragraph 1.A above shall, unless otherwise expressly authorized by the Committee, be at prevailing market rates. For the purpose of providing an investment return on System holdings of foreign currencies or for the purpose of adjusting interest rates paid or received in connection with swap drawings, transactions with foreign central banks may be undertaken at non-market exchange rates.
4. It shall be the normal practice to arrange with foreign central banks for the coordination of foreign currency transactions. In making operating arrangements with foreign central banks on System holdings of foreign currencies, the Selected Bank shall not commit itself to maintain any specific balance, unless authorized by the Committee. Any agreements or understandings concerning the administration of the accounts maintained by the Selected Bank with the foreign banks designated by the Board of Governors under section 214.5 of Regulation N shall be referred for review and approval to the Committee.
5. Foreign currency holdings shall be invested to ensure that adequate liquidity is maintained to meet anticipated needs and so that each currency portfolio shall generally have an average duration of no more than 24 months (calculated as Macaulay duration). Such investments may include buying or selling outright obligations of, or fully guaranteed as to principal and interest by, a foreign government or agency thereof; buying such securities under agreements for repurchase of such securities; selling such securities under agreements for the resale of such securities; and holding various time and other deposit accounts at foreign institutions. In addition, when appropriate in connection with arrangements to provide investment facilities for foreign currency holdings, U.S. government securities may be purchased from foreign central banks under agreements for repurchase of such securities within 30 calendar days.
6. All operations undertaken pursuant to the preceding paragraphs shall be reported promptly to the Foreign Currency Subcommittee (the "Subcommittee") and the Committee. The Subcommittee consists of the Chairman and Vice Chairman of the Committee, the Vice Chairman of the Board of Governors, and such other member of the Board as the Chairman may designate (or in the absence of members of the Board serving on the Subcommittee, other Board members designated by the Chairman as alternates, and in the absence of the Vice Chairman of the Committee, the Vice Chairman's alternate). Meetings of the Subcommittee shall be called at the request of any member, or at the request of the manager, System Open Market Account ("manager"), for the purposes of reviewing recent or contemplated operations and of consulting with the manager on other matters relating to the manager's responsibilities. At the request of any member of the Subcommittee, questions arising from such reviews and consultations shall be referred for determination to the Committee.
7. The Chairman is authorized:
A. With the approval of the Committee, to enter into any needed agreement or understanding with the Secretary of the Treasury about the division of responsibility for foreign currency operations between the System and the Treasury;
B. To keep the Secretary of the Treasury fully advised concerning System foreign currency operations, and to consult with the Secretary on policy matters relating to foreign currency operations;
C. From time to time, to transmit appropriate reports and information to the National Advisory Council on International Monetary and Financial Policies.
8. All Federal Reserve Banks shall participate in the foreign currency operations for System Account in accordance with paragraph 3G(1) of the Board of Governors' Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks dated January 1, 1944.
9. The Committee authorizes the Selected Bank to undertake transactions of the type described in paragraphs 1, 2, and 5, and foreign exchange and investment transactions that it may be otherwise authorized to undertake from time to time for the purpose of testing operational readiness. The aggregate amount of such transactions shall not exceed $2.5 billion per calendar year. These transactions shall be conducted with prior notice to the Committee.
FOREIGN CURRENCY DIRECTIVE
(As reaffirmed effective January 27, 2015)
1. System operations in foreign currencies shall generally be directed at countering disorderly market conditions, provided that market exchange rates for the U.S. dollar reflect actions and behavior consistent with IMF Article IV, Section 1.
2. To achieve this end the System shall:
A. Undertake spot and forward purchases and sales of foreign exchange.
B. Maintain reciprocal currency arrangements with foreign central banks in accordance with the Authorization for Foreign Currency Operations.
C. Maintain standing dollar liquidity swap arrangements with foreign banks in accordance with the Authorization for Foreign Currency Operations.
D. Maintain standing foreign currency liquidity swap arrangements with foreign banks in accordance with the Authorization for Foreign Currency Operations.
E. Cooperate in other respects with central banks of other countries and with international monetary institutions.
3. Transactions may also be undertaken:
A. To adjust System balances in light of probable future needs for currencies.
B. To provide means for meeting System and Treasury commitments in particular currencies, and to facilitate operations of the Exchange Stabilization Fund.
C. For such other purposes as may be expressly authorized by the Committee.
4. System foreign currency operations shall be conducted:
A. In close and continuous consultation and cooperation with the United States Treasury;
B. In cooperation, as appropriate, with foreign monetary authorities; and
C. In a manner consistent with the obligations of the United States in the International Monetary Fund regarding exchange arrangements under IMF Article IV.
PROCEDURAL INSTRUCTIONS WITH RESPECT TO FOREIGN CURRENCY OPERATIONS
(As amended effective January 27, 2015)
In conducting operations pursuant to the authorization and direction of the Federal Open Market Committee (the "Committee") as set forth in the Authorization for Foreign Currency Operations and the Foreign Currency Directive, the Federal Reserve Bank selected by the Committee to execute open market transactions (the "Selected Bank"), through the manager, System Open Market Account ("manager"), shall be guided by the following procedural understandings with respect to consultations and clearances with the Committee, the Foreign Currency Subcommittee (the "Subcommittee"), and the Chairman of the Committee, unless otherwise directed by the Committee. All operations undertaken pursuant to such clearances shall be reported promptly to the Committee.
1. For the reciprocal currency arrangements authorized in paragraphs 2.A of the Authorization for Foreign Currency Operations:
A. Drawings must be approved by the Subcommittee (or by the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available) if the swap drawing proposed by a foreign bank does not exceed the larger of (i) $200 million or (ii) 15 percent of the size of the swap arrangement.
B. Drawings must be approved by the Committee (or by the Subcommittee, if the Subcommittee believes that consultation with the full Committee is not feasible in the time available, or by the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available) if the swap drawing proposed by a foreign bank exceeds the larger of (i) $200 million or (ii) 15 percent of the size of the swap arrangement.
C. The manager shall also consult with the Subcommittee or the Chairman about proposed swap drawings by the System.
D. Any changes in the terms of existing swap arrangements shall be referred for review and approval to the Chairman. The Chairman shall keep the Committee informed of any changes in terms, and the terms shall be consistent with principles discussed with and guidance provided by the Committee.
2. For the dollar and foreign currency liquidity swap arrangements authorized in paragraphs 2.B and 2.C of the Authorization for Foreign Currency Operations:
A. Drawings must be approved by the Chairman in consultation with the Subcommittee. The Chairman or the Subcommittee will consult with the Committee prior to the initial drawing on the dollar or foreign currency liquidity swap lines if possible under the circumstances then prevailing; authority to approve subsequent drawings for either the dollar or foreign currency liquidity swap lines may be delegated to the manager by the Chairman.
B. Any changes in the terms of existing swap arrangements shall be referred for review and approval to the Chairman. The Chairman shall keep the Committee informed of any changes in terms, and the terms shall be consistent with principles discussed with and guidance provided by the Committee.
3. Any operation must be approved by:
A. The Subcommittee (or by the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available) if it:
i. Would result in a change in the System's overall open position in foreign currencies exceeding $300 million on any day or $600 million since the most recent regular meeting of the Committee.
ii. Would result in a change on any day in the System's net position in a single foreign currency exceeding $150 million, or $300 million when the operation is associated with repayment of swap drawings.
iii. Might generate a substantial volume of trading in a particular currency by the System, even though the change in the System's net position in that currency (as defined in paragraph 1.D of the Authorization for Foreign Currency Operations) might be less than the limits specified in 3.A.ii.
B. The Committee (or by the Subcommittee, if the Subcommittee believes that consultation with the full Committee is not feasible in the time available, or by the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available) if it would result in a change in the System's overall open position in foreign currencies exceeding $1.5 billion since the most recent regular meeting of the Committee.
4. The Committee authorizes the Selected Bank to undertake transactions of the type described in paragraphs 1, 2, and 5 of the Authorization for Foreign Currency Operations and foreign exchange and investment transactions that it may be otherwise authorized to undertake from time to time for the purpose of testing operational readiness. The aggregate amount of such transactions shall not exceed $2.5 billion per calendar year. These transactions shall be conducted with prior notice to the Committee.
By unanimous vote, the Committee amended its Program for Security of FOMC Information with changes to how Federal Reserve Banks classify and access Committee information.
In its annual reconsideration of the Statement on Longer-Run Goals and Monetary Policy Strategy, participants generally agreed that only a minor update was required at this meeting. Several participants observed that this statement had helped to increase public understanding of the Committee's goals and policy framework. It was noted, however, that the Committee should continue to discuss possible enhancements to the statement over the coming year.
Following the discussion, the Committee voted to reaffirm the statement with an updated reference to participants' estimates of the longer-run normal unemployment rate. Mr. Tarullo abstained because he did not believe the statement reflects sufficient consensus in the principles underlying the Committee's policy actions so as to significantly advance public understanding of its monetary policy strategy.
STATEMENT ON LONGER-RUN GOALS AND MONETARY POLICY STRATEGY
(As amended effective January 27, 2015)
"The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.
Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee's policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee's goals.
The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances. The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants' estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC's Summary of Economic Projections. For example, in the most recent projections, FOMC participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 5.5 percent.
In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate.
The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January."
Developments in Financial Markets and the Federal Reserve's Balance Sheet
In a joint session of the Committee and the Board of Governors of the Federal Reserve System, the manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets. The deputy manager followed with a review of System open market operations conducted during the period since the Committee met on December 16-17, 2014. The deputy manager also discussed the outcomes of recent tests of term and overnight reverse repurchase agreements (term RRPs and ON RRPs, respectively). These tests suggested that the combination of term RRP and ON RRP operations had been effective in supporting money market rates leading into and over year-end. The presentation also outlined some staff recommendations for further testing of Term Deposit Facility operations.
By unanimous vote, the Committee ratified the Open Market Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
Liftoff Tools and Possible Liftoff Options
A staff briefing provided some background on possible options for the use of supplementary tools, in addition to interest on excess reserves (IOER), that the Committee could choose to use during the early stages of policy normalization. The purpose of these options was to help ensure sufficient control over the federal funds rate and other short-term interest rates during this period while mitigating potential risks associated with particular policy tools. The presentation discussed the possibility of establishing, on a temporary basis, an aggregate cap for ON RRP operations that was substantially above the cap the Committee had chosen for the purposes of testing such operations. In addition, the presentation discussed the possible use of term RRP operations, either before or after the commencement of policy firming, as a way to reinforce control of short-term interest rates and to manage the size of the ON RRP program. Other possible options presented at the briefing included adjusting the values of the IOER and ON RRP rates associated with a given target range for the federal funds rate and the use of term deposits.
In their discussion of these issues, participants generally agreed that it was very important for the commencement of policy firming to proceed successfully. Consequently, most were prepared to take the steps necessary to ensure that the federal funds rate traded within the target range established by the Federal Open Market Committee (FOMC). However, a few participants noted that day-to-day volatility in the federal funds rate, potentially including temporary movements outside the target range, would not be surprising, and that historical experience suggested that such temporary movements had few, if any, implications for overall financial conditions or the aggregate economy.
With regard to the appropriate setting of the cap for ON RRP operations at the beginning of normalization, the staff reported that testing to date suggested that ON RRP operations have generally been successful in establishing a floor on the level of the federal funds effective rate and other short-term interest rates, as long as market participants judge that the aggregate cap is quite unlikely to bind. Against this backdrop, most meeting participants indicated that a sizable ON RRP cap would be appropriate to support policy implementation at the time of liftoff, and a couple of participants suggested that the aggregate cap might be suspended for a time. A couple of participants expressed continued concerns about the potential risks to financial stability associated with a large ON RRP facility and the possible effect of such a facility on patterns of financial intermediation. Moreover, some participants were concerned that a decision to allow a temporary increase in the maximum size of the ON RRP facility could be viewed by market participants as a signal that a large ON RRP facility would be maintained for a longer period than those participants deemed appropriate. While acknowledging these concerns, many participants believed that a temporarily elevated cap on the ON RRP operations at a time when the Committee saw conditions as appropriate to begin normalization would likely pose limited risks; another participant judged that an ON RRP program was, in any case, unlikely to materially increase the risks to financial stability. Some participants noted that a relatively high cap could be established and then reduced fairly soon after the initial policy firming if it was determined that it was not needed, and that such a reduction could help underscore the Committee's intent to use such a facility only to the extent necessary. A number of participants emphasized that the Committee should develop plans to ensure that such a facility is temporary and that it can be phased out once it is no longer needed to help control the federal funds rate.
With regard to the possible use of term RRP operations as an additional supplementary tool, participants noted that recent testing showed that term RRP operations ahead of the year-end were associated with a significant decline in the level of take-up at ON RRP operations. The staff presentation suggested that risks to financial stability associated with term RRPs could be somewhat lower than those associated with ON RRP operations because term RRP operations would be conducted only on selected dates, the Federal Reserve would set the quantity auctioned, and the rate on term RRPs would be determined by the auction process. However, a few participants expressed the view that term RRPs were unlikely to lower risks to financial stability significantly. In addition, some participants noted that the use of term RRP operations could complicate communications. A few others observed that the Committee should not design its operations to reduce year-end or quarter-end volatility induced by financial firms' reporting practices. Nonetheless, many participants agreed that the use of term RRP operations during the period of policy tightening could be useful in some situations.
With regard to the potential use of other tools, several participants noted that the IOER and ON RRP rates should be set at the top and bottom, respectively, of the target range for the federal funds rate. To deviate from such a structure would complicate communications about the policy framework and therefore should be avoided if possible. However, some participants judged that adjustments to the relationship of the IOER rate and the ON RRP rate to the target range for the federal funds rate might, in some circumstances, be helpful for improving control of the federal funds rate. A few participants noted that use of term deposits during the tightening phase could also be appropriate in some circumstances.
The staff presentation also discussed a technical issue related to the calculation of the payment of interest on reserves. Under current arrangements, an increase in the IOER rate that is implemented in the middle of a reserve maintenance period is not fully reflected in interest payments to depository institutions until the beginning of a new maintenance period. Participants generally suggested that it would be useful for the staff to investigate changes in the method used to determine the interest payments on reserves that could tighten the link between the IOER rate in place each day and the level of reserve balances held by depository institutions each day.
At the conclusion of their discussion, participants generally agreed that it would be useful to discuss further at coming meetings specific calibrations of policy tools that could be used during the early stages of policy normalization. In addition, many noted that it would be useful to communicate additional information to the public on these issues to provide greater clarity about the Committee's approach to policy implementation at that time.
A staff briefing outlined two proposals that the Committee could consider for further testing of term RRP operations. In the first of these proposals, the Desk would conduct a series of preannounced term RRP operations that would span the end of the first quarter. In the second proposal, the Desk would conduct small term RRP operations in February and early March, in addition to the quarter-end option presented in the first proposal. In their discussion of term RRP testing, participants noted that the testing could provide further information about the substitutability between the ON and term RRP operations, including outside year-end and quarter-end periods. A number of participants emphasized that, even if the Committee conducted additional tests, it had not yet decided whether to use term RRP operations as part of policy normalization.
Following the discussion of the testing of term RRP operations, the Committee approved the following resolution on term RRP testing over the end of the first quarter of 2015:
"During the period of March 19, 2015, to March 30, 2015, the Federal Open Market Committee (FOMC) authorizes the Federal Reserve Bank of New York to conduct a series of term reverse repurchase operations involving U.S. government securities. Such operations shall: (i) mature no later than April 9, 2015; (ii) be subject to an overall size limit of $200 billion outstanding at any one time; (iii) be subject to a maximum bid rate of five basis points above the ON RRP offering rate in effect on the day of the operation; (iv) be awarded to all submitters: (A) at the highest submitted rate if the sum of the bids received is less than or equal to the preannounced size of the operation, or (B) at the stop-out rate, determined by evaluating bids in ascending order by submitted rate up to the point at which the total quantity of bids equals the preannounced size of the operation, with all bids below this rate awarded in full at the stop-out rate and all bids at the stop-out rate awarded on a pro rata basis, if the sum of the counterparty offers received is greater than the preannounced size of the operation. Such operations may be for forward settlement. The System Open Market Account manager will inform the FOMC in advance of the terms of the planned operations. The Chair must approve the terms of, timing of the announcement of, and timing of the operations. These operations shall be conducted in addition to the authorized overnight reverse repurchase agreements, which remain subject to a separate overall size limit of $300 billion per day."
The Committee also approved the following resolution on testing term RRP operations during February and March:
"During the period of February 12, 2015, to March 10, 2015, the Federal Open Market Committee (FOMC) authorizes the Federal Reserve Bank of New York to conduct a series of term reverse repurchase operations involving U.S. government securities. Such operations shall: (i) mature no later than March 12, 2015; (ii) be subject to an overall size limit of $50 billion outstanding at any one time; (iii) be subject to a maximum bid rate of five basis points above the ON RRP offering rate in effect on the day of the operation; (iv) be awarded to all submitters: (A) at the highest submitted rate if the sum of the bids received is less than or equal to the preannounced size of the operation, or (B) at the stop-out rate, determined by evaluating bids in ascending order by submitted rate up to the point at which the total quantity of bids equals the preannounced size of the operation, with all bids below this rate awarded in full at the stop-out rate and all bids at the stop-out rate awarded on a pro rata basis, if the sum of the counterparty offers received is greater than the preannounced size of the operation. Such operations may be for forward settlement. The System Open Market Account manager will inform the FOMC in advance of the terms of the planned operations. The Chair must approve the terms of, timing of the announcement of, and timing of the operations. These operations shall be conducted in addition to the authorized overnight reverse repurchase agreements, which remain subject to a separate overall size limit of $300 billion per day."
Mr. Lacker dissented in the votes on both resolutions because he felt that the testing to date had already provided sufficient information about this tool, and that authorizing further testing could encourage the incorrect impression that the Committee had already decided that it would be engaging in term RRP operations during the period of policy normalization.
The Board meeting concluded at the end of the discussion of liftoff tools and possible liftoff options.
Staff Review of the Economic Situation
The information reviewed for the January 27-28 meeting indicated that economic activity expanded at a solid pace over the second half of 2014, and that labor market conditions had again improved in recent months. Consumer price inflation moved further below the FOMC's longer-run objective of 2 percent, held down by continuing large decreases in energy prices. While longer-term market-based measures of inflation compensation declined substantially in recent months, survey measures of longer-run inflation expectations remained stable.
Total nonfarm payroll employment expanded in December and the gains for October and November were revised up, putting the increase for the fourth quarter above that for the third quarter. The unemployment rate declined to 5.6 percent in December, the labor force participation rate decreased, and the employment-to-population rate was unchanged. The share of workers employed part time for economic reasons declined. The rate of private-sector job openings moved up in November, while the rates of hiring and of quits edged down but remained well above their year-earlier readings.
Industrial production rose at a robust pace in the fourth quarter, with a strong increase in manufacturing output and a modest gain in mining output. Automakers' assembly schedules for the first quarter and broader indicators of manufacturing production, such as the readings on new orders from national and regional manufacturing surveys, generally pointed to moderate gains in factory output early this year. In contrast, some indicators of mining activity, such as counts of drilling rigs in operation, weakened, presumably reflecting the recent sharp declines in energy prices.
Real personal consumption expenditures (PCE) appeared to have risen at a robust pace over the second half of 2014. Data on spending in the third quarter were revised up, and the components of nominal retail sales used to construct estimates of PCE rose briskly in the fourth quarter. Light motor vehicle sales in the fourth quarter maintained their robust third-quarter pace. Important factors influencing household spending remained supportive of further solid gains in real PCE early this year. Real disposable personal income increased in November; since then, continued declines in energy prices likely raised the purchasing power of households' incomes. Households' net worth likely increased as home values and equity prices advanced, and consumer sentiment, as measured by the Thomson Reuters/University of Michigan Surveys of Consumers, moved up in early January to its highest level in more than a decade.
The pace of housing market activity improved somewhat but remained slow. Starts of new single-family homes increased in December to their highest level since 2008, and permits for new construction also moved higher. Starts of multifamily units were unchanged in December and within the range they have been in for the past year. Sales of new homes increased, on net, in November and December, while sales of existing homes declined, on average, over those two months.
Real private expenditures for business equipment and intellectual property appeared to decelerate in the fourth quarter. Nominal orders and shipments of nondefense capital goods, excluding aircraft, declined in November and December. Moreover, the level of new orders for these capital goods was only a little above that for shipments, which pointed to modest near-term gains in business equipment spending despite relatively positive readings on business conditions from national and regional surveys. Firms' nominal spending for nonresidential structures edged down in November but remained higher than in the third quarter.
Real federal government purchases appeared likely to have decreased sharply in the fourth quarter, reversing much of the surprisingly strong increase in the third quarter. Real state and local government purchases were rising modestly in the fourth quarter, as nominal construction expenditures for October and November were little changed, on net, and the payrolls of these governments increased somewhat.
The U.S. international trade deficit narrowed substantially in November, with imports declining more than exports. The decrease in the value of imports stemmed in large part from a reduction in the value of petroleum imports, reflecting both lower prices and volumes. However, many other categories of goods imports were also weaker. Export declines were concentrated in capital goods, particularly aircraft. Despite the narrowing of the nominal trade deficit in November, real net exports appeared to be on track to decline in the fourth quarter after adding considerably to real gross domestic product (GDP) growth in the third quarter.
Total U.S. consumer prices, as measured by the PCE price index, increased 1-1/4 percent over the 12 months ending in November, while core prices, as measured by PCE prices excluding food and energy, rose about 1-1/2 percent; consumer energy prices declined, and consumer food prices increased faster than overall prices. Over the 12 months ending in December, total inflation as measured by the consumer price index (CPI) was 3/4 percent, while core CPI inflation was 1-1/2 percent. Over the 3 months ending in December, the total CPI decreased at an annual rate of 2-1/2 percent, reflecting recent declines in consumer energy prices, and the core CPI increased at a 1 percent pace. Measures of expected long-run inflation from a variety of surveys, including the Michigan survey and the Desk's Survey of Primary Dealers, remained stable. In contrast, market-based measures of inflation compensation 5 to 10 years ahead declined further. Over the 12 months ending in December, nominal average hourly earnings for all employees increased only slightly faster than core consumer price inflation.
Foreign real GDP growth appeared to increase slightly in the fourth quarter. In the euro area, retail sales, car registrations, and industrial production through November were above their third-quarter averages, and in Japan, strengthening consumption and exports suggested a recovery of output after two quarters of contraction. However, growth slowed in China, partly reflecting further moderation in residential investment, and declining construction activity also contributed to slowing GDP growth in Korea and the United Kingdom. Inflation in the advanced foreign economies declined sharply at the end of last year, amid rapidly falling energy prices. By contrast, inflation in the emerging market economies fell only modestly, as several of these economies have government-administered energy prices and some have been experiencing upward price pressures from currency depreciations.
Staff Review of the Financial Situation
Over the intermeeting period, amid trading that was volatile at times, longer-term sovereign yields in the United States and other advanced economies declined. These moves were attributed in part to a deterioration in market sentiment associated with downward pressure on inflation, increased concern about the global economic outlook, and announced and anticipated foreign central bank policies. Moreover, continued sharp declines in oil prices and U.S. economic data releases that were viewed by investors as a bit weaker than anticipated, on balance, reportedly weighed on sentiment.
Federal Reserve communications over the intermeeting period were apparently seen as about in line with expectations on balance. However, reflecting in part the deterioration in market sentiment, the expected path for the federal funds rate implied by market quotes shifted down. Results from the Desk's January Survey of Primary Dealers indicated that dealers continued to put the highest probability on scenarios in which the FOMC chooses to commence policy firming around the middle of the year, although the average probability assigned to a commencement after June increased somewhat.
Yields on nominal Treasury securities continued to move lower over the intermeeting period, with market expectations of the policy rate path being revised downward, and with term premiums declining, in part reflecting actual and expected policy easing abroad. On balance, the Treasury yield curve flattened over the intermeeting period, while interest rate volatility increased somewhat. Although the measure of inflation compensation over the next 5 years based on Treasury Inflation-Protected Securities (TIPS) increased, inflation compensation 5 to 10 years ahead declined further to its lowest level in a decade. Yields on 5- and 10-year TIPS moved lower over the period.
Over the intermeeting period, U.S. equity markets were volatile. Option-implied volatility for the S&P 500 index declined, on balance, but remained in the upper half of the range seen over the past year. Broad U.S. equity price indexes moved higher, while stock prices for large domestic banking organizations moved lower on net. Corporate bond spreads were also volatile over the intermeeting period but were little changed, on net, for investment-grade issuers and ended the period lower for speculative-grade issuers, particularly energy companies.
Credit flows to nonfinancial firms generally remained strong through the last quarter of 2014, though they slowed somewhat for riskier firms. Gross corporate bond issuance continued to be solid, although speculative-grade bond issuance declined late in the year and remained subdued into January. Commercial and industrial loans on banks' books continued to expand at a robust rate in the fourth quarter of 2014, consistent with the stronger loan demand from large and middle-market firms reported in the January Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS). Issuance of syndicated leveraged loans in the fourth quarter was at its slowest pace in two years, as spreads on newly issued loans increased and refinancing activity declined significantly. Issuance of collateralized loan obligations declined but remained elevated; 2014 was the strongest year on record for the issuance of such securities.
Financing conditions in the commercial real estate (CRE) sector stayed accommodative. In the January SLOOS, banks reported that standards continued to ease, on net, for CRE lending and noted stronger demand for all CRE loan types. Issuance of commercial mortgage-backed securities continued at a solid pace in November and December.
Residential mortgage credit conditions, while remaining tight, showed some further signs of gradual easing. According to the January SLOOS, lending standards eased for a number of categories of residential mortgage loans in the fourth quarter. The price of mortgage credit for qualified borrowers declined again over the intermeeting period, with interest rates on 30-year fixed-rate mortgages reaching levels close to their all-time lows. Refinance applications rose near the end of the intermeeting period.
Conditions in consumer credit markets stayed largely accommodative over the intermeeting period. Auto and student loan balances continued to post significant gains through November, while the expansion of credit card loans on banks' books remained moderate during the fourth quarter as a whole. Respondents to the January SLOOS indicated that demand for auto and credit card loans had strengthened further in the fourth quarter. Consumer credit quality has remained strong on balance. The credit performance of auto loans, however, reportedly deteriorated a bit further for some lenders, and several banks indicated in the January SLOOS that they expect the performance of subprime auto loans to worsen this year.
The U.S. dollar strengthened against the currencies of most other advanced economies amid investor concerns about growth in those economies as well as increased monetary accommodation in some of them; the dollar was largely unchanged, on average, against the currencies of emerging market economies. Sovereign yields abroad moved lower, with euro-area yields reflecting the expected and actual easing of the stance of monetary policy by the European Central Bank (ECB) and U.K. yields responding to a shift in expectations toward a later start of Bank of England policy firming. Global equity markets were broadly higher, rebounding from declines in mid-December.
Several central banks announced monetary policy actions during the period. The ECB announced that it would expand its asset purchase program to include the purchase of sovereign bonds; the euro depreciated significantly against the dollar both in anticipation of and following this announcement. The Swiss National Bank (SNB) ended its policy of defending the exchange rate floor of 1.20 Swiss francs per euro, resulting in a significant appreciation of the franc. At the same time, the SNB reduced policy rates, moving the rate it pays on deposits and its target range for Swiss franc LIBOR, or London interbank offered rate, further into negative territory. The Bank of Canada, National Bank of Denmark, Reserve Bank of India, and Central Bank of Turkey also cut policy rates in January to support their economies and, in some cases, to foster higher inflation, while the Central Bank of Brazil raised rates in response to concerns about elevated inflation.
The staff provided its latest report on potential risks to financial stability. Relatively high levels of capital and liquidity in the banking sector, moderate levels of maturity transformation in the financial sector, and a relatively subdued pace of borrowing by the nonfinancial sector continued to be seen as important factors limiting the vulnerability of the financial system to adverse shocks. However, the staff report noted valuation pressures in some asset markets. Such pressures were most notable in corporate debt markets, despite some easing in recent months. In addition, valuation pressures appear to be building in the CRE sector, as indicated by rising prices and the easing in lending standards on CRE loans. Finally, the increased role of bond and loan mutual funds, in conjunction with other factors, may have increased the risk that liquidity pressures could emerge in related markets if investor appetite for such assets wanes. The effects on the largest banking firms of the sharp decline in oil prices and developments in foreign exchange markets appeared limited, although other institutions with more concentrated exposures could face strains if oil prices remain at current levels for a prolonged period.
Staff Economic Outlook
The staff estimated that real GDP growth in the second half of 2014 was faster than in the projection prepared for the December meeting, primarily reflecting stronger-than-expected consumer spending. Even so, real GDP was still estimated to have risen more slowly in the fourth quarter than in the third quarter, as changes in both net exports and federal government purchases appeared likely to have subtracted from real GDP growth in the fourth quarter following large positive contributions in the previous quarter.
The staff's outlook for economic activity over the first half of 2015 was revised up since December, in part reflecting an anticipated boost to consumer spending from declines in energy prices. However, the forecast for real GDP growth over the medium term was little revised, as the greater momentum implied by recent spending gains and the support to household spending from lower energy prices was about offset by the restraint implied by the recent appreciation of the dollar. The staff continued to forecast that real GDP would expand at a modestly faster pace in 2015 and 2016 than it did in 2014 and that it would rise more quickly than potential output, supported by increases in consumer and business confidence and a pickup in foreign economic growth, as well as by a U.S. monetary policy stance that was assumed to remain highly accommodative for some time. In 2017, real GDP growth was projected to begin slowing toward, but to remain slightly above, the rate of growth of potential output. The expansion in economic activity over the medium term was anticipated to lead to a slow reduction in resource slack, and the unemployment rate was expected to decline gradually and to move slightly below the staff's estimate of its longer-run natural rate for a time.
The staff's forecast for inflation in the near term was revised down, as further sharp declines in crude oil prices since the December FOMC meeting pointed toward a somewhat larger transitory decrease in the total PCE price index early this year than was previously projected. In addition, the incoming data on consumer prices apart from those for energy showed a somewhat smaller rise than anticipated. The staff's forecast for inflation in 2016 and 2017 was essentially unchanged, with inflation projected to remain below the Committee's 2 percent objective. Nevertheless, inflation was projected to reach 2 percent over time, with inflation expectations in the longer run assumed to be consistent with the Committee's objective and slack in labor and product markets anticipated to fade.
The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average over the past 20 years. The risks to the forecast for real GDP growth were viewed as tilted a little to the downside, reflecting the staff's assessment that neither monetary policy nor fiscal policy was well positioned to help the economy withstand adverse shocks. At the same time, the staff viewed the risks around its outlook for the unemployment rate as roughly balanced. The downside risks to the forecast for inflation were seen as having increased somewhat, partly reflecting the recent soft monthly readings on core inflation.
Participants' Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants regarded the information received over the intermeeting period as indicating that economic activity had been expanding at a solid pace. Although growth likely slowed from the rapid rate recorded for the third quarter of 2014, a variety of indicators suggested that real GDP continued to grow faster than potential GDP late in the year and during January. Labor market conditions improved further, with strong job gains and a lower unemployment rate; participants judged that the underutilization of labor resources was continuing to diminish. Participants expected that, over the medium term, real economic activity would increase at a moderate pace sufficient to lead to further improvements in labor market conditions toward levels consistent with the Committee's objective of maximum employment. Inflation had declined further below the Committee's longer-run objective, largely reflecting declines in energy prices, and was anticipated to decline further in the near term. Market-based measures of inflation compensation 5 to 10 years ahead had registered a further decline, while survey-based measures of longer-term inflation expectations remained stable. Participants generally anticipated that inflation would rise gradually toward the Committee's 2 percent objective as the labor market improved further and the transitory effects of lower energy prices and other factors dissipated. The risks to the outlook for economic activity and the labor market were seen as nearly balanced. Participants generally regarded the net effect of the recent decline in energy prices as likely to be positive for economic activity and employment. Many participants continued to judge that a deterioration in the foreign economic situation could pose downside risks to the outlook for U.S. economic growth. Several saw those risks as having diminished over the intermeeting period, with lower oil prices and actions of foreign central banks both being supportive of growth abroad, but others pointed to heightened geopolitical and other risks.
With respect to the U.S. economy, participants noted that household spending was rising moderately. Recent declines in oil prices, which had boosted household purchasing power, were among the factors likely to underpin consumer spending in coming months; other factors cited as supporting household spending included low interest rates, easing credit standards, and continued gains in employment and income. However, it was noted that the recovery in the housing sector remained slow and that tepid nominal wage growth, if continued, could become a significant restraining factor for household spending.
Industry contacts pointed to generally solid business conditions, with businesses in many parts of the country continuing to express optimism about prospects for further improvement in 2015. Although manufacturing activity appeared to have slowed somewhat over the intermeeting period in some regions, business contacts suggested that this slowing was likely to prove temporary, and information from some parts of the country suggested that capital investment was poised to pick up. Several participants noted that there were signs of layoffs in the oil and gas industries, and that persistently low energy prices might prompt a larger retrenchment of employment in these industries. In addition, it was observed that if capital investment in energy-producing industries slowed significantly, it could damp the overall expansion of economic activity for a period, especially if the slowing took place after most of the positive effects of lower energy prices on growth in household spending had occurred. A few participants observed that government spending was unlikely to be a major contributor to the expansion of demand in the period ahead, with real federal purchases projected to be fairly flat over the medium term.
In their discussion of the foreign economic outlook, participants noted that a number of developments over the intermeeting period had likely reduced the risks to U.S. growth. Accommodative policy actions announced by a number of foreign central banks had likely strengthened the outlook abroad. The decline in energy prices was also seen as potentially exerting a stronger-than-anticipated positive effect on growth in the domestic economy and abroad. However, the increase in the foreign exchange value of the dollar was expected to be a persistent source of restraint on U.S. net exports, and a few participants pointed to the risk that the dollar could appreciate further. In addition, the slowdown of growth in China was noted as a factor restraining economic expansion in a number of countries, and several continuing risks to the international economic outlook were cited, including global disinflationary pressure, tensions in the Middle East and Ukraine, and financial uncertainty in Greece. Overall, the risks to the outlook for U.S. economic activity and the labor market were seen as nearly balanced.
Participants noted that inflation had moved further below the Committee's longer-run objective, largely reflecting declines in energy prices and other transitory factors. A number of participants observed that, with anchored inflation expectations, the fall in energy prices should not leave an enduring imprint on aggregate inflation. It was pointed out that the recent intensification of downward pressure on inflation reflected price movements that were concentrated in a narrow range of items in households' consumption basket, a pattern borne out by trimmed mean measures of inflation. Several participants remarked that inflation measures that excluded energy items had also moved down in recent months, but these declines partly reflected transitory factors, including downward pressure on import prices and the pass-through of lower energy costs to the prices of non- energy items. Nonetheless, several participants saw the continuing weakness of core inflation measures as a concern. In addition, a few participants suggested that the weakness of nominal wage growth indicated that core and headline inflation could take longer to return to 2 percent than the Committee anticipated. In contrast, a couple of participants suggested that nominal wage growth provides little information about the future behavior of price inflation. Participants also discussed the possibility that, because of the infrequent occurrence of reductions in nominal wages, wages may not have fully adjusted downward in the period of high unemployment, and therefore pent-up wage deflation might have weighed on wage gains for a time during the expansion. If this was the case, nominal wage growth could be expected to pick up in coming periods and to resume a more normal relationship with labor market slack. Most participants expected that continuing reductions in resource slack would be helpful in returning inflation over the medium term to the Committee's 2 percent longer-run objective, but a few participants voiced concern that nominal wage growth might rise rapidly and inflation might exceed 2 percent for a time.
Participants discussed the sizable decline in market-based measures of inflation compensation that had been observed over the past year and continued over the intermeeting period. A number of them judged that the decline mostly reflected a reduction in the risk premiums embedded in nominal interest rates rather than a decline in inflation expectations; this interpretation was supported by results of some analytical models used to decompose movements in market-based measures of inflation compensation and also by the continuing stability of survey-based measures of inflation expectations. However, other participants put some weight on the possibility that the decline in inflation compensation reflected a reduction in expected inflation. These participants further argued that the stability of survey-based measures of inflation expectations should not be taken as providing much reassurance; in particular, it was noted that in Japan in the late 1990s and early 2000s, survey-based measures of longer-term inflation expectations had not recorded major declines even as a disinflationary process had become entrenched. In addition, a few participants argued that even if the shift down in inflation compensation reflected lower inflation risk premiums rather than reductions in expected inflation, policymakers might still want to take that decline into account because it could reflect increased concern on the part of investors about adverse outcomes in which low inflation was accompanied by weak economic activity. Participants generally agreed that the behavior of market-based measures of inflation compensation needed to be monitored closely.
Participants also discussed other aspects of the substantial decline in nominal longer-term interest rates and its implications. The fall had occurred despite the strengthening U.S. economic outlook and market expectations that policy normalization could begin later this year. Some participants suggested that shifts of funds from abroad into U.S. Treasury securities may have put downward pressure on term premiums; the shifts, in turn, may have reflected in part a reaction to declines in foreign sovereign yields in response to actual and anticipated monetary policy actions abroad. A couple of participants noted that the reduction in longer-term real interest rates tended to make U.S. financial conditions more accommodative, potentially calling for a somewhat higher path for the federal funds rate going forward. Others observed that insofar as the shifts reflected concerns about growth prospects abroad or were accompanied by a stronger dollar, the implications for U.S. monetary policy were less clear. It was further noted that investment flows from abroad could also be contributing to the decline in TIPS-based measures of inflation compensation, as such flows tend to be concentrated in nominal Treasury securities rather than inflation-protected securities.
Participants saw broad-based improvement in labor market conditions over the intermeeting period, including strong gains in payroll employment and a further reduction in the unemployment rate. Some participants believed that considerable labor market slack remained, especially when indicators other than the unemployment rate were taken into account, including the unusually large fraction of the labor force working part time for economic reasons. A few observed that the combination of recent labor market improvements and continued softness in inflation had led them to lower their estimates of the longer-run normal rate of unemployment. However, a few others saw only a limited degree of remaining labor underutilization or anticipated that underutilization would be eliminated relatively soon.
Participants' Discussion of Policy Planning
Participants discussed considerations related to the choice of the appropriate timing of the initial firming in monetary policy and pace of subsequent rate increases. Ahead of this discussion, the staff gave a presentation that outlined some of the key issues likely to be involved, including the extent to which similar economic outcomes could be generated by different combinations of the date of the initial firming of policy and the pace of rate increases thereafter, how these combinations could affect the risks to economic outcomes, a review of past episodes in the United States and abroad in which monetary policy transitioned to a tightening phase after a lengthy period of low policy rates, and issues related to communications regarding the likely timing and pace of normalization.
Participants discussed the tradeoffs between the risks that would be associated with departing from the effective lower bound later and those that would be associated with departing earlier. Several participants noted that a late departure could result in the stance of monetary policy becoming excessively accommodative, leading to undesirably high inflation. It was also suggested that maintaining the federal funds rate at its effective lower bound for an extended period or raising it rapidly, if that proved necessary, could adversely affect financial stability. Some participants were concerned that a decision to delay the commencement of tightening could be perceived as indicating that an overly accommodative policy is likely to prevail during the firming phase. In connection with the risks associated with an early start to policy normalization, many participants observed that a premature increase in rates might damp the apparent solid recovery in real activity and labor market conditions, undermining progress toward the Committee's objectives of maximum employment and 2 percent inflation. In addition, an earlier tightening would increase the likelihood that the Committee might be forced by adverse economic outcomes to return the federal funds rate to its effective lower bound. Some participants noted the communications challenges associated with the prospect of commencing policy tightening at a time when inflation could be running well below 2 percent, and a few expressed concern that in some circumstances the public could come to question the credibility of the Committee's 2 percent goal. Indeed, one participant recommended that, in light of the outlook for inflation, the Committee consider ways to use its tools to provide more, not less, accommodation.
Many participants indicated that their assessment of the balance of risks associated with the timing of the beginning of policy normalization had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time. Some observed that, even with these risks taken into consideration, the federal funds rate may have already been kept at its lower bound for a sufficient length of time, and that it might be appropriate to begin policy firming in the near term. Regardless of the particular strategy undertaken, it was noted that, provided that the data-dependent nature of the path for the federal funds rate after its initial increase could be communicated to financial markets and the general public in an effective manner, the precise date at which firming commenced would have a less important bearing on economic outcomes.
Participants discussed the economic conditions that they anticipate will prevail at the time they expect it will be appropriate to begin normalizing policy. There was wide agreement that it would be difficult to specify in advance an exhaustive list of economic indicators and the values that these indicators would need to take. Nonetheless, a number of participants suggested that they would need to see further improvement in labor market conditions and data pointing to continued growth in real activity at a pace sufficient to support additional labor market gains before beginning policy normalization. Many participants indicated that such economic conditions would help bolster their confidence in the likelihood of inflation moving toward the Committee's 2 percent objective after the transitory effects of lower energy prices and other factors dissipate. Some participants noted that their confidence in inflation returning to 2 percent would also be bolstered by stable or rising levels of core PCE inflation, or of alternative series, such as trimmed mean or median measures of inflation. A number of participants emphasized that they would need to see either an increase in market-based measures of inflation compensation or evidence that continued low readings on these measures did not constitute grounds for concern. Several participants indicated that signs of improvements in labor compensation would be an important signal, while a few others deemphasized the value of labor compensation data for judging incipient inflation pressures in light of the loose short-run empirical connection between wage and price inflation.
Participants discussed the communications challenges associated with signaling, when it becomes appropriate to do so, that policy normalization is likely to begin relatively soon while remaining clear that the Committee's actions would depend on incoming data. Many participants regarded dropping the "patient" language in the statement, whenever that might occur, as risking a shift in market expectations for the beginning of policy firming toward an unduly narrow range of dates. As a result, some expressed the concern that financial markets might overreact, resulting in undesirably tight financial conditions. Participants discussed some possible communications by which they might further underscore the data dependency of their decision regarding when to tighten the stance of monetary policy. A number of participants noted that while forward guidance had been a very useful tool under the extraordinary conditions of recent years, as the start of normalization approaches, there would be limits to the specificity that the Committee could provide about its timing. Looking ahead, some participants highlighted the potential benefits of streamlining the Committee's postmeeting statement once normalization has begun. More broadly, it was suggested that the Committee should communicate clearly that policy decisions will be data dependent, and that unanticipated economic developments could therefore warrant a path of the federal funds rate different from that currently expected by investors or policymakers.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the FOMC met in December indicated that economic activity had been expanding at a solid pace. Labor market conditions had improved further, with strong job gains and a lower unemployment rate; numerous labor market indicators suggested that the underutilization of labor resources was continuing to diminish. Household spending was rising moderately; recent declines in energy prices had boosted household purchasing power. Business fixed investment was advancing, while the recovery in the housing sector remained slow. Inflation had declined further below the Committee's longer-run objective, largely reflecting declines in energy prices, and was expected to decline further in the near term. Market-based measures of five-year, five-year-forward inflation compensation had declined substantially in recent months, but survey-based measures of longer-term inflation expectations had remained stable. The Committee expected that, with appropriate monetary policy accommodation, economic activity would continue to expand at a moderate pace, with labor market indicators moving toward levels the Committee judges consistent with its dual mandate. The Committee also expected that inflation would rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. In view of the uncertainties about the inflation outlook, the Committee agreed that it should continue to monitor inflation developments closely.
In their discussion of language for the postmeeting statement, members generally agreed that they should acknowledge the solid growth over the second half of 2014 as well as the further improvement in labor market conditions over the intermeeting period. Job gains had been strong, and the Committee judged that labor market slack continued to diminish. In addition, members decided that the statement should note the further decline of inflation seen of late and the additional decline that was in prospect in the near term, while also registering their judgment that these short-term movements of inflation largely reflected the recent decline in energy prices and other transitory factors, and that inflation was likely to rise gradually toward 2 percent over the medium term. Members also agreed that it was appropriate to observe that lower energy prices had boosted household purchasing power. The Committee further decided that the postmeeting statement should explicitly acknowledge the role of international developments as one of the factors influencing the Committee's assessment of progress toward its objectives of maximum employment and 2 percent inflation.
The Committee agreed to maintain the target range for the federal funds rate at 0 to 1/4 percent and to reaffirm the indication in the statement that the Committee's decision about how long to maintain the current target range for the federal funds rate would depend on its assessment of actual and expected progress toward its objectives of maximum employment and 2 percent inflation. Members agreed to continue to include, in the forward guidance, language indicating that the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. Members agreed that their policy decisions would remain data dependent, and they continued to include wording in the statement noting that if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate would likely occur sooner than currently anticipated, and, conversely, that if progress proves slower than expected, then increases in the target range would likely occur later than currently anticipated. The Committee decided to maintain its policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. Finally, the Committee also decided to reiterate its expectation that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
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 SOMA in accordance with the following domestic policy directive:
"Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions. The System Open Market Account manager and the secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."
The vote encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in December suggests that economic activity has been expanding at a solid pace. Labor market conditions have improved further, with strong job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately; recent declines in energy prices have boosted household purchasing power. Business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has declined further below the Committee's longer-run objective, largely reflecting declines in energy prices. Market-based measures of inflation compensation have declined substantially in recent months; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to decline further in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Charles L. Evans, Stanley Fischer, Jeffrey M. Lacker, Dennis P. Lockhart, Jerome H. Powell, Daniel K. Tarullo, and John C. Williams.
Voting against this action: None.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, March 17-18, 2015. The meeting adjourned at 12:55 p.m. on January 28, 2015.
Notation Vote
By notation vote completed on January 6, 2015, the Committee unanimously approved the minutes of the Committee meeting held on December 16-17, 2014.
_____________________________
Thomas Laubach
Secretary
1. Attended the joint session of the Federal Open Market Committee and the Board of Governors. Return to text
2. Attended the portion of the meeting following the joint session of the Federal Open Market Committee and the Board of Governors. Return to text
3. Attended through the conclusion of the joint session of the Federal Open Market Committee and the Board of Governors. Return to text
4. Attended through the discussion on liftoff tools and possible liftoff options. Return to text
5. Versions of the current Committee documents are available at www.federalreserve.gov/monetarypolicy/rules_authorizations.htm. Return to text
6. Effective February 2, 2015. Return to text
7. To improve consistency, references to "the FOMC," "the Federal Open Market Committee," and "the Committee" were standardized, where appropriate, around the convention of "the Committee." This change was implemented in other affected documents. Return to text
8. The change regarding the introduction of the term "Selected Bank" was implemented in other affected documents, including the Authorization for Foreign Currency Operations, Procedural Instructions with Respect to Foreign Currency Operations, and Program for Security of FOMC Information. Return to text |
2015-01-28T00:00:00 | 2015-01-28 | Statement | Information received since the Federal Open Market Committee met in December suggests that economic activity has been expanding at a solid pace. Labor market conditions have improved further, with strong job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately; recent declines in energy prices have boosted household purchasing power. Business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has declined further below the Committeeâs longer-run objective, largely reflecting declines in energy prices. Market-based measures of inflation compensation have declined substantially in recent months; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to decline further in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. However, if incoming information indicates faster progress toward the Committeeâs employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committeeâs holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams. |
2014-12-17T00:00:00 | 2014-12-17 | Statement | Information received since the Federal Open Market Committee met in October suggests that economic activity is expanding at a moderate pace. Labor market conditions improved further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices. Market-based measures of inflation compensation have declined somewhat further; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced. The Committee expects inflation to rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; and Daniel K. Tarullo.
Voting against the action were Richard W. Fisher, who believed that, while the Committee should be patient in beginning to normalize monetary policy, improvement in the U.S. economic performance since October has moved forward, further than the majority of the Committee envisions, the date when it will likely be appropriate to increase the federal funds rate; Narayana Kocherlakota, who believed that the Committee's decision, in the context of ongoing low inflation and falling market-based measures of longer-term inflation expectations, created undue downside risk to the credibility of the 2 percent inflation target; and Charles I. Plosser, who believed that the statement should not stress the importance of the passage of time as a key element of its forward guidance and, given the improvement in economic conditions, should not emphasize the consistency of the current forward guidance with previous statements. |
2014-12-17T00:00:00 | 2015-01-07 | Minute | Minutes of the Federal Open Market Committee
December 16-17, 2014
A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, December 16, 2014, at 1:00 p.m. and continued on Wednesday, December 17, 2014, at 9:00 a.m.
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
Stanley Fischer
Richard W. Fisher
Narayana Kocherlakota
Loretta J. Mester
Charles I. Plosser
Jerome H. Powell
Daniel K. Tarullo
Christine Cumming, Charles L. Evans, Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Alternate Members of the Federal Open Market Committee
James Bullard, Esther L. George, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively
William B. English, Secretary and Economist
Matthew M. Luecke, Deputy Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Steven B. Kamin, Economist
David W. Wilcox, Economist
James A. Clouse, Thomas A. Connors, Evan F. Koenig, Thomas Laubach, Michael P. Leahy, Paolo A. Pesenti, Samuel Schulhofer-Wohl, Mark E. Schweitzer, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Robert deV. Frierson,1 Secretary of the Board, Office of the Secretary, Board of Governors
Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors
Stephen A. Meyer and William R. Nelson, Deputy Directors, Division of Monetary Affairs, Board of Governors
Andreas Lehnert, Deputy Director, Office of Financial Stability Policy and Research, Board of Governors
Andrew Figura, David Reifschneider, and Stacey Tevlin, Special Advisers to the Board, Office of Board Members, Board of Governors
Trevor A. Reeve, Special Adviser to the Chair, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Christopher J. Erceg, Senior Associate Director, Division of International Finance, Board of Governors
Michael T. Kiley, Senior Adviser, Division of Research and Statistics, and Senior Associate Director, Office of Financial Stability Policy and Research, Board of Governors
Ellen E. Meade and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors
Daniel M. Covitz, Eric M. Engen, and Diana Hancock, Associate Directors, Division of Research and Statistics, Board of Governors
David Lopez-Salido, Deputy Associate Director, Division of Monetary Affairs, Board of Governors; John J. Stevens, Deputy Associate Director, Division of Research and Statistics, Board of Governors
Stephanie R. Aaronson, Assistant Director, Division of Research and Statistics, Board of Governors
Robert J. Tetlow, Adviser, Division of Monetary Affairs, Board of Governors
Elizabeth Klee, Section Chief, Division of Monetary Affairs, Board of Governors
Katie Ross,1 Manager, Office of the Secretary, Board of Governors
Achilles Sangster II, Information Management Analyst, Division of Monetary Affairs, Board of Governors
Kelly J. Dubbert, First Vice President, Federal Reserve Bank of Kansas City
David Altig and Alberto G. Musalem, Executive Vice Presidents, Federal Reserve Banks of Atlanta and New York, respectively
Michael Dotsey, Geoffrey Tootell, and Christopher J. Waller, Senior Vice Presidents, Federal Reserve Banks of Philadelphia, Boston, and St. Louis, respectively
Hesna Genay, Douglas Tillett, Robert G. Valletta, and Alexander L. Wolman, Vice Presidents, Federal Reserve Banks of Chicago, Chicago, San Francisco, and Richmond, respectively
Willem Van Zandweghe, Assistant Vice President, Federal Reserve Bank of Kansas City
Developments in Financial Markets and the Federal Reserve's Balance Sheet
In a joint session of the Federal Open Market Committee (FOMC) and the Board of Governors of the Federal Reserve System, the manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets as well as System open market operations conducted during the period since the Committee met on October 28-29, 2014. In addition, the manager reviewed the implications of recent foreign central bank policy actions for the international portion of the SOMA portfolio. The manager also provided an update on staff work related to potential arrangements that would allow depository institutions to pledge funds held in a segregated account at the Federal Reserve as collateral in borrowing transactions with private creditors and which could potentially provide an additional supplementary tool during policy normalization. After further review, staff analysis suggested that such accounts involved a number of operational, regulatory, and policy issues. These issues raised questions about these accounts' possible effectiveness that would be difficult to resolve in a timely fashion. It was therefore decided that further work to implement such accounts would be shelved for now.
The deputy manager followed with a discussion of the outcomes of recent tests of supplementary normalization tools, namely the Term Deposit Facility (TDF) and term and overnight reverse repurchase agreements (term RRPs and ON RRPs, respectively). Regarding the TDF testing, the introduction of an early withdrawal option led to significant increases in the number of participating depository institutions and in take-up relative to earlier operations without this feature. As expected, both participation and take-up in the operations continued to be sensitive to the offering rate and maximum individual award amount. The Open Market Desk successfully conducted the first two of four preannounced term RRP operations extending across the end of the year to help address expected downward pressures on short-term rates. Commentary from market participants suggested that these operations may help alleviate some of the volatility in short-term rates that would otherwise be expected around the year-end. Regarding the ON RRP testing--during which the offered rate was varied between 3 and 10 basis points--increases in offered rates appeared to put some upward pressure on unsecured money market rates, as anticipated, and the offered rate continued to provide a soft floor for secured rates. Changes in the spread between the rate paid on reserves and the ON RRP offered rate did not appear to affect the volume of activity in the federal funds market. While the tests of ON RRPs had been informative, the staff suggested that additional testing could further improve understanding of how this supplementary tool could be used to achieve greater control of the federal funds rate during policy normalization. Accordingly, participants discussed a draft resolution to extend the Desk's authority to conduct the ON RRP exercise for 12 months beyond the expiration of the current authorization on January 30, 2015. It was noted that a one-year extension to what had been a one-year testing program was a practical step and signaled nothing about either the timing of the start of policy normalization or how long an ON RRP facility might be needed.
Following the discussion of the extension of ON RRP test operations, the Committee unanimously approved the following resolution:
"The Federal Open Market Committee (FOMC) authorizes the Federal Reserve Bank of New York to conduct a series of overnight reverse repurchase operations involving U.S. government securities for the purpose of further assessing the appropriate structure of such operations in supporting the implementation of monetary policy during normalization. The reverse repurchase operations authorized by this resolution shall be (i) conducted at an offering rate that may vary from zero to five basis points; (ii) for an overnight term or such longer term as is warranted to accommodate weekend, holiday, and similar trading conventions; (iii) subject to a per-counterparty limit of up to $30 billion per day; (iv) subject to an overall size limit of up to $300 billion per day; and (v) awarded to all submitters (A) at the specified offering rate if the sum of the bids received is less than or equal to the overall size limit, or (B) at the stop-out rate, determined by evaluating bids in ascending order by submitted rate up to the point at which the total quantity of bids equals the overall size limit, with all bids below this rate awarded in full at the stop-out rate and all bids at the stop-out rate awarded on a pro rata basis, if the sum of the counterparty offers received is greater than the overall size limit. The Chair must approve any change in the offering rate within the range specified in (i) and any changes to the per-counterparty and overall size limits subject to the limits specified in (iii) and (iv). The System Open Market Account manager will notify the FOMC in advance about any changes to the offering rate, per-counterparty limit, or overall size limit applied to operations. These operations shall be authorized for one additional year beyond the previously authorized end date--that is, through January 29, 2016."
By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
The Board meeting concluded at the end of the discussion of developments in financial markets and the Federal Reserve's balance sheet.
Staff Review of the Economic Situation
The information reviewed for the December 16-17 meeting suggested that economic activity was increasing at a moderate pace in the fourth quarter and that labor market conditions had improved further. Consumer price inflation continued to run below the FOMC's longer-run objective of 2 percent, partly restrained by declining energy prices. Market-based measures of inflation compensation moved lower, but survey measures of longer-run inflation expectations remained stable.
Total nonfarm payroll employment expanded in October and November at a faster pace than in the third quarter. The unemployment rate edged down to 5.8 percent in October and remained at that level in November. Both the labor force participation rate and the employment-to-population ratio rose slightly, and the share of workers employed part time for economic reasons declined. The rate of private-sector job openings stayed, on balance, at its recent elevated level in September and October, and the rates of hiring and of quits stepped up on net.
Industrial production rose in October and November, led by strong increases in manufacturing output. Automakers' schedules indicated that the pace of light motor vehicle assemblies would move up somewhat in the first quarter, and broader indicators of manufacturing production, such as the readings on new orders from the national and regional manufacturing surveys, were generally consistent with solid gains in factory output over the near term.
Real personal consumption expenditures (PCE) appeared to be rising robustly in the fourth quarter. The components of the nominal retail sales data used to construct estimates of PCE rose strongly in October and November, and light motor vehicle sales increased noticeably. Key factors that influence household spending pointed toward further solid PCE growth. Real disposable income rose further in October, energy prices continued to decline, households' net worth likely increased as home values advanced, and consumer sentiment in early December from the Thomson Reuters/University of Michigan Surveys of Consumers was at its highest level since before the most recent recession.
The pace of activity in the housing sector generally remained slow. Both starts and permits of new single-family homes increased only a little, on balance, in October and November. Starts of multifamily units declined, on net, over the past two months. Sales of new and existing homes rose modestly in October.
Real private expenditures for business equipment and intellectual property appeared to be decelerating in the fourth quarter. Nominal orders and shipments of nondefense capital goods excluding aircraft declined in October. However, new orders for these capital goods remained above the level of shipments, and other forward-looking indicators, such as national and regional surveys of business conditions, were generally consistent with modest near-term gains in business equipment spending. Firms' nominal spending for nonresidential structures edged down in October after rising slightly in the third quarter.
Data for October and November pointed toward a decline in real federal government purchases in the fourth quarter after a surprisingly large third-quarter increase. Real state and local government purchases appeared to be rising modestly in the fourth quarter as their payrolls and construction expenditures increased a little in recent months.
The U.S. international trade deficit was little changed in October, as exports and imports both rose. The gains in exports were concentrated in aircraft and other capital goods, and the increase in imports reflected a pickup in purchases of automotive products and computers. But with the October deficit remaining wider than the monthly average in the third quarter, real net exports looked to be declining in the fourth quarter.
Both total U.S. consumer price inflation, as measured by the PCE price index, and core inflation, as measured by PCE prices excluding food and energy, were about 1-1/2 percent over the 12 months ending in October; consumer energy prices declined, while consumer food prices rose more than overall prices. Over the 12 months ending in November, total inflation as measured by the consumer price index (CPI) was 1 1/4 percent, partly reflecting the further decline in energy prices, while core CPI inflation was 1-3/4 percent. Measures of expected long-run inflation from a variety of surveys, including the Michigan survey, the Blue Chip Economic Indicators, the Survey of Professional Forecasters, and the Desk's Survey of Primary Dealers, remained stable. In contrast, market-based measures of inflation compensation moved lower.
Labor compensation continued to increase only a little faster than consumer prices. Compensation per hour in the nonfarm business sector rose about 2 percent over the year ending in the third quarter. Similar rates of increase were observed for the employment cost index over the same year-long period and for average hourly earnings for all employees over the 12 months ending in November.
Overall growth in foreign real gross domestic product (GDP) remained subdued in the third quarter. In the advanced foreign economies, real GDP contracted for a second consecutive quarter in Japan, rose only slightly in the euro area, but continued to expand moderately in Canada and the United Kingdom. In the emerging market economies, economic growth slowed in Mexico in the third quarter and remained sluggish in Brazil; economic growth in China likely slowed moderately in the fourth quarter. Oil prices continued to decline, likely reflecting favorable supply developments as well as some weakening in global demand. Inflation in the advanced foreign economies remained quite low during the intermeeting period, partly because of the fall in oil prices. Declining oil prices had a smaller effect on inflation in the emerging market economies, reflecting the greater prevalence of administered energy prices.
Staff Review of the Financial Situation
Over the intermeeting period, market participants became a bit more optimistic about U.S. economic prospects while also responding to economic and policy developments abroad. The sharp decline in oil prices weighed on inflation compensation and left a mixed imprint on other asset markets. On net, yields on longer-term Treasury securities fell, corporate bond spreads widened, equity prices were little changed, and the foreign exchange value of the dollar appreciated.
Economic data releases reinforced the views of market participants that the U.S. economic recovery continued to gain momentum. In addition, investors appeared to read the October FOMC statement as suggesting a slightly less accommodative path for future monetary policy than they had previously expected.
Results from the December Survey of Primary Dealers indicated that the dealers' expectations for the timing of the first increase in the federal funds target range and the subsequent policy path were little changed from the October survey. The average probability distribution of the expected date of liftoff continued to imply that the most likely date would be around the middle of 2015, with the distribution having narrowed slightly compared with the previous survey.
Longer-term nominal Treasury yields declined significantly, on balance, over the intermeeting period. Measures of inflation compensation based on Treasury Inflation-Protected Securities and on inflation swaps decreased, reportedly reflecting, in part, the decline in oil prices and increased concerns about global economic growth.
Broad U.S. equity price indexes were about unchanged over the intermeeting period. Option-implied volatility for one-month returns on the S&P 500 index--the VIX--rose sharply late in the period to levels close to those in mid-October. Investment- and speculative-grade corporate bond spreads widened over the period. Spreads on speculative-grade bonds for energy-related firms rose substantially because of the pronounced decline in oil prices.
Business financing flows were robust over the intermeeting period. Gross bond issuance by nonfinancial corporations was the strongest in more than a year. Nonfinancial commercial paper outstanding expanded noticeably in November, more than compensating for a slowdown in October. Commercial and industrial loans on banks' books continued to expand briskly. In addition, issuance of both leveraged loans and collateralized loan obligations were strong in October and November.
Financing for commercial real estate (CRE) remained broadly available. CRE loans on banks' books expanded at a moderate pace in October and November, and issuance of commercial mortgage-backed securities (CMBS) was strong. According to the December Senior Credit Officer Opinion Survey on Dealer Financing Terms, broker-dealers had eased somewhat all of the terms on which they finance CMBS for most-favored clients.
Measures of residential mortgage lending conditions were little changed over the intermeeting period. Credit conditions for mortgages remained tight for borrowers with less-than-pristine credit. Interest rates on 30-year fixed-rate mortgages declined, consistent with the moves in longer-term Treasury yields. Refinancing activity was subdued.
Financing conditions in consumer credit markets generally stayed accommodative. Auto and student loan balances expanded robustly in October, and revolving credit balances increased at a moderate pace. Issuance of consumer asset-backed securities was strong in the fourth quarter.
Reflecting divergent economic and monetary policy prospects in the United States and abroad, the dollar appreciated substantially against most currencies over the intermeeting period. The dollar moved up significantly against the yen as the Bank of Japan expanded its asset purchase program as well as against the currencies of oil exporters as oil prices declined. Over the period, market participants seemed to conclude that monetary policy in Europe was likely to be put on a more accommodative path, and 10-year yields in Germany and the United Kingdom declined further. As German yields fell to new record lows, spreads of most euro-area peripheral bonds over those yields narrowed. Changes in stock prices abroad were mixed, on net, over the intermeeting period: There were large increases in Japan and China along with large decreases in oil-exporting countries, such as Canada, Mexico, and Russia.
Late in the intermeeting period, following the sharp fall in oil prices, the Russian ruble depreciated rapidly and substantially, prompting the Russian central bank, which had already raised its policy rate in early November, to raise the rate twice more in five days, with the most recent increase following an unscheduled policy meeting on December 15.
Staff Economic Outlook
In the staff forecast prepared for the December FOMC meeting, real GDP growth in the second half of 2014 was higher than in the projection for the October meeting, largely reflecting stronger-than-expected data for PCE. Nevertheless, real GDP growth was anticipated to slow in the fourth quarter as both net exports and federal government purchases--important positive contributors to real GDP growth in the third quarter--were anticipated to drop back. The staff's medium-term forecast for real GDP growth was revised up a little on net. The projected path for oil prices was lower, and the trajectory for equity prices was a bit higher. And although the projected path of the dollar was revised up, the staff revised down its estimate of how much the appreciation of the dollar since last summer would restrain projected growth in real GDP. The staff continued to forecast that real GDP would expand at a faster pace in 2015 and 2016 than it had this year and that it would rise more quickly than potential output, supported by increases in consumer and business confidence and a pickup in foreign economic growth, along with monetary policy that was assumed to remain highly accommodative for some time. In 2017, real GDP growth was projected to begin slowing toward, but to remain above, the rate of potential output growth as the normalization of monetary policy was assumed to proceed. The expansion in economic activity over the medium term was anticipated to slowly reduce resource slack, and the unemployment rate was expected to decline gradually and to temporarily move slightly below the staff's estimate of its longer-run natural rate.
The staff's forecast for inflation in the near term was revised down to reflect the further large energy price declines since the October FOMC meeting, which were anticipated to lead to a temporary decrease in the total PCE price index late this year and early next year. The staff's inflation projection for the next few years was essentially unchanged; the staff continued to project that inflation would move up gradually toward, but run somewhat below, the Committee's longer-run objective of 2 percent. Nevertheless, inflation was projected to reach the Committee's objective over time, with longer-run inflation expectations assumed to remain stable, prices of energy and non-oil imports forecast to begin rising next year, and slack in labor and product markets anticipated to diminish slowly.
The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average over the past 20 years. The risks to the forecast for real GDP growth and inflation were viewed as tilted a little to the downside, reflecting the staff's assessment that neither monetary policy nor fiscal policy was well positioned to help the economy withstand adverse shocks. At the same time, the staff viewed the risks around its outlook for the unemployment rate as roughly balanced.
Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, members of the Board of Governors and the Federal Reserve Bank presidents submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, inflation, and the federal funds rate for each year from 2014 through 2017 and over the longer run, conditional on each participant's judgment of appropriate monetary policy. The longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These economic projections and policy assessments are described in the Summary of Economic Projections (SEP), which is attached as an addendum to these minutes.
In their discussion of the economic situation and the outlook, meeting participants regarded the information received over the intermeeting period as supporting their view that economic activity was expanding at a moderate pace. Labor market conditions improved further, with solid job gains and a lower unemployment rate; participants judged that the underutilization of labor resources was continuing to diminish. Participants expected that, over the medium term, real economic activity would increase at a pace sufficient to lead to further improvements in labor market indicators toward levels consistent with the Committee's objective of maximum employment. Inflation was continuing to run below the Committee's longer-run objective, reflecting in part continued reductions in oil prices and falling import prices. Market-based measures of inflation compensation declined further, while survey-based measures of longer-term inflation expectations remained stable. Participants generally anticipated that inflation would rise gradually toward the Committee's 2 percent objective as the labor market improved further and the transitory effects of lower energy prices and other factors dissipated. The risks to the outlook for economic activity and the labor market were seen as nearly balanced. Some participants suggested that the recent domestic economic data had increased their confidence in the outlook for growth going forward. Participants generally regarded the net effect of the recent decline in energy prices as likely to be positive for economic activity and employment. However, many of them thought that a further deterioration in the foreign economic situation could result in slower domestic economic growth than they currently expected.
Household spending continued to advance over the intermeeting period, and reports from contacts in several parts of the country indicated that recent retail or auto sales had been robust. Many participants pointed to relatively high levels of consumer confidence as signaling near-term strength in discretionary consumer spending, and most participants judged that the recent significant decline in energy prices would provide a boost to consumer spending. Participants also cited solid gains in payroll employment, low interest rates, and the decline in levels of household debt relative to income as factors that were expected to support continued growth in consumer spending. In contrast, residential construction continued to be slow, and recent readings on single- family building permits suggested that this sluggishness was likely to continue in the short run.
Industry contacts pointed to generally solid business conditions, with businesses in many parts of the country expressing some optimism about prospects for further improvement in 2015. Manufacturing activity was strong, as indicated by the index of industrial production and a variety of regional reports. Information from some regions pointed to a pickup in capital investment, although the continued decline in oil prices led business contacts to expect a slowdown in drilling activity and, if prices remain low, reduced capital investment in the oil and gas industries. In the agricultural sector, the robust fall harvest reportedly lowered crop prices; operating margins for food processing and farm equipment businesses have been narrowing, putting stress on some producers.
In their discussion of the foreign economic outlook, participants noted that the implications of the drop in crude oil prices would differ across regions, especially if the price declines affected inflation expectations and financial markets; a few participants said that the effect on overseas employment and output as a whole was likely to be positive. While some participants had lowered their assessments of the prospects for global economic growth, several noted that the likelihood of further responses by policymakers abroad had increased. Several participants indicated that they expected slower economic growth abroad to negatively affect the U.S. economy, principally through lower net exports, but the net effect of lower oil prices on U.S. economic activity was anticipated to be positive.
Participants saw broad-based improvement in labor market conditions over the intermeeting period, including solid gains in payroll employment, a slight reduction in the unemployment rate, and increases in the rates of hiring and quits. Positive signals were also seen in the decline in the share of workers employed part time for economic reasons and in the increase in the labor force participation rate. These favorable trends notwithstanding, the levels of these measures suggested to some participants that there remained more labor market slack than was indicated by the unemployment rate alone. However, a few others continued to view the unemployment rate as a reliable indicator of overall labor market conditions and saw a narrower degree of labor underutilization remaining. Although a few participants suggested that the recent uptick in the employment cost index or average hourly earnings could be a tentative sign of an upturn in wage growth, most participants saw no clear evidence of a broad-based acceleration in wages. A couple of participants, however, pointing to the weak statistical relationship between wage inflation and labor market conditions, suggested that the pace of wage inflation was providing relatively little information about the degree of labor underutilization.
Participants generally anticipated that inflation was likely to decline further in the near term, reflecting the reduction in oil prices and the effects of the rise in the foreign exchange value of the dollar on import prices. Most participants saw these influences as temporary and thus continued to expect inflation to move back gradually to the Committee's 2 percent longer-run objective as the labor market improved further in an environment of well-anchored inflation expectations. Survey-based measures of longer-term inflation expectations remained stable, although market-based measures of inflation compensation over the next five years, as well as over the five-year period beginning five years ahead, moved down further over the intermeeting period. Participants discussed various explanations for the decline in market-based measures, including a fall in expected future inflation, reductions in inflation risk premiums, and higher liquidity and other premiums that might be influencing the prices of Treasury Inflation-Protected Securities and inflation derivatives. Model-based decompositions of inflation compensation seemed to support the message from surveys that longer-term inflation expectations had remained stable, although it was observed that these results were sensitive to the assumptions underlying the particular models used. It was noted that even if the declines in inflation compensation reflected lower inflation risk premiums rather than a reduction in expected inflation, policymakers might still want to take them into account because such changes could reflect increased concerns on the part of investors about adverse outcomes in which low inflation was accompanied by weak economic activity. In the end, participants generally agreed that it would take more time and analysis to draw definitive conclusions regarding the recent behavior of inflation compensation.
In their discussion of financial market developments, participants observed that movements in asset prices over the intermeeting period appeared to have been importantly influenced by concerns about prospects for foreign economic growth and by associated expectations of monetary policy actions in Europe and Japan. A couple of participants remarked on the apparent disparity between market-based measures of expected future U.S. short-term interest rates and projections for short-term rates based on surveys or based on the median of federal funds rate projections in the SEP. One participant noted that very low term premiums in market-based measures might explain at least some portion of this gap. Another possibility was that market-based measures might be assigning considerable weight to less favorable outcomes for the U.S. economy in which the federal funds rate would remain low for quite some time or fall back to very low levels in the future, whereas the projections in the SEP report the paths for the federal funds rate that participants see as appropriate given their views of the most likely evolution of inflation and real activity.
Participants discussed a number of risks to the economic outlook. Many participants regarded the international situation as an important source of downside risks to domestic real activity and employment, particularly if declines in oil prices and the persistence of weak economic growth abroad had a substantial negative effect on global financial markets or if foreign policy responses were insufficient. However, the downside risks were seen as nearly balanced by risks to the upside. Several participants, pointing to indicators of consumer and business confidence as well as to the solid record of payroll employment gains in 2014, suggested that the real economy may end up showing more momentum than anticipated, while a few others thought that the boost to domestic spending coming from lower energy prices could turn out to be quite large. With regard to inflation, a number of participants saw a risk that it could run persistently below their 2 percent objective, with some expressing concern that such an outcome could undermine the credibility of the Committee's commitment to that objective. Some participants were worried that the recent substantial fall in energy prices could lead to a reduction in longer-term inflation expectations, while others were concerned that the decline in market-based measures of inflation compensation might reflect, in part, that such a decline had already begun. However, a couple of others noted that if the unemployment rate continued to decline quickly, wage and price inflation could rise more than generally anticipated.
In their discussion of communications regarding the path of the federal funds rate over the medium term, most participants concluded that updating the Committee's forward guidance would be appropriate in light of the conclusion of the asset purchase program in October and the further progress that the economy had made toward the Committee's objectives. Most participants agreed that it would be useful to state that the Committee judges that it can be patient in beginning to normalize the stance of monetary policy; they noted that such language would provide more flexibility to adjust policy in response to incoming information than the previous language, which had tied the beginning of normalization to the end of the asset purchase program. This approach was seen as consistent, given the Committee's assessment of the economic outlook at the current meeting, with the Committee's previous statement. Most participants thought the reference to patience indicated that the Committee was unlikely to begin the normalization process for at least the next couple of meetings. Some participants regarded the revised language as risking an unwarranted concentration of market expectations for the timing of the initial increase in the federal funds rate target on a narrow range of dates around mid-2015, and as not adequately allowing for the possibility that economic conditions might evolve in a way that could call for either an earlier or a later liftoff date. A few participants suggested that the statement should focus on the economic conditions that would likely accompany the decision to raise rates. Participants generally stressed the need to communicate that the timing of the first increase in the federal funds rate would depend on the incoming data and their implications for the Committee's assessment of progress toward its objectives of maximum employment and inflation of 2 percent. With lower energy prices and the stronger dollar likely to keep inflation below target for some time, it was noted that the Committee might begin normalization at a time when core inflation was near current levels, although in that circumstance participants would want to be reasonably confident that inflation will move back toward 2 percent over time.
A few participants spoke of the importance of explaining to the public how economic and financial conditions would influence the Committee's decisions regarding the appropriate path for the federal funds rate after normalization begins. It was noted that to the extent that such guidance can be effectively communicated, the precise date of liftoff becomes less important for economic outcomes. In this regard, some participants emphasized that policy will still be highly accommodative for a time after the first increase in the federal funds rate target, given the difference between the current setting of the federal funds rate target range and the Committee's view of the longer-run normal rate as well as the Federal Reserve's elevated holdings of longer-term securities.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the FOMC met in October indicated that economic activity was expanding at a moderate pace. Labor market conditions had improved further, with solid job gains and a lower unemployment rate; taken as a whole, labor market indicators suggested that the underutilization of labor resources was continuing to diminish. Household spending was rising moderately and business fixed investment was advancing, while the recovery in the housing sector remained slow. Inflation had continued to run below the Committee's longer-run objective, in part reflecting declines in energy prices. Market-based measures of inflation compensation had declined somewhat further, but survey-based measures of longer-term inflation expectations had remained stable. The Committee expected that, with appropriate monetary policy accommodation, economic activity would continue to expand at a moderate pace, with labor market indicators moving toward levels the Committee judges consistent with its dual mandate. The Committee also expected that inflation would rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.
In their discussion of language for the postmeeting statement, members generally agreed that they should acknowledge the broad improvement in labor market conditions over the intermeeting period as well as their judgment that labor market slack continued to diminish. In addition, they decided that the statement should note that the low level of inflation seen of late partly reflected the recent decline in energy prices. The Committee modified the previous statement language to make clear that it expects that inflation will rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. Given the uncertainties about the outlook for inflation, members decided that it would be appropriate to indicate that the Committee continues to monitor inflation developments closely.
The Committee agreed to maintain the target range for the federal funds rate at 0 to 1/4 percent and to reaffirm the indication in the statement that the Committee's decision about how long to maintain the current target range for the federal funds rate would depend on its assessment of actual and expected progress toward its objectives of maximum employment and 2 percent inflation. Most members agreed to update the Committee's forward guidance with language indicating that it judges that it can be patient in beginning to normalize the stance of monetary policy. In order to avoid the misinterpretation that this new wording reflected a change in the Committee's policy intentions, the statement included a sentence indicating that the Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. Two members thought that this forward guidance did not take sufficient account of the progress that had been made toward the Committee's objectives, while one wanted to strengthen the forward guidance in order to underscore the Committee's commitment to its 2 percent inflation objective. Members agreed that their policy decisions would remain data dependent, and they continued to include wording in the statement noting that if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate would likely occur sooner than currently anticipated, and, similarly, that if progress proves slower than expected, then increases in the target range would likely occur later than currently anticipated. The Committee decided to maintain its policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. Finally, the Committee also decided to reiterate its expectation that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. 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 SOMA in accordance with the following domestic policy directive:
"Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions. The System Open Market Account manager and the secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."
The vote encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in October suggests that economic activity is expanding at a moderate pace. Labor market conditions improved further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices. Market-based measures of inflation compensation have declined somewhat further; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced. The Committee expects inflation to rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Stanley Fischer, Loretta J. Mester, Jerome H. Powell, and Daniel K. Tarullo.
Voting against this action: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser.
Mr. Fisher agreed that the Committee should be patient in beginning to normalize the stance of monetary policy. He dissented because he saw the improvement in the U.S. economic outlook since October as indicating that it likely will be appropriate to increase the federal funds rate sooner than the Committee's current statement envisions.
Mr. Kocherlakota dissented because he believed that the Committee's decision and statement did not respond to ongoing below-target inflation and falling market-based measures of longer-term inflation expectations. In his judgment, the credibility of the Committee's 2 percent inflation target was at risk, calling for a more accommodative policy stance.
Mr. Plosser dissented for two reasons. He believed that the Committee's policy guidance should be more data dependent and not focus on time. In his view, the improvement in economic conditions that has occurred over the course of the year was greater than anticipated, and he believed that the statement should communicate that there is a measurable probability that liftoff may occur in the first quarter of next year, even if the most likely scenario is for normalization to begin around midyear. He further believed that waiting too long to raise rates could lead to the need for more-aggressive policy in the future, which could potentially lead to unnecessary volatility and instability.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, January 27-28, 2015. The meeting adjourned at 11:00 a.m. on December 17, 2014.
Notation Vote
By notation vote completed on November 18, 2014, the Committee unanimously approved the minutes of the Committee meeting held on October 28-29, 2014.
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William B. English
Secretary
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1 Attended the joint session of the Federal Open Market Committee and the Board of Governors. Return to text. |
2014-10-29T00:00:00 | 2014-11-19 | Minute | Minutes of the Federal Open Market Committee
October 28-29, 2014
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, October 28, 2014, at 1:00 p.m. and continued on Wednesday, October 29, 2014, at 9:00 a.m.
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
Stanley Fischer
Richard W. Fisher
Narayana Kocherlakota
Loretta J. Mester
Charles I. Plosser
Jerome H. Powell
Daniel K. Tarullo
Christine Cumming, Charles L. Evans, Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Alternate Members of the Federal Open Market Committee
James Bullard, Esther L. George, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively
William B. English, Secretary and Economist
Matthew M. Luecke, Deputy Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Thomas C. Baxter, Deputy General Counsel
Steven B. Kamin, Economist
David W. Wilcox, Economist
James A. Clouse, Thomas A. Connors, Evan F. Koenig, Thomas Laubach, Samuel Schulhofer-Wohl, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Robert deV. Frierson,1 Secretary of the Board, Office of the Secretary, Board of Governors
Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors
Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors
Stephen A. Meyer and William R. Nelson, Deputy Directors, Division of Monetary Affairs, Board of Governors
Andrew Figura, David Reifschneider, and Stacey Tevlin, Special Advisers to the Board, Office of Board Members, Board of Governors
Trevor A. Reeve, Special Adviser to the Chair, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Christopher J. Erceg, Senior Associate Director, Division of International Finance, Board of Governors
Ellen E. Meade and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors
Eric M. Engen and David E. Lebow, Associate Directors, Division of Research and Statistics, Board of Governors; Fabio M. Natalucci,1 Associate Director, Division of Monetary Affairs, Board of Governors
Joseph W. Gruber, Deputy Associate Director, Division of International Finance, Board of Governors; John J. Stevens,2 Deputy Associate Director, Division of Research and Statistics, Board of Governors
Steven A. Sharpe, Assistant Director, Division of Research and Statistics, Board of Governors
Patrick E. McCabe,1 Adviser, Division of Research and Statistics, Board of Governors; Robert J. Tetlow,3 Adviser, Division of Monetary Affairs, Board of Governors
Penelope A. Beattie,1 Assistant to the Secretary, Office of the Secretary, Board of Governors
Christopher J. Gust, Section Chief, Division of Monetary Affairs, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Katie Ross,1 Manager, Office of the Secretary, Board of Governors
Canlin Li, Senior Economist, Division of Monetary Affairs, Board of Governors
Randall A. Williams, Records Project Manager, Division of Monetary Affairs, Board of Governors
Helen E. Holcomb, First Vice President, Federal Reserve Bank of Dallas
David Altig, Jeff Fuhrer, James J. McAndrews, and Glenn D. Rudebusch, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Boston, New York, and San Francisco, respectively
Troy Davig, Michael Dotsey, Joshua L. Frost,1 Spencer Krane, and Christopher J. Waller, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Philadelphia, New York, Chicago, and St. Louis, respectively
Todd E. Clark and Douglas Tillett, Vice Presidents, Federal Reserve Banks of Cleveland and Chicago, respectively
Andreas L. Hornstein, Senior Advisor, Federal Reserve Bank of Richmond
Developments in Financial Markets and the Federal Reserve's Balance Sheet
In a joint session of the Federal Open Market Committee (FOMC) and the Board of Governors of the Federal Reserve System, the deputy manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets as well as System open market operations conducted during the period since the Committee met on September 16-17, 2014. In addition, the deputy manager summarized the outcomes of recent test operations of the Term Deposit Facility, described the results from the overnight reverse repurchase agreement (ON RRP) operational exercise, and reviewed the implications of recent foreign central bank policy actions for the international portion of the SOMA portfolio. The SOMA manager then discussed the Open Market Desk's plans for modestly expanding the list of counterparties eligible to participate in ON RRP operations based on substantially the same criteria established in the past for such counterparties. The manager also described ongoing staff work on improving data collections regarding bank funding markets and possibly using those data to provide more robust measures of bank funding rates. Finally, the manager reported on potential arrangements that would allow depository institutions to pledge funds held in a segregated account at the Federal Reserve as collateral in borrowing transactions with private creditors and would provide an additional supplementary tool during policy normalization; the manager noted possible next steps that the staff could potentially undertake to investigate the issues related to such arrangements.
Next, the staff outlined two proposals that the Committee could consider for further testing of RRP operations. In the first proposal, the Desk would vary by modest amounts the interest rate on ON RRP operations according to a preannounced schedule. Varying the spread between the ON RRP rate and the interest on excess reserves rate could provide the Committee with information about the effect of that spread on money markets and the demand for ON RRP. In addition, changes in the ON RRP rate would provide further information about the effectiveness of an ON RRP facility in providing a floor for money market rates during policy normalization. In the second proposal, the Desk would conduct a series of preannounced term RRP operations that would extend across the end of the year. In their discussion of term RRP testing, participants noted that the testing could provide information about the potential effectiveness of another of the Committee's supplementary policy tools and would help address expected downward pressures on short-term rates at year-end. But it was also noted that by conducting the term RRPs, the Committee would be losing information on how market participants might adjust and make investment arrangements prior to year-end with only the $300 billion in ON RRP available. One participant commented that the downward pressure on rates at year-end might be more directly addressed by raising the overall size limit on the ON RRP exercise. However, it was emphasized that increasing the cap on ON RRP operations at year-end could raise the risks for financial markets that had led the FOMC to impose the cap; these concerns were seen as less pronounced with a temporary program of term RRP operations. It was also noted that the proposed term RRP operations were only a test and that the Committee had not yet decided the conditions under which such operations would be used in the future.4
Following the discussion of the testing of RRP operations, the Committee unanimously approved the following resolution on the ON RRP exercise:
"The Federal Open Market Committee (FOMC) modifies the authorization concerning overnight reverse repurchase operations adopted at the September 17, 2014, FOMC meeting as follows:
(i) The offering rate of the operations may vary from zero to ten basis points.
This modification shall be effective beginning with the operation conducted on November 3, 2014, and conclude with the operation conducted on December 12, 2014."
By unanimous vote, the Committee approved the following resolution on term RRP operations:
"During the period of December 1, 2014, to December 30, 2014, the Federal Open Market Committee (FOMC) authorizes the Federal Reserve Bank of New York to conduct a series of term reverse repurchase operations involving U.S. Government securities. Such operations shall: (i) mature no later than January 5, 2015; (ii) be subject to an overall size limit of $300 billion outstanding at any one time; (iii) be subject to a maximum bid rate of ten basis points; (iv) be awarded to all submitters: (A) at the highest submitted rate if the sum of the bids received is less than or equal to the preannounced size of the operation, or (B) at the stopout rate, determined by evaluating bids in ascending order by submitted rate up to the point at which the total quantity of bids equals the preannounced size of the operation, with all bids below this rate awarded in full at the stopout rate and all bids at the stopout rate awarded on a pro rata basis, if the sum of the counterparty offers received is greater than the preannounced size of the operation. Such operations may be for forward settlement. The System Open Market Account manager will inform the FOMC in advance of the terms of the planned operations. The Chair must approve the terms of, timing of the announcement of, and timing of the operations. These operations shall be conducted in addition to the authorized overnight reverse repurchase agreements, which remain subject to a separate overall size limit of $300 billion per day."
By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
The Board meeting concluded at the end of the discussion of developments in financial markets and the Federal Reserve's balance sheet.
Staff Review of the Economic Situation
The information reviewed for the October 28-29 meeting indicated that economic activity expanded at a moderate pace in the third quarter and that labor market conditions improved over the intermeeting period. Consumer price inflation continued to run below the FOMC's longer-run objective of 2 percent. Market-based measures of inflation compensation declined somewhat, while survey-based measures of longer-term inflation expectations remained stable.
Total nonfarm payroll employment rose in September and the gains for July and August were revised up, leaving the average increase in the third quarter similar to that for the first half of the year. In September, the unemployment rate declined to 5.9 percent, and the share of workers employed part time for economic reasons decreased a little. The labor force participation rate edged down, and the employment-to-population ratio remained essentially unchanged. Other indicators generally suggested a continued improvement in labor market conditions. Although the rate of gross private-sector hiring declined, the rate of job openings moved up, measures of firms' hiring plans increased, initial claims for unemployment insurance remained low, and some measures of household expectations for labor market conditions improved.
Industrial production increased briskly in September after having been little changed, on net, over the first two months of the quarter, and the rate of capacity utilization in the manufacturing sector moved up. Readings on new orders from the national and regional manufacturing surveys were generally consistent with moderate near-term increases in factory output, but automakers' production schedules for the fourth quarter pointed to some slowing in the pace of motor vehicle assemblies.
Real personal consumption expenditures (PCE) appeared to have increased at a modest pace in the third quarter. The components of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimates of PCE were, in total, little changed in September following solid gains in July and August. In addition, sales of light motor vehicles fell back in September following a steep increase in August. Recent data on factors that tend to support household spending were mixed. Real disposable income continued to increase in August, and consumer sentiment as measured by the Thomson Reuters/University of Michigan Surveys of Consumers improved in September and early October. In contrast, household net worth likely decreased because of a decline in equity prices.
Housing market conditions seemed to be improving only slowly. Starts and permits of single-family homes were little changed, on net, in recent months. New home sales were flat in September after moving up in August, and sales of existing single-family homes moved essentially sideways over the past several months.
Real spending on business equipment and intellectual property products appeared to have risen at a moderate pace in the third quarter. Nominal shipments of nondefense capital goods excluding aircraft were little changed, on net, in August and September after a solid increase in July. New orders for these capital goods declined in September but remained above the level of shipments, indicating that shipments may increase further in subsequent months. Other forward-looking indicators, such as national and regional surveys of business conditions, were generally consistent with moderate gains in business equipment spending in the near term. Nominal business spending for new nonresidential construction decreased in August, and vacancy rates for nonresidential buildings remained elevated. Meanwhile, inventories in most industries were about in line with sales; in the energy sector, inventories appeared somewhat lean despite substantial stockbuilding since earlier in the year.
Total real government purchases appeared to have risen modestly in the third quarter. Federal government purchases likely increased, as nominal defense spending was higher in the third quarter than in the second quarter. In addition, real state and local government purchases probably rose somewhat, as the payrolls of these governments expanded and their nominal construction expenditures increased during the third quarter.
The U.S. international trade deficit narrowed slightly in August. Following large increases in July, both exports and imports grew only modestly, with gains concentrated in capital goods excluding automotive products.
Total U.S. consumer price inflation, as measured by the PCE price index, was about 1-1/2 percent over the 12 months ending in August. Over the 12 months ending in September, both the consumer price index (CPI) and the CPI excluding food and energy prices rose about 1-3/4 percent. Consumer energy prices declined further in September, largely reflecting continued declines in retail gasoline prices, and survey data suggested gasoline prices fell further over the first few weeks of October. Consumer food prices rose solidly in recent months. Near-term inflation expectations from the Michigan survey declined in September and early October, while longer-term inflation expectations in the survey were little changed.
Foreign economies appeared to have continued to expand at a moderate rate in the third quarter, although with considerable divergence across countries. In Japan, consumption staged a mild rebound after contracting in the previous quarter in response to a tax increase, while indicators for the euro area pointed to only continued sluggish growth. Third-quarter growth in real gross domestic product (GDP) remained healthy in the United Kingdom, and indicators for Canada also were positive. Among emerging market economies, GDP growth remained strong in the third quarter in China and Korea and indicators for Mexico were favorable as well. The Brazilian economy appeared to be stabilizing. Foreign inflation remained generally subdued and in some regions quite low, especially in the euro area, where headline inflation was well below 1 percent.
Staff Review of the Financial Situation
Concerns about the global economic outlook apparently helped to prompt a sharp pullback from risky assets in the United States, but prices of those assets subsequently reversed much of their declines by the end of the intermeeting period. In addition, a number of technical factors reportedly contributed to volatile interest rate moves in mid-October. Worries about a possible spread of Ebola also appeared to weigh on market sentiment somewhat at times. On net, yields on longer-term Treasury securities fell notably, U.S. equity prices edged down, corporate bond spreads widened modestly, and the dollar appreciated moderately against most other currencies.
Federal Reserve communications were reportedly viewed as slightly more accommodative than anticipated, on balance. The expected path of the federal funds rate implied by market quotes shifted down notably, on net, over the period. Market-based measures suggested that the expected date of the first increase in the federal funds rate was pushed out from the third quarter of 2015 to late 2015. However, the results from the Desk's October Survey of Primary Dealers indicated that the dealers' projected path of the federal funds rate was little changed from the September survey, with dealers continuing to see the middle of next year as the most likely time of liftoff.
The Treasury market experienced significant volatility on October 15, with 5- and 10-year Treasury yields dropping as much as 30 basis points in about an hour before retracing much of those moves by the end of the day. Amid very high trading volumes, Treasury market liquidity, as measured by bid-asked spreads, worsened significantly, and measures of the implied volatility of longer-term rates jumped on the day but subsequently fell back. While the release of the somewhat weaker-than-expected data for September U.S. retail sales was seen as the trigger for these sharp movements, market participants indicated that a number of technical factors related to investor positioning and trading strategies likely amplified the swing in interest rates.
Over the intermeeting period as a whole, longer-term nominal Treasury yields declined about 30 basis points. Market-based measures of inflation compensation moved lower as well, extending the declines seen since the summer. The decline in inflation compensation reportedly reflected in part concerns about global growth and the risk of building disinflationary pressures, the lower-than-expected August CPI report, the decline in oil prices, and the appreciation of the U.S. dollar. Yields on agency mortgage-backed securities (MBS) declined roughly in line with comparable Treasury yields, while spreads on both investment- and speculative-grade corporate bonds widened modestly relative to Treasury securities.
The S&P 500 index decreased about 1 percent, on net, over the intermeeting period. Option-implied volatility for the S&P 500 index over the next month increased moderately, on balance, ending the period below its long-run historical average, though during the mid-October volatility spike, it briefly touched high levels last seen in 2011. About half of the firms in the S&P 500 index reported earnings for the third quarter, with the reports generally viewed as positive. Overall, third-quarter earnings estimates continued to imply modest growth in earnings per share compared with the previous quarter.
Despite some volatility related to quarter-end, conditions in unsecured funding markets were little changed, on net, over the intermeeting period. In secured funding markets, some money market rates fell in the days leading up to quarter-end, reportedly reflecting in part the announcement of the $300 billion overall size limit on the ON RRP exercise following the September FOMC meeting. After quarter-end, however, short-term rates generally moved back toward their preannouncement levels.
Credit flows to nonfinancial business picked up in September and early October. Gross issuance of investment- and speculative-grade bonds rebounded from seasonal lows over the summer, notwithstanding the slowdown during the mid-October market volatility spike. Commercial and industrial loans on banks' books continued to expand at a robust pace in the third quarter, consistent with the strong demand from large and middle-market firms reported in the October Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS). In the leveraged loan market, institutional issuance slowed some in September, though investors' interest in the asset class remained strong.
Financing conditions in the commercial real estate (CRE) market continued to ease. According to the October SLOOS, banks eased CRE lending standards, on net, and reported stronger demand for such loans. Growth of CRE loans on the balance sheets of large banks slowed in the third quarter, while growth at small banks remained moderate. Issuance of commercial mortgage-backed securities stayed robust in September.
Over the intermeeting period, mortgage rates to qualified borrowers declined about 25 basis points. The decline in rates coincided with an appreciable increase in the volume of refinancing activity. Mortgage lending conditions were little changed on net.
Conditions in most consumer credit markets remained accommodative during the third quarter. Auto loans continued to be widely available, and respondents to the October SLOOS indicated that demand for auto loans had strengthened further in the third quarter. In addition, demand for credit card loans increased, and a few large banks reported having eased lending policies on such loans.
As in the United States, participants in foreign financial markets became more concerned, on balance, about prospects for global economic growth. On net over the period, equity indexes were down in most advanced and emerging market economies, and measures of implied volatility rose. Benchmark sovereign yields fell sharply, with German yields reaching record lows. Expected policy rate paths moved down in most advanced economies, and market-based measures of inflation compensation continued to decline. The Riksbank unexpectedly cut its main policy rate to zero in response to the low level of Swedish inflation. Spreads on peripheral European sovereign bonds increased, modestly for most countries but more substantially for Greek bonds, reflecting, in part, market concerns that Greece might exit its International Monetary Fund program prematurely. Spreads on emerging market bonds generally edged higher. In addition, the broad nominal dollar index ended the period moderately higher.
The European Central Bank released the results of the 2014 comprehensive assessment, which included both an asset quality review and a forward-looking stress test. Under the stress test, which recognizes capital raising and balance sheet adjustments through September 2014, 13 banks were identified as needing to strengthen their capital positions and 8 will be required to raise net new capital. The results were broadly in line with expectations, and the market reaction to the release was limited.
The staff's periodic report on potential risks to financial stability noted that recent developments in financial markets highlighted the potential for shocks to trigger increases in market volatility and declines in asset prices that could undermine financial stability. Nevertheless, the U.S. financial system appeared resilient to shocks of the magnitude seen recently due to the relatively strong capital and liquidity profiles of large domestic banking firms, subdued aggregate leverage in the nonfinancial sector, and relatively restrained use of short-term wholesale funding across the financial sector. However, the staff report also pointed to asset valuation pressures that were broadening, as well as a loosening of underwriting standards in the speculative corporate debt and CRE markets; it noted the need to closely monitor these developments going forward.
Staff Economic Outlook
The information on economic activity received since the staff prepared its forecast for the September FOMC meeting was close to expectations, and therefore, the staff's projection for real GDP growth over the remainder of the year was little revised. However, in response to a further rise in the foreign exchange value of the dollar, a deterioration in global growth prospects, and a decline in equity prices, the staff revised down its projection for real GDP growth a little over the medium term. Even with the slower expansion of economic activity in this projection, real GDP was still expected to rise faster than potential output in 2015 and 2016, supported by accommodative monetary policy and a further easing of the restraint on spending from changes in fiscal policy; in 2017, real GDP growth was projected to step down toward the rate of potential output growth. As a result, resource slack was anticipated to decline steadily, albeit at a slightly slower rate than in the previous projection, and the unemployment rate was expected to gradually improve and to be at the staff's estimate of its longer-run natural rate in 2017.
The staff's forecast for inflation this quarter and early next year was reduced in response to further declines in crude oil prices, but the forecast for inflation over the medium term was only a touch lower. Consumer price inflation was projected to be lower in the second half of this year than in the first half and to remain below the Committee's longer-run objective of 2 percent over the next few years. With resource slack projected to diminish slowly and changes in commodity and import prices anticipated to be subdued, inflation was projected to rise gradually and to reach the Committee's objective in the longer run.
The staff continued to view the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average over the past 20 years. The risks to the forecast for real GDP growth and inflation were seen as tilted to the downside, reflecting recent financial developments and concerns about the foreign economic outlook, as well as the staff's assessment that neither monetary policy nor fiscal policy appeared well positioned to help the economy withstand adverse shocks. At the same time, the staff continued to view the risks around its outlook for the unemployment rate as roughly balanced.
Participants' Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, most meeting participants viewed the information received over the intermeeting period as suggesting that economic activity continued to expand at a moderate pace. Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate; on balance, participants judged that the underutilization of labor resources was gradually diminishing. Participants generally expected that, over the medium term, real economic activity would increase at a pace sufficient to lead to a further gradual decline in the unemployment rate toward levels consistent with the Committee's objective of maximum employment. Inflation was continuing to run below the Committee's longer-run objective. Market-based measures of inflation compensation declined somewhat, while survey-based measures of longer-term inflation expectations remained stable. Participants anticipated that inflation would be held down over the near term by the decline in energy prices and other factors, but would move toward the Committee's 2 percent goal in coming years, although a few expressed concern that inflation might persist below the Committee's objective for quite some time. Most viewed the risks to the outlook for economic activity and the labor market as nearly balanced. However, a number of participants noted that economic growth over the medium term might be slower than they currently expected if the foreign economic or financial situation deteriorated significantly.
Household spending advanced at a moderate pace over the intermeeting period, and reports from contacts in several parts of the country indicated that recent retail or auto sales had been robust. However, one participant pointed to mixed retail sales reports that likely reflected a continuation of restrained discretionary spending on the part of low- and middle-income households. Many participants judged that the recent significant decline in energy prices would provide a boost to consumer spending over the near term, with several of them noting that the drop in gasoline prices would benefit lower-income households in particular. Among the other favorable factors that were expected to support continued growth in consumer spending, participants cited solid gains in payroll employment, low interest rates, rising consumer confidence, and the decline in levels of household debt relative to income.
The recovery in the housing sector remained slow despite low interest rates and some recent improvement in the availability of mortgage credit. Contacts in some parts of the country reported continued weakness in single-family construction, while in other regions activity reportedly was picking up gradually following a sluggish summer. A few participants pointed to continued strong growth in multifamily construction, although the limited pipeline of new projects in one District suggested that activity could slow in 2015.
Reports from business contacts in many parts of the country pointed to an improvement in business conditions, with indexes of the manufacturing sector posting broad-based gains in recent months in a number of Districts. A couple of participants reported expectations of a robust holiday sales season based on accumulating inventories of consumer goods or an increase in e-commerce traffic and related transportation activity. Contacts in several regions reported ready availability of credit, strong loan growth, or a steady increase in commercial construction activity. While the fall in energy prices was generally regarded as a positive development for many businesses, it was noted that a sustained drop in prices would have effects on oil drilling and related investment activity. In the agricultural sector, the robust fall harvest had driven down crop prices; food processing and farm equipment businesses were slowing as a result of lower farm income and a drop in exports.
In discussing economic developments abroad, participants pointed to a somewhat weaker economic outlook and increased downside risks in Europe, China, and Japan, as well as to the strengthening of the dollar over the period. It was observed that if foreign economic or financial conditions deteriorated further, U.S. economic growth over the medium term might be slower than currently expected. However, many participants saw the effects of recent developments on the domestic economy as likely to be quite limited. These participants suggested variously that the share of external trade in the U.S. economy is relatively small, that the effects of changes in the value of the dollar on net exports are modest, that shifts in the structure of U.S. trade and production over time may have reduced the effects on U.S. trade of developments like those seen of late, or that the slowdown in external demand would likely prove to be less severe than initially feared. Several participants judged that the decline in the prices of energy and other commodities as well as lower long-term interest rates would likely provide an offset to the higher dollar and weaker foreign growth, or that the domestic recovery remained on a firm footing.
Indicators of labor market conditions continued to improve over the intermeeting period, with a further reduction in the unemployment rate, declines in longer-duration unemployment, strong growth in payroll employment, and a low level of initial claims for unemployment insurance. Business contacts reported employment gains in several parts of the country, with relatively few pointing to emerging wage pressures, although one participant indicated that larger wage gains had been accruing to some individuals who switched jobs. Labor market conditions indexes constructed from a broad set of indicators suggested that the underutilization of labor had continued to diminish, although a number of participants noted that underutilization of labor market resources remained. A couple of participants judged that the large number of individuals working part time for economic reasons and the continued drift down in the labor force participation rate suggested that the unemployment rate was understating the degree of labor market underutilization.
Most participants anticipated that inflation was likely to edge lower in the near term, reflecting the decline in oil and other commodity prices and lower import prices. These participants continued to expect inflation to move back to the Committee's 2 percent target over the medium term as resource slack diminished in an environment of well-anchored inflation expectations, although a few of them thought the return to 2 percent might be quite gradual. Survey-based measures of inflation expectations remained well anchored, but market-based measures of inflation compensation over the next five years as well as over the five-year period beginning five years ahead had declined over the intermeeting period. Various explanations were offered for the decline in the market-based measures, and participants expressed different views about how to interpret these recent movements. The explanations included a decline in inflation risk premiums, possibly reflecting a lower perceived probability of higher inflation outcomes; and special factors, including liquidity risk premiums, that might be influencing the pricing of Treasury Inflation-Protected Securities and inflation derivatives. One participant noted that even if the declines reflected lower inflation risk premiums and not a reduction in expected inflation, policymakers might still want to take them into account because such a change could reflect increased concerns on the part of investors about adverse outcomes in which low inflation was accompanied by weak economic activity. A couple of participants noted that it was likely too early to draw conclusions regarding these developments, especially in light of the recent market volatility. However, many participants observed that the Committee should remain attentive to evidence of a possible downward shift in longer-term inflation expectations; some of them noted that if such an outcome occurred, it would be even more worrisome if growth faltered.
In their discussion of financial market developments and financial stability issues, participants judged that the movements in the prices of stocks, bonds, commodities, and the U.S. dollar over the intermeeting period appeared to have been driven primarily by concerns about prospects for foreign economic growth. Many participants commented on the turbulence in financial markets that occurred in mid-October. Some participants pointed out that, despite the market volatility, financial conditions remained highly accommodative and that further pockets of turbulence were likely to arise as the start of policy normalization approached. That said, more work to better understand the recent market dynamics was seen as desirable. In addition, a couple of participants noted the potential usefulness of collecting additional data on wholesale funding markets in order to better understand how changes in interest rates could influence those markets.
In their discussion of communications regarding the path of the federal funds rate over the medium term, meeting participants agreed that the timing of the first increase in the federal funds rate and the appropriate path of the policy rate thereafter would depend on incoming economic data and their implications for the outlook. Most participants judged that it would be helpful to include new language in the Committee's forward guidance to clarify how the Committee's decision about when to begin the policy normalization process will depend on incoming information about the economy. Some participants preferred to eliminate language in the statement indicating that the current target range for the federal funds rate would likely be maintained for a "considerable time" after the end of the asset purchase program. These participants were concerned that such a characterization could be misinterpreted as suggesting that the Committee's decisions would not depend on the incoming data. However, other participants thought that the "considerable time" phrase was useful in communicating the Committee's policy intentions or that additional wording could be used to emphasize the data-dependence of the Committee's decision process. A couple of them noted that the removal of the "considerable time" phrase might be seen as signaling a significant shift in the stance of policy, potentially resulting in an unintended tightening of financial conditions. A couple of others thought that the current forward guidance might be read as suggesting an earlier date of liftoff than was likely to prove appropriate, given the outlook for inflation and the downside risks to the economy associated with the effective lower bound on interest rates. With regard to the pace of interest rate increases after the start of policy normalization, a number of participants thought that it could soon be helpful to clarify the Committee's likely approach. It was noted that communication about post-liftoff policy would pose challenges given the inherent uncertainty of the economic and financial outlook and the Committee's desire to retain flexibility to adjust policy in response to the incoming data. Most participants supported retaining the language in the statement indicating that the Committee anticipates that economic conditions may warrant keeping the target range for the federal funds rate below longer-run normal levels even after employment and inflation are near mandate-consistent levels. However, a couple of participants thought that the language should be amended in light of the prescriptions suggested by many monetary policy rules and the risks associated with keeping interest rates below their longer-run values for an extended period of time.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the FOMC met in September indicated that economic activity was expanding at a moderate pace. Labor market conditions had improved somewhat further, with solid job gains and a lower unemployment rate; on balance, a range of indicators suggested that underutilization of labor resources was gradually diminishing. Household spending was rising moderately and business fixed investment was advancing, while the recovery in the housing sector remained slow. Inflation had continued to run below the Committee's longer-run objective. Market-based measures of inflation compensation had declined somewhat, but survey-based measures of longer-term inflation expectations had remained stable. The Committee expected that, with appropriate policy accommodation, economic activity would expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate.
In their discussion of language for the post-meeting statement, a number of members judged that, while some underutilization in the labor market remained, it appeared to be gradually diminishing. In addition, members considered the advantages and disadvantages of adding language to the statement to acknowledge recent developments in financial markets. On the one hand, including a reference would show that the Committee was monitoring financial developments while also providing an opportunity to note that financial conditions remained highly supportive of growth. On the other hand, including a reference risked the possibility of suggesting greater concern on the part of the Committee than was actually the case, perhaps leading to the misimpression that monetary policy was likely to respond to increases in volatility. In the end, the Committee decided not to include such a reference. Finally, a couple of members suggested including language in the statement indicating that recent foreign economic developments had increased uncertainty or had boosted downside risks to the U.S. economic outlook, but participants generally judged that such wording would suggest greater pessimism about the economic outlook than they thought appropriate.
In their discussion of the asset purchase program, members generally agreed that the condition articulated by the Committee when it began the program in September 2012 had been achieved--that is, there had been a substantial improvement in the outlook for the labor market--and that there was sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability. Accordingly, all members but one supported concluding the Committee's asset purchase program at the end of October and maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency MBS in agency MBS and of rolling over maturing Treasury securities at auction. By keeping the Committee's holdings of longer-term securities at sizable levels, this policy was expected to help maintain accommodative financial conditions.
In addition, the Committee agreed to maintain the target range for the federal funds rate at 0 to 1/4 percent and to reaffirm the indication in the statement that the Committee's decision about how long to maintain the current target range for the federal funds rate would depend on its assessment of actual and expected progress toward its objectives of maximum employment and 2 percent inflation. All but one member agreed that the Committee should reiterate the expectation that it likely would be appropriate to maintain the current target range for the federal funds rate for a considerable time following the end of the asset purchase program in October, especially if projected inflation continued to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remained well anchored. The one member thought that the Committee should instead strengthen the forward guidance in order to underscore the Committee's commitment to its 2 percent inflation objective. The Committee agreed to include additional wording in the statement in order to emphasize that the Committee's decision on the timing of the first increase in the federal funds rate would be data dependent. In particular, the statement would say that, if incoming information indicated faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate would likely occur sooner than currently anticipated. It would also note that, if progress proves slower than expected, then increases in the target range would likely occur later than currently anticipated. The Committee also agreed to reiterate its expectation that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
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 SOMA in accordance with the following domestic policy directive:
"Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. The Desk is directed to conclude the current program of purchases of longer-term Treasury securities and agency mortgage-backed securities by the end of October. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions. The System Open Market Account manager and the secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."
The vote encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in September suggests that economic activity is expanding at a moderate pace. Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing. Household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has continued to run below the Committee's longer-run objective. Market-based measures of inflation compensation have declined somewhat; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced. Although inflation in the near term will likely be held down by lower energy prices and other factors, the Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.
The Committee judges that there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program. Moreover, the Committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability. Accordingly, the Committee decided to conclude its asset purchase program this month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program this month, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Stanley Fischer, Richard W. Fisher, Loretta J. Mester, Charles I. Plosser, Jerome H. Powell, and Daniel K. Tarullo.
Voting against this action: Narayana Kocherlakota.
Mr. Kocherlakota dissented because he believed that, in light of continued sluggishness in the inflation outlook and the recent slide in market-based measures of longer-term inflation expectations, the Committee should commit to maintaining the current target range for the federal funds rate at least until projected inflation one to two years ahead has returned to 2 percent and should continue the asset purchase program at its current pace. Mr. Kocherlakota noted that when the Committee first reduced its asset purchases in December 2013, it said in the post-meeting statement that it would be monitoring inflation developments carefully for evidence that inflation was moving back toward its objective over the medium term; Mr. Kocherlakota indicated he saw no such evidence.
Longer-Run Goals and Monetary Policy Strategy
In the discussion at the January 2014 FOMC meeting regarding the annual reaffirmation of the Statement on Longer-Run Goals and Monetary Policy Strategy, participants noted that, while they were generally satisfied with the statement, it would be appropriate to consider whether any changes might be warranted before the statement was reaffirmed in 2015. The Committee subsequently referred the matter to the subcommittee on communications, which identified possible issues for consideration by the full Committee. The subcommittee then asked the staff to prepare a memorandum to the Committee exploring those issues.
At this meeting, a staff presentation discussed three issues related to the existing statement that might warrant elaboration or clarification: whether inflation persistently below the Committee's 2 percent longer-run objective and inflation similarly persistently above that objective would be regarded as equally undesirable, whether additional information should be provided about the "balanced approach" that the Committee takes in promoting its two objectives under circumstances in which these objectives are judged not to be complementary, and how financial stability is linked to the Committee's mandated goals of maximum employment and price stability. Following the staff presentation, participants discussed a range of topics related to these three issues and to monetary policy communications more broadly. Participants generally thought that it was worthwhile to periodically consider possible changes to the statement, regardless of whether any were ultimately implemented. Most participants agreed that the existing consensus statement was working well as a communications tool and judged that the threshold for making changes to the document should be a high one. On the specific issues, there was widespread agreement that inflation moderately above the Committee's 2 percent goal and inflation the same amount below that level were equally costly--and many participants thought that that view was largely shared by the public. One participant suggested that the Committee should clarify the time horizon within which it seeks to achieve its inflation objective. Participants believed that the language referring to the Committee's balanced approach in promoting its objectives was appropriately broad and encompassed the views of participants. A number of participants noted that financial stability is a necessary condition for the achievement of the Committee's longer-run goals. A few of them offered suggestions for communicating more specifically how financial stability, and perhaps other asymmetric risks to the outlook, are taken into account in the setting of monetary policy. However, several other participants noted that reaching an agreement in the near term on clarifying the linkages between monetary policy and financial stability could prove challenging, in part because the issues involved are complex and need further study. Regarding broader communications issues, a number of participants suggested that the subcommittee could again investigate the feasibility and desirability of constructing a consensus forecast, building on the lessons of the experiments carried out in 2012, and several thought that further enhancements to the Summary of Economic Projections might also be worth considering. No decisions were made at this meeting, and participants generally agreed that it would be useful to discuss these issues further at upcoming meetings.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, December 16-17, 2014. The meeting adjourned at 12:45 p.m. on October 29, 2014.
Notation Vote
By notation vote completed on October 7, 2014, the Committee unanimously approved the minutes of the Committee meeting held on September 16-17, 2014.
_____________________________
William B. English
Secretary
1. Attended the joint session of the Federal Open Market Committee and the Board of Governors. Return to text
2. Attended the portion of the meeting following the joint session of the Federal Open Market Committee and the Board of Governors. Return to text
3. Attended the discussion of longer-run goals and monetary policy strategy. Return to text
4. Following the conclusion of the meeting, the Desk released a statement outlining the planned ON RRP and term RRP exercises. Return to text |
2014-10-29T00:00:00 | 2014-10-29 | Statement | Information received since the Federal Open Market Committee met in September suggests that economic activity is expanding at a moderate pace. Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing. Household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has continued to run below the Committee's longer-run objective. Market-based measures of inflation compensation have declined somewhat; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced. Although inflation in the near term will likely be held down by lower energy prices and other factors, the Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.
The Committee judges that there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program. Moreover, the Committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability. Accordingly, the Committee decided to conclude its asset purchase program this month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program this month, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Richard W. Fisher; Loretta J. Mester; Charles I. Plosser; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action was Narayana Kocherlakota, who believed that, in light of continued sluggishness in the inflation outlook and the recent slide in market-based measures of longer-term inflation expectations, the Committee should commit to keeping the current target range for the federal funds rate at least until the one-to-two-year ahead inflation outlook has returned to 2 percent and should continue the asset purchase program at its current level.
Statement Regarding Purchases of Treasury Securities and Agency Mortgage-Backed Securities
Statement Regarding Purchases of Treasury Securities and Agency Mortgage-Backed Securities |
2014-09-17T00:00:00 | 2014-10-08 | Minute | Minutes of the Federal Open Market Committee
September 16-17, 2014
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, September 16, 2014, at 11:00 a.m. and continued on Wednesday, September 17, 2014, at 9:00 a.m.
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
Stanley Fischer
Richard W. Fisher
Narayana Kocherlakota
Loretta J. Mester
Charles I. Plosser
Jerome H. Powell
Daniel K. Tarullo
Christine Cumming, Charles L. Evans, Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Alternate Members of the Federal Open Market Committee
James Bullard, Esther L. George, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively
William B. English, Secretary and Economist
Matthew M. Luecke, Deputy Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Steven B. Kamin, Economist
David W. Wilcox, Economist
James A. Clouse, Evan F. Koenig, Thomas Laubach, Michael P. Leahy, Mark E. Schweitzer, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Robert deV. Frierson,1 Secretary of the Board, Office of the Secretary, Board of Governors
Michael S. Gibson,2 Director, Division of Banking Supervision and Regulation, Board of Governors
Matthew J. Eichner,1 Deputy Director, Division of Research and Statistics, Board of Governors; Stephen A. Meyer and William R. Nelson, Deputy Directors, Division of Monetary Affairs, Board of Governors; Mark E. Van Der Weide,3 Deputy Director, Division of Banking Supervision and Regulation, Board of Governors
Andreas Lehnert, Deputy Director, Office of Financial Stability Policy and Research, Board of Governors
Andrew Figura, David Reifschneider, and Stacey Tevlin, Special Advisers to the Board, Office of Board Members, Board of Governors
Trevor A. Reeve, Special Adviser to the Chair, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Christopher J. Erceg, Senior Associate Director, Division of International Finance, Board of Governors
Michael T. Kiley4 and Jeremy B. Rudd4,Senior Advisers, Division of Research and Statistics, Board of Governors; Joyce K. Zickler, Senior Adviser, Division of Monetary Affairs, Board of Governors
Eric M. Engen and Michael G. Palumbo, Associate Directors, Division of Research and Statistics, Board of Governors; Fabio M. Natalucci, Associate Director, Division of Monetary Affairs, Board of Governors
Marnie Gillis DeBoer, Deputy Associate Director, Division of Monetary Affairs, Board of Governors; Joshua Gallin, Deputy Associate Director, Division of Research and Statistics, Board of Governors
Edward Nelson, Assistant Director, Division of Monetary Affairs, Board of Governors
Patrick E. McCabe,1 Adviser, Division of Research and Statistics, Board of Governors
Penelope A. Beattie,1 Assistant to the Secretary, Office of the Secretary, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Katie Ross,1 Manager, Office of the Secretary, Board of Governors
Valerie Hinojosa, Records Project Manager, Division of Monetary Affairs, Board of Governors
Marie Gooding, First Vice President, Federal Reserve Bank of Atlanta
David Altig, Alberto G. Musalem, and Daniel G. Sullivan, Executive Vice Presidents, Federal Reserve Banks of Atlanta, New York, and Chicago, respectively
Troy Davig, Michael Dotsey, Geoffrey Tootell, Christopher J. Waller, and John A. Weinberg, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Philadelphia, Boston, St. Louis, and Richmond, respectively
Sylvain Leduc, Jonathan P. McCarthy, and Douglas Tillett, Vice Presidents, Federal Reserve Banks of San Francisco, New York, and Chicago, respectively
Kei-Mu Yi, Special Policy Advisor to the President, Federal Reserve Bank of Minneapolis
Developments in Financial Markets and the Federal Reserve's Balance Sheet
In a joint session of the Federal Open Market Committee (FOMC) and the Board of Governors of the Federal Reserve System, the manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets and reviewed the effects of recent foreign central bank policy actions on yields on the international portion of the SOMA portfolio. The deputy manager reported on the System open market operations conducted during the period since the Committee met on July 29-30, 2014, summarized plans for additional test operations of the Term Deposit Facility, and described the results from the fixed-rate overnight reverse repurchase agreement (ON RRP) operational exercise.
The deputy manager also outlined a proposal for changes to the ongoing ON RRP exercise to test possible design features that could allow an ON RRP facility to serve as an effective supplementary tool during policy normalization while also mitigating the potential for unintended effects in financial markets. Participants discussed the proposed changes in the ON RRP exercise, including raising the counterparty-specific limit from $10 billion to $30 billion, limiting the overall size of each operation to $300 billion, and introducing an auction process that would be used to determine the interest rate on such operations and allocate take-up if the sum of bids exceeded the overall limit. Testing these design features was generally seen as furthering the Committee's understanding of how an ON RRP facility might be structured to best balance its objectives of supporting monetary control and of limiting the Federal Reserve's role in financial intermediation as well as reducing potential financial stability risks the facility might pose during periods of stress. Participants also discussed other tests that could be incorporated in the exercise at a later date, including a daily time-varying cap along with the overall limit on the size of ON RRP operations, small variations in the offered rate on ON RRP operations, and moderate increases and decreases in the overall size limit. A number of participants expressed concern that these tests could be misunderstood as providing a signal of the Committee's intentions regarding the parameters of the ON RRP program that will be implemented when normalization begins; they wanted to emphasize that the tests are intended to provide additional information to guide the Committee's decisions. Participants agreed to consider potential additional revisions to the ON RRP exercise at future FOMC meetings. Following the discussion, the Committee unanimously approved the following resolution:
"The Federal Open Market Committee (FOMC) authorizes the Federal Reserve Bank of New York to conduct a series of overnight reverse repurchase operations involving U.S. government securities for the purpose of further assessing the appropriate structure of such operations in supporting the implementation of monetary policy during normalization. The reverse repurchase operations authorized by this resolution shall be (i) conducted at an offering rate that may vary from zero to five basis points, (ii) for an overnight term, or such longer term as is warranted to accommodate weekend, holiday, and similar trading conventions, (iii) subject to a per-counterparty limit of up to $30 billion per day, (iv) subject to an overall size limit of up to $300 billion per day, (v) awarded to all submitters (A) at the specified offering rate if the sum of the bids received is less than or equal to the overall size limit, or (B) at the stopout rate, determined by evaluating bids in ascending order by submitted rate up to the point at which the total quantity of bids equals the overall size limit, with all bids below this rate awarded in full at the stopout rate and all bids at the stopout rate awarded on a pro rata basis, if the sum of the counterparty offers received is greater than the overall size limit, and (vi) offered beginning with the operation conducted on September 22, 2014, with the resolution adopted at the January 28-29, 2014, FOMC meeting remaining in place until the conclusion of the operation conducted on September 19, 2014. The Chair must approve any change in the offering rate within the range specified in (i) and any changes to the per-counterparty and overall size limits subject to the limits specified in (iii) and (iv). The System Open Market Account manager will notify the FOMC in advance about any changes to the offering rate, per-counterparty limit, or overall size limit applied to operations. These operations shall be authorized through January 30, 2015."
By unanimous vote, the Committee ratified the Open Market Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
Monetary Policy Normalization
Meeting participants considered publication of a summary statement of their monetary policy normalization principles and plans based on the discussions at recent Committee meetings. Participants agreed that it was appropriate at this time to provide additional information regarding their approach to normalization. The proposed statement was seen as a concise summary of participants' views that would help the public understand the steps that the Committee plans to take when the time comes to begin the normalization process and that would convey the Committee's confidence in its plans. However, it was emphasized that the Committee would need to be flexible and pragmatic during normalization, adjusting the details of its approach, if necessary, in light of changing conditions. Regarding the specific points in the proposed statement, a couple of participants expressed their preference that the principles make greater allowance for sales of agency mortgage-backed securities (MBS) over the next few years in order to normalize the size and composition of the Federal Reserve's balance sheet more quickly and to limit distortions in the allocation of credit that they believed were associated with the Federal Reserve's holdings of agency MBS. In addition, a few participants noted that they would have preferred that the principles point to an earlier end to the reinvestment of repayments of principal on securities held in the SOMA portfolio. At the end of the discussion, all but one participant could support the publication of the following statement after the meeting:
Policy Normalization Principles and Plans
During its recent meetings, the Federal Open Market Committee (FOMC) discussed ways to normalize the stance of monetary policy and the Federal Reserve's securities holdings. The discussions were part of prudent planning and do not imply that normalization will necessarily begin soon. The Committee continues to judge that many of the normalization principles that it adopted in June 2011 remain applicable. However, in light of the changes in the System Open Market Account (SOMA) portfolio since 2011 and enhancements in the tools the Committee will have available to implement policy during normalization, the Committee has concluded that some aspects of the eventual normalization process will likely differ from those specified earlier. The Committee also has agreed that it is appropriate at this time to provide additional information regarding its normalization plans. All FOMC participants but one agreed on the following key elements of the approach they intend to implement when it becomes appropriate to begin normalizing the stance of monetary policy:
The Committee will determine the timing and pace of policy normalization--meaning steps to raise the federal funds rate and other short-term interest rates to more normal levels and to reduce the Federal Reserve's securities holdings--so as to promote its statutory mandate of maximum employment and price stability.
When economic conditions and the economic outlook warrant a less accommodative monetary policy, the Committee will raise its target range for the federal funds rate.
During normalization, the Federal Reserve intends to move the federal funds rate into the target range set by the FOMC primarily by adjusting the interest rate it pays on excess reserve balances.
During normalization, the Federal Reserve intends to use an overnight reverse repurchase agreement facility and other supplementary tools as needed to help control the federal funds rate. The Committee will use an overnight reverse repurchase agreement facility only to the extent necessary and will phase it out when it is no longer needed to help control the federal funds rate.
The Committee intends to reduce the Federal Reserve's securities holdings in a gradual and predictable manner primarily by ceasing to reinvest repayments of principal on securities held in the SOMA.
The Committee expects to cease or commence phasing out reinvestments after it begins increasing the target range for the federal funds rate; the timing will depend on how economic and financial conditions and the economic outlook evolve.
The Committee currently does not anticipate selling agency mortgage-backed securities as part of the normalization process, although limited sales might be warranted in the longer run to reduce or eliminate residual holdings. The timing and pace of any sales would be communicated to the public in advance.
The Committee intends that the Federal Reserve will, in the longer run, hold no more securities than necessary to implement monetary policy efficiently and effectively, and that it will hold primarily Treasury securities, thereby minimizing the effect of Federal Reserve holdings on the allocation of credit across sectors of the economy.
The Committee is prepared to adjust the details of its approach to policy normalization in light of economic and financial developments.
The Board meeting concluded at the end of the discussion of policy normalization principles and plans.
Staff Review of the Economic Situation
The information reviewed for the September 16-17 meeting suggested that economic activity was expanding at a moderate pace in the third quarter. Labor market conditions improved a little further, although the unemployment rate was essentially unchanged over the intermeeting period. Consumer price inflation was running below the FOMC's longer-run objective of 2 percent, but measures of longer-run inflation expectations remained stable.
Total nonfarm payroll employment increased in July and August but at a slower pace than in the first half of the year. The unemployment rate was 6.1 percent in August, the same as in June, and the labor force participation rate and the employment-to-population ratio also were unchanged since that time. Both the share of workers employed part time for economic reasons and the rate of long-duration unemployment declined a little over the past two months. Other recent indicators generally pointed to ongoing improvement in labor market conditions: Although some measures of household expectations of the labor market situation deteriorated somewhat, the rates of job openings and of gross private-sector hiring moved up, initial claims for unemployment insurance were essentially flat at a relatively low level, and some readings on firms' hiring plans improved.
On balance, industrial production edged up over July and August, and the rate of manufacturing capacity utilization was unchanged. Automakers' schedules indicated that the pace of motor vehicle assemblies would decline slightly in the fourth quarter, but broader indicators of manufacturing production, such as the readings on new orders from the national and regional manufacturing surveys, were consistent with moderate increases in factory output in the near term.
Real personal consumption expenditures (PCE) appeared to be rising at a moderate pace in the third quarter.5 The components of nominal retail sales data used by the Bureau of Economic Analysis (BEA) to construct its estimates of PCE increased at a solid rate in July and August, and sales of light motor vehicles surged in August after edging down in July. Recent information pertaining to key factors that influence consumer spending were positive: Real disposable incomes continued to increase in July, households' net worth likely edged up as equity prices and home values rose somewhat further, and consumer sentiment as measured by the Thomson Reuters/University of Michigan Surveys of Consumers improved in August and early September.
The pace of activity in the housing sector seemed to be picking up. Starts and permits of both new single-family homes and multifamily units were higher in July than their average levels in the second quarter. Sales of existing homes increased further in July, although new home sales declined.
Real private expenditures for business equipment and intellectual property products appeared to rise further going into the third quarter. Nominal shipments of nondefense capital goods excluding aircraft moved up in July. Moreover, new orders for these capital goods continued to be above the level of shipments, pointing to increases in shipments in subsequent months. In addition, other forward-looking indicators, such as surveys of business conditions, were consistent with moderate gains in business equipment spending in the near term. Nominal business expenditures for nonresidential construction also increased in July. Recent book-value data for inventories, along with readings on inventories from national and regional manufacturing surveys, did not point to significant inventory imbalances in most industries; in the energy sector, inventories were drawn down significantly early in the year and, despite substantial stockbuilding since then, remained low.
Total real government purchases seemed to be roughly flat in the third quarter. Federal government purchases probably declined a little, as defense spending was lower in July and August than in the second quarter. State and local government purchases appeared to be rising slowly as the payrolls of these governments expanded a bit further in July and August and their nominal construction expenditures increased in July.
The U.S. international trade deficit narrowed in both June and July. Exports were little changed in June, but they expanded robustly in July, with particular strength in industrial supplies and automotive products. Imports fell in June but then partly recovered in July, driven by swings in imports of oil and automotive products.
Total U.S. consumer price inflation, as measured by the PCE price index, was about 1-1/2 percent over the 12 months ending in July. Over the 12 months ending in August, the consumer price index (CPI) rose about 1-3/4 percent. Consumer energy prices declined in both July and August, while consumer food prices rose. Core price inflation (which excludes food and energy prices) was essentially the same as total inflation for the PCE price measure and for the CPI over their most recent 12-month periods. Near-term inflation expectations from the Michigan survey moved down a bit in August and early September, while longer-term inflation expectations in the survey were little changed.
Measures of labor compensation increased a little faster than consumer prices. Compensation per hour in the business sector rose 2-3/4 percent over the year ending in the second quarter; with modest gains in labor productivity, unit labor costs advanced more slowly than compensation per hour. Over the same year-long period, the employment cost index rose only about 2 percent, and average hourly earnings increased at a similar rate over the 12 months ending in August.
Foreign economies continued to expand in the second quarter, but with significant differences across countries. Economic growth rebounded strongly from a weak first-quarter pace in Canada, China, and Mexico, supported by improvement in exports. In contrast, the Japanese economy contracted sharply following the consumption tax increase in April, economic activity stagnated in the euro area, and the Brazilian economy fell into recession. In the third quarter, household spending appeared to be normalizing in Japan, and production continued to rise in Mexico. However, indicators of economic activity in the euro area remained weak, and Chinese economic data for July and August suggested some slowing in the third quarter. With inflation very low in the euro area, the European Central Bank reduced its policy interest rates at its September 4 meeting and announced plans to purchase private assets.
Staff Review of the Financial Situation
Data releases on domestic economic activity were reportedly interpreted by financial market participants as somewhat better than expected, on balance, notwithstanding the disappointing employment report for August. Federal Reserve communications, particularly the July FOMC minutes and the Chair's speech at the Jackson Hole economic policy symposium, were viewed as signaling slightly less policy accommodation than anticipated. Reflecting these and other developments, yields on nominal Treasury securities rose somewhat and equity prices edged up over the intermeeting period. On net, the conflicts in the Middle East and Ukraine and other geopolitical tensions had limited effects on domestic financial markets.
The federal funds rate path implied by financial market quotes was essentially unchanged over the intermeeting period. But the results from the Desk's September Survey of Primary Dealers indicated that the distribution of the likely date of liftoff across dealers shifted to somewhat earlier dates, and showed the second quarter of 2015 as the most likely date for liftoff. However, the dealers' expected levels of various employment and inflation indicators at the time of liftoff did not change materially from the previous survey.
The yield on 10-year nominal Treasury securities moved up about 15 basis points, on net, since the FOMC met in July, likely boosted in part by Federal Reserve communications. Measures of inflation compensation based on Treasury Inflation-Protected Securities edged down, reportedly reflecting the lower-than-expected CPI data in July and recent declines in oil prices.
Broad measures of domestic equity prices were up modestly over the intermeeting period, with some reports suggesting that investors were interpreting incoming economic data as implying that the economic recovery was strengthening.
Yields on corporate bonds and agency MBS rose about in line with those on comparable-maturity Treasury securities. High-yield bond mutual funds experienced sharp outflows early in the intermeeting period, and spreads on such bonds widened noticeably; however, these spreads returned to their initial levels over subsequent weeks, and high-yield bond funds attracted modest inflows. Measures of liquidity in the corporate bond market remained stable in the face of these substantial flows.
Conditions in short-term dollar funding markets were little changed. The Federal Reserve continued its testing of ON RRP operations over the intermeeting period. Take-up in ON RRP operations increased a little, on average, over the period relative to the previous intermeeting period.
Credit conditions for domestic businesses remained favorable. Corporate bond issuance slowed in July and August, reflecting a fairly typical summer lull as well as the elevated volatility in the high-yield bond market early in the intermeeting period, but issuance rebounded strongly in the first week of September. Commercial paper outstanding and commercial and industrial loans at banks expanded briskly. Credit conditions in the commercial real estate (CRE) sector continued to ease, and growth in CRE loans at banks stayed solid. The issuance of commercial mortgage-backed securities remained robust in July and August.
Issuance of institutional leveraged loans continued apace in July and August, traditionally a slow period in this market. The issuance of "new money" loans, which are typically earmarked for corporate leveraged-buyouts and mergers and acquisitions, was strong, and the pipeline of such loans was reported to be quite large heading into the fall. The issuance of collateralized loan obligations was still a major source of demand for leveraged loans.
Financing conditions for households remained mixed. Auto loans were widely available; standards and terms for credit card loans eased somewhat, though they were still tight; and access to residential mortgages continued to be limited for all but those with excellent credit histories.
Responding in part to disappointing economic data abroad, the U.S. dollar appreciated against most currencies over the intermeeting period, including large appreciations against the euro, the yen, and the pound sterling. Greater monetary accommodation in the euro area and expectations of a lower policy rate in the near term added to the downward pressure on the euro while uncertainty about the outcome of the forthcoming referendum on Scottish independence weighed on the value of the pound. In addition, near-term policy rate expectations moved down in the United Kingdom, reacting to both the release of the August Inflation Report and uncertainty induced by the referendum. Sovereign yields in the European economies generally declined, and yield spreads of sovereign bonds from the euro-area periphery over German bunds narrowed considerably. Most foreign equity indexes ended the period modestly higher.
Staff Economic Outlook
In the economic forecast prepared by the staff for the September FOMC meeting, the projection for growth in real gross domestic product (GDP) in the second half of this year was revised down slightly from the one prepared for the previous meeting, primarily because of a somewhat weaker near-term outlook for consumer spending. The staff's medium-term forecast for real GDP was also revised down a little, reflecting a higher projected path for the foreign exchange value of the dollar along with slightly smaller projected gains for home prices. The staff still anticipated that the pace of real GDP growth in 2015 and 2016 would exceed the growth rate of potential output, supported by continued increases in consumer and business confidence, the further easing of the restraint on spending from changes in fiscal policy, additional improvements in credit availability, and a pickup in foreign economic growth. In 2017, real GDP growth was projected to begin slowing toward, but to remain above, the rate of potential output growth. The expansion in economic activity over the projection period was anticipated to steadily reduce resource slack, and the unemployment rate was expected to decline gradually and temporarily move slightly below the staff's estimate of its longer-run natural rate toward the end of the period.
The staff's near-term forecast for inflation was a little lower than the projection prepared for the previous FOMC meeting, reflecting recent readings on core consumer price inflation that were lower than anticipated and declines in oil prices that were faster than expected, but the forecast for inflation over the medium term was little changed. The staff continued to project inflation to be lower in the second half of this year than in the first half and to remain below the Committee's longer-run objective of 2 percent over the next few years. With longer-term inflation expectations assumed to remain stable, resource slack projected to diminish slowly, and changes in commodity and import prices expected to be subdued, inflation was projected to rise gradually and to reach the Committee's objective in the longer run.
Overall, the staff's economic projection for the September meeting was quite similar to the forecast presented at the June meeting, when the FOMC last prepared a Summary of Economic Projections (SEP). The staff's September projection showed a slightly higher path for the unemployment rate, a bit lower real GDP growth, and essentially no change to inflation compared with its June forecast.
The staff continued to view the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average over the past 20 years. The risks to the forecast for real GDP growth were still seen as tilted a little to the downside, as neither monetary policy nor fiscal policy was viewed as well positioned to help the economy withstand adverse shocks. At the same time, the staff viewed the risks around its outlook for the unemployment rate and for inflation as roughly balanced.
Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, members of the Board of Governors and the Federal Reserve Bank presidents submitted their projections of real output growth, the unemployment rate, inflation, and the federal funds rate for each year from 2014 through 2017 and over the longer run, conditional on each participant's assessment of appropriate monetary policy. The longer-run projections represent each participant's assessment of the value to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These economic projections and policy assessments are described in the SEP, which is attached as an addendum to these minutes.
In their discussion of the economic situation and the outlook, meeting participants viewed the information received over the intermeeting period as suggesting that economic activity was expanding at a moderate rate. On balance, labor market conditions improved somewhat further; however, the unemployment rate was little changed, and most participants judged that there remained significant underutilization of labor resources. Participants generally expected that, over the medium term, real economic activity would increase at a pace sufficient to lead to a further gradual decline in the unemployment rate toward levels consistent with the Committee's objective of maximum employment. Inflation was running below the Committee's longer-run objective, but longer-term inflation expectations were stable. Participants anticipated that inflation would move toward the Committee's 2 percent goal in coming years, with several expressing concern that inflation might persist below the Committee's objective for quite some time. Most viewed the risks to the outlook for economic activity and the labor market as broadly balanced. However, a number of participants noted that economic growth over the medium term might be slower than they expected if foreign economic growth came in weaker than anticipated, structural productivity continued to increase only slowly, or the recovery in residential construction continued to lag.
Household spending appeared to be rising moderately, with several participants noting that the recent positive reports on retail sales, motor vehicle purchases, and health-care spending had reduced their concern about weakness in the underlying pace of household spending. Among the favorable factors attending the outlook for consumer spending, participants cited continued gains in household wealth, improved household balance sheets, low delinquency rates, a high saving rate, or rising confidence in employment and income prospects. However, other participants said they heard mixed reports from business contacts regarding consumer spending or were uncertain about the prospects for stronger gains in real income necessary to sustain moderate growth in household spending.
The recovery in housing activity remained slow in all but a few areas of the country despite relatively low mortgage rates, rising house prices, and improvements in household wealth. Contacts in a couple of Districts reported that new construction was being held back by shortages of materials, of lots available for development, and of skilled workers or by the overhang of vacant homes not on the market. Households with relatively low credit scores continued to have difficulty obtaining mortgage loans. It was noted that this difficulty could be a factor restraining the demand for housing, particularly among younger households who have high levels of student loan debt or weak job prospects. A few participants pointed out the relative strength in construction of and demand for multifamily units, which possibly was due to a shift in demand among younger homebuyers away from single-family homes.
Information from business contacts in most parts of the country indicated improvements in business conditions, rising confidence about the economic outlook, and increasing willingness to undertake new investment projects. According to national and regional surveys, manufacturing activity was strong, and several participants had received reports of hiring and increased capital spending in that sector. Among the other industries cited as relatively strong in recent months were transportation, energy, and services. Several participants noted positive signs of further increases in investment spending going forward, including elevated levels of new orders and shipments of capital goods, strong interest in the technology sector, and the need to replace aging capital. A couple of participants added that nonresidential construction activity was rising in their Districts.
The improvement in business conditions was reflected in reports of increased demand for loans at banks in several Districts. Demand rose for loans to both households and businesses, and a couple of participants indicated that borrowers were expanding their use of existing credit lines as well as obtaining new commitments. Bankers in one District stated that, while they had eased the terms and conditions on loans in response to competition from other lenders, they had not taken on riskier loans. Some financial developments that could undermine financial stability over time were noted, including a deterioration in leveraged lending standards, stretched stock market valuations, and compressed risk spreads. However, one participant suggested that the leveraged loan market seemed to be moving into better balance, and that market participants appeared to be taking appropriate account of the changes in interest rates that might be associated with the eventual normalization of the stance of monetary policy. Moreover, a couple of participants, while stressing the importance of remaining vigilant about potential risks to financial stability, observed that conditions in financial markets at present did not suggest the types of financial stability considerations that would impede the achievement of the Committee's macroeconomic objectives.
Some participants noted that expectations for the path of the federal funds rate implied by market quotes appeared to remain below most of the projections of the federal funds rate provided by Committee participants in the SEP, which represent each individual participant's assessment of the appropriate path for the federal funds rate consistent with his or her economic outlook. However, it was pointed out that measures of financial market participants' expectations incorporate their judgments regarding not only the most likely outcomes, but also the possible downside tail risks that might be associated with especially low paths for the federal funds rate. For example, respondents to the recent Survey of Primary Dealers placed considerable odds on the federal funds rate returning to the zero lower bound during the two years following the initial increase in that rate. The probability that investors attach to such low interest rate scenarios could pull the expected path of the federal funds rate computed from market quotes below most Committee participants' assessments of appropriate policy as reported in the SEP.
The restraint on economic activity from fiscal policy was seen as diminishing, and a couple of participants pointed out that, over the second half of the year, the remaining drag was likely to be small. Nonetheless, the cutbacks in both defense and nondefense federal outlays, as well as state governments' budget restraint, continued to weigh on jobs and income in some parts of the country. Fiscal policy overall was anticipated to be a neutral factor for economic growth over the next several years.
During participants' discussion of prospects for economic activity abroad, they commented on a number of uncertainties and risks attending the outlook. Over the intermeeting period, the foreign exchange value of the dollar had appreciated, particularly against the euro, the yen, and the pound sterling. Some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the U.S. external sector. Several participants added that slower economic growth in China or Japan or unanticipated events in the Middle East or Ukraine might pose a similar risk. At the same time, a couple of participants pointed out that the appreciation of the dollar might also tend to slow the gradual increase in inflation toward the FOMC's 2 percent goal.
Labor market conditions continued to improve over the intermeeting period. Although the unemployment rate was little changed, participants variously cited positive readings from other indicators, including a decline in longer-term unemployment, the low level of new claims for unemployment insurance, the rise in job openings, and survey reports of increased hiring plans and job availability. While the most recent estimate of nonfarm payroll employment showed a smaller monthly gain than earlier in the year, it followed six months in which increases had averaged more than 200,000. Some participants were reluctant to place much weight on one monthly report or noted that the first estimate for August has frequently been revised up in recent years. Participants generally agreed that the accumulated progress in labor market conditions since the Committee's current asset purchase program began in September 2012 had been substantial and expected that progress would be sustained. Nonetheless, they continued to express differing views on the extent of remaining slack in labor markets. Most agreed that underutilization of labor resources remained significant; these participants noted variously that the level of nonfarm payroll jobs had only recently returned to its pre-recession level, that the number of individuals working part time for economic reasons was still elevated relative to the level of unemployment, and that the labor force participation rate was still below assessments of its structural trend. In this regard, a couple of participants pointed out that the stability of the participation rate, on balance, over the past year suggested that some of the cyclical shortfall had diminished. Most agreed that the Committee's assessment of labor market slack should be grounded in its review of a range of labor market indicators, although a few saw the gap between the unemployment rate and their estimate of its longer-run normal level as a reliable indicator of slack.
Most measures of labor compensation showed no broad-based increase in wage inflation. However, businesses in several Districts continued to report upward pressure on wages in specific industries and occupations associated with labor shortages or difficult-to-fill jobs, while a couple of participants noted a more general rise in current or planned wage increases in their regions. Several participants commented that the relatively subdued rise in nominal labor compensation was still below longer-run trend rates of productivity growth and inflation and was a signal of slack remaining in the labor market. However, a couple of others suggested some caution in reading subdued wage inflation as an indicator of labor market underutilization. They pointed out that if nominal wages did not adjust downward when unemployment was high, pent-up wage deflation could help explain the modest increases in wages so far during the recovery, and wages could rise more rapidly going forward as the unemployment rate continues to decline.
Inflation had been running below the Committee's longer-run objective, and the readings on consumer prices over the intermeeting period were somewhat softer than during the preceding four months, in part because of declining energy prices. Most participants anticipated that inflation would move gradually back toward its objective over the medium term. However, participants differed somewhat in their assessments of how quickly inflation would move up. Some cited the stability of longer-run inflation expectations at a level consistent with the Committee's objective as an important factor in their forecasts that inflation would reach 2 percent in coming years. Participants' views on the responsiveness of inflation to the level and change in resource utilization varied, with a few seeing labor markets as sufficiently tight that wages and prices would soon begin to move up noticeably but with some others indicating that inflation was unlikely to approach 2 percent until the unemployment rate falls below its longer-run normal level. While most viewed the risk that inflation would run persistently below 2 percent as having diminished somewhat since earlier in the year, a couple noted the possibility that longer-term inflation expectations might be slightly lower than the Committee's 2 percent objective or that domestic inflation might be held down by persistent disinflation among U.S. trading partners and further appreciation of the dollar.
In their discussion of the appropriate path for monetary policy over the medium term, meeting participants agreed that the timing of the first increase in the federal funds rate and the appropriate path of the policy rate thereafter would depend on incoming economic data and their implications for the outlook. That said, several participants thought that the current forward guidance regarding the federal funds rate suggested a longer period before liftoff, and perhaps also a more gradual increase in the federal funds rate thereafter, than they believed was likely to be appropriate given economic and financial conditions. In addition, the concern was raised that the reference to "considerable time" in the current forward guidance could be misunderstood as a commitment rather than as data dependent. However, it was noted that the current formulation of the Committee's forward guidance clearly indicated that the Committee's policy decisions were conditional on its ongoing assessment of realized and expected progress toward its objectives of maximum employment and 2 percent inflation, and that its assessment reflected its review of a broad array of economic indicators. It was emphasized that the current forward guidance for the federal funds rate was data dependent and did not indicate that the first increase in the target range for the federal funds rate would occur mechanically after some fixed calendar interval following the completion of the current asset purchase program. If employment and inflation converged more rapidly toward the Committee's goals than currently expected, the date of liftoff could be earlier, and subsequent increases in the federal funds rate target more rapid, than participants currently anticipated. Conversely, if employment and inflation returned toward the Committee's objectives more slowly than currently anticipated, the date of liftoff for the federal funds rate could be later, and future federal funds rate target increases could be more gradual. In addition, some participants saw the current forward guidance as appropriate in light of risk-management considerations, which suggested that it would be prudent to err on the side of patience while awaiting further evidence of sustained progress toward the Committee's goals. In their view, the costs of downside shocks to the economy would be larger than those of upside shocks because, in current circumstances, it would be less problematic to remove accommodation quickly, if doing so becomes necessary, than to add accommodation. A number of participants also noted that changes to the forward guidance might be misinterpreted as a signal of a fundamental shift in the stance of policy that could result in an unintended tightening of financial conditions.
Participants also discussed how the forward-guidance language might evolve once the Committee decides that the current formulation no longer appropriately conveys its intentions about the future stance of policy. Most participants indicated a preference for clarifying the dependence of the current forward guidance on economic data and the Committee's assessment of progress toward its objectives of maximum employment and 2 percent inflation. A clarification along these lines was seen as likely to improve the public's understanding of the Committee's reaction function while allowing the Committee to retain flexibility to respond appropriately to changes in the economic outlook. One participant favored using a numerical threshold based on the inflation outlook as a form of forward guidance. A few participants, however, noted the difficulties associated with expressing forward guidance in terms of numerical thresholds for some set of economic variables. Another participant indicated a preference for reducing reliance on explicit forward guidance in the statement and conveying instead guidance regarding the future stance of monetary policy through other mechanisms, including the SEP. It was noted that providing explicit forward guidance regarding the future path of the federal funds rate might become less important once a highly accommodative stance of policy is no longer appropriate and the process of policy normalization is well under way. It was generally agreed that when changes to the forward guidance become appropriate, they will likely present communication challenges, and that caution will be needed to avoid sending unintended signals about the Committee's policy outlook.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the FOMC met in July indicated that economic activity was expanding at a moderate pace. Household spending appeared to be rising moderately, and business fixed investment was advancing, while the recovery in the housing sector remained slow. Fiscal policy was restraining economic growth, although the extent of restraint was diminishing and would soon be quite small. Inflation was running below the Committee's longer-run objective, but longer-term inflation expectations were stable. The Committee expected that, with appropriate policy accommodation, economic activity would expand at a moderate pace, with labor market indicators and inflation moving toward levels that the Committee judges consistent with its dual mandate.
With incoming information continuing to broadly support the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward the Committee's 2 percent objective, members agreed that a further measured reduction in the pace of asset purchases was appropriate at this meeting. Accordingly, the Committee agreed that, beginning in October, it would add to its holdings of agency MBS at a pace of $5 billion per month rather than $10 billion per month, and it would add to its holdings of longer-term Treasury securities at a pace of $10 billion per month rather than $15 billion per month. The Committee judged that, if incoming information broadly supported its expectations that labor market indicator and inflation would continue to move toward mandate-consistent levels, it would end its current program of asset purchases at its October meeting.
Members discussed their assessments of progress toward the Committee's objectives of maximum employment and 2 percent inflation and considered possible enhancements to the statement that would more clearly communicate the Committee's view on such progress. Regarding the labor market, many members indicated that, although labor market conditions had generally continued to improve, there was still significant slack in labor markets. A few members, however, expressed reservations about continuing to characterize the extent of underutilization of labor resources as significant. In the end, members agreed to indicate that labor market conditions had improved somewhat further, but that the unemployment rate was little changed and a range of labor market indicators continued to suggest that there remained significant underutilization of labor resources. It was noted, however, that the characterization of labor market underutilization might have to be changed if progress in the labor market continued. Regarding inflation, members agreed that inflation had moved closer to the Committee's 2 percent objective during the first half of the year but, more recently, had fallen back somewhat. As a consequence, they updated the language in the statement to indicate that inflation had been running below the Committee's longer-run objective. However, with stable longer-term inflation expectations, the Committee continued to judge that the likelihood of inflation running persistently below 2 percent had diminished somewhat since early in the year.
After the discussion, all members but two voted to maintain the Committee's target range for the federal funds rate and to reiterate its forward guidance about the federal funds rate. The guidance continued to state that the Committee's decisions about how long to maintain the current target range for the federal funds rate would depend on its assessment of actual and expected progress toward its objectives of maximum employment and 2 percent inflation. The Committee again anticipated that it likely would be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continued to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remained well anchored. The forward guidance also reiterated the Committee's expectation that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. Two members, however, dissented because, in their view, the statement language did not accurately reflect the progress made to date toward the Committee's goals of maximum employment and inflation of 2 percent, and they believed that ongoing progress will likely warrant an earlier increase in the federal funds rate than suggested by the forward guidance in the Committee's postmeeting statement.
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 SOMA in accordance with the following domestic policy directive:
"Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. Beginning in October, the Desk is directed to purchase longer-term Treasury securities at a pace of about $10 billion per month and to purchase agency mortgage-backed securities at a pace of about $5 billion per month. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The System Open Market Account manager and the secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."
The vote encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. On balance, labor market conditions improved somewhat further; however, the unemployment rate is little changed and a range of labor market indicators suggests that there remains significant underutilization of labor resources. Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee's longer-run objective. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced and judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.
The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in October, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $5 billion per month rather than $10 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $10 billion per month rather than $15 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will end its current program of asset purchases at its next meeting. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Stanley Fischer, Narayana Kocherlakota, Loretta J. Mester, Jerome H. Powell, and Daniel K. Tarullo.
Voting against this action: Richard W. Fisher and Charles I. Plosser.
President Fisher dissented because he believed that the continued strengthening of the real economy, the improved outlook for labor utilization and for general price stability, and continued signs of financial market excess will likely warrant an earlier reduction in monetary accommodation than is suggested by the Committee's stated forward guidance.
Mr. Plosser dissented because he objected to the statement's guidance indicating that it likely will be appropriate to maintain the current target range for the federal funds rate for "a considerable time after the asset purchase program ends." In his view, the reference to calendar time should be replaced with language that indicates how monetary policy will respond to incoming data. Moreover, he judged that the statement did not acknowledge the substantial progress that had been made toward the Committee's economic goals and thus risks unnecessary and disruptive volatility in financial markets, and perhaps in the economy, if the Committee reduces accommodation sooner or more quickly than financial markets anticipate.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, October 28-29, 2014. The meeting adjourned at 10:35 a.m. on September 17, 2014.
Notation Vote
By notation vote completed on August 19, 2014, the Committee unanimously approved the minutes of the Committee meeting held on July 29-30, 2014.
_____________________________
William B. English
Secretary
1. Attended the joint session of the Federal Open Market Committee and the Board of Governors. Return to text
2. Attended Wednesday's session only. Return to text
3. Attended Tuesday's session only. Return to text
4. Attended the portion of the meeting following the joint session of the Federal Open Market Committee and the Board of Governors. Return to text
5. Recently released data for health-services consumption in the second quarter were notably stronger than the Bureau of Economic Analysis estimated when constructing its most recent PCE estimates for the second quarter. Return to text |
2014-09-17T00:00:00 | 2014-09-17 | Statement | Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. On balance, labor market conditions improved somewhat further; however, the unemployment rate is little changed and a range of labor market indicators suggests that there remains significant underutilization of labor resources. Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee's longer-run objective. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced and judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.
The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in October, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $5 billion per month rather than $10 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $10 billion per month rather than $15 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will end its current program of asset purchases at its next meeting. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Narayana Kocherlakota; Loretta J. Mester; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action were Richard W. Fisher and Charles I. Plosser. President Fisher believed that the continued strengthening of the real economy, improved outlook for labor utilization and for general price stability, and continued signs of financial market excess, will likely warrant an earlier reduction in monetary accommodation than is suggested by the Committee's stated forward guidance. President Plosser objected to the guidance indicating that it likely will be appropriate to maintain the current target range for the federal funds rate for "a considerable time after the asset purchase program ends," because such language is time dependent and does not reflect the considerable economic progress that has been made toward the Committee's goals.
Statement Regarding Purchases of Treasury Securities and Agency Mortgage-Backed Securities |
2014-07-30T00:00:00 | 2014-08-20 | Minute | Minutes of the Federal Open Market Committee
July 29-30, 2014
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, July 29, 2014, at 10:00 a.m. and continued on Wednesday, July 30, 2014, at 9:00 a.m.
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
Stanley Fischer
Richard W. Fisher
Narayana Kocherlakota
Loretta J. Mester
Charles I. Plosser
Jerome H. Powell
Daniel K. Tarullo
Charles L. Evans, Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Alternate Members of the Federal Open Market Committee
James Bullard, Esther L. George, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively
William B. English, Secretary and Economist
Matthew M. Luecke, Deputy Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Thomas C. Baxter, Deputy General Counsel
Steven B. Kamin, Economist
David W. Wilcox, Economist
James A. Clouse, Thomas A. Connors, Evan F. Koenig, Thomas Laubach, Michael P. Leahy, Paolo A. Pesenti, Mark E. Schweitzer, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Robert deV. Frierson,1 Secretary of the Board, Office of the Secretary, Board of Governors
Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors
Matthew J. Eichner,1 Deputy Director, Division of Research and Statistics, Board of Governors; Maryann F. Hunter, Deputy Director, Division of Banking Supervision and Regulation, Board of Governors; Stephen A. Meyer and William R. Nelson, Deputy Directors, Division of Monetary Affairs, Board of Governors
Jon W. Faust and Stacey Tevlin, Special Advisers to the Board, Office of Board Members, Board of Governors
Trevor A. Reeve, Special Adviser to the Chair, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Ellen E. Meade and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors
David Bowman, Associate Director, Division of International Finance, Board of Governors; David E. Lebow2 and Michael G. Palumbo, Associate Directors, Division of Research and Statistics, Board of Governors; Fabio M. Natalucci1 and Gretchen C. Weinbach,1 Associate Directors, Division of Monetary Affairs, Board of Governors
Jane E. Ihrig, Deputy Associate Director, Division of Monetary Affairs, Board of Governors
Eric C. Engstrom, Patrick E. McCabe,1 and Karen M. Pence, Advisers, Division of Research and Statistics, Board of Governors
Penelope A. Beattie,1 Assistant to the Secretary, Office of the Secretary, Board of Governors
Francisco Covas and Elizabeth Klee,1 Section Chiefs, Division of Monetary Affairs, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Katie Ross,1 Manager, Office of the Secretary, Board of Governors
Elmar Mertens, Senior Economist, Division of Monetary Affairs, Board of Governors
Peter M. Garavuso, Records Project Manager, Division of Monetary Affairs, Board of Governors
Gregory L. Stefani, First Vice President, Federal Reserve Bank of Cleveland
David Altig, Ron Feldman, Jeff Fuhrer, and Daniel G. Sullivan, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Minneapolis, Boston, and Chicago, respectively
Michael Dotsey and Meg McConnell, Senior Vice Presidents, Federal Reserve Banks of Philadelphia and New York, respectively
Fred Furlong, Group Vice President, Federal Reserve Bank of San Francisco
Antoine Martin,1 Douglas Tillett, David C. Wheelock, Jonathan L. Willis, and Patricia Zoebel,1 Vice Presidents, Federal Reserve Banks of New York, Chicago, St. Louis, Kansas City, and New York, respectively
Robert L. Hetzel, Senior Economist, Federal Reserve Bank of Richmond
During the interval between the June and July meetings, Chair Yellen appointed a subcommittee on communications issues chaired by Governor Fischer and including President Mester, Governor Powell, and President Williams. Governor Fischer indicated that the subcommittee would continue the work of previous subcommittees in helping the Committee frame and organize the discussion of a broad range of communications issues.
Developments in Financial Markets and the Federal Reserve's Balance Sheet
In a joint session of the Federal Open Market Committee (FOMC) and the Board of Governors of the Federal Reserve System, the manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets. The manager also reported on the System open market operations conducted during the period since the Committee met on June 17-18, 2014, summarized the outcomes of recent test operations of the Term Deposit Facility (TDF), described the results from the fixed-rate overnight reverse repurchase agreement (ON RRP) operational exercise, and reviewed the ongoing effects of recent foreign central bank policy actions on yields on the international portion of the SOMA portfolio. In addition, the manager noted plans for a pilot program for increasing the number of the Open Market Desk's counterparties for agency mortgage-backed securities (MBS) operations to include a few firms that are too small to qualify as primary dealers. By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
Monetary Policy Normalization
Meeting participants continued their discussion of issues associated with the eventual normalization of the stance and conduct of monetary policy, consistent with the Committee's intention to provide additional information to the public later this year, well before most participants anticipate the first steps in reducing policy accommodation to become appropriate. The staff detailed a possible approach for implementing and communicating monetary policy once the Committee begins to tighten the stance of policy. The approach reflected the Committee's discussion of normalization strategies and policy tools during the previous two meetings.
Participants expressed general support for the normalization approach outlined by the staff, though some noted reservations about one or more of its features. Almost all participants agreed that it would be appropriate to retain the federal funds rate as the key policy rate, and they supported continuing to target a range of 25 basis points for this rate at the time of liftoff and for some time thereafter. However, one participant preferred to use the range for the federal funds rate as a communication tool rather than as a hard target, and another preferred that policy communications during the normalization period focus on the rate of interest on excess reserves (IOER) and the ON RRP rate in addition to the federal funds rate. Participants agreed that adjustments in the IOER rate would be the primary tool used to move the federal funds rate into its target range and influence other money market rates. In addition, most thought that temporary use of a limited-scale ON RRP facility would help set a firmer floor under money market interest rates during normalization. Most participants anticipated that, at least initially, the IOER rate would be set at the top of the target range for the federal funds rate, and the ON RRP rate would be set at the bottom of the federal funds target range. Alternatively, some participants suggested the ON RRP rate could be set below the bottom of the federal funds target range, judging that it might be possible to begin the normalization process with minimal or no reliance on an ON RRP facility and increase its role only if necessary. However, many other participants thought that such a strategy might result in insufficient control of money market rates at liftoff, which could cause confusion about the likely path of monetary policy or raise questions about the Committee's ability to implement policy effectively.
Participants generally agreed that the ON RRP facility should be only as large as needed for effective monetary policy implementation and should be phased out when it is no longer needed for that purpose. Participants expressed their desire to include features in the facility's design that would limit the Federal Reserve's role in financial intermediation and mitigate the risk that the facility might magnify strains in short-term funding markets during periods of financial stress. They discussed options to address these concerns, including methods for limiting the program's size. Many participants noted that further testing would provide additional information that could help determine the appropriate features to temper the risks that might be associated with an ON RRP facility.
Participants also discussed approaches to normalizing the size and composition of the Federal Reserve's balance sheet. In general, they agreed that the size of the balance sheet should be reduced gradually and predictably. In addition, they believed that, in the long run, the balance sheet should be reduced to the smallest level consistent with efficient implementation of monetary policy and should consist primarily of Treasury securities in order to minimize the effect of the SOMA portfolio on the allocation of credit across sectors of the economy. A few participants noted that the appropriate size of the balance sheet would depend on the Committee's future decisions regarding its framework for monetary policy. Most participants supported reducing or ending re- investment sometime after the first increase in the target range for the federal funds rate. A few, however, believed that ceasing reinvestment before liftoff was a better approach because it would lead to an earlier reduction in the size of the portfolio. Most participants continued to anticipate that the Committee would not sell MBS, except perhaps to eliminate residual holdings. However, a couple of participants preferred to sell MBS in order to unwind the effect of the Federal Reserve's holdings on mortgage rates relative to other interest rates more rapidly than would occur as a result of repayments of principal alone. Some others noted that, given the uncertainties attending the normalization process and the outlook for the economy and financial markets, it could be helpful to retain the option to sell some assets.
Participants agreed that the Committee should provide additional information to the public regarding the details of normalization well before most participants anticipate the first steps in reducing policy accommodation to become appropriate. They stressed the importance of communicating a clear plan while at the same time noting the importance of maintaining flexibility so that adjustments to the normalization approach could be made as the situation changed and in light of experience. Participants requested additional analysis from the staff on issues related to normalization as background for further discussion at their next meeting. A few participants also suggested that the Committee should solicit additional information from the public regarding the possible effects of an ON RRP facility, but some others pointed out that the Committee would continue to receive such feedback informally in response to its ongoing communications regarding normalization. The Board meeting concluded at the end of the discussion of approaches to policy normalization.
Staff Review of the Economic Situation
The information reviewed for the July 29-30 meeting indicated that real gross domestic product (GDP) rebounded in the second quarter following its first-quarter decline, but it expanded at only a modest pace, on balance, over the first half of the year. Consumer price inflation rose somewhat in the second quarter, but futures prices for energy and agricultural commodities generally were trending down over the next couple of years and longer-run measures of inflation expectations remained stable. The Bureau of Economic Analysis (BEA) released its advance estimate for second-quarter real GDP, along with revised data for earlier periods, on the second day of the FOMC meeting. The staff's assessment of economic activity and inflation in the first half of 2014, based on information available before the meeting began, was broadly consistent with the new information from the BEA.
Measures of labor market conditions generally continued to improve during the intermeeting period. Total nonfarm payroll employment increased strongly in June, and the average monthly gain for the second quarter was the largest since the first quarter of 2012. The unemployment rate declined to 6.1 percent in June, the labor force participation rate was unchanged, and the employment-to-population ratio edged up. The rate of long-duration unemployment moved down, and the share of workers employed part time for economic reasons edged up; both measures remained elevated by historical standards. Initial claims for unemployment insurance declined further in recent weeks. The rate of job openings rose further in May, but the rate of hiring was unchanged and remained at a modest level.
Industrial production increased in the second quarter, as higher output from manufacturers and mines more than offset a decline in the output of electric and natural gas utilities. Capacity utilization also moved higher in the second quarter. Automakers' production schedules indicated that light motor vehicle assemblies would increase in the third quarter, and readings on new orders from national and regional manufacturing surveys were consistent with moderate gains in factory output in the near term.
Real personal consumption expenditures (PCE) rose more quickly in the second quarter than in the first, partly reflecting higher purchases of light motor vehicles. Key factors that tend to influence household spending remained positive in recent months. In particular, gains in equity values and home prices boosted household net worth, and real disposable personal income continued to rise in the second quarter. Consumer sentiment in the Thomson Reuters/University of Michigan Surveys of Consumers edged down in early July but was only slightly below its average over the first half of the year.
Real expenditures for residential investment turned up in the second quarter after declining for two consecutive quarters. Starts of new single-family houses declined in June, but they rose for the quarter as a whole, and the level of permit issuance was consistent with increases in starts in subsequent months. In the multifamily sector, starts and permits also increased, on net, in the second quarter. Existing home sales moved up during the second quarter but remained below year-earlier levels, while new home sales declined. Home prices continued to rise through May, though the rate of increase was less rapid than earlier in the year.
Real private expenditures for business equipment and intellectual property products increased in the second quarter. Nominal new orders for nondefense capital goods were little changed, on net, in May and June; however, the level of orders was above that for shipments, pointing to increases in shipments in subsequent months. Other forward-looking indicators, such as national and regional surveys of business conditions, also generally suggested moderate increases in business equipment spending in the near term. Real business expenditures for nonresidential construction also increased in the second quarter. Meanwhile, business inventories generally appeared well aligned with sales, apart from the energy sector, where inventories remained below year-earlier levels.
Real federal government purchases decreased over the first half of the year, reflecting ongoing fiscal consolidation and continued declines in defense spending. In contrast, real state and local government purchases increased in the second quarter, as payrolls expanded at a faster pace than in the first quarter and outlays for construction moved higher.
The U.S. international trade deficit narrowed in May as imports fell and exports rose. The rise in exports was concentrated in petroleum products and automotive parts. The fall in imports was led by declines in oil and consumer goods. For the second quarter overall, net exports exerted a moderate drag on the change in U.S. real GDP, compared with a more substantial negative contribution in the first quarter.
U.S. consumer prices, as measured by the PCE price index, increased at a faster pace in the second quarter than in the first and were about 1-1/2 percent higher than a year earlier. Consumer energy price inflation rose in the second quarter, but retail gasoline prices, measured on a seasonally adjusted basis, subsequently moved lower through the fourth week of July. Consumer food price inflation also increased in the second quarter, reflecting the effects of drought and disease on crop and livestock production; however, spot prices for crops moved down in recent weeks, and futures prices pointed to lower prices for livestock in the year ahead. The PCE price index for items excluding food and energy also rose more quickly in the second quarter than in the first and was 1-1/2 percent higher than a year earlier. Near-term inflation expectations from the Michigan survey were little changed, on net, in June and early July, while longer-term expectations declined. Measures of labor compensation indicated that gains in nominal wages and employee benefits remained modest.
Recent indicators suggested that foreign economic activity strengthened in the second quarter: Chinese GDP accelerated substantially, and Mexican data suggested a pickup there. Real GDP growth remained strong in the United Kingdom, and data for both Canada and the euro area showed improvement relative to the first quarter. By contrast, household spending in Japan dropped sharply following the country's April 1 consumption tax increase. In many advanced foreign economies, inflation picked up in the second quarter from very low rates in the first, although second-quarter inflation in the euro area remained well below the European Central Bank's objective.
Staff Review of the Financial Situation
Financial conditions eased somewhat, on balance, between the June and July FOMC meetings, although geopolitical risks weighed on investor sentiment at times. On net, yields on longer-term Treasury securities fell, equity prices rose, and the foreign exchange value of the dollar was little changed.
Market participants characterized the Federal Reserve's monetary policy communications over the intermeeting period as suggesting a slightly more accommodative policy stance than had been expected. The anticipated path of the federal funds rate shifted down modestly following the June FOMC statement and the Chair's press conference. Policy expectations also edged down on the release of the minutes of the June FOMC meeting. Market participants took note of the discussion of monetary policy normalization in the minutes and, particularly, the discussion of the likely spread between the ON RRP rate and the IOER rate.
Results from the Desk's July Survey of Primary Dealers, conducted shortly before the July FOMC meeting, indicated that market participants' expectations for the timing of the first increase in the federal funds rate and the subsequent policy path were largely unchanged from those reported in the survey taken just before the June meeting. The median dealer continued to see the third quarter of 2015 as the most likely time for the liftoff of the federal funds rate from the effective lower bound, although, relative to the June survey, the distribution of the modal expected time of liftoff became more concentrated around the third quarter of 2015.
On balance, 10- and 30-year nominal Treasury yields both declined about 20 basis points over the intermeeting period. Concerns about tensions in Ukraine and the Middle East and the release of the June minutes appeared to contribute to the declines in longer-term Treasury yields. The decline in yields at the long end of the curve likely also reflected a continuation of a pattern that began last year, which some market participants attributed to a reduction in investors' expectations for longer-run economic growth and declines in term premiums. Measures of longer-horizon inflation compensation based on Treasury Inflation-Protected Securities were about unchanged.
Conditions in unsecured short-term dollar funding markets remained stable over the intermeeting period. The Federal Reserve continued its ON RRP exercise and TDF testing. As a result of somewhat higher market rates on repurchase agreements, ON RRP take-up, on average, was a little lower than in the prior intermeeting period, although participation in the ON RRP exercise jumped to a record high at quarter-end on June 30. Moreover, the ON RRP exercise appeared to have continued to help firm the floor under money market interest rates. In TDF testing that ran from mid-May to early July, gradual increases in offer rates and in the maximum individual award amounts generally resulted in higher participation.
The S&P 500 index rose about 1-1/2 percent over the intermeeting period, as earnings reports from a range of companies appeared to indicate that profits in the second quarter had increased modestly relative to the first quarter. The VIX, an index of option-implied volatility for one-month returns on the S&P 500 index, remained at low levels over the intermeeting period.
Credit flows to nonfinancial corporations remained strong in the second quarter. Gross issuance of investment- and speculative-grade bonds stayed brisk. Commercial and industrial loans on banks' balance sheets continued to increase at a robust pace, consistent with reports in the July Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) of easier lending standards and terms as well as stronger loan demand from firms of all sizes. Issuance of leveraged loans by institutional investors also remained solid.
Credit conditions in markets for commercial real estate (CRE) improved further in the second quarter. According to the July SLOOS, banks continued to ease their standards and report stronger demand for CRE loans during the second quarter on balance. CRE loans on banks' books continued to expand moderately, and issuance of commercial mortgage-backed securities remained solid.
Credit conditions in residential mortgage markets generally remained tight over the intermeeting period. Mortgage interest rates held steady around 4 percent, and origination volumes continued to be low. According to the July SLOOS, underwriting standards on prime home-purchase loans appeared to have eased further at banks during the second quarter but, on net, standards on all types of residential real estate loans reportedly remained tighter than the midpoints of the respondent banks' longer-term ranges.
In contrast to mortgage lending, consumer credit continued to expand robustly in May, largely on the strength of auto and student loans, though credit card debt picked up somewhat as well. Banks responding to the July SLOOS indicated that demand for auto loans strengthened further in the second quarter. In addition, demand for credit card loans increased, and a few large banks reported having eased lending policies for such loans.
Benchmark yields on long-term sovereign bonds in the advanced foreign economies continued the downward trend that began at the start of the year, with rising tensions in the Middle East and Ukraine during the intermeeting period likely adding some to the downward pressure. Concerns about one of Portugal's largest banks and about litigation risks facing European banks weighed on European financial markets, prompting yield spreads on peripheral sovereign bonds in the euro area to widen and equity price indexes for European banks to decline. Intermeeting data releases on euro-area industrial production came in below market expectations, also weighing on headline equity markets in the region. Mixed news from emerging market economies, including better-than-expected GDP growth in China and concerns about Argentina's scheduled debt payments, generally had modest market effects. Changes in emerging market equity indexes were mixed over the period, and emerging market bond yields generally declined. The broad trade-weighted dollar was little changed, on net, over the intermeeting period.
The staff's periodic report on potential risks to financial stability concluded that relatively strong capital positions of U.S. banks, subdued use of maturity transformation and leverage within the broader financial sector, and relatively low levels of leverage for the aggregate nonfinancial sector were important factors supporting overall financial stability. However, the staff report also highlighted that low and declining risk premiums, low levels of market volatility, and a loosening of underwriting standards in a number of markets raised somewhat the risk of an eventual correction in asset valuations.
Staff Economic Outlook
The data received since the staff prepared its forecast for the June FOMC meeting suggested that real GDP growth was even weaker in the first half of the year than had been anticipated.3 However, the staff left its forecast for real GDP growth in the second half of the year essentially unrevised because other indicators of economic activity appeared comparatively strong in relation to real GDP during the first half of the year. In particular, payroll employment continued to advance at a solid pace, the unemployment rate declined further, industrial production posted steady gains, and readings from business surveys were strong. The staff's medium-term forecast for real GDP growth was also little revised. The staff continued to project that real GDP would expand at a faster pace in the second half of this year and over the next two years than in 2013. This forecast was predicated on a further anticipated waning of the restraint on spending growth from changes in fiscal policy, continued improvement in credit availability, increases in consumer and business confidence, and a pickup in foreign economic growth. In response to a further downward surprise in the unemployment rate, the staff again lowered its forecast for the unemployment rate over the projection period. To reconcile the downward revision to real GDP growth for the first half of year with an unemployment rate that was now closer to the staff's estimate of its longer-run natural rate, the staff lowered its assumed pace of potential output growth this year by more than it marked down GDP growth. As a result, resource slack in this projection was anticipated to be somewhat narrower this year than in the previous forecast and to be taken up slowly over the projection period.
The staff's near-term forecast for inflation was revised up a little, as recent data showed somewhat faster-than-anticipated increases that were judged to be only partly transitory. With a little less resource slack in this projection, the medium-term forecast for inflation was also revised up slightly. Nonetheless, as in the June projection, inflation was projected to step down in the second half of this year and to remain below the Committee's longer-run objective of 2 percent over the next few years. With longer-run inflation expectations assumed to remain stable, changes in commodity and import prices expected to be subdued, and slack in labor and product markets anticipated to diminish only slowly, inflation was forecast to rise gradually and to reach the Committee's objective in the longer run.
The staff continued to view uncertainty around its projections for real GDP growth, inflation, and the unemployment rate as roughly in line with the average of the past 20 years. Although the risks to GDP growth were still seen as tilted a little to the downside, as neither monetary policy nor fiscal policy was viewed as well positioned to help the economy withstand adverse shocks, these risks were considered to be more nearly balanced than in the previous projection. The staff continued to view the risks around its outlook for the unemployment rate and for inflation as roughly balanced.
Participants' Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants generally viewed the rebound in real GDP in the second quarter and the ongoing improvement in labor market conditions as supporting their expectations for continued moderate economic expansion with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. Although most participants continued to view the risks to the outlook for economic activity and the labor market as nearly balanced, some pointed to possible sources of downside risk, including persistent weakness in the housing sector, a continued slow rise in household income, or spillovers from developments in the Middle East and Ukraine. Participants noted that inflation had moved somewhat closer to the Committee's 2 percent longer-run objective and generally saw the risks of inflation running persistently below their objective as having diminished somewhat.
Household spending appeared to be rising moderately and was expected to contribute to stronger economic growth in the second half of the year than in the first half. Business contacts in several Districts reported a pickup in consumer spending after the weakness in the first quarter. However, a few participants raised concerns that households might remain cautious, with the personal saving rate staying elevated, or that the slow rise in wages and income might be insufficient to support stronger consumer spending.
The recovery in housing activity remained slow according to most participants. Although mortgage rates were still low and housing appeared to be relatively affordable, various factors were seen as restraining demand, including low expected income and high levels of student debt as well as difficulty in obtaining mortgage credit, particularly for younger, first-time homebuyers. It was also noted that the weakness in homebuilding along with the continued rise in house prices suggested that supply constraints were also weighing on construction activity. A couple of participants indicated that some demand appeared to have shifted to rental properties. The rising demand for rentals was in part being satisfied by investors buying homes for the rental market; it was also providing support for multifamily construction. Some participants noted their concern that a number of the factors restraining residential construction might persist, damping the housing recovery for some time.
Many participants reported continued improvement in sentiment among their business contacts and noted positive readings from recent regional and national surveys of manufacturing and service-sector activity. In particular, participants cited strength in airlines, railroads, trucking firms, businesses supplying the motor vehicle and aerospace industries, and those in the high-tech sector. In addition, higher energy prices continued to provide support for activity in the energy sector. In the agriculture sector, favorable growing conditions for crops had lowered prices but increased the profitability of livestock producers. The reports from their business contacts provided support for participants' expectation of stronger economic growth in the second half of the year. In some cases, the information from businesses suggested increases in spending on capital equipment or a pickup in investment in commercial and industrial construction and transportation. Contacts in a number of areas indicated that credit was readily available, and reports from participants' business and financial contacts indicated a strengthening in demand for bank credit. However, several participants reported that businesses remained somewhat uncertain about the economic outlook and thus were still cautious about stepping up capital spending and hiring. Federal fiscal restraint reportedly continued to depress business activity in some areas dependent on federal spending.
Labor market conditions improved in recent months according to participants' reports on developments in their Districts as well as a range of national indicators. The improvement was reflected not only in a pickup in payroll employment gains and a noticeable decline in the overall unemployment rate, but also in reductions in broader measures of underutilization such as long- duration joblessness and the number of workers with part-time jobs who would prefer full-time employment. The labor force participation rate was stable, and a couple of participants pointed out that the transition rate from long-duration unemployment to employment had moved up. Moreover, some participants cited positive signs of increased hiring and turnover in the labor market, including increases in job openings and hiring plans, higher quit rates, and apparent improvements in matching workers and jobs.
Participants generally agreed that both the recent improvement in labor market conditions and the cumulative progress over the past year had been greater than anticipated and that labor market conditions had moved noticeably closer to those viewed as normal in the longer run. Participants differed, however, in their assessments of the remaining degree of labor market slack and how to measure it. A few argued that the unemployment rate continues to serve as a reliable summary statistic for the overall state of the labor market and thought that it should be the Committee's principal focus for evaluating labor market conditions. However, many participants continued to see a larger gap between current labor market conditions and those consistent with their assessments of normal levels of labor utilization than indicated by the difference between the unemployment rate and estimates of its longer-run normal level. These participants cited, for example, the still-elevated levels of long-term unemployment and workers employed part time for economic reasons as well as low labor force participation. Several participants pointed out that the recent drop in the unemployment rate had been associated with progress in reabsorbing the long-term unemployed into jobs and reducing part-time work, suggesting that slack was diminishing and could be reduced further as employment opportunities expanded.
Labor compensation was still rising only modestly. Many participants continued to attribute the subdued rise in wages to the remaining slack in the labor market; it was noted that the elevated level of relatively low-paid part-time workers was holding down overall wage increases. Several other participants pointed to reports that wage pressures had increased in some regions and occupations that were experiencing labor shortages or relatively low unemployment. However, a couple of participants indicated that the pass-through of labor costs has been more attenuated since the mid-1980s and that wage pressures might not be a reliable leading indicator of higher inflation.
Inflation firmed in recent months, and most participants anticipated that it would continue to move up toward the Committee's 2 percent objective. Many of them expected that inflation was likely to rise gradually over the medium term, as resource slack diminished and inflation expectations remained stable. In support of their assessments, several reported results from various statistical models of inflation and inflation expectations. Most now judged that the downside risks to inflation had diminished, but a few participants continued to see inflation as likely to persist below the Committee's objective over the medium term. Several commented that the upside risks had not increased. However, a few others argued that the recent tightening of the labor market had increased the upside risks to inflation and inflation expectations, particularly in an environment in which the economic expansion was expected to strengthen further.
In their discussion of financial stability issues, participants noted evidence of valuation pressures in some particular asset markets, but those pressures did not appear to be widespread and other measures of vulnerability in the financial system were at low to moderate levels. As a result, they generally saw the vulnerabilities in the financial system as well contained. Some participants discussed how the Committee might better incorporate financial stability risks in its discussion of macroeconomic risks. They also suggested that the Committee consider how promptly various financial stability concerns could be addressed, if need be, and which tools, including monetary policy and regulatory responses, would be most timely and effective in doing so.
With respect to monetary policy over the medium run, participants generally agreed that labor market conditions and inflation had moved closer to the Committee's longer-run objectives in recent months, and most anticipated that progress toward those goals would continue. Moreover, many participants noted that if convergence toward the Committee's objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated. Indeed, some participants viewed the actual and expected progress toward the Committee's goals as sufficient to call for a relatively prompt move toward reducing policy accommodation to avoid overshooting the Committee's unemployment and inflation objectives over the medium term. These participants were increasingly uncomfortable with the Committee's forward guidance. In their view, the guidance suggested a later initial increase in the target federal funds rate as well as lower future levels of the funds rate than they judged likely to be appropriate. They suggested that the guidance should more clearly communicate how policy-setting would respond to the evolution of economic data. However, most participants indicated that any change in their expectations for the appropriate timing of the first increase in the federal funds rate would depend on further information on the trajectories of economic activity, the labor market, and inflation. In particular, although participants generally saw the drop in real GDP in the first quarter as transitory, some noted that it increased uncertainty about the outlook, and they were looking to additional data on production, spending, and labor market developments to shed light on the underlying pace of economic growth. Moreover, despite recent inflation developments, several participants continued to believe that inflation was likely to move back to the Committee's objective very slowly, thereby warranting a continuation of highly accommodative policy as long as projected inflation remained below 2 percent and longer-term inflation expectations were well anchored.
Committee Policy Action
In their discussion of monetary policy in the period ahead, members judged that information received since the Federal Open Market Committee met in June indicated that economic activity rebounded in the second quarter. Household spending appeared to be rising moderately, and business fixed investment was advancing, while the recovery in the housing sector remained slow. Fiscal policy was restraining economic growth, al-though the extent of the restraint was diminishing. The Committee expected that, with appropriate policy accommodation, economic activity would expand at a moderate pace with labor market indicators and inflation moving toward levels that the Committee judges consistent with its dual mandate.
With the incoming information broadly supporting the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back to the Committee's 2 percent objective, members generally agreed that a further measured reduction in the pace of asset purchases was appropriate at this meeting. Accordingly, the Committee agreed that, beginning in August, it would add to its holdings of agency MBS at a pace of $10 billion per month rather than $15 billion per month, and it would add to its holdings of Treasury securities at a pace of $15 billion per month rather than $20 billion per month. The Committee again judged that, if incoming data broadly supported its expectations that labor market indicators and inflation would continue to move toward mandate-consistent levels, the Committee would likely reduce the pace of asset purchases in further measured steps at future meetings. However, the Committee reiterated that asset purchases were not on a preset course and that its decisions remained contingent on the outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.
Members discussed their assessments of progress--both realized and expected--toward the Committee's objectives of maximum employment and 2 percent inflation and considered enhancements to the statement language that would more clearly communicate the Committee's view on such progress. Regarding the labor market, many members concluded that a range of indicators of labor market conditions--including the unemployment rate as well as a number of other measures of labor utilization--had improved more in recent months than they anticipated earlier. They judged it appropriate to replace the description of recent labor market conditions that mentioned solely the unemployment rate with a description of their assessment of the remaining underutilization of labor resources based on their evaluation of a range of labor market indicators. In their discussion, some members expressed reservations about describing the extent of underutilization in labor resources more broadly. In particular, they worried that the degree of labor market slack was difficult to characterize succinctly and that the statement language might prove difficult to adjust as labor market conditions continued to improve. Moreover, they were concerned that, despite the improvement in labor market conditions, the new language might be misinterpreted as indicating increased concern about underutilization of labor resources. At the conclusion of the discussion, the Committee agreed to state that labor market conditions had improved, with the unemployment rate declining further, while also stating that a range of labor market indicators suggested that there remained significant underutilization of labor resources. Many members noted, however, that the characterization of labor market underutilization might have to change before long, particularly if progress in the labor market continued to be faster than anticipated. Regarding inflation, members agreed to update the language in the statement to acknowledge that inflation had recently moved somewhat closer to the Committee's longer-run objective and to convey their judgment that the likelihood of inflation running persistently below 2 percent had diminished somewhat.
After the discussion, all members but one voted to maintain the Committee's target range for the federal funds rate and to reiterate its forward guidance on how it would assess the appropriate timing of the first increase in the target rate and the anticipated behavior of the federal funds rate after it is raised. One member, however, objected to the guidance that it would likely be appropriate to maintain the current range for the federal funds rate for a considerable time after the asset purchase program ends because it was time dependent and did not recognize the implications for monetary policy of the considerable progress that had been made toward the Committee's goals.
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 SOMA in accordance with the following domestic policy directive:
"Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. Beginning in August, the Desk is directed to purchase longer-term Treasury securities at a pace of about $15 billion per month and to purchase agency mortgage-backed securities at a pace of about $10 billion per month. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The System Open Market Account manager and the secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."
The vote encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in June indicates that growth in economic activity rebounded in the second quarter. Labor market conditions improved, with the unemployment rate declining further. However, a range of labor market indicators suggests that there remains significant underutilization of labor resources. Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has moved somewhat closer to the Committee's longer-run objective. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced and judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat.
The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in August, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $10 billion per month rather than $15 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $15 billion per month rather than $20 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Stanley Fischer, Richard W. Fisher, Narayana Kocherlakota, Loretta J. Mester, Jerome H. Powell, and Daniel K. Tarullo.
Voting against this action: Charles I. Plosser.
Mr. Plosser dissented because he objected to the statement's guidance indicating that it likely will be appropriate to maintain the current target range for the federal funds rate for "a considerable time after the asset purchase program ends." In his view, the reference to calendar time should be replaced with language that indicates how monetary policy will respond to incoming data. Moreover, he judged that the statement did not acknowledge the substantial progress that had been made toward the Committee's economic goals and thus risks unnecessary and disruptive volatility in financial markets, and perhaps in the economy, if the Committee reduces accommodation sooner or more quickly than financial markets anticipate.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, September 16-17, 2014. The meeting adjourned at 11:55 a.m. on July 30, 2014.
Notation Vote
By notation vote completed on July 8, 2014, the Committee unanimously approved the minutes of the Committee meeting held on June 17-18, 2014.
_____________________________
William B. English
Secretary
1. Attended the joint session of the Federal Open Market Committee and the Board of Governors. Return to text
2. Attended the portion of the meeting following the joint session of the Federal Open Market Committee and the Board of Governors. Return to text
3. The staff's forecast for the July FOMC meeting was prepared prior to the July 30 release of the BEA's advance estimate of real GDP in the second quarter and revisions for earlier periods. Return to text |
2014-07-30T00:00:00 | 2014-07-30 | Statement | Information received since the Federal Open Market Committee met in June indicates that growth in economic activity rebounded in the second quarter. Labor market conditions improved, with the unemployment rate declining further. However, a range of labor market indicators suggests that there remains significant underutilization of labor resources. Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has moved somewhat closer to the Committee's longer-run objective. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced and judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat.
The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in August, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $10 billion per month rather than $15 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $15 billion per month rather than $20 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Richard W. Fisher; Narayana Kocherlakota; Loretta J. Mester; Jerome H. Powell; and Daniel K. Tarullo. Voting against was Charles I. Plosser who objected to the guidance indicating that it likely will be appropriate to maintain the current target range for the federal funds rate for "a considerable time after the asset purchase program ends," because such language is time dependent and does not reflect the considerable economic progress that has been made toward the Committee's goals.
Statement Regarding Purchases of Treasury Securities and Agency Mortgage-Backed Securities
Statement Regarding Purchases of Treasury Securities and Agency Mortgage-Backed Securities |
2014-06-18T00:00:00 | 2014-06-18 | Statement | Information received since the Federal Open Market Committee met in April indicates that growth in economic activity has rebounded in recent months. Labor market indicators generally showed further improvement. The unemployment rate, though lower, remains elevated. Household spending appears to be rising moderately and business fixed investment resumed its advance, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually, moving toward those the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.
The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in July, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $15 billion per month rather than $20 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $20 billion per month rather than $25 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Richard W. Fisher; Narayana Kocherlakota; Loretta J. Mester; Charles I. Plosser; Jerome H. Powell; and Daniel K. Tarullo.
Statement Regarding Purchases of Treasury Securities and Agency Mortgage-Backed Securities |
2014-06-18T00:00:00 | 2014-07-09 | Minute | Minutes of the Federal Open Market Committee
June 17-18, 2014
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, June 17, 2014, at 10:00 a.m. and continued on Wednesday, June 18, 2014, at 9:00 a.m.
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
Stanley Fischer
Richard W. Fisher
Narayana Kocherlakota
Loretta J. Mester
Charles I. Plosser
Jerome H. Powell
Daniel K. Tarullo
Christine Cumming, Charles L. Evans, Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Alternate Members of the Federal Open Market Committee
James Bullard, Esther L. George, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively
William B. English, Secretary and Economist
Matthew M. Luecke, Deputy Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Steven B. Kamin, Economist
David W. Wilcox, Economist
James A. Clouse, Thomas A. Connors, Evan F. Koenig, Thomas Laubach, Michael P. Leahy, Samuel Schulhofer-Wohl, Mark E. Schweitzer, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Robert deV. Frierson,1 Secretary of the Board, Office of the Secretary, Board of Governors
Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors
Stephen A. Meyer and William R. Nelson, Deputy Directors, Division of Monetary Affairs, Board of Governors
Mark E. Van Der Weide, Deputy Director, Division of Banking Supervision and Regulation, Board of Governors
Jon W. Faust and Stacey Tevlin, Special Advisers to the Board, Office of Board Members, Board of Governors
Trevor A. Reeve, Special Adviser to the Chair, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Brian M. Doyle, Senior Adviser, Division of International Finance, Board of Governors; Ellen E. Meade and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors
Daniel M. Covitz, Eric M. Engen, Michael T. Kiley, and David E. Lebow, Associate Directors, Division of Research and Statistics, Board of Governors; Fabio M. Natalucci1 and Gretchen C. Weinbach,1 Associate Directors, Division of Monetary Affairs, Board of Governors; Beth Anne Wilson, Associate Director, Division of International Finance, Board of Governors
William F. Bassett and Jane E. Ihrig,1 Deputy Associate Directors, Division of Monetary Affairs, Board of Governors; Joshua Gallin, Deputy Associate Director, Division of Research and Statistics, Board of Governors
Min Wei,2 Assistant Director, Division of Monetary Affairs, Board of Governors
Jeremy B. Rudd, Adviser, Division of Research and Statistics, Board of Governors
Penelope A. Beattie,1 Assistant to the Secretary, Office of the Secretary, Board of Governors
Laura Lipscomb,1 Section Chief, Division of Monetary Affairs, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Katie Ross,1 Manager, Office of the Secretary, Board of Governors
Wendy Dunn and Patrick McCabe,1 Senior Economists, Division of Research and Statistics, Board of Governors; Etienne Gagnon, Senior Economist, Division of Monetary Affairs, Board of Governors
Jonathan Rose, Economist, Division of Monetary Affairs, Board of Governors
Achilles Sangster II, Records Management Analyst, Division of Monetary Affairs, Board of Governors
Mark L. Mullinix, First Vice President, Federal Reserve Bank of Richmond
David Altig and Daniel G. Sullivan, Executive Vice Presidents, Federal Reserve Banks of Atlanta and Chicago, respectively
Cletus C. Coughlin, Mary Daly, Troy Davig, Michael Dotsey, Joshua L. Frost, and John A. Weinberg, Senior Vice Presidents, Federal Reserve Banks of St. Louis, San Francisco, Kansas City, Philadelphia, New York, and Richmond, respectively
Deborah L. Leonard,1 Giovanni Olivei, and Douglas Tillett, Vice Presidents, Federal Reserve Banks of New York, Boston, and Chicago, respectively
Marc Giannoni, Research Officer, Federal Reserve Bank of New York
In the agenda for this meeting, it was reported that Loretta J. Mester had been elected a member of the Federal Open Market Committee and that she had executed her oath of office.
Developments in Financial Markets and the Federal Reserve's Balance Sheet
In a joint session of the Federal Open Market Committee (FOMC) and the Board of Governors of the Federal Reserve System, the deputy manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets. The SOMA manager reported on the System open market operations during the period since the Committee met on April 29-30, 2014, outlined the testing of the Term Deposit Facility, described the results from the fixed-rate overnight reverse repurchase agreement (ON RRP) operational exercise, and provided some possible options for adjusting the list of counterparties eligible to participate in ON RRP operations. The manager also noted the effects of recent foreign central bank policy actions on the yields on the international portion of the SOMA portfolio and discussed ongoing staff work on improving data collections regarding bank funding markets. By unanimous vote, the Committee ratified the Open Market Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
Monetary Policy Normalization
Meeting participants continued their discussion of issues associated with the eventual normalization of the stance and conduct of monetary policy. The Committee's consideration of this topic was undertaken as part of prudent planning and did not imply that normalization would necessarily begin sometime soon. A staff presentation included some possible strategies for implementing and communicating monetary policy during a period when the Federal Reserve will have a very large balance sheet. In addition, the presentation outlined design features of a potential ON RRP facility and discussed options for the Committee's policy of rolling over maturing Treasury securities at auction and reinvesting principal payments on all agency debt and agency mortgage-backed securities (MBS) in agency MBS.
Most participants agreed that adjustments in the rate of interest on excess reserves (IOER) should play a central role during the normalization process. It was generally agreed that an ON RRP facility with an interest rate set below the IOER rate could play a useful supporting role by helping to firm the floor under money market interest rates. One participant thought that the ON RRP rate would be the more effective policy tool during normalization in light of the wider variety of counterparties eligible to participate in ON RRP operations. The appropriate size of the spread between the IOER and ON RRP rates was discussed, with many participants judging that a relatively wide spread--perhaps near or above the current level of 20 basis points--would support trading in the federal funds market and provide adequate control over market interest rates. Several participants noted that the spread might be adjusted during the normalization process. A couple of participants suggested that adequate control of short-term rates might be accomplished with a very wide spread or even without an ON RRP facility. A few participants commented that the Committee should also be prepared to use its other policy tools, including term deposits and term reverse repurchase agreements, if necessary. Most participants thought that the federal funds rate should continue to play a role in the Committee's operating framework and communications during normalization, with many of them indicating a preference for continuing to announce a target range. However, a few participants thought that, given the degree of uncertainty about the effects of the Committee's tools on market rates, it might be preferable to focus on an administered rate in communicating the stance of policy during the normalization period. In addition, participants examined possibilities for changing the calculation of the effective federal funds rate in order to obtain a more robust measure of overnight bank funding rates and to apply lessons from international efforts to develop improved standards for benchmark interest rates.
While generally agreeing that an ON RRP facility could play an important role in the policy normalization process, participants discussed several potential unintended consequences of using such a facility and design features that could help to mitigate these consequences. Most participants expressed concerns that in times of financial stress, the facility's counterparties could shift investments toward the facility and away from financial and nonfinancial corporations, possibly causing disruptions in funding that could magnify the stress. In addition, a number of participants noted that a relatively large ON RRP facility had the potential to expand the Federal Reserve's role in financial intermediation and reshape the financial industry in ways that were difficult to anticipate. Participants discussed design features that could address these concerns, including constraints on usage either in the aggregate or by counterparty and a relatively wide spread between the ON RRP rate and the IOER rate that would help limit the facility's size. Several participants emphasized that, although the ON RRP rate would be useful in controlling short-term interest rates during normalization, they did not anticipate that such a facility would be a permanent part of the Committee's longer-run operating framework. Finally, a number of participants expressed concern about conducting monetary policy operations with nontraditional counterparties.
Participants also discussed the appropriate time for making a change to the Committee's policy of rolling over maturing Treasury securities at auction and reinvesting principal payments on all agency debt and agency MBS in agency MBS. It was noted that, in the staff's models, making a change to the Committee's reinvestment policy prior to the liftoff of the federal funds rate, at the time of liftoff, or sometime thereafter would be expected to have only limited implications for macroeconomic outcomes, the Committee's statutory objectives, or remittances to the Treasury. Many participants agreed that ending reinvestments at or after the time of liftoff would be best, with most of these participants preferring to end them after liftoff. These participants thought that an earlier change to the reinvestment policy would involve risks to the economic outlook if it was seen as suggesting that the Committee was likely to tighten policy more rapidly than currently anticipated or if it had unexpectedly large effects in MBS markets; moreover, an early change could add complexity to the Committee's communications at a time when it would be clearer to signal changes in policy through interest rates alone. However, some participants favored ending reinvestments prior to the first firming in policy interest rates, as stated in the Committee's exit strategy principles announced in June 2011. Those participants thought that such an approach would avoid weakening the credibility of the Committee's communications regarding normalization, would act to modestly reduce the size of the Federal Reserve's balance sheet, or would help prepare the public for the eventual rise in short-term interest rates. Regardless of whether they preferred to introduce a change to the Committee's reinvestment policy before or after the initial tightening in short-term interest rates, a number of participants thought that it might be best to follow a graduated approach with respect to winding down reinvestments or to manage reinvestments in a manner that would smooth the decline in the balance sheet. Some stressed that the details should depend on financial and economic conditions.
Overall, participants generally expressed a preference for a simple and clear approach to normalization that would facilitate communication to the public and enhance the credibility of monetary policy. It was observed that it would be useful for the Committee to develop and communicate its plans to the public later this year, well before the first steps in normalizing policy become appropriate. Most participants indicated that they expected to learn more about the effects of the Committee's various policy tools as normalization proceeds, and many favored maintaining flexibility about the evolution of the normalization process as well as the Committee's longer-run operating framework. Participants requested additional analysis from the staff on issues related to normalization and agreed that it would be helpful to continue to review these issues at upcoming meetings. The Board meeting concluded at the end of the discussion.
Staff Review of the Economic Situation
The information reviewed for the June 17-18 meeting indicated that real gross domestic product (GDP) had dropped significantly early in the year but that economic growth had bounced back in recent months. The average pace of employment gains stepped up, and the unemployment rate declined markedly in April and held steady in May, although it was still elevated. Consumer price inflation picked up in recent months, while measures of longer-run inflation expectations remained stable.
Most measures of labor market conditions improved in recent months. Total nonfarm payroll employment expanded in April and May at a faster rate than the average monthly pace during the previous two quarters. The unemployment rate dropped to 6.3 percent in April and remained at that level in May. However, the labor force participation rate also declined in April and then held steady in May, while the employment-to-population ratio remained flat. Both the share of workers employed part time for economic reasons and the rate of long-duration unemployment edged down in recent months, although both measures were still high. Initial claims for unemployment insurance decreased slightly, on net, over the intermeeting period, and the rate of job openings stepped up in April; nevertheless, the rate of hiring was unchanged and remained at a modest level.
Industrial production increased, on balance, in April and May, as manufacturing output and production in the mining sector expanded and more than offset a further decline in the output of utilities from the elevated levels recorded during the unusually cold winter months. As a result, the rate of industrial capacity utilization rose in recent months. Automakers' schedules indicated that the pace of light motor vehicle assemblies would step up in the coming months, and broader indicators of manufacturing production, such as the readings on new orders from national manufacturing surveys, were consistent with moderate increases in factory output in the near term.
Real personal consumption expenditures (PCE) declined a little in April following strong gains in February and March. The component of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimate of PCE edged down in May, but light motor vehicle sales moved up briskly. Recent information about key factors that influence household spending mostly pointed to gains in PCE in the coming months. Real disposable income continued to rise in April, and households' net worth likely increased as equity prices and home values advanced further; however, consumer sentiment in the Thomson Reuters/University of Michigan Surveys of Consumers moved down somewhat in May and early June.
The pace of activity in the housing sector remained subdued. Starts of new single-family homes declined slightly, on net, in April and May, although starts of multifamily units increased. Permits for single-family homes, which are usually a better indicator of the underlying pace of residential construction, increased only a little on balance. Sales of new homes rose in April but remained near their average monthly level last year. Existing home sales only edged up in April and were still below last year's average level, while pending home sales were little changed.
Real private expenditures for business equipment and intellectual property products were estimated to have increased slowly in the first quarter as a whole. In April, nominal orders and shipments of nondefense capital goods excluding aircraft decreased a little after rising briskly in March. However, the level of new orders for these capital goods remained above the level of shipments in April, pointing to increases in shipments in subsequent months. Other forward-looking indicators, such as surveys of business conditions, were also generally consistent with modest increases in business equipment spending in the near term. Nominal business spending for nonresidential structures was essentially unchanged in April. Recent data on the book value of inventories, along with readings on inventories from national and regional manufacturing surveys, did not point to significant inventory imbalances in most industries except in the energy sector, where inventories appeared unusually low after having been drawn down during the winter.
Federal spending data for April and May pointed toward only a small decline in real federal government purchases in the second quarter, as the pace of decreases in defense expenditures seemed to ease. Real state and local government purchases appeared to edge up going into the second quarter. The payrolls of these governments expanded in April and May, and nominal state and local construction expenditures increased a little in April.
The U.S. international trade deficit widened in March and in April. Both imports and exports recovered from weak readings in February, with imports of consumer goods, automotive products, and capital goods rising significantly and exports of capital goods and industrial supplies showing particular strength.
U.S. consumer price inflation, as measured by the PCE price index, was about 1-1/2 percent over the 12 months ending in April, below the Committee's longer-run objective of 2 percent. Over the same 12-month period, consumer energy prices rose faster than total consumer prices, while consumer food prices climbed more slowly than overall prices; core PCE inflation--which excludes food and energy prices--was also around 1-1/2 percent. In May, the consumer price index (CPI) increased at a faster pace than in the preceding few months; both food and energy prices rose more briskly, and core CPI inflation also stepped up. Over the 12 months ending in May, both total and core CPI inflation were about 2 percent. Near-term inflation expectations from the Michigan survey declined slightly, on balance, in May and early June, while longer-term inflation expectations from the survey were little changed.
Increases in measures of labor compensation remained modest. Compensation per hour in the nonfarm business sector rose about 2-1/4 percent over the year ending in the first quarter; with small gains in labor productivity, unit labor costs advanced more slowly than compensation per hour. Over the year ending in May, average hourly earnings for all employees increased around 2 percent.
Foreign real GDP growth slowed in the first quarter, especially in China and some other emerging market economies. Real GDP also increased more slowly in Canada, in part because of severe winter weather, and the pace of economic activity remained weak in the euro area. Economic growth continued to be strong in the United Kingdom, and economic activity jumped in Japan as household spending surged in advance of April's consumption tax hike. Indicators for the second quarter generally suggested that foreign economic growth picked up from the first quarter. In some advanced foreign economies, inflation moved up recently from earlier low readings. Inflation continued to be low, however, in the euro area, and the European Central Bank (ECB) announced additional stimulus measures.
Staff Review of the Financial Situation
On balance, financial conditions in the United States remained supportive of growth in economic activity and employment: The expected path of the federal funds rate was slightly lower in the long run, yields on longer-term Treasury securities moved down modestly, equity prices rose, corporate bond spreads narrowed, and the foreign exchange value of the dollar was little changed.
Federal Reserve communications over the intermeeting period had limited effects in financial markets. The April FOMC statement and minutes appeared to be generally in line with expectations, while the Chair's congressional testimony before the Joint Economic Committee in early May and the subsequent question-and-answer session were viewed by market participants as suggesting marginally more accommodative policy than expected.
Results from the Desk's June Survey of Primary Dealers indicated no change in the dealers' consensus expectation about the most likely timing of the first increase in the federal funds rate target but showed a lower median longer-run level of the federal funds rate relative to the April survey. Expectations for Federal Reserve asset purchases were largely unchanged. In addition, although there was significant dispersion among dealer responses, the median dealer expected the FOMC to end its reinvestment of principal payments on Treasury securities, agency debt, and agency MBS sometime after the first increase in the federal funds rate target; in the April survey, the median dealer had expected reinvestments to end before liftoff.
Yields on short- and medium-term nominal Treasury securities increased slightly, on balance, over the intermeeting period. In contrast, yields at the long end of the curve edged lower, continuing a downward trend evident over much of this year. Market participants continued to discuss the decreases in long forward rates since the beginning of the year and pointed to a variety of domestic and global factors possibly contributing to this trend, including lower expectations for potential growth and policy rates in the longer run, a decline in inflation risk premiums, purchases of longer-term securities by price-insensitive investors, unwinding of short Treasury positions, and falling interest rate uncertainty. Measures of longer-horizon inflation compensation based on Treasury Inflation-Protected Securities remained about steady.
Conditions in unsecured short-term dollar funding markets remained stable over the intermeeting period. The Federal Reserve continued its ON RRP exercise. Total take-up in the ON RRP exercise rose in April and May before falling back in June. Much of the transitory increase in take-up occurred in response to a large seasonal reduction in outstanding Treasury debt and an associated drop in the rates on Treasury repurchase agreements during the first half of the second quarter that were reversed during the second half. In May, the Federal Reserve began an eight-week series of test auctions of seven-day term deposits. The number of participants and the total amount awarded increased over the course of the first five operations.
Broad stock price indexes rose over the intermeeting period, apparently boosted by a more optimistic assessment of near-term economic prospects and likely supported by continued low interest rates. Despite generally lackluster results for first-quarter earnings, corporate guidance for profits in coming quarters led to upward revisions in analysts' forecasts of year-ahead earnings per share for S&P 500 firms. The VIX, an index of option-implied volatility for one-month returns on the S&P 500 index, continued to decline and ended the period near its historical lows. Measures of uncertainty in other financial markets also declined; results from the Desk's primary dealer survey suggested this development might have reflected low realized volatilities, generally favorable economic news, less uncertainty for the path of monetary policy, and complacency on the part of market participants about potential risks.
Credit flows to nonfinancial corporations remained strong. Amid low yields and reduced market volatility, gross issuance of investment- and speculative-grade bonds rebounded in May. Commercial and industrial (C&I) loans on banks' balance sheets increased and issuance of leveraged loans remained strong. Responses to the June Senior Credit Officer Opinion Survey on Dealer Financing Terms indicated that investor demand for financing to fund purchases of collateralized loan obligations rose somewhat since the beginning of the year.
Commercial real estate loans continued to increase amid some further easing of underwriting standards for commercial mortgages. While issuance of commercial mortgage-backed securities started the year a bit slow relative to 2013, it has picked up recently. Bank and insurance company originations of commercial mortgages expanded in the first quarter.
Mortgage credit conditions generally remained tight, though further incremental signs of easing emerged amid continued gains in house prices. Mortgage interest rates declined somewhat more than long-term Treasury yields over the intermeeting period, while option-adjusted spreads on production-coupon MBS narrowed. Both mortgage applications for home purchases and refinancing applications remained at very low levels.
Conditions in consumer credit markets were solid in recent months. Credit card loan balances increased. Growth in student loans moderated further but remained solid, and outstanding auto loans continued to pick up. Issuance of auto and credit card asset-backed securities was again robust.
The expected path of ECB policy rates implied by market quotes for short-term interest rates fell over the intermeeting period, as investors anticipated the easing of policy announced by the ECB at its June meeting. By contrast, late in the period, market participants interpreted statements by Bank of England Governor Carney as signaling an earlier tightening of policy than had been anticipated, and near-term policy rate expectations moved higher in response. Benchmark sovereign bond yields declined modestly in most countries, but U.K. gilt yields rose. The foreign exchange value of the dollar was little changed, on balance, over the period, as the dollar appreciated against the euro but declined against the Canadian dollar and many emerging market currencies. Consistent with some improvement in investor sentiment toward risky assets, foreign equity prices generally rose over the intermeeting period, and foreign sovereign and corporate bond spreads narrowed. In addition, both bond and equity emerging market mutual funds saw net inflows over the period.
Staff Economic Outlook
In the economic forecast prepared by the staff for the June FOMC meeting, real GDP growth in the first half of this year as a whole was lower, on net, than in the projection for the April meeting. In particular, the available readings on exports, inventory investment, outlays for health-care services, and construction pointed to much weaker real GDP in the first quarter than the staff had expected. However, the staff still anticipated that real GDP growth would rebound briskly in the second quarter, consistent with recent indicators for consumer spending and business investment, along with the expectation that exports and inventory investment would return to more normal levels and that economic activity that had been restrained by the severe winter weather would bounce back. Primarily because of the combination of recent downward surprises in the unemployment rate and weaker-than-expected real GDP, the staff slightly lowered its assumed pace of potential output growth this year and next and slightly decreased its assumption for the natural rate of unemployment over this same period. As a result, the staff's medium-term forecast for real GDP growth was revised down a little on balance. Nevertheless, the staff continued to project that real GDP would expand at a faster pace in the second half of this year and over the next two years than it did last year and that it would rise more quickly than potential output. The faster pace of real GDP growth was expected to be supported by diminishing drag on spending from changes in fiscal policy, increases in consumer and business confidence, further improvements in credit availability, and a pickup in the rate of foreign economic growth. The expansion in economic activity was anticipated to slowly reduce resource slack over the projection period, and the unemployment rate was expected to decline gradually to the staff's estimate of its longer-run natural rate in the medium term. In the longer-run outlook, the staff slightly lowered its assumptions for real GDP growth and the level of equilibrium real interest rates.
The staff's forecast for inflation in the near term was revised up a little as recent data showed somewhat faster increases in consumer prices than anticipated. However, the medium-term projection for inflation was revised down slightly, reflecting a reassessment by the staff of the underlying trend in inflation. The staff continued to forecast that inflation would remain below the Committee's longer-run objective of 2 percent over the next few years. With longer-run inflation expectations assumed to remain stable, changes in commodity and import prices expected to be subdued, and slack in labor and product markets anticipated to diminish slowly, inflation was projected to rise gradually toward the Committee's objective. The staff continued to project that inflation would reach the Committee's objective in the longer run.
The staff's economic projections for the June meeting were somewhat different from the forecasts presented at the March meeting, when the FOMC last prepared a Summary of Economic Projections (SEP). The staff's June projections for the unemployment rate, real GDP growth, and inflation over the next few years were all a little lower, on balance, than those in its March forecast.
The staff viewed the extent of uncertainty around its June projections for real GDP growth and the unemployment rate as roughly in line with the average over the past 20 years. Nonetheless, the risks to the forecast for real GDP growth were viewed as tilted a little to the downside, as neither monetary policy nor fiscal policy was seen as being well positioned to help the economy withstand adverse shocks. At the same time, the staff viewed the risks around its outlook for the unemployment rate and for inflation as roughly balanced.
Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, the meeting participants submitted their assessments of real output growth, the unemployment rate, inflation, and the target federal funds rate for each year from 2014 through 2016 and over the longer run, under each participant's judgment of appropriate monetary policy.3 The longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These economic projections and policy assessments are described in the SEP, which is attached as an addendum to these minutes.
In their discussion of the economic situation and the outlook, meeting participants viewed the information received over the intermeeting period as suggesting that economic activity was rebounding in the second quarter following a surprisingly large decline in real GDP in the first quarter of the year. Labor market conditions generally improved further. Although participants marked down their expectations for average growth of real GDP over the first half of 2014, their projections beginning in the second half of 2014 changed little. Over the next two and a half years, they continued to expect economic activity to expand at a rate sufficient to lead to a further decline in the unemployment rate to levels close to their current assessments of its longer-run normal value. Among the factors anticipated to support the sustained economic expansion were accommodative monetary policy, diminished drag from fiscal restraint, further gains in household net worth, improving credit conditions for households and businesses, and rising employment and wages. While inflation was still seen as running below the Committee's longer-run objective, longer-run inflation expectations remained stable and the Committee anticipated that inflation would move back toward its 2 percent objective over the forecast period. Most participants viewed the risks to the outlook for the economy, the labor market, and inflation as broadly balanced.
Household spending appeared to have risen moderately, on balance, in recent months, with sales of motor vehicles, in particular, rising strongly. However, several participants read the recent soft information on retail sales and health-care spending as raising some concern about the underlying strength in consumer spending. A couple of participants noted that, to date, consumer spending had been supported importantly by gains in household net worth while income gains had been held back by only modest increases in wages. In their view, an important element in the economic outlook was a pickup in income, from higher wages as well as ongoing employment gains, that would be expected to support a sustained rise in consumer spending.
The recovery in the housing sector was reported to have remained slow in all but a few areas of the country. Many participants expressed concern about the still-soft indicators of residential construction, and they discussed a range of factors that might be contributing to either a temporary delay in the housing recovery or a persistently lower level of homebuilding than previously anticipated. Despite attractive mortgage rates, housing demand was seen as being damped by such factors as restrictive credit conditions, particularly for households with low credit scores; high down payments; or low demand among younger homebuyers, due in part to the burden of student loan debt. Others noted supply constraints, pointing to shortages of lots, low inventories of desirable homes for sale, an overhang of homes associated with foreclosures or seriously delinquent mortgages, or rising construction costs. Several other participants suggested the possibility that more persistent structural changes in housing demand associated with an aging population and evolving lifestyle preferences were boosting demand for multifamily units at the expense of single-family homes.
Information from participants' business contacts suggested capital spending was likely to increase going forward. Contacts in a number of Districts reported that they were generally optimistic about the business outlook, although in a couple of regions respondents remained cautious about prospects for stronger economic growth or worried about a renewal of federal fiscal restraint after the current congressional budget agreement expires. Among the industries cited as relatively strong in recent months were transportation, energy, telecommunications, and manufacturing, particularly motor vehicles. Some participants commented that their contacts in small and medium-sized businesses reported an improved outlook for sales, and several heard businesses more generally discuss plans to increase capital expenditures. One participant noted that District businesses were investing largely to meet replacement needs, while another suggested that the backlog of such needs would likely provide some impetus to business investment.
Favorable financial conditions appeared be supporting economic activity. While information about mortgage lending was mixed, a number of participants reported increases in C&I lending by banks in their Districts, a pickup in loan demand at banks, or better credit quality for borrowers. In addition, small businesses reported improvements in credit availability. However, participants also discussed whether some recent trends in financial markets might suggest that investors were not appropriately taking account of risks in their investment decisions. In particular, low implied volatility in equity, currency, and fixed-income markets as well as signs of increased risk-taking were viewed by some participants as an indication that market participants were not factoring in sufficient uncertainty about the path of the economy and monetary policy. They agreed that the Committee should continue to carefully monitor financial conditions and to emphasize in its communications the dependence of its policy decisions on the evolution of the economic outlook; it was also pointed out that, where appropriate, supervisory measures should be applied to address excessive risk-taking and associated financial imbalances. At the same time, it was noted that monetary policy needed to continue to promote the favorable financial conditions required to support the economic expansion.
In discussing economic developments abroad, a couple of participants noted that recent monetary policy actions by the ECB and the Bank of Japan had improved the outlook for economic activity in those areas and could help return inflation to target. Several others, however, remained concerned that persistent low inflation in Europe and Japan could eventually erode inflation expectations more broadly. And a couple of participants expressed uncertainty about the outlook for economic growth in Japan and China. In addition, several saw developments in Iraq and Ukraine as posing possible downside risks to global economic activity or potential upside risks to world oil prices.
Labor market conditions generally continued to improve over the intermeeting period. That improvement was evidenced by the decline in the unemployment rate as well as by changes in other indicators, such as solid gains in nonfarm payrolls, a low level of new claims for unemployment insurance, uptrends in quits and job openings, and more positive views of job availability by households. In assessing labor market conditions, participants again offered a range of views on how far conditions in the labor market were from those associated with maximum employment. Many judged that slack remained elevated, and a number of them thought it was greater than measured by the official unemployment rate, citing, in particular, the still-high level of workers employed part time for economic reasons or the depressed labor force participation rate. Even so, several participants pointed out that both long- and short-term unemployment and measures that include marginally attached workers had declined. Most participants projected the improvement in labor market conditions to continue, with the unemployment rate moving down gradually over the medium term. However, a couple of participants anticipated that the decline in unemployment would be damped as part-time workers shift to full-time jobs and as nonparticipants rejoin the labor force, while a few others commented that they expected no lasting reversal of the decline in labor force participation.
Aggregate wage measures continued to rise at only a modest rate, and reports on wages from business contacts and surveys in a number of Districts were mixed. Several of those reports pointed to an absence of wage pressures, while some others indicated that tight labor markets or shortages of skilled workers were leading to upward pressure on wages in some areas or occupations and that an increasing proportion of small businesses were planning to raise wages. Participants discussed the prospects for wage increases to pick up as slack in the labor market diminishes. Several noted that a return to growth in real wages in line with productivity growth would provide welcome support for household spending.
Readings on a range of price measures--including the PCE price index, the CPI, and a number of the analytical measures developed at the Reserve Banks--appeared to provide evidence that inflation had moved up recently from low levels earlier in the year, consistent with the Committee's forecast of a gradual increase in inflation over the medium term. Reports from business contacts were mixed, spanning an absence of price pressures in some Districts and rising input costs in others. Some participants expressed concern about the persistence of below-trend inflation, and a couple of them suggested that the Committee may need to allow the unemployment rate to move below its longer-run normal level for a time in order keep inflation expectations anchored and return inflation to its 2 percent target, though one participant emphasized the risks of doing so. In contrast, some others expected a faster pickup in inflation or saw upside risks to inflation and inflation expectations because they anticipated a more rapid decline in economic slack.
During their consideration of issues related to monetary policy over the medium term, participants generally supported the Committee's current guidance about the likely path of its asset purchases and about its approach to determining the timing of the first increase in the federal funds rate and the path of the policy rate thereafter. Participants offered views on a range of issues related to policy communications. Some participants suggested that the Committee's communications about its forward guidance should emphasize more strongly that its policy decisions would depend on its ongoing assessment across a range of indicators of economic activity, labor market conditions, inflation and inflation expectations, and financial market developments. In that regard, circumstances that might entail either a slower or a more rapid removal of policy accommodation were cited. For example, a number of participants noted their concern that a more gradual approach might be appropriate if forecasts of above-trend economic growth later this year were not realized. And a couple suggested that the Committee might need to strengthen its commitment to maintain sufficient policy accommodation to return inflation to its target over the medium term in order to prevent an undesirable decline in inflation expectations. Alternatively, some other participants expressed concern that economic growth over the medium run might be faster than currently expected or that the rate of growth of potential output might be lower than currently expected, calling for a more rapid move to begin raising the federal funds rate in order to avoid significantly overshooting the Committee's unemployment and inflation objectives.
While the current asset purchase program is not on a preset course, participants generally agreed that if the economy evolved as they anticipated, the program would likely be completed later this year. Some committee members had been asked by members of the public whether, if tapering in the pace of purchases continues as expected, the final reduction would come in a single $15 billion per month reduction or in a $10 billion reduction followed by a $5 billion reduction. Most participants viewed this as a technical issue with no substantive macroeconomic consequences and no consequences for the eventual decision about the timing of the first increase in the federal funds rate--a decision that will depend on the Committee's evolving assessments of actual and expected progress toward its objectives. In light of these considerations, participants generally agreed that if incoming information continued to support its expectation of improvement in labor market conditions and a return of inflation toward its longer-run objective, it would be appropriate to complete asset purchases with a $15 billion reduction in the pace of purchases in order to avoid having the small, remaining level of purchases receive undue focus among investors. If the economy progresses about as the Committee expects, warranting reductions in the pace of purchases at each upcoming meeting, this final reduction would occur following the October meeting.
Committee Policy Action
In their discussion of monetary policy in the period ahead, members judged that information received since the Federal Open Market Committee met in April indicated that economic activity was rebounding from the decline in the first quarter of the year. Labor market indicators generally showed further improvement. The unemployment rate, though lower, remained elevated. Household spending appeared to be rising moderately and business fixed investment resumed its advance, while the recovery in the housing sector remained slow. Fiscal policy was restraining economic growth, although the extent of restraint was diminishing. The Committee expected that, with appropriate policy accommodation, economic activity would expand at a moderate pace and labor market conditions would continue to improve gradually, moving toward those the Committee judges consistent with its dual mandate. Members saw the risks to the outlook for the economy and the labor market as nearly balanced. Inflation was running below the Committee's longer-run objective, but the Committee anticipated that with stable inflation expectations and strengthening economic activity, inflation would, over time, return to the Committee's 2 percent objective. However, members continued to recognize that inflation persistently below its longer-run objective could pose risks to economic performance and agreed to monitor inflation developments closely for evidence that inflation was moving back toward its objective over the medium term.
Members judged that the economy had sufficient underlying strength to support ongoing improvement in labor market conditions and a return of inflation toward the Committee's longer-run 2 percent objective, and thus agreed that a further measured reduction in the pace of the Committee's asset purchases was appropriate at this meeting. Accordingly, the Committee agreed that beginning in July, it would add to its holdings of agency MBS at a pace of $15 billion per month rather than $20 billion per month, and it would add to its holdings of Treasury securities at a pace of $20 billion per month rather than $25 billion per month. Members again judged that, if incoming information broadly supported the Committee's expectations for ongoing progress toward meeting its dual objectives of maximum employment and inflation of 2 percent, the Committee would likely reduce the pace of asset purchases in further measured steps at future meetings. The Committee reiterated, however, that purchases were not on a preset course, and that its decisions about the pace of purchases would remain contingent on its outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.
The Committee agreed to maintain its target range for the federal funds rate and to reiterate its forward guidance about how it would assess the appropriate timing of the first increase in the target rate and the anticipated behavior of the federal funds rate after it is raised. The guidance continued to emphasize that the Committee's decisions about how long to maintain the current target range for the federal funds rate would depend on its assessment of actual and expected progress toward its objectives of maximum employment and 2 percent inflation. The Committee again stated that it currently anticipated that it likely would be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continued to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remained well anchored. The forward guidance also reiterated the Committee's expectation that even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
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 SOMA in accordance with the following domestic policy directive:
"Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. Beginning in July, the Desk is directed to purchase longer-term Treasury securities at a pace of about $20 billion per month and to purchase agency mortgage-backed securities at a pace of about $15 billion per month. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The System Open Market Account manager and the secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."
The vote encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in April indicates that growth in economic activity has rebounded in recent months. Labor market indicators generally showed further improvement. The unemployment rate, though lower, remains elevated. Household spending appears to be rising moderately and business fixed investment resumed its advance, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually, moving toward those the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.
The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in July, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $15 billion per month rather than $20 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $20 billion per month rather than $25 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Stanley Fischer, Richard W. Fisher, Narayana Kocherlakota, Loretta J. Mester, Charles I. Plosser, Jerome H. Powell, and Daniel K. Tarullo.
Voting against this action: None.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, July 29-30. The meeting adjourned at 11:10 a.m. on June 18, 2014.
Notation Vote
By notation vote completed on May 19, 2014, the Committee unanimously approved the minutes of the Committee meeting held on April 29-30, 2014.
_____________________________
William B. English
Secretary
1. Attended the joint session of the Federal Open Market Committee and the Board of Governors. Return to text
2. Attended Tuesday's session only. Return to text
3. Four members of the Board of Governors and the presidents of the 12 Federal Reserve Banks submitted projections. Governor Brainard took office on June 16, 2014, and participated in the June 17-18, 2014, meeting; she was not able to submit economic projections. Return to text |
2014-04-30T00:00:00 | 2014-05-21 | Minute | Minutes of the Federal Open Market Committee
April 29-30, 2014
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, April 29, 2014, at 10:30 a.m. and continued on Wednesday, April 30, 2014, at 9:00 a.m.
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Richard W. Fisher
Narayana Kocherlakota
Sandra Pianalto
Charles I. Plosser
Jerome H. Powell
Jeremy C. Stein
Daniel K. Tarullo
Charles L. Evans, Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Alternate Members of the Federal Open Market Committee
James Bullard, Esther L. George, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively
William B. English, Secretary and Economist
Matthew M. Luecke, Deputy Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Steven B. Kamin, Economist
David W. Wilcox, Economist
James A. Clouse, Thomas A. Connors,1 Evan F. Koenig, Thomas Laubach, Michael P. Leahy, Loretta J. Mester, Samuel Schulhofer-Wohl, Mark E. Schweitzer, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Robert deV. Frierson,2 Secretary of the Board, Office of the Secretary, Board of Governors
Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors
Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors
Matthew J. Eichner, Deputy Director, Division of Research and Statistics, Board of Governors; Stephen A. Meyer and William Nelson, Deputy Directors, Division of Monetary Affairs, Board of Governors
Jon W. Faust, Special Adviser to the Board, Office of Board Members, Board of Governors
Trevor A. Reeve, Special Adviser to the Chair, Office of Board Members, Board of Governors
Linda Robertson,3 Assistant to the Board, Office of Board Members, Board of Governors
Ellen E. Meade and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors
David Bowman4 and Beth Anne Wilson, Associate Directors, Division of International Finance, Board of Governors; Daniel M. Covitz, David E. Lebow, and Michael G. Palumbo, Associate Directors, Division of Research and Statistics, Board of Governors; Fabio M. Natalucci2 and Gretchen C. Weinbach,2 Associate Directors, Division of Monetary Affairs, Board of Governors
Marnie Gillis DeBoer2 and Jane E. Ihrig,2 Deputy Associate Directors, Division of Monetary Affairs, Board of Governors
Brian J. Gross,1 Special Assistant to the Board, Office of Board Members, Board of Governors
Stacey Tevlin, Assistant Director, Division of Research and Statistics, Board of Governors
Robert J. Tetlow, Adviser, Division of Monetary Affairs, Board of Governors
Dana L. Burnett, Section Chief, Division of Monetary Affairs, Board of Governors
Patrick McCabe,2 Senior Economist, Division of Research and Statistics, Board of Governors
Penelope A. Beattie,2 Assistant to the Secretary, Office of the Secretary, Board of Governors
Randall A. Williams, Records Project Manager, Division of Monetary Affairs, Board of Governors
James M. Lyon, First Vice President, Federal Reserve Bank of Minneapolis
David Altig, James J. McAndrews, and Alberto G. Musalem, Executive Vice Presidents, Federal Reserve Banks of Atlanta, New York, and New York, respectively
Joshua L. Frost and Spencer Krane, Senior Vice Presidents, Federal Reserve Banks of New York and Chicago, respectively
George A. Kahn, Antoine Martin, Joe Peek, Keith Sill, Daniel L. Thornton, and Douglas Tillett, Vice Presidents, Federal Reserve Banks of Kansas City, New York, Boston, Philadelphia, St. Louis, and Chicago, respectively
Andreas L. Hornstein, Senior Advisor, Federal Reserve Bank of Richmond
John Fernald, Senior Research Adviser, Federal Reserve Bank of San Francisco
Sean Savage, Senior Associate, Federal Reserve Bank of New York
Monetary Policy Normalization
In a joint session of the Federal Open Market Committee (FOMC) and the Board of Governors of the Federal Reserve System, meeting participants discussed issues associated with the eventual normalization of the stance and conduct of monetary policy. The Committee's discussion of this topic was undertaken as part of prudent planning and did not imply that normalization would necessarily begin sometime soon. A staff presentation outlined several approaches to raising short-term interest rates when it becomes appropriate to do so, and to controlling the level of short-term interest rates once they are above the effective lower bound, during a period when the Federal Reserve will have a very large balance sheet. The approaches differed in terms of the combination of policy tools that might be used to accomplish those objectives. In addition to the rate of interest paid on excess reserve balances, the tools considered included fixed-rate overnight reverse repurchase (ON RRP) operations, term reverse repurchase agreements, and the Term Deposit Facility (TDF). The staff presentation discussed the potential implications of each approach for financial intermediation and financial markets, including the federal funds market, and the possible implications for financial stability. In addition, the staff outlined options for additional operational testing of the policy tools.
Following the staff presentation, meeting participants discussed a wide range of topics related to policy normalization. Participants generally agreed that starting to consider the options for normalization at this meeting was prudent, as it would help the Committee to make decisions about approaches to policy normalization and to communicate its plans to the public well before the first steps in normalizing policy become appropriate. Early communication, in turn, would enhance the clarity and credibility of monetary policy and help promote the achievement of the Committee's statutory objectives. It was emphasized that the tools available to the Committee will allow it to reduce policy accommodation when doing so becomes appropriate. Participants considered how various combinations of tools could have different implications for the degree of control over short-term interest rates, for the Federal Reserve's balance sheet and remittances to the Treasury, for the functioning of the federal funds market, and for financial stability in both normal times and in periods of stress. Because the Federal Reserve has not previously tightened the stance of policy while holding a large balance sheet, most participants judged that the Committee should consider a range of options and be prepared to adjust the mix of its policy tools as warranted. Participants generally favored the further testing of various tools, including the TDF, to better assess their operational readiness and effectiveness. No decisions regarding policy normalization were taken; participants requested additional analysis from the staff and agreed that it would be helpful to continue to review these issues at upcoming meetings. The Board meeting concluded at the end of the discussion.
Developments in Financial Markets and the Federal Reserve's Balance Sheet
The manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets as well as the System open market operations during the period since the Committee met on March 18-19, 2014. By unanimous vote, the Committee ratified the Open Market Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
By unanimous vote, the Committee agreed to renew the reciprocal currency arrangements with the Bank of Canada and the Bank of Mexico; these arrangements are associated with the Federal Reserve's participation in the North American Framework Agreement of 1994. In addition, by unanimous vote, the Committee agreed to renew the dollar and foreign currency liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank. The votes to renew the Federal Reserve's participation in these arrangements were taken at this meeting because provisions in the arrangements specify that the Federal Reserve provide six months' prior notice of an intention to terminate its participation.
Staff Review of the Economic Situation
The information reviewed for the April 29-30 meeting indicated that growth in economic activity paused in the first quarter as a whole, but that activity stepped up late in the quarter; this pattern reflected, in part, the temporary effects of the unusually cold and snowy weather earlier in the quarter and the unwinding of those effects later in the quarter. In March, payroll employment increased further, although the unemployment rate held steady and was still elevated. Consumer price inflation continued to run below the Committee's longer-run objective, but measures of longer-run inflation expectations remained stable.
The unemployment rate stayed at 6.7 percent in March, but both the labor force participation rate and the employment-to-population ratio increased slightly. The rate of long-duration unemployment declined somewhat, but the share of workers employed part time for economic reasons moved up; both of these measures were still well above their pre-recession levels. Initial claims for unemployment insurance remained low over the intermeeting period. Although the rate of job openings moved up in February, the hiring rate was flat and continued to be subdued.
Following a rebound in February that was partly weather related, manufacturing production rose further in March and the rate of manufacturing capacity utilization increased. The production of motor vehicles and parts declined in March, but factory output outside of the motor vehicle sector expanded. Automakers' schedules indicated that the pace of motor vehicle assemblies in the coming months would be similar to the level in March. However, broad indicators of manufacturing production, such as the new orders indexes from the national and regional manufacturing surveys, were at levels consistent with moderate increases in factory output in the near term.
Real personal consumption expenditures (PCE) expanded slightly less rapidly in the first quarter than in the fourth quarter. After moving roughly sideways, on net, in January and February, the component of nominal retail sales used by the Bureau of Economic Analysis (BEA) to construct its monthly estimate of PCE rose briskly in March, in part because the weather returned to more seasonal norms. Recent information on several important factors that influence household spending was positive. Real disposable income continued to increase in the first quarter, further gains in house prices likely bolstered household net worth, and consumer sentiment in the Thomson Reuters/University of Michigan Surveys of Consumers improved, on balance, in March and April.
The pace of activity in the housing sector remained soft, as real expenditures for residential investment decreased again in the first quarter. Starts of new single-family homes increased in March. However, permits for single-family homes--which are typically less sensitive to fluctuations in the weather and a better indicator of the underlying pace of construction--remained below their fourth-quarter level and had not shown a sustained improvement since last spring, when mortgage rates began to rise. Sales of both new and existing homes decreased in March of this year, but pending home sales rose.
Real private expenditures on business equipment and intellectual property products declined in the first quarter. However, nominal shipments of nondefense capital goods excluding aircraft rose in February and in March, and new orders were somewhat above the level of shipments, pointing to modest gains in shipments in the near term. Other forward-looking indicators, such as surveys of business conditions and capital spending plans, were also consistent with increased outlays for business equipment in the coming months. Real spending for nonresidential construction was about flat in the first quarter after declining in the fourth quarter, while real inventory investment moved lower. Business inventories in most industries appeared to be broadly aligned with sales in recent months.
Real federal government purchases rose slightly in the first quarter, as the increase from the reversal of the government shutdown in the fourth quarter was mostly offset by the ongoing downtrend in purchases. Real state and local government purchases decreased somewhat in the first quarter, as state and local construction expenditures declined.
The U.S. international trade deficit widened in February as exports fell and imports rose. The export declines were concentrated in aircraft and petroleum products, while exports of consumer goods rose. Rising imports of services and automotive products offset declines in imports of oil and capital goods. In the advance release of the national income and product accounts, the BEA estimated that net exports subtracted substantially from real gross domestic product (GDP) growth in the first quarter.
U.S. consumer prices, as measured by the PCE price index, rose at a slow rate in the first quarter, though somewhat faster than the pace posted in the fourth quarter, and were about 1 percent higher than a year earlier. After falling in the fourth quarter, consumer energy prices increased markedly in the first quarter as natural gas prices moved higher on a sharp decline in inventories during the unusually cold winter months. The PCE price index for items excluding food and energy rose at the same rate in the first quarter as in the previous one and was around 1-1/4 percent higher than four quarters earlier. Both near- and longer-term inflation expectations from the Michigan survey were unchanged in March and April. Over the 12 months ending in March, both the employment cost index for private-sector workers and average hourly earnings for all employees increased only a little more than consumer price inflation.
Indicators of foreign economic activity suggested continued expansion in the first quarter but at a rate somewhat below that in the fourth quarter. The deceleration was concentrated in emerging market economies (EMEs). Real GDP growth slowed markedly in China, largely reflecting lower investment growth and exports. Weaker exports also restrained economic activity in other emerging Asian economies. In Mexico, indicators of activity suggested some improvement from a lackluster fourth quarter. By contrast, economic growth remained near its solid fourth-quarter pace in the advanced foreign economies (AFEs). In the euro area, the United Kingdom, and Canada, average industrial production in the first two months of the year was up moderately from the fourth quarter; in Japan, industrial production rose robustly, and consumer demand was boosted by anticipation of the April increase in the consumption tax. Inflation developments were mixed. Inflation rebounded in Canada but remained very low in the euro area. In China and India, inflation fell in the first quarter, largely because of lower food prices. Monetary policy remained highly accommodative during the intermeeting period in the AFEs and also in many EMEs, although monetary policy in Brazil was tightened to contain inflation pressures.
Staff Review of the Financial Situation
Despite some volatility in certain asset prices, financial conditions did not change appreciably, on net, over the intermeeting period. Asset prices moved in response to economic data releases that were, on balance, a little stronger than expected and to Federal Reserve communications. The anticipated path of the federal funds rate moved up somewhat, as did intermediate-dated Treasury yields, while corporate bond spreads narrowed and the S&P 500 increased slightly. The foreign exchange value of the dollar was little changed.
Federal Reserve communications garnered significant attention from market participants over the period but appeared to have only a modest net effect on their expectations for monetary policy. The communications following the conclusion of the March FOMC meeting were interpreted as somewhat less accommodative than expected. However, subsequent communications--including the release of the minutes of the March FOMC meeting--appeared to mostly reverse the earlier change in expectations.
Yields on short- and medium-term nominal Treasury securities rose, on balance, over the intermeeting period. In contrast, yields at the long end of the curve declined, continuing a downward trend evident over much of this year. Market participants cited a number of factors as contributing to the drop in long-term yields so far this year, including portfolio reallocation by large institutional investors, the trading strategies pursued by some investors, and safe-haven flows. Some market participants reportedly also revised down their estimate of the average real federal funds rate over the longer term, reflecting in part changes in their assessments of long-run economic conditions. Measures of longer-horizon inflation compensation based on Treasury Inflation-Protected Securities were little changed.
Conditions in short-term funding markets remained fairly stable over the intermeeting period. Take-up in the Federal Reserve's fixed-rate ON RRP exercise continued to be sensitive to the spread between market rates and the rate offered in the exercise, with higher take-up occurring on days when the market rate on repurchase agreements was close to or below the ON RRP rate. As has been the case since the ON RRP exercise began, money market funds increased their usage at quarter-end; take-up reached a record level of about $240 billion at the end of March. Part of the increase in ON RRP usage at the end of March relative to the end of December likely reflected higher counterparty allotment limits, which were raised from $3 billion to $7 billion during the first quarter. The allotment limit was subsequently increased to $10 billion per counterparty in early April. The seasonal paydown of short-term Treasury debt following the April tax date was accompanied by a notable pickup in participation at ON RRP operations, but Treasury repo rates generally remained very close to the ON RRP rate of 5 basis points.
The S&P 500 increased a bit, on net, over the intermeeting period, but broader stock market indexes edged down. The prices of social media and biotechnology stocks, which had risen substantially faster than the broader market over the previous year, fell sharply over the intermeeting period, leaving the gains on these shares about in line with those on broader indexes over the past 12 months. Some initial public offerings were reportedly put on hold as prices of small-capitalization stocks declined. By contrast, stocks that generally have more stable dividends, such as those of utility and telecommunications companies, advanced. First-quarter earnings reports for large banking organizations were mixed, and the stock prices of such firms generally underperformed broad equity indexes.
Credit flows to nonfinancial corporations remained robust, on balance, notwithstanding subdued bond issuance in April that was attributed to typical constraints on issuance during the period when many firms are reporting their earnings. The growth in commercial and industrial loans on banks' balance sheets remained robust, consistent with the increase in loan demand by large and middle-market firms reported in the April Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS). Institutional issuance of leveraged loans continued at a brisk pace amid reports of an ongoing gradual easing of credit terms and deal structures.
Financing conditions in the commercial real estate (CRE) sector improved further. In the first quarter, commercial mortgage loans held on banks' books continued to grow solidly. According to the April SLOOS, banks again eased standards on CRE loans during the first quarter; they also reported an increase in loan demand, especially for construction and land development loans. In contrast, issuance of commercial mortgage-backed securities in 2014 has been a bit slower than last year's pace.
Mortgage credit conditions generally remained tight over the intermeeting period, though signs of easing continued to emerge amid further gains in house prices. In particular, the April SLOOS indicated a net easing of banks' credit standards for home-purchase loans to prime customers in the first quarter. Mortgage interest rates and their spreads over Treasury yields were little changed over the intermeeting period, and applications for refinancing and purchase mortgages remained tepid.
Conditions in consumer credit markets continued to be mixed. Student and auto loans expanded at a robust pace, while credit card debt outstanding stayed flat, as it had been in recent months. Financing conditions in the consumer asset-backed securities market remained favorable, and issuance continued to be solid.
Most foreign equity indexes rose over the period despite a global selloff of technology-related stocks, and 10-year sovereign bond yields in Canada, Germany, and the United Kingdom were nearly unchanged on net. Yield spreads on peripheral euro-area debt over German bonds of similar maturity continued to narrow. The broad nominal exchange rate index for the dollar was about unchanged, as the dollar appreciated against the euro, yen, and renminbi but depreciated against most other currencies. Investor sentiment toward EMEs continued to improve over the period despite incoming data that were somewhat weaker than expected. Increasing tensions between Ukraine and Russia, as well as the lowering of Russia's sovereign debt rating by Standard & Poor's, contributed to a rise in Russia's 10-year sovereign bond yield and a sharp decline in its main equity index. Outside of that region, however, these building tensions left little imprint on global financial markets.
The staff's periodic report on potential risks to financial stability concluded that the vulnerability of the financial system to adverse shocks remained at moderate levels overall. Relatively strong capital profiles of large domestic banking firms, low levels of aggregate leverage in the nonfinancial sector, and moderate use of short-term wholesale funding across the financial sector were seen as the primary factors supporting overall financial stability. However, the staff report also highlighted valuation pressures in some segments of the equity market, continued strong demand for corporate debt instruments and associated pressures on underwriting standards, and liquidity risks associated with fixed-income mutual funds.
Staff Economic Outlook
In the economic forecast prepared by the staff for the April FOMC meeting, real GDP growth in the first half of this year was somewhat slower than in the projection for the March meeting. The available readings on net exports and, to a lesser extent, residential investment pointed to less spending growth in the first quarter than the staff previously expected. However, the staff's assessment was that the unanticipated weakness in economic activity in the first quarter would be largely transitory and implied little revision to its projection for second-quarter output growth. In addition, the medium-term forecast for real GDP growth was essentially unrevised. The staff continued to project that real GDP would expand at a faster pace over the next few years than it did last year, and that it would rise more quickly than the growth rate of potential output. The faster pace of real GDP growth was expected to be supported by an easing in the restraint from changes in fiscal policy, increases in consumer and business confidence, further improvements in credit availability and financial conditions, and a pickup in the rate of foreign economic growth. The expansion in economic activity was anticipated to slowly reduce resource slack over the projection period, and the unemployment rate was expected to decline gradually to the staff's estimate of its longer-run natural rate.
The staff's forecast for inflation was basically unchanged from the projection prepared for the previous FOMC meeting. The staff continued to forecast that inflation would remain below the Committee's longer-run objective of 2 percent over the next few years. With longer-run inflation expectations assumed to remain stable, changes in commodity and import prices expected to be subdued, and slack in labor and product markets anticipated to diminish slowly, inflation was projected to rise gradually toward the Committee's objective.
The staff viewed the extent of uncertainty around its April projections for real GDP growth, inflation, and the unemployment rate as roughly in line with the average over the past 20 years. Nonetheless, the risks to the forecast for real GDP growth were viewed as tilted a little to the downside, especially because the economy was not well positioned to withstand adverse shocks while the target for the federal funds rate was at its effective lower bound. At the same time, the staff viewed the risks around its outlook for the unemployment rate and for inflation as roughly balanced.
Participants' Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants generally indicated that their assessment of the economic outlook had not changed materially since the March meeting. Severe winter weather had contributed to a sharp slowing in activity during the first quarter, but recent indicators pointed to a rebound and suggested that the economy had returned to a trajectory of moderate growth. However, some participants remarked that it was too early to confirm that the bounceback in economic activity would put the economy on a path of sustained above-trend economic growth. In general, participants continued to view the risks to the outlook for the economy and the labor market as nearly balanced. However, a number of participants pointed to possible sources of downside risk to growth, including a persistent slowdown in the housing sector or potential international developments, such as a further slowing of growth in China or an increase in geopolitical tensions regarding Russia and Ukraine.
Participants noted that business contacts in many parts of the country were generally optimistic about economic prospects, with reports of increased sales of automobiles, higher production in the aerospace industry, and increased usage of industrial power; in addition, a couple of firms with a global presence reported a notable increase in demand from customers in Europe. Contacts in several Districts pointed to plans for increasing capital expenditures or to stronger demand for commercial and industrial loans. In the agricultural sector, the planting season was under way, but there were concerns about the effects of drought on production in some areas.
Most participants commented on the continuing weakness in housing activity. They saw a range of factors affecting the housing market, including higher home prices, construction bottlenecks stemming from a scarcity of labor and harsh winter weather, input cost pressures, or a shortage in the supply of available lots. Views varied regarding the outlook for the multifamily sector, with the large increase in multifamily units coming to market potentially putting downward pressure on prices and rents, but the demand for this type of housing expected to rise as the population ages. A couple of participants noted that mortgage credit availability remained constrained and lending standards were tight compared with historical norms, especially for purchase mortgages. However, reports from some Districts indicated that real estate and housing-related business activity had strengthened recently, consistent with the solid gains in consumer spending registered in March.
Conditions in the labor market continued to improve over the intermeeting period and participants generally expected further gradual improvement. Participants discussed a range of research and analysis bearing on the amount of available slack remaining in the labor market. A number of them argued that several indicators of labor underutilization--including the low labor force participation rate and the still-elevated rates of longer-duration unemployment and of workers employed part time for economic reasons--suggested that there is more slack in the labor market than is captured by the unemployment rate alone. Low nominal wage inflation was also viewed as consistent with slack in labor markets. However, some participants reported that labor markets were tight in their Districts or that contacts indicated some sectors or occupations were experiencing shortages of workers. Another participant observed that labor underutilization, as measured by an index that takes employment transition rates into account, was consistent with past periods in which the official unemployment rate had reached its current level, and had declined about as much relative to the official unemployment rate as it had in previous economic recoveries.
In discussing the effect of labor market conditions on inflation, a number of participants expressed skepticism about recent studies suggesting that long-term unemployment provides less downward pressure on wage and price inflation than short-term unemployment does. A couple of participants cited other research findings that both short- and long-term unemployment rates exert pressure on wages, with the effects of long-term unemployment increasing as the level of short-term unemployment declines. Moreover, a few participants pointed out that because of downward nominal wage rigidity during the recession, wage increases are likely to remain relatively modest for some time during the recovery, even as the labor market strengthens. It was also noted that because inflation was expected to remain well below the Committee's 2 percent objective and the unemployment rate was still above participants' estimates of its longer-run normal level, the Committee did not, at present, face a tradeoff between its employment and inflation objectives, and an expansion of aggregate demand would result in further progress relative to both objectives.
Inflation continued to run below the Committee's 2 percent longer-run objective over the intermeeting period. Many participants saw the recent behavior of the prices of food, energy, shelter, and imports as consistent with a stabilization in inflation and judged that the transitory factors that had reduced inflation, such as declines in administered prices for medical services, were fading. Most participants expected inflation to return to 2 percent within the next few years, supported by highly accommodative monetary policy, stable inflation expectations, and a continued gradual recovery in economic activity. However, a few others expressed the concern that the return to 2 percent inflation could be even more gradual.
In their discussion of financial stability, participants generally did not see imbalances that posed significant near-term risks to the financial system and the broader economy, but they nevertheless reviewed some financial developments that pointed to potential future risks. A couple of participants noted that conditions in the leveraged loan market had become stretched, although equity cushions on new deals remained above levels seen prior to the financial crisis. Two others saw declining credit spreads, particularly on speculative-grade corporate bonds, as consistent with an increase in investors' appetite for risk. In addition, several participants noted that the low level of expected volatility implied by some financial market prices might also signal an increase in risk appetite. Some stated that it would be helpful to continue to explore the appropriate regulatory, supervisory, and monetary policy responses to potential risks to financial stability.
It was noted that the changes to the Committee's forward guidance at the March FOMC meeting had been well understood by investors. However, a number of participants emphasized the importance of communicating still more clearly about the Committee's policy intentions as the time of the first increase in the federal funds rate moves closer. Some thought it would be helpful to clarify the reasoning underlying the language in the FOMC's postmeeting statement indicating that even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. In addition, a few participants judged that additional clarity about the Committee's reaction function could be particularly important in the event that future economic conditions necessitate a more rapid rise in the target federal funds rate than the Committee currently anticipates. A number of participants suggested that it would be useful to provide additional information regarding how long the Committee would continue its policy of rolling over maturing Treasury securities at auction and reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities.
Committee Policy Action
Members viewed the information received over the intermeeting period as indicating that economic growth had picked up recently, following a sharp slowdown during the winter due in part to unusually severe weather conditions. Although labor market indicators were mixed, on balance they showed further improvement. The unemployment rate, however, remained elevated. While household spending appeared to be rising more rapidly, business fixed investment had edged down and the recovery in the housing sector remained slow. Fiscal policy was restraining economic growth, but the extent of that restraint had diminished. The Committee expected that, with appropriate policy accommodation, economic activity would expand at a moderate pace and labor market conditions would continue to improve gradually, moving toward those the Committee judges to be consistent with its dual mandate. Moreover, members continued to see risks to the outlook for the economy and the labor market as nearly balanced. Inflation was running below the Committee's longer-run objective and was seen as posing possible risks to economic performance, but members anticipated that stable inflation expectations and strengthening economic activity would, over time, return inflation to the Committee's 2 percent target. However, in light of their concerns about the possible persistence of low inflation, members agreed that inflation developments should be monitored carefully for evidence that inflation was moving back toward the Committee's longer-run objective.
In their discussion of monetary policy in the period ahead, members noted that there had been little change in the economic outlook since the March meeting and decided that it would be appropriate to make a further measured reduction in the pace of asset purchases at this meeting. Accordingly, the Committee agreed that, beginning in May, it would add to its holdings of agency mortgage-backed securities at a pace of $20 billion per month rather than $25 billion per month, and would add to its holdings of longer-term Treasury securities at a pace of $25 billion per month rather than $30 billion per month. Members again judged that, if the economy continued to develop as anticipated, the Committee would likely reduce the pace of asset purchases in further measured steps at future meetings. However, members underscored that the pace of asset purchases was not on a preset course and would remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of purchases.
The Committee agreed that no changes to its target range for the federal funds rate or its forward guidance were warranted at this meeting, aside from removing a short paragraph that was added when the forward guidance was updated at the March meeting and which noted that the change in the Committee's guidance did not signal a change in the Committee's policy intentions; members deemed this language no longer necessary.
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 SOMA in accordance with the following domestic policy directive:
"Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. Beginning in May, the Desk is directed to purchase longer-term Treasury securities at a pace of about $25 billion per month and to purchase agency mortgage-backed securities at a pace of about $20 billion per month. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."
The vote encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in March indicates that growth in economic activity has picked up recently, after having slowed sharply during the winter in part because of adverse weather conditions. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate, however, remains elevated. Household spending appears to be rising more quickly. Business fixed investment edged down, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually, moving toward those the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.
The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in May, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $20 billion per month rather than $25 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $25 billion per month rather than $30 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."
Voting for this action: Janet L. Yellen, William C. Dudley, Richard W. Fisher, Narayana Kocherlakota, Sandra Pianalto, Charles I. Plosser, Jerome H. Powell, Jeremy C. Stein, and Daniel K. Tarullo.
Voting against this action: None.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, June 17-18, 2014. The meeting adjourned at 10:55 a.m. on April 30, 2014.
Notation Vote
By notation vote completed on April 8, 2014, the Committee unanimously approved the minutes of the Committee meeting held on March 18-19, 2014.
_____________________________
William B. English
Secretary
____________________
1. Attended Wednesday's session only. Return to text
2. Attended the discussion of monetary policy normalization. Return to text
3. Attended Tuesday's session only. Return to text
4. Attended Tuesday's session following the discussion of monetary policy normalization. Return to text |
2014-04-30T00:00:00 | 2014-04-30 | Statement | Information received since the Federal Open Market Committee met in March indicates that growth in economic activity has picked up recently, after having slowed sharply during the winter in part because of adverse weather conditions. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate, however, remains elevated. Household spending appears to be rising more quickly. Business fixed investment edged down, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually, moving toward those the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.
The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in May, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $20 billion per month rather than $25 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $25 billion per month rather than $30 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Richard W. Fisher; Narayana Kocherlakota; Sandra Pianalto; Charles I. Plosser; Jerome H. Powell; Jeremy C. Stein; and Daniel K. Tarullo.
Statement Regarding Purchases of Treasury Securities and Agency Mortgage-Backed Securities |
2014-03-19T00:00:00 | 2014-03-19 | Statement | Information received since the Federal Open Market Committee met in January indicates that growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate, however, remains elevated. Household spending and business fixed investment continued to advance, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually, moving toward those the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.
The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in April, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $25 billion per month rather than $30 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $30 billion per month rather than $35 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
With the unemployment rate nearing 6-1/2 percent, the Committee has updated its forward guidance. The change in the Committee's guidance does not indicate any change in the Committee's policy intentions as set forth in its recent statements.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Richard W. Fisher; Sandra Pianalto; Charles I. Plosser; Jerome H. Powell; Jeremy C. Stein; and Daniel K. Tarullo.
Voting against the action was Narayana Kocherlakota, who supported the sixth paragraph, but believed the fifth paragraph weakens the credibility of the Committee's commitment to return inflation to the 2 percent target from below and fosters policy uncertainty that hinders economic activity.
Statement Regarding Purchases of Treasury Securities and Agency Mortgage-Backed Securities |
2014-03-19T00:00:00 | 2014-04-09 | Minute | Minutes of the Federal Open Market Committee
March 18-19, 2014
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, March 18, 2014, at 2:00 p.m. and continued on Wednesday, March 19, 2014, at 8:30 a.m.
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Richard W. Fisher
Narayana Kocherlakota
Sandra Pianalto
Charles I. Plosser
Jerome H. Powell
Jeremy C. Stein
Daniel K. Tarullo
Christine Cumming, Charles L. Evans, Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Alternate Members of the Federal Open Market Committee
James Bullard, Esther L. George, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively
William B. English, Secretary and Economist
Matthew M. Luecke, Deputy Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Thomas C. Baxter, Deputy General Counsel
Steven B. Kamin, Economist
David W. Wilcox, Economist
James A. Clouse, Thomas A. Connors, Evan F. Koenig, Thomas Laubach, Michael P. Leahy, Loretta J. Mester, Samuel Schulhofer-Wohl, Mark E. Schweitzer, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors; Louise L. Roseman, Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors
Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors
Stephen A. Meyer and William Nelson, Deputy Directors, Division of Monetary Affairs, Board of Governors
Jon W. Faust, Special Adviser to the Board, Office of Board Members, Board of Governors
Trevor A. Reeve, Special Adviser to the Chair, Office of Board Members, Board of Governors
Ellen E. Meade, Senior Adviser, Division of Monetary Affairs, Board of Governors
Eric M. Engen, Michael G. Palumbo, and Wayne Passmore, Associate Directors, Division of Research and Statistics, Board of Governors
Brian J. Gross, Special Assistant to the Board, Office of Board Members, Board of Governors
Edward Nelson, Assistant Director, Division of Monetary Affairs, Board of Governors
Jeremy B. Rudd, Adviser, Division of Research and Statistics, Board of Governors
Stephanie Aaronson, Section Chief, Division of Research and Statistics, Board of Governors; Laura Lipscomb, Section Chief, Division of Monetary Affairs, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Peter M. Garavuso, Records Management Analyst, Division of Monetary Affairs, Board of Governors
David Altig, Jeff Fuhrer, Glenn D. Rudebusch, and Daniel G. Sullivan, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Boston, San Francisco, and Chicago, respectively
Troy Davig, Christopher J. Waller, and John A. Weinberg, Senior Vice Presidents, Federal Reserve Banks of Kansas City, St. Louis, and Richmond, respectively
Jonathan P. McCarthy, Keith Sill, and Douglas Tillett, Vice Presidents, Federal Reserve Banks of New York, Philadelphia, and Chicago, respectively
Developments in Financial Markets and the Federal Reserve's Balance Sheet
The manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets as well as the System open market operations during the period since the Federal Open Market Committee (FOMC) met on January 28-29, 2014. By unanimous vote, the Committee ratified the Open Market Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the March 18-19 meeting indicated that economic growth slowed early this year, likely only in part because of the temporary effects of the unusually cold and snowy winter weather. Total payroll employment expanded further, while the unemployment rate held steady, on balance, and was still elevated. Consumer price inflation continued to run below the Committee's longer-run objective, but measures of longer-run inflation expectations remained stable.
Total nonfarm payroll employment rose in January and February at a slower pace than in the fourth quarter of last year. The unemployment rate was 6.7 percent in February, the same as in December of last year. The labor force participation rate, along with the employment-to-population ratio, increased, on net, in recent months. Both the share of workers employed part time for economic reasons and the rate of long-duration unemployment were lower in February than they were late last year, although both measures were still high. Initial claims for unemployment insurance were little changed over the intermeeting period. The rate of job openings stepped down, while the rate of hiring was unchanged in December and January.
Manufacturing production was roughly flat, on balance, in January and February, in part because of the effects of the severe winter weather, which held down both motor vehicle output and production outside the motor vehicle sector. Automakers' production schedules indicated that the pace of light motor vehicle assemblies would increase in the second quarter, and broader indicators of manufacturing production, such as the readings on new orders from national manufacturing surveys, were consistent with an expectation of moderate expansion in factory output in the coming months.
Real personal consumption expenditures (PCE) increased a little, on net, in December and January. However, the components of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimate of PCE rose at a faster rate in February than in the previous couple of months, and light motor vehicle sales also moved up. Recent information on key factors that influence household spending, along with the expectation that the weather would return to seasonal norms, generally pointed toward additional gains in PCE in the coming months. Households' net worth probably continued to expand as equity prices and home values increased further, and consumer sentiment in the Thomson Reuters/University of Michigan Surveys of Consumers during February and early March remained above its average last fall; however, real disposable incomes only edged up, on balance, in December and January.
The pace of activity in the housing sector appeared to soften. Starts for both new single-family homes and multifamily units were lower in January and February than at the end of last year. Permits for single-family homes--which are typically less sensitive to fluctuations in the weather and a better indicator of the underlying pace of construction--also moved down in those months and had not shown a sustained improvement since last spring when mortgage rates began to rise. Sales of existing homes decreased in January and pending home sales were little changed, although new home sales expanded.
Growth in real private expenditures for business equipment and intellectual property products stepped up in the fourth quarter to a faster rate than in the third quarter. In January, nominal shipments of nondefense capital goods excluding aircraft decreased slightly. However, new orders for these capital goods increased and remained above the level of shipments in January, pointing to increases in shipments in subsequent months. Other forward-looking indicators, such as surveys of business conditions, also were generally consistent with modest increases in business equipment spending in the near term. Real business spending for nonresidential structures was essentially unchanged in the fourth quarter, and nominal expenditures for such structures were flat in January. Real nonfarm inventory investment increased at a significantly slower pace in the fourth quarter than in the preceding quarter, and recent data on the book value of inventories, along with readings on inventories from national and regional manufacturing surveys, did not point to significant inventory imbalances in most industries; however, days' supply of light motor vehicles in January and February exceeded the automakers' targets.
Federal spending data in January and February pointed toward real federal government purchases being roughly flat in the first quarter, as the general downtrend in purchases seemed likely to be about offset by a reversal of the effects of the partial government shutdown during the fourth quarter. Total real state and local government purchases also appeared to be about flat going into the first quarter. The payrolls of these governments expanded somewhat, on balance, in January and February, but nominal state and local construction expenditures declined a little in January.
The U.S. international trade deficit, after widening in December, remained about unchanged in January. Exports increased in January, but the gains were modest as decreases in sales of cars, petroleum products, and agricultural goods were just offset by gains in other major categories. Imports also rose in January as the increase in the volume of oil imports more than offset declines in imports of non-oil goods and services.
Total U.S. consumer price inflation, as measured by the PCE price index, was about 1-1/4 percent over the 12 months ending in January, continuing to run below the Committee's longer-run objective of 2 percent. Over the same 12-month period, consumer energy prices rose faster than total consumer prices while consumer food prices only edged up, and core PCE prices--which exclude food and energy prices--increased just a bit more than 1 percent. In February, the consumer price index (CPI) rose at a pace similar to that seen in recent months, as food prices rose more quickly, energy prices declined, and the increase in the core CPI remained slow. Both near- and longer-term inflation expectations from the Michigan survey were little changed in February and early March.
Measures of labor compensation indicated that increases in nominal wages remained subdued. Compensation per hour in the nonfarm business sector increased slightly over the year ending in the fourth quarter, and, with some gains in labor productivity, unit labor costs declined a little. Over the same year-long period, the employment cost index and average hourly earnings for all employees rose only a little faster than consumer price inflation.
Foreign real gross domestic product (GDP) expanded at a moderate pace in the fourth quarter of 2013, with weak economic growth in Japan and Mexico offsetting stronger gains in many other economies. Recent indicators suggested that total foreign real GDP was expanding at a similar pace in the first quarter of 2014. The economic recovery in the euro area appeared to be continuing, and the pace of Japanese economic growth looked to have picked up. In Canada, however, severe winter weather appeared to have held down economic activity in early 2014. Among the emerging market economies (EMEs), recent data suggested that economic growth in China was slowing in the first quarter, and that the rate of growth in the other Asian economies was also declining from a very robust fourth-quarter pace. Mexican real GDP growth slowed sharply in the fourth quarter, led by a contraction in the manufacturing sector, but recent indicators, such as auto production, suggested some rebound in the pace of economic activity in the current quarter. Inflation increased slightly in some advanced economies but remained well below central banks' targets. At the same time, inflation declined in some emerging Asian economies. Monetary policy remained highly accommodative in the advanced foreign economies. Across the EMEs, monetary policy adjustments varied according to economic and financial developments, with some central banks tightening policy and others loosening it.
Staff Review of the Financial Situation
Financial market conditions in the United States over the intermeeting period appeared to have been influenced by an easing of concerns about developments in the EMEs but relatively little affected by the generally weaker-than-expected economic data, which market participants appeared to attribute in large part to the temporary effects of unusually severe winter weather. On balance, U.S. financial conditions remained supportive of growth in economic activity and employment: The expected path of the federal funds rate was little changed, longer-term yields on Treasury securities edged down, equity prices rose, speculative-grade corporate bond spreads narrowed, and the foreign exchange value of the dollar depreciated slightly.
FOMC communications over the intermeeting period were about in line with market expectations. The FOMC decision and statement in January were largely anticipated by market participants. The Monetary Policy Report and Chair Yellen's accompanying congressional testimony in February were viewed as emphasizing continuity in the approach to monetary policy, solidifying expectations that the pace of the Committee's asset purchases would be reduced by a further $10 billion at each upcoming meeting absent a material change in the economic outlook.
Results from the Desk's Survey of Primary Dealers for March indicated that the dealers' expectations about both the likely future path of the federal funds rate and Federal Reserve asset purchases were largely unchanged since January. The survey results showed that most dealers expected the Committee to modify its forward rate guidance at the March meeting, with many anticipating a shift toward qualitative guidance.
Yields on short- and intermediate-term Treasury securities were little changed, on balance, over the intermeeting period, as the effects of a waning of flight-to-quality demands early in the period roughly offset those of generally weaker-than-expected economic data. Yields on longer-term Treasury securities edged down. Measures of longer-horizon inflation compensation based on Treasury inflation-protected securities also declined somewhat.
The Federal Reserve continued its fixed-rate overnight reverse repurchase agreement (ON RRP) exercise. Early in the intermeeting period, market rates on repurchase agreements were close to the fixed rate offered in the exercise, prompting high take-up in the ON RRP operations. The increases in the interest rate offered by the Federal Reserve in its ON RRP exercise, along with the increases in caps for individual bids, also may have contributed to higher levels of activity at daily operations. Later in the period, market rates on repurchase agreements moved higher, apparently in response to a rise in Treasury bill issuance, and ON RRP volumes moderated. Reflecting the larger size of the ON RRP exercises and the reduced pace of asset purchases, the rate of increase in the monetary base slowed over January and February.
Conditions in unsecured short-term dollar funding markets remained stable over the intermeeting period. Responses to the March 2014 Senior Credit Officer Opinion Survey on Dealer Financing Terms suggested little change over the past three months in conditions in securities financing and over-the-counter derivatives markets and in credit terms applicable to most classes of counterparties.
Broad stock price indexes rose over the intermeeting period, apparently boosted by a solid finish to the corporate earnings season. Equity prices were also supported by a broad increase in investors' willingness to take riskier positions, in part likely reflecting an easing of concerns about EMEs early in the period.
Credit flows to nonfinancial corporations remained robust. Following a slowdown in January, nonfinancial corporate bond issuance rebounded in February, with the majority of proceeds going to investment-grade firms. The growth of commercial and industrial loans on banks' balance sheets increased over the period. Institutional issuance of leveraged loans continued at a brisk pace.
Financing conditions in the commercial real estate (CRE) sector continued to improve gradually. In the fourth quarter, banks' CRE loans increased across all major loan categories, and CRE loans on banks' books advanced at a solid pace in the first two months of the year. Issuance of commercial mortgage-backed securities was robust in February after a slow start in January.
Conditions in the municipal bond market remained favorable over the intermeeting period with the spread of municipal yields over yields on comparable-maturity Treasury securities little changed. Although Puerto Rico's general obligation (GO) bonds were downgraded from investment grade to speculative grade, prices of these bonds held steady, albeit at depressed levels. Puerto Rico successfully brought to market a GO bond issue in early March, substantially easing its near-term liquidity pressures.
House prices registered a further notable rise in January. Mortgage interest rates and their spreads over Treasury yields were little changed over the intermeeting period. Both mortgage applications for home purchases and refinancing applications remained at low levels through early March. Financing conditions in residential mortgage markets stayed tight, even as further incremental signs of easing emerged.
Conditions in consumer credit markets were still mixed. Auto loans continued to be broadly available, while credit card limits for borrowers with subprime and prime credit scores remained at low levels in the fourth quarter. Partly reflecting these conditions, credit card balances stayed about flat through January, while auto and student loans continued to expand briskly. Issuance of auto and credit card asset-backed securities was robust again in January and February.
Financial market sentiment abroad appeared to improve over the period, particularly with respect to the stresses that had developed in some EMEs just prior to the January FOMC meeting. Although global equity price indexes fell abruptly on March 3 amid the deepening of the political crisis in Ukraine, most markets quickly retraced those losses. Consistent with the general improvement in financial market sentiment, most foreign currencies appreciated against the dollar as flight-to-safety flows reversed. One notable exception was the Chinese renminbi, which depreciated against the dollar. The performance of foreign equity price indexes was mixed, on net: Stock prices rose in the EMEs, but they were flat in Europe and declined substantially in Japan. Longer-term sovereign bond yields in the advanced economies fell modestly over the period.
Staff Economic Outlook
In the economic forecast prepared by the staff for the March FOMC meeting, real GDP growth in the first half of this year was somewhat lower than in the projection for the January meeting. The available readings on consumer spending, residential construction, and business investment pointed to less spending growth in the first quarter than the staff had previously expected. The staff's assessment was that the unusually severe winter weather could account for some, but not all, of the recent unanticipated weakness in economic activity, and the staff lowered its projection for near-term output growth. Largely because of the combination of recent downward surprises in the unemployment rate and weaker-than-expected real GDP growth, the staff lowered slightly the assumed pace of potential output growth in recent years and over the projection period. As a result, the staff's medium-term forecast for real GDP growth also was revised down slightly. Nevertheless, the staff continued to project that real GDP would expand at a faster pace over the next few years than it did last year, and that real GDP growth would exceed the growth rate of potential output. The faster pace of real GDP growth was expected to be supported by an easing in the restraint from changes in fiscal policy, increases in consumer and business confidence, further improvements in credit availability and financial conditions, and a pickup in the rate of foreign economic growth. The expansion in economic activity was anticipated to lead to a slow reduction in resource slack over the projection period, and the unemployment rate was expected to decline gradually to the staff's estimate of its longer-run natural rate.
The staff's forecast for inflation was basically unchanged from the projection prepared for the previous FOMC meeting. The staff continued to forecast that inflation would stay below the Committee's longer-run objective of 2 percent over the next few years. Inflation was projected to rise gradually toward the Committee's objective, as longer-run inflation expectations were assumed to remain stable, changes in commodity and import prices were expected to be subdued, and slack in labor and product markets was anticipated to diminish slowly.
The staff's economic projections for the March meeting were quite similar to its forecasts presented at the December meeting when the FOMC last prepared a Summary of Economic Projections (SEP). The staff's March projections for both real GDP growth and the unemployment rate over the next few years were just slightly lower than in its December forecasts, while the inflation projection was essentially unchanged.
The staff viewed the extent of uncertainty around its March projections for real GDP growth and the unemployment rate as roughly in line with the average of the past 20 years. Nonetheless, the risks to the forecast for real GDP growth were viewed as tilted a little to the downside, especially because the economy was not well positioned to withstand adverse shocks while the target for the federal funds rate was at its effective lower bound. At the same time, the staff viewed the risks around its outlook for the unemployment rate and for inflation as roughly balanced.
Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, the meeting participants--the 4 members of the Board of Governors and the presidents of the 12 Federal Reserve Banks, all of whom participated in the deliberations--submitted their assessments of real output growth, the unemployment rate, inflation, and the target federal funds rate for each year from 2014 through 2016 and over the longer run, under each participant's judgment of appropriate monetary policy. The longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These economic projections and policy assessments are described in the SEP, which is attached as an addendum to these minutes. In their discussion of the economic situation and the outlook, participants generally noted that data released since their January meeting had indicated somewhat slower-than-expected growth in economic activity during the winter months, in part reflecting adverse weather conditions. Labor market indicators were mixed. Inflation had continued to run below the Committee's longer-run objective, but longer-term inflation expectations had remained stable. Several participants indicated that recent economic news, although leading them to mark down somewhat their estimates of economic growth in late 2013 as well as their assessments of likely growth in the first quarter of 2014, had not prompted a significant revision of their projections of moderate economic growth over coming quarters.
Most participants noted that unusually severe winter weather had held down economic activity during the early months of the year. Business contacts in various parts of the country reported a number of weather-induced disruptions, including reduced manufacturing activity due to lost workdays, interruptions to supply chains of inputs and delivery of final products, and lower-than-expected retail sales. Participants expected economic activity to pick up as the weather-related disruptions to spending and production dissipated. A few participants, however, highlighted factors other than weather that had likely contributed to the slowdown during the first quarter, including slower growth in net exports following its unusually large positive contribution to growth in the fourth quarter of 2013. Moreover, it was noted that some of the pickup in economic growth that had appeared to have been indicated by the data available at the January meeting had been reversed by subsequent data revisions. For many participants, the outlook for economic activity over coming quarters had changed little, on balance, since the time of the December meeting.
Housing activity remained slow over the intermeeting period. Although unfavorable weather had contributed to the recent disappointing performance of housing, a few participants suggested that last year's rise in mortgage interest rates might have produced a larger-than-expected reduction in home sales. In addition, it was noted that the return of house prices to more-normal levels could be damping the pace of the housing recovery, and that home affordability has been reduced for some prospective buyers. Slackening demand from institutional investors was cited as another factor behind the decline in home sales. Nonetheless, the underlying fundamentals, including population growth and household formation, were viewed as pointing to a continuing recovery of the housing market.
In their discussion of labor market developments, participants noted further improvement, on balance, in labor market conditions. The unemployment rate had moved down in recent months, as had broader measures of unemployment and underemployment. Other labor market indicators, such as payrolls and hiring and quit rates, while not all showing the same extent of improvement, also pointed to ongoing gains in labor markets. Going forward, participants continued to expect a gradual decline in the unemployment rate over the medium term, with judgments differing somewhat across participants about the likely pace of the decline. It was also noted that uncertainty about the trend rate of productivity growth was making it difficult to ascertain the rate of real GDP growth that would be associated with progress in reducing the unemployment rate.
While there was general agreement that slack remains in the labor market, participants expressed a range of views regarding the amount of slack and how well the unemployment rate performs as a summary indicator of labor market conditions. Several participants pointed to a number of factors--including the low labor force participation rate and the still-high rates of longer-duration unemployment and of workers employed part time for economic reasons--as suggesting that there might be considerably more labor market slack than indicated by the unemployment rate alone. A couple of other participants, however, saw reasons to believe that slack was more limited, viewing the decline in the participation rate as primarily reflecting demographic trends with little role for cyclical factors and observing that broader measures of unemployment had registered declines in the past year that were comparable with the decline in the standard measure. Several participants cited low nominal wage growth as pointing to the existence of continued labor market slack. Participants also noted the debate in the research literature and elsewhere concerning whether long-term unemployment differs materially from short-term unemployment in its implications for wage and price pressures.
Inflation continued to run below the Committee's 2 percent longer-run objective over the intermeeting period. A couple of participants expressed concern that inflation might not return to 2 percent in the next few years and suggested that a protracted period of inflation below 2 percent raised questions about whether the Committee was providing an appropriate degree of monetary accommodation. One of these participants suggested that persistently low inflation was a clear reflection of a sizable shortfall of employment from its maximum level. A number of participants noted that a pickup in nominal wage growth would be consistent with labor market conditions moving closer to normal and would support the return of consumer price inflation to the Committee's 2 percent longer-run goal. However, a couple of other participants suggested that factors other than economic slack had played a notable role in holding down inflation of late, including unusually slow growth in prices of medical services. Most participants expected inflation to return to 2 percent over the next few years, supported by stable inflation expectations and the continued gradual recovery in economic activity.
Several participants pointed to international developments that bear watching. It was suggested that slower growth in China had likely already put some downward pressure on world commodity prices, and a couple of participants observed that a larger-than-expected slowdown in economic growth in China could have adverse implications for global economic growth. In addition, it was noted that events in Ukraine were likely to have little direct effect on the U.S. economic outlook but might have negative implications for global growth if they escalated and led to a protracted period of geopolitical tensions in that region.
In their discussion of recent financial developments, participants saw financial conditions as generally consistent with the Committee's policy intentions. However, several participants mentioned trends that, if continued, could become a concern from the perspective of financial stability. A couple of participants pointed to the decline in credit spreads to relatively low levels by historical standards; one of these participants noted the risk of either a sharp rise in spreads, which could have negative repercussions for aggregate demand, or a continuation of the decline in spreads, which could undermine financial stability over time. One participant voiced concern about high levels of margin debt and of equity market valuations as well as a notable shift into commodity investments. Another participant stressed the growth in consumer credit to less creditworthy households.
In their discussion of monetary policy going forward, participants focused primarily on possible changes to the Committee's forward guidance for the federal funds rate. Almost all participants agreed that it was appropriate at this meeting to update the forward guidance, in part because the unemployment rate was seen as likely to fall below its 6-1/2 percent threshold value before long. Most participants preferred replacing the numerical thresholds with a qualitative description of the factors that would influence the Committee's decision to begin raising the federal funds rate. One participant, however, favored retaining the existing threshold language on the grounds that removing it before the unemployment rate reached 6-1/2 percent could be misinterpreted as a signal that the path of policy going forward would be less accommodative. Another participant favored introducing new quantitative thresholds of 5-1/2 percent for the unemployment rate and 2-1/4 percent for projected inflation. A few participants proposed adding new language in which the Committee would indicate its willingness to keep rates low if projected inflation remained persistently below the Committee's 2 percent longer-run objective; these participants suggested that the inclusion of this quantitative element in the forward guidance would demonstrate the Committee's commitment to defend its inflation objective from below as well as from above. Other participants, however, judged that it was already well understood that the Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance. Most participants therefore did not favor adding new quantitative language, preferring to shift to qualitative language that would describe the Committee's likely reaction to the state of the economy.
Most participants also believed that, as part of the process of clarifying the Committee's future policy intentions, it would be appropriate at this time for the Committee to provide additional guidance in its postmeeting statement regarding the likely behavior of the federal funds rate after its first increase. For example, the statement could indicate that the Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. Participants observed that a number of factors were likely to have contributed to a persistent decline in the level of interest rates consistent with attaining and maintaining the Committee's objectives. In particular, participants cited higher precautionary savings by U.S. households following the financial crisis, higher global levels of savings, demographic changes, slower growth in potential output, and continued restraint on the availability of credit. A few participants suggested that new language along these lines could instead be introduced when the first increase in the federal funds rate had drawn closer or after the Committee had further discussed the reasons for anticipating a relatively low federal funds rate during the period of policy firming. A number of participants noted the overall upward shift since December in participants' projections of the federal funds rate included in the March SEP, with some expressing concern that this component of the SEP could be misconstrued as indicating a move by the Committee to a less accommodative reaction function. However, several participants noted that the increase in the median projection overstated the shift in the projections. In addition, a number of participants observed that an upward shift was arguably warranted by the improvement in participants' outlooks for the labor market since December and therefore need not be viewed as signifying a less accommodative reaction function. Most participants favored providing an explicit indication in the statement that the new forward guidance, taken as a whole, did not imply a change in the Committee's policy intentions, on the grounds that such an indication could help forestall misinterpretation of the new forward guidance.
Committee Policy Action
Committee members saw the information received over the intermeeting period as indicating that growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate, however, remained elevated when judged against members' estimates of the longer-run normal rate of unemployment. Household spending and business fixed investment continued to advance, while the recovery in the housing sector remained slow. Fiscal policy was restraining economic growth, although the extent of restraint had diminished. The Committee expected that, with appropriate policy accommodation, the economy would expand at a moderate pace and labor market conditions would continue to improve gradually, moving toward those the Committee judges consistent with the dual mandate. Moreover, members judged that the risks to the outlook for the economy and the labor market were nearly balanced. Inflation was running below the Committee's longer-run objective, and this was seen as posing possible risks to economic performance, but members anticipated that stable inflation expectations and strengthening economic activity would, over time, return inflation to the Committee's 2 percent objective. However, in light of their concerns about the possible persistence of low inflation, members agreed that inflation developments should be monitored carefully for evidence that inflation was moving back toward the Committee's longer-run objective.
In their discussion of monetary policy in the period ahead, members agreed that there was sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, members decided that it would be appropriate to make a further measured reduction in the pace of its asset purchases at this meeting. Members again judged that, if the economy continued to develop as anticipated, the Committee would likely reduce the pace of asset purchases in further measured steps at future meetings. Members also underscored that the pace of asset purchases was not on a preset course and would remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of purchases. Accordingly, the Committee agreed that, beginning in April, it would add to its holdings of agency mortgage-backed securities at a pace of $25 billion per month rather than $30 billion per month, and would add to its holdings of longer-term Treasury securities at a pace of $30 billion per month rather than $35 billion per month. While making a further measured reduction in its pace of purchases, the Committee emphasized that its holdings of longer-term securities were sizable and would still be increasing, which would promote a stronger economic recovery by maintaining downward pressure on longer-term interest rates, supporting mortgage markets, and helping to make broader financial conditions more accommodative. The Committee also reiterated that it would continue its asset purchases, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. One member, while concurring with this policy action, suggested that in future statements the Committee might provide further information about the trajectory of the Federal Reserve's balance sheet, including information about when the Committee might discontinue its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities.
With respect to forward guidance about the federal funds rate, all members judged that, as the unemployment rate was likely to fall below 6-1/2 percent before long, it was appropriate to replace the existing quantitative thresholds at this meeting. Almost all members judged that the new language should be qualitative in nature and should indicate that, in determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee would assess progress, both realized and expected, toward its objectives of maximum employment and 2 percent inflation. However, a couple of members preferred to include language in the statement indicating that the Committee would keep rates low if projected inflation remained persistently below the Committee's 2 percent longer-run objective. One of these members argued that the Committee should continue to provide quantitative thresholds for both the unemployment rate and inflation.
Members also considered statement language that would provide information about the anticipated behavior of the federal funds rate once it is raised above its effective lower bound. The Committee decided that it was appropriate to add language indicating that the Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. In discussing this addition, a couple of members suggested that language along these lines might better be introduced at a later meeting. However, another member indicated that adding the new language at this stage could be beneficial for the effectiveness of policy because financial conditions depend on both the length of time that the federal funds rate is at the effective lower bound and on the expected path that the federal funds rate will follow once policy firming begins. It was also noted that the postmeeting statements, rather than the SEP, provide the public with information on the Committee's monetary policy decisions and that it was therefore appropriate for the postmeeting statement to convey the Committee's position on the likely future behavior of the federal funds rate.
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 SOMA in accordance with the following domestic policy directive:
"Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. Beginning in April, the Desk is directed to purchase longer-term Treasury securities at a pace of about $30 billion per month and to purchase agency mortgage-backed securities at a pace of about $25 billion per month. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."
The vote encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in January indicates that growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate, however, remains elevated. Household spending and business fixed investment continued to advance, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually, moving toward those the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.
The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in April, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $25 billion per month rather than $30 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $30 billion per month rather than $35 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
With the unemployment rate nearing 6-1/2 percent, the Committee has updated its forward guidance. The change in the Committee's guidance does not indicate any change in the Committee's policy intentions as set forth in its recent statements."
Voting for this action: Janet L. Yellen, William C. Dudley, Richard W. Fisher, Sandra Pianalto, Charles I. Plosser, Jerome H. Powell, Jeremy C. Stein, and Daniel K. Tarullo.
Voting against this action: Narayana Kocherlakota.
Mr. Kocherlakota dissented because, in his view, the new forward guidance in the fifth paragraph of the statement would weaken the credibility of the Committee's commitment to its inflation goal by failing to communicate purposeful steps to more rapidly increase inflation to the 2 percent target and by suggesting that the Committee views inflation persistently below 2 percent as an acceptable outcome. Moreover, he judged that the new guidance would act as a drag on economic activity because it provided little information about the desired rate of progress toward maximum employment and no quantitative measure of what constitutes maximum employment, and thus would generate uncertainty about the extent to which the Committee is willing to use monetary stimulus to foster faster growth. Mr. Kocherlakota strongly endorsed the sixth paragraph of the statement because providing information about the Committee's intentions for the federal funds rate once employment and inflation are near mandate-consistent levels should help stimulate economic activity by reducing uncertainty.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, April 29-30, 2014. The meeting adjourned at 10:05 a.m. on March 19, 2014.
Notation Vote
By notation vote completed on February 18, 2014, the Committee unanimously approved the minutes of the Committee meeting held on January 28-29, 2014.
Videoconference meeting of March 4
The Committee met by videoconference on March 4, 2014, to discuss issues associated with its forward guidance for the federal funds rate. The Committee discussed possible changes to its forward guidance that could provide additional information about the factors likely to enter its decisions regarding the federal funds rate target as the unemployment rate approached its 6-1/2 percent threshold and once that threshold was crossed. The agenda did not contemplate any policy decisions, and none were taken.
Many participants noted that market expectations of the future course of the federal funds rate were currently reasonably well aligned with those of policymakers, and that a sizable change to the forward guidance could disturb this alignment. Nonetheless, participants generally saw the Committee's upcoming meeting as an opportune occasion for a reformulation of the guidance language; one of these participants suggested that the reformulation could be accompanied by a statement that the new language was intended to be consistent with current market expectations. A few participants stressed that the Committee had several other vehicles, including the Chair's postmeeting press conference, through which it could clarify its future policy intentions.
Participants agreed that the existing forward guidance, with its reference to a 6-1/2 percent threshold for the unemployment rate, was becoming outdated as the unemployment rate continued its expected gradual decline. Most participants felt that the quantitative thresholds had been very useful in communicating policy intentions when employment was far from mandate-consistent levels, but, with the economy having moved appreciably closer to maximum employment, the forward guidance should emphasize that the Committee is focusing more on a broader set of economic indicators. Thus, most participants felt that quantitative thresholds, triggers, or floors should not be a part of future statement language, with a number of participants noting the uncertainty associated with defining and measuring the unemployment rate and the level of employment that would be most consistent with the Committee's maximum employment objective, or other similar concepts. These participants generally favored qualitative language describing the economic factors that would influence the Committee's decision regarding the first increase in the federal funds rate target. Participants put forward a number of suggestions for such qualitative language. One participant favored linking the length of time that the federal funds rate would remain at the lower bound to the period over which complete recovery of the labor market was projected to occur, while another advocated qualitative forward guidance expressed in terms of the Committee's projections of real output growth, arguing that such an approach would avoid the uncertainties associated with estimates of potential output or maximum employment. Yet another participant argued that it would be desirable for the statement to describe the Committee's reasons for keeping the federal funds rate at the lower bound when standard policy rules were prescribing that the rate should be increased and noted that one possible reason for doing so is that the effective lower bound on the federal funds rate limits the Committee's scope to provide accommodation in response to adverse shocks. In contrast, some participants expressed a preference for quantitative guidance. A few participants saw merit in stating explicitly that the Committee would provide accommodation to the extent necessary to prevent inflation from running persistently below its 2 percent longer-run goal. One of these participants argued that such forward guidance would strengthen the credibility of the Committee's inflation objective as well as encourage employment outcomes that were most consistent with the Committee's other objective of maximum employment. Another participant suggested that the Committee state that it would adjust policy to keep projected inflation near 2 percent over the medium term, and that it would balance deviations from its objectives in the near term. Still another participant expressed a preference for stating explicit quantitative criteria for some labor market variable or variables.
Most participants favored providing information about the likely behavior of the federal funds rate after its first increase. A few participants, however, viewed the period of policy firming as likely to be far enough in the future that the Committee did not need to provide such information at this stage.
Committee participants also considered whether revised forward guidance should include a more prominent mention of financial developments or of potential risks to financial stability. Most participants felt that the Committee's monitoring of financial conditions and of risks to financial stability was already well understood by markets and that, while some reference to financial developments might usefully be included in the statement, a lengthy addition did not seem necessary. One participant favored including a reference in the statement to "financial conditions," rather than "financial stability," emphasizing that, when factors other than monetary policy induce a change in financial conditions, the Committee may need to take that change in financial conditions into account when making its monetary policy decisions.
_____________________________
William B. English
Secretary |
2014-03-04T00:00:00 | N/A | Minute | Minutes of the Federal Open Market Committee
March 18-19, 2014
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, March 18, 2014, at 2:00 p.m. and continued on Wednesday, March 19, 2014, at 8:30 a.m.
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Richard W. Fisher
Narayana Kocherlakota
Sandra Pianalto
Charles I. Plosser
Jerome H. Powell
Jeremy C. Stein
Daniel K. Tarullo
Christine Cumming, Charles L. Evans, Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Alternate Members of the Federal Open Market Committee
James Bullard, Esther L. George, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively
William B. English, Secretary and Economist
Matthew M. Luecke, Deputy Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Thomas C. Baxter, Deputy General Counsel
Steven B. Kamin, Economist
David W. Wilcox, Economist
James A. Clouse, Thomas A. Connors, Evan F. Koenig, Thomas Laubach, Michael P. Leahy, Loretta J. Mester, Samuel Schulhofer-Wohl, Mark E. Schweitzer, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors; Louise L. Roseman, Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors
Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors
Stephen A. Meyer and William Nelson, Deputy Directors, Division of Monetary Affairs, Board of Governors
Jon W. Faust, Special Adviser to the Board, Office of Board Members, Board of Governors
Trevor A. Reeve, Special Adviser to the Chair, Office of Board Members, Board of Governors
Ellen E. Meade, Senior Adviser, Division of Monetary Affairs, Board of Governors
Eric M. Engen, Michael G. Palumbo, and Wayne Passmore, Associate Directors, Division of Research and Statistics, Board of Governors
Brian J. Gross, Special Assistant to the Board, Office of Board Members, Board of Governors
Edward Nelson, Assistant Director, Division of Monetary Affairs, Board of Governors
Jeremy B. Rudd, Adviser, Division of Research and Statistics, Board of Governors
Stephanie Aaronson, Section Chief, Division of Research and Statistics, Board of Governors; Laura Lipscomb, Section Chief, Division of Monetary Affairs, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Peter M. Garavuso, Records Management Analyst, Division of Monetary Affairs, Board of Governors
David Altig, Jeff Fuhrer, Glenn D. Rudebusch, and Daniel G. Sullivan, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Boston, San Francisco, and Chicago, respectively
Troy Davig, Christopher J. Waller, and John A. Weinberg, Senior Vice Presidents, Federal Reserve Banks of Kansas City, St. Louis, and Richmond, respectively
Jonathan P. McCarthy, Keith Sill, and Douglas Tillett, Vice Presidents, Federal Reserve Banks of New York, Philadelphia, and Chicago, respectively
Developments in Financial Markets and the Federal Reserve's Balance Sheet
The manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets as well as the System open market operations during the period since the Federal Open Market Committee (FOMC) met on January 28-29, 2014. By unanimous vote, the Committee ratified the Open Market Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the March 18-19 meeting indicated that economic growth slowed early this year, likely only in part because of the temporary effects of the unusually cold and snowy winter weather. Total payroll employment expanded further, while the unemployment rate held steady, on balance, and was still elevated. Consumer price inflation continued to run below the Committee's longer-run objective, but measures of longer-run inflation expectations remained stable.
Total nonfarm payroll employment rose in January and February at a slower pace than in the fourth quarter of last year. The unemployment rate was 6.7 percent in February, the same as in December of last year. The labor force participation rate, along with the employment-to-population ratio, increased, on net, in recent months. Both the share of workers employed part time for economic reasons and the rate of long-duration unemployment were lower in February than they were late last year, although both measures were still high. Initial claims for unemployment insurance were little changed over the intermeeting period. The rate of job openings stepped down, while the rate of hiring was unchanged in December and January.
Manufacturing production was roughly flat, on balance, in January and February, in part because of the effects of the severe winter weather, which held down both motor vehicle output and production outside the motor vehicle sector. Automakers' production schedules indicated that the pace of light motor vehicle assemblies would increase in the second quarter, and broader indicators of manufacturing production, such as the readings on new orders from national manufacturing surveys, were consistent with an expectation of moderate expansion in factory output in the coming months.
Real personal consumption expenditures (PCE) increased a little, on net, in December and January. However, the components of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimate of PCE rose at a faster rate in February than in the previous couple of months, and light motor vehicle sales also moved up. Recent information on key factors that influence household spending, along with the expectation that the weather would return to seasonal norms, generally pointed toward additional gains in PCE in the coming months. Households' net worth probably continued to expand as equity prices and home values increased further, and consumer sentiment in the Thomson Reuters/University of Michigan Surveys of Consumers during February and early March remained above its average last fall; however, real disposable incomes only edged up, on balance, in December and January.
The pace of activity in the housing sector appeared to soften. Starts for both new single-family homes and multifamily units were lower in January and February than at the end of last year. Permits for single-family homes--which are typically less sensitive to fluctuations in the weather and a better indicator of the underlying pace of construction--also moved down in those months and had not shown a sustained improvement since last spring when mortgage rates began to rise. Sales of existing homes decreased in January and pending home sales were little changed, although new home sales expanded.
Growth in real private expenditures for business equipment and intellectual property products stepped up in the fourth quarter to a faster rate than in the third quarter. In January, nominal shipments of nondefense capital goods excluding aircraft decreased slightly. However, new orders for these capital goods increased and remained above the level of shipments in January, pointing to increases in shipments in subsequent months. Other forward-looking indicators, such as surveys of business conditions, also were generally consistent with modest increases in business equipment spending in the near term. Real business spending for nonresidential structures was essentially unchanged in the fourth quarter, and nominal expenditures for such structures were flat in January. Real nonfarm inventory investment increased at a significantly slower pace in the fourth quarter than in the preceding quarter, and recent data on the book value of inventories, along with readings on inventories from national and regional manufacturing surveys, did not point to significant inventory imbalances in most industries; however, days' supply of light motor vehicles in January and February exceeded the automakers' targets.
Federal spending data in January and February pointed toward real federal government purchases being roughly flat in the first quarter, as the general downtrend in purchases seemed likely to be about offset by a reversal of the effects of the partial government shutdown during the fourth quarter. Total real state and local government purchases also appeared to be about flat going into the first quarter. The payrolls of these governments expanded somewhat, on balance, in January and February, but nominal state and local construction expenditures declined a little in January.
The U.S. international trade deficit, after widening in December, remained about unchanged in January. Exports increased in January, but the gains were modest as decreases in sales of cars, petroleum products, and agricultural goods were just offset by gains in other major categories. Imports also rose in January as the increase in the volume of oil imports more than offset declines in imports of non-oil goods and services.
Total U.S. consumer price inflation, as measured by the PCE price index, was about 1-1/4 percent over the 12 months ending in January, continuing to run below the Committee's longer-run objective of 2 percent. Over the same 12-month period, consumer energy prices rose faster than total consumer prices while consumer food prices only edged up, and core PCE prices--which exclude food and energy prices--increased just a bit more than 1 percent. In February, the consumer price index (CPI) rose at a pace similar to that seen in recent months, as food prices rose more quickly, energy prices declined, and the increase in the core CPI remained slow. Both near- and longer-term inflation expectations from the Michigan survey were little changed in February and early March.
Measures of labor compensation indicated that increases in nominal wages remained subdued. Compensation per hour in the nonfarm business sector increased slightly over the year ending in the fourth quarter, and, with some gains in labor productivity, unit labor costs declined a little. Over the same year-long period, the employment cost index and average hourly earnings for all employees rose only a little faster than consumer price inflation.
Foreign real gross domestic product (GDP) expanded at a moderate pace in the fourth quarter of 2013, with weak economic growth in Japan and Mexico offsetting stronger gains in many other economies. Recent indicators suggested that total foreign real GDP was expanding at a similar pace in the first quarter of 2014. The economic recovery in the euro area appeared to be continuing, and the pace of Japanese economic growth looked to have picked up. In Canada, however, severe winter weather appeared to have held down economic activity in early 2014. Among the emerging market economies (EMEs), recent data suggested that economic growth in China was slowing in the first quarter, and that the rate of growth in the other Asian economies was also declining from a very robust fourth-quarter pace. Mexican real GDP growth slowed sharply in the fourth quarter, led by a contraction in the manufacturing sector, but recent indicators, such as auto production, suggested some rebound in the pace of economic activity in the current quarter. Inflation increased slightly in some advanced economies but remained well below central banks' targets. At the same time, inflation declined in some emerging Asian economies. Monetary policy remained highly accommodative in the advanced foreign economies. Across the EMEs, monetary policy adjustments varied according to economic and financial developments, with some central banks tightening policy and others loosening it.
Staff Review of the Financial Situation
Financial market conditions in the United States over the intermeeting period appeared to have been influenced by an easing of concerns about developments in the EMEs but relatively little affected by the generally weaker-than-expected economic data, which market participants appeared to attribute in large part to the temporary effects of unusually severe winter weather. On balance, U.S. financial conditions remained supportive of growth in economic activity and employment: The expected path of the federal funds rate was little changed, longer-term yields on Treasury securities edged down, equity prices rose, speculative-grade corporate bond spreads narrowed, and the foreign exchange value of the dollar depreciated slightly.
FOMC communications over the intermeeting period were about in line with market expectations. The FOMC decision and statement in January were largely anticipated by market participants. The Monetary Policy Report and Chair Yellen's accompanying congressional testimony in February were viewed as emphasizing continuity in the approach to monetary policy, solidifying expectations that the pace of the Committee's asset purchases would be reduced by a further $10 billion at each upcoming meeting absent a material change in the economic outlook.
Results from the Desk's Survey of Primary Dealers for March indicated that the dealers' expectations about both the likely future path of the federal funds rate and Federal Reserve asset purchases were largely unchanged since January. The survey results showed that most dealers expected the Committee to modify its forward rate guidance at the March meeting, with many anticipating a shift toward qualitative guidance.
Yields on short- and intermediate-term Treasury securities were little changed, on balance, over the intermeeting period, as the effects of a waning of flight-to-quality demands early in the period roughly offset those of generally weaker-than-expected economic data. Yields on longer-term Treasury securities edged down. Measures of longer-horizon inflation compensation based on Treasury inflation-protected securities also declined somewhat.
The Federal Reserve continued its fixed-rate overnight reverse repurchase agreement (ON RRP) exercise. Early in the intermeeting period, market rates on repurchase agreements were close to the fixed rate offered in the exercise, prompting high take-up in the ON RRP operations. The increases in the interest rate offered by the Federal Reserve in its ON RRP exercise, along with the increases in caps for individual bids, also may have contributed to higher levels of activity at daily operations. Later in the period, market rates on repurchase agreements moved higher, apparently in response to a rise in Treasury bill issuance, and ON RRP volumes moderated. Reflecting the larger size of the ON RRP exercises and the reduced pace of asset purchases, the rate of increase in the monetary base slowed over January and February.
Conditions in unsecured short-term dollar funding markets remained stable over the intermeeting period. Responses to the March 2014 Senior Credit Officer Opinion Survey on Dealer Financing Terms suggested little change over the past three months in conditions in securities financing and over-the-counter derivatives markets and in credit terms applicable to most classes of counterparties.
Broad stock price indexes rose over the intermeeting period, apparently boosted by a solid finish to the corporate earnings season. Equity prices were also supported by a broad increase in investors' willingness to take riskier positions, in part likely reflecting an easing of concerns about EMEs early in the period.
Credit flows to nonfinancial corporations remained robust. Following a slowdown in January, nonfinancial corporate bond issuance rebounded in February, with the majority of proceeds going to investment-grade firms. The growth of commercial and industrial loans on banks' balance sheets increased over the period. Institutional issuance of leveraged loans continued at a brisk pace.
Financing conditions in the commercial real estate (CRE) sector continued to improve gradually. In the fourth quarter, banks' CRE loans increased across all major loan categories, and CRE loans on banks' books advanced at a solid pace in the first two months of the year. Issuance of commercial mortgage-backed securities was robust in February after a slow start in January.
Conditions in the municipal bond market remained favorable over the intermeeting period with the spread of municipal yields over yields on comparable-maturity Treasury securities little changed. Although Puerto Rico's general obligation (GO) bonds were downgraded from investment grade to speculative grade, prices of these bonds held steady, albeit at depressed levels. Puerto Rico successfully brought to market a GO bond issue in early March, substantially easing its near-term liquidity pressures.
House prices registered a further notable rise in January. Mortgage interest rates and their spreads over Treasury yields were little changed over the intermeeting period. Both mortgage applications for home purchases and refinancing applications remained at low levels through early March. Financing conditions in residential mortgage markets stayed tight, even as further incremental signs of easing emerged.
Conditions in consumer credit markets were still mixed. Auto loans continued to be broadly available, while credit card limits for borrowers with subprime and prime credit scores remained at low levels in the fourth quarter. Partly reflecting these conditions, credit card balances stayed about flat through January, while auto and student loans continued to expand briskly. Issuance of auto and credit card asset-backed securities was robust again in January and February.
Financial market sentiment abroad appeared to improve over the period, particularly with respect to the stresses that had developed in some EMEs just prior to the January FOMC meeting. Although global equity price indexes fell abruptly on March 3 amid the deepening of the political crisis in Ukraine, most markets quickly retraced those losses. Consistent with the general improvement in financial market sentiment, most foreign currencies appreciated against the dollar as flight-to-safety flows reversed. One notable exception was the Chinese renminbi, which depreciated against the dollar. The performance of foreign equity price indexes was mixed, on net: Stock prices rose in the EMEs, but they were flat in Europe and declined substantially in Japan. Longer-term sovereign bond yields in the advanced economies fell modestly over the period.
Staff Economic Outlook
In the economic forecast prepared by the staff for the March FOMC meeting, real GDP growth in the first half of this year was somewhat lower than in the projection for the January meeting. The available readings on consumer spending, residential construction, and business investment pointed to less spending growth in the first quarter than the staff had previously expected. The staff's assessment was that the unusually severe winter weather could account for some, but not all, of the recent unanticipated weakness in economic activity, and the staff lowered its projection for near-term output growth. Largely because of the combination of recent downward surprises in the unemployment rate and weaker-than-expected real GDP growth, the staff lowered slightly the assumed pace of potential output growth in recent years and over the projection period. As a result, the staff's medium-term forecast for real GDP growth also was revised down slightly. Nevertheless, the staff continued to project that real GDP would expand at a faster pace over the next few years than it did last year, and that real GDP growth would exceed the growth rate of potential output. The faster pace of real GDP growth was expected to be supported by an easing in the restraint from changes in fiscal policy, increases in consumer and business confidence, further improvements in credit availability and financial conditions, and a pickup in the rate of foreign economic growth. The expansion in economic activity was anticipated to lead to a slow reduction in resource slack over the projection period, and the unemployment rate was expected to decline gradually to the staff's estimate of its longer-run natural rate.
The staff's forecast for inflation was basically unchanged from the projection prepared for the previous FOMC meeting. The staff continued to forecast that inflation would stay below the Committee's longer-run objective of 2 percent over the next few years. Inflation was projected to rise gradually toward the Committee's objective, as longer-run inflation expectations were assumed to remain stable, changes in commodity and import prices were expected to be subdued, and slack in labor and product markets was anticipated to diminish slowly.
The staff's economic projections for the March meeting were quite similar to its forecasts presented at the December meeting when the FOMC last prepared a Summary of Economic Projections (SEP). The staff's March projections for both real GDP growth and the unemployment rate over the next few years were just slightly lower than in its December forecasts, while the inflation projection was essentially unchanged.
The staff viewed the extent of uncertainty around its March projections for real GDP growth and the unemployment rate as roughly in line with the average of the past 20 years. Nonetheless, the risks to the forecast for real GDP growth were viewed as tilted a little to the downside, especially because the economy was not well positioned to withstand adverse shocks while the target for the federal funds rate was at its effective lower bound. At the same time, the staff viewed the risks around its outlook for the unemployment rate and for inflation as roughly balanced.
Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, the meeting participants--the 4 members of the Board of Governors and the presidents of the 12 Federal Reserve Banks, all of whom participated in the deliberations--submitted their assessments of real output growth, the unemployment rate, inflation, and the target federal funds rate for each year from 2014 through 2016 and over the longer run, under each participant's judgment of appropriate monetary policy. The longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These economic projections and policy assessments are described in the SEP, which is attached as an addendum to these minutes. In their discussion of the economic situation and the outlook, participants generally noted that data released since their January meeting had indicated somewhat slower-than-expected growth in economic activity during the winter months, in part reflecting adverse weather conditions. Labor market indicators were mixed. Inflation had continued to run below the Committee's longer-run objective, but longer-term inflation expectations had remained stable. Several participants indicated that recent economic news, although leading them to mark down somewhat their estimates of economic growth in late 2013 as well as their assessments of likely growth in the first quarter of 2014, had not prompted a significant revision of their projections of moderate economic growth over coming quarters.
Most participants noted that unusually severe winter weather had held down economic activity during the early months of the year. Business contacts in various parts of the country reported a number of weather-induced disruptions, including reduced manufacturing activity due to lost workdays, interruptions to supply chains of inputs and delivery of final products, and lower-than-expected retail sales. Participants expected economic activity to pick up as the weather-related disruptions to spending and production dissipated. A few participants, however, highlighted factors other than weather that had likely contributed to the slowdown during the first quarter, including slower growth in net exports following its unusually large positive contribution to growth in the fourth quarter of 2013. Moreover, it was noted that some of the pickup in economic growth that had appeared to have been indicated by the data available at the January meeting had been reversed by subsequent data revisions. For many participants, the outlook for economic activity over coming quarters had changed little, on balance, since the time of the December meeting.
Housing activity remained slow over the intermeeting period. Although unfavorable weather had contributed to the recent disappointing performance of housing, a few participants suggested that last year's rise in mortgage interest rates might have produced a larger-than-expected reduction in home sales. In addition, it was noted that the return of house prices to more-normal levels could be damping the pace of the housing recovery, and that home affordability has been reduced for some prospective buyers. Slackening demand from institutional investors was cited as another factor behind the decline in home sales. Nonetheless, the underlying fundamentals, including population growth and household formation, were viewed as pointing to a continuing recovery of the housing market.
In their discussion of labor market developments, participants noted further improvement, on balance, in labor market conditions. The unemployment rate had moved down in recent months, as had broader measures of unemployment and underemployment. Other labor market indicators, such as payrolls and hiring and quit rates, while not all showing the same extent of improvement, also pointed to ongoing gains in labor markets. Going forward, participants continued to expect a gradual decline in the unemployment rate over the medium term, with judgments differing somewhat across participants about the likely pace of the decline. It was also noted that uncertainty about the trend rate of productivity growth was making it difficult to ascertain the rate of real GDP growth that would be associated with progress in reducing the unemployment rate.
While there was general agreement that slack remains in the labor market, participants expressed a range of views regarding the amount of slack and how well the unemployment rate performs as a summary indicator of labor market conditions. Several participants pointed to a number of factors--including the low labor force participation rate and the still-high rates of longer-duration unemployment and of workers employed part time for economic reasons--as suggesting that there might be considerably more labor market slack than indicated by the unemployment rate alone. A couple of other participants, however, saw reasons to believe that slack was more limited, viewing the decline in the participation rate as primarily reflecting demographic trends with little role for cyclical factors and observing that broader measures of unemployment had registered declines in the past year that were comparable with the decline in the standard measure. Several participants cited low nominal wage growth as pointing to the existence of continued labor market slack. Participants also noted the debate in the research literature and elsewhere concerning whether long-term unemployment differs materially from short-term unemployment in its implications for wage and price pressures.
Inflation continued to run below the Committee's 2 percent longer-run objective over the intermeeting period. A couple of participants expressed concern that inflation might not return to 2 percent in the next few years and suggested that a protracted period of inflation below 2 percent raised questions about whether the Committee was providing an appropriate degree of monetary accommodation. One of these participants suggested that persistently low inflation was a clear reflection of a sizable shortfall of employment from its maximum level. A number of participants noted that a pickup in nominal wage growth would be consistent with labor market conditions moving closer to normal and would support the return of consumer price inflation to the Committee's 2 percent longer-run goal. However, a couple of other participants suggested that factors other than economic slack had played a notable role in holding down inflation of late, including unusually slow growth in prices of medical services. Most participants expected inflation to return to 2 percent over the next few years, supported by stable inflation expectations and the continued gradual recovery in economic activity.
Several participants pointed to international developments that bear watching. It was suggested that slower growth in China had likely already put some downward pressure on world commodity prices, and a couple of participants observed that a larger-than-expected slowdown in economic growth in China could have adverse implications for global economic growth. In addition, it was noted that events in Ukraine were likely to have little direct effect on the U.S. economic outlook but might have negative implications for global growth if they escalated and led to a protracted period of geopolitical tensions in that region.
In their discussion of recent financial developments, participants saw financial conditions as generally consistent with the Committee's policy intentions. However, several participants mentioned trends that, if continued, could become a concern from the perspective of financial stability. A couple of participants pointed to the decline in credit spreads to relatively low levels by historical standards; one of these participants noted the risk of either a sharp rise in spreads, which could have negative repercussions for aggregate demand, or a continuation of the decline in spreads, which could undermine financial stability over time. One participant voiced concern about high levels of margin debt and of equity market valuations as well as a notable shift into commodity investments. Another participant stressed the growth in consumer credit to less creditworthy households.
In their discussion of monetary policy going forward, participants focused primarily on possible changes to the Committee's forward guidance for the federal funds rate. Almost all participants agreed that it was appropriate at this meeting to update the forward guidance, in part because the unemployment rate was seen as likely to fall below its 6-1/2 percent threshold value before long. Most participants preferred replacing the numerical thresholds with a qualitative description of the factors that would influence the Committee's decision to begin raising the federal funds rate. One participant, however, favored retaining the existing threshold language on the grounds that removing it before the unemployment rate reached 6-1/2 percent could be misinterpreted as a signal that the path of policy going forward would be less accommodative. Another participant favored introducing new quantitative thresholds of 5-1/2 percent for the unemployment rate and 2-1/4 percent for projected inflation. A few participants proposed adding new language in which the Committee would indicate its willingness to keep rates low if projected inflation remained persistently below the Committee's 2 percent longer-run objective; these participants suggested that the inclusion of this quantitative element in the forward guidance would demonstrate the Committee's commitment to defend its inflation objective from below as well as from above. Other participants, however, judged that it was already well understood that the Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance. Most participants therefore did not favor adding new quantitative language, preferring to shift to qualitative language that would describe the Committee's likely reaction to the state of the economy.
Most participants also believed that, as part of the process of clarifying the Committee's future policy intentions, it would be appropriate at this time for the Committee to provide additional guidance in its postmeeting statement regarding the likely behavior of the federal funds rate after its first increase. For example, the statement could indicate that the Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. Participants observed that a number of factors were likely to have contributed to a persistent decline in the level of interest rates consistent with attaining and maintaining the Committee's objectives. In particular, participants cited higher precautionary savings by U.S. households following the financial crisis, higher global levels of savings, demographic changes, slower growth in potential output, and continued restraint on the availability of credit. A few participants suggested that new language along these lines could instead be introduced when the first increase in the federal funds rate had drawn closer or after the Committee had further discussed the reasons for anticipating a relatively low federal funds rate during the period of policy firming. A number of participants noted the overall upward shift since December in participants' projections of the federal funds rate included in the March SEP, with some expressing concern that this component of the SEP could be misconstrued as indicating a move by the Committee to a less accommodative reaction function. However, several participants noted that the increase in the median projection overstated the shift in the projections. In addition, a number of participants observed that an upward shift was arguably warranted by the improvement in participants' outlooks for the labor market since December and therefore need not be viewed as signifying a less accommodative reaction function. Most participants favored providing an explicit indication in the statement that the new forward guidance, taken as a whole, did not imply a change in the Committee's policy intentions, on the grounds that such an indication could help forestall misinterpretation of the new forward guidance.
Committee Policy Action
Committee members saw the information received over the intermeeting period as indicating that growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate, however, remained elevated when judged against members' estimates of the longer-run normal rate of unemployment. Household spending and business fixed investment continued to advance, while the recovery in the housing sector remained slow. Fiscal policy was restraining economic growth, although the extent of restraint had diminished. The Committee expected that, with appropriate policy accommodation, the economy would expand at a moderate pace and labor market conditions would continue to improve gradually, moving toward those the Committee judges consistent with the dual mandate. Moreover, members judged that the risks to the outlook for the economy and the labor market were nearly balanced. Inflation was running below the Committee's longer-run objective, and this was seen as posing possible risks to economic performance, but members anticipated that stable inflation expectations and strengthening economic activity would, over time, return inflation to the Committee's 2 percent objective. However, in light of their concerns about the possible persistence of low inflation, members agreed that inflation developments should be monitored carefully for evidence that inflation was moving back toward the Committee's longer-run objective.
In their discussion of monetary policy in the period ahead, members agreed that there was sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, members decided that it would be appropriate to make a further measured reduction in the pace of its asset purchases at this meeting. Members again judged that, if the economy continued to develop as anticipated, the Committee would likely reduce the pace of asset purchases in further measured steps at future meetings. Members also underscored that the pace of asset purchases was not on a preset course and would remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of purchases. Accordingly, the Committee agreed that, beginning in April, it would add to its holdings of agency mortgage-backed securities at a pace of $25 billion per month rather than $30 billion per month, and would add to its holdings of longer-term Treasury securities at a pace of $30 billion per month rather than $35 billion per month. While making a further measured reduction in its pace of purchases, the Committee emphasized that its holdings of longer-term securities were sizable and would still be increasing, which would promote a stronger economic recovery by maintaining downward pressure on longer-term interest rates, supporting mortgage markets, and helping to make broader financial conditions more accommodative. The Committee also reiterated that it would continue its asset purchases, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. One member, while concurring with this policy action, suggested that in future statements the Committee might provide further information about the trajectory of the Federal Reserve's balance sheet, including information about when the Committee might discontinue its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities.
With respect to forward guidance about the federal funds rate, all members judged that, as the unemployment rate was likely to fall below 6-1/2 percent before long, it was appropriate to replace the existing quantitative thresholds at this meeting. Almost all members judged that the new language should be qualitative in nature and should indicate that, in determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee would assess progress, both realized and expected, toward its objectives of maximum employment and 2 percent inflation. However, a couple of members preferred to include language in the statement indicating that the Committee would keep rates low if projected inflation remained persistently below the Committee's 2 percent longer-run objective. One of these members argued that the Committee should continue to provide quantitative thresholds for both the unemployment rate and inflation.
Members also considered statement language that would provide information about the anticipated behavior of the federal funds rate once it is raised above its effective lower bound. The Committee decided that it was appropriate to add language indicating that the Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. In discussing this addition, a couple of members suggested that language along these lines might better be introduced at a later meeting. However, another member indicated that adding the new language at this stage could be beneficial for the effectiveness of policy because financial conditions depend on both the length of time that the federal funds rate is at the effective lower bound and on the expected path that the federal funds rate will follow once policy firming begins. It was also noted that the postmeeting statements, rather than the SEP, provide the public with information on the Committee's monetary policy decisions and that it was therefore appropriate for the postmeeting statement to convey the Committee's position on the likely future behavior of the federal funds rate.
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 SOMA in accordance with the following domestic policy directive:
"Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. Beginning in April, the Desk is directed to purchase longer-term Treasury securities at a pace of about $30 billion per month and to purchase agency mortgage-backed securities at a pace of about $25 billion per month. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."
The vote encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in January indicates that growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate, however, remains elevated. Household spending and business fixed investment continued to advance, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually, moving toward those the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.
The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in April, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $25 billion per month rather than $30 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $30 billion per month rather than $35 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
With the unemployment rate nearing 6-1/2 percent, the Committee has updated its forward guidance. The change in the Committee's guidance does not indicate any change in the Committee's policy intentions as set forth in its recent statements."
Voting for this action: Janet L. Yellen, William C. Dudley, Richard W. Fisher, Sandra Pianalto, Charles I. Plosser, Jerome H. Powell, Jeremy C. Stein, and Daniel K. Tarullo.
Voting against this action: Narayana Kocherlakota.
Mr. Kocherlakota dissented because, in his view, the new forward guidance in the fifth paragraph of the statement would weaken the credibility of the Committee's commitment to its inflation goal by failing to communicate purposeful steps to more rapidly increase inflation to the 2 percent target and by suggesting that the Committee views inflation persistently below 2 percent as an acceptable outcome. Moreover, he judged that the new guidance would act as a drag on economic activity because it provided little information about the desired rate of progress toward maximum employment and no quantitative measure of what constitutes maximum employment, and thus would generate uncertainty about the extent to which the Committee is willing to use monetary stimulus to foster faster growth. Mr. Kocherlakota strongly endorsed the sixth paragraph of the statement because providing information about the Committee's intentions for the federal funds rate once employment and inflation are near mandate-consistent levels should help stimulate economic activity by reducing uncertainty.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, April 29-30, 2014. The meeting adjourned at 10:05 a.m. on March 19, 2014.
Notation Vote
By notation vote completed on February 18, 2014, the Committee unanimously approved the minutes of the Committee meeting held on January 28-29, 2014.
Videoconference meeting of March 4
The Committee met by videoconference on March 4, 2014, to discuss issues associated with its forward guidance for the federal funds rate. The Committee discussed possible changes to its forward guidance that could provide additional information about the factors likely to enter its decisions regarding the federal funds rate target as the unemployment rate approached its 6-1/2 percent threshold and once that threshold was crossed. The agenda did not contemplate any policy decisions, and none were taken.
Many participants noted that market expectations of the future course of the federal funds rate were currently reasonably well aligned with those of policymakers, and that a sizable change to the forward guidance could disturb this alignment. Nonetheless, participants generally saw the Committee's upcoming meeting as an opportune occasion for a reformulation of the guidance language; one of these participants suggested that the reformulation could be accompanied by a statement that the new language was intended to be consistent with current market expectations. A few participants stressed that the Committee had several other vehicles, including the Chair's postmeeting press conference, through which it could clarify its future policy intentions.
Participants agreed that the existing forward guidance, with its reference to a 6-1/2 percent threshold for the unemployment rate, was becoming outdated as the unemployment rate continued its expected gradual decline. Most participants felt that the quantitative thresholds had been very useful in communicating policy intentions when employment was far from mandate-consistent levels, but, with the economy having moved appreciably closer to maximum employment, the forward guidance should emphasize that the Committee is focusing more on a broader set of economic indicators. Thus, most participants felt that quantitative thresholds, triggers, or floors should not be a part of future statement language, with a number of participants noting the uncertainty associated with defining and measuring the unemployment rate and the level of employment that would be most consistent with the Committee's maximum employment objective, or other similar concepts. These participants generally favored qualitative language describing the economic factors that would influence the Committee's decision regarding the first increase in the federal funds rate target. Participants put forward a number of suggestions for such qualitative language. One participant favored linking the length of time that the federal funds rate would remain at the lower bound to the period over which complete recovery of the labor market was projected to occur, while another advocated qualitative forward guidance expressed in terms of the Committee's projections of real output growth, arguing that such an approach would avoid the uncertainties associated with estimates of potential output or maximum employment. Yet another participant argued that it would be desirable for the statement to describe the Committee's reasons for keeping the federal funds rate at the lower bound when standard policy rules were prescribing that the rate should be increased and noted that one possible reason for doing so is that the effective lower bound on the federal funds rate limits the Committee's scope to provide accommodation in response to adverse shocks. In contrast, some participants expressed a preference for quantitative guidance. A few participants saw merit in stating explicitly that the Committee would provide accommodation to the extent necessary to prevent inflation from running persistently below its 2 percent longer-run goal. One of these participants argued that such forward guidance would strengthen the credibility of the Committee's inflation objective as well as encourage employment outcomes that were most consistent with the Committee's other objective of maximum employment. Another participant suggested that the Committee state that it would adjust policy to keep projected inflation near 2 percent over the medium term, and that it would balance deviations from its objectives in the near term. Still another participant expressed a preference for stating explicit quantitative criteria for some labor market variable or variables.
Most participants favored providing information about the likely behavior of the federal funds rate after its first increase. A few participants, however, viewed the period of policy firming as likely to be far enough in the future that the Committee did not need to provide such information at this stage.
Committee participants also considered whether revised forward guidance should include a more prominent mention of financial developments or of potential risks to financial stability. Most participants felt that the Committee's monitoring of financial conditions and of risks to financial stability was already well understood by markets and that, while some reference to financial developments might usefully be included in the statement, a lengthy addition did not seem necessary. One participant favored including a reference in the statement to "financial conditions," rather than "financial stability," emphasizing that, when factors other than monetary policy induce a change in financial conditions, the Committee may need to take that change in financial conditions into account when making its monetary policy decisions.
_____________________________
William B. English
Secretary |
2014-01-29T00:00:00 | 2014-01-29 | Statement | Information received since the Federal Open Market Committee met in December indicates that growth in economic activity picked up in recent quarters. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate declined but remains elevated. Household spending and business fixed investment advanced more quickly in recent months, while the recovery in the housing sector slowed somewhat. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.
Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee continues to see the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in February, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $30 billion per month rather than $35 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $35 billion per month rather than $40 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Richard W. Fisher; Narayana Kocherlakota; Sandra Pianalto; Charles I. Plosser; Jerome H. Powell; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen.
Statement Regarding Purchases of Treasury Securities and Agency Mortgage-Backed Securities |
2014-01-29T00:00:00 | 2014-02-19 | Minute | Minutes of the Federal Open Market Committee
January 28-29, 2014
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, January 28, 2014, at 2:00 p.m. and continued on Wednesday, January 29, 2014, at 9:00 a.m.
PRESENT:
Ben Bernanke, Chairman
William C. Dudley, Vice Chairman
Richard W. Fisher
Narayana Kocherlakota
Sandra Pianalto
Charles I. Plosser
Jerome H. Powell
Jeremy C. Stein
Daniel K. Tarullo
Janet L. Yellen
Christine Cumming, Charles L. Evans, Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Alternate Members of the Federal Open Market Committee
James Bullard, Esther L. George, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively
William B. English, Secretary and Economist
Matthew M. Luecke, Deputy Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Thomas C. Baxter, Deputy General Counsel
Steven B. Kamin, Economist
David W. Wilcox, Economist
James A. Clouse, Thomas A. Connors, Evan F. Koenig, Thomas Laubach, Michael P. Leahy, Loretta J. Mester, Paolo A. Pesenti, Samuel Schulhofer-Wohl, Mark E. Schweitzer, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors
Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors
Stephen A. Meyer and William Nelson, Deputy Directors, Division of Monetary Affairs, Board of Governors
Jon W. Faust, Special Adviser to the Board, Office of Board Members, Board of Governors
Linda Robertson and David W. Skidmore, Assistants to the Board, Office of Board Members, Board of Governors
Trevor A. Reeve, Senior Associate Director, Division of International Finance, Board of Governors
Joyce K. Zickler, Senior Adviser, Division of Monetary Affairs, Board of Governors
Daniel M. Covitz and Michael T. Kiley, Associate Directors, Division of Research and Statistics, Board of Governors
Jane E. Ihrig, Deputy Associate Director, Division of Monetary Affairs, Board of Governors
Edward Nelson, Assistant Director, Division of Monetary Affairs, Board of Governors; John J. Stevens, Assistant Director, Division of Research and Statistics, Board of Governors
Jeremy B. Rudd, Adviser, Division of Research and Statistics, Board of Governors
Dana L. Burnett, Section Chief, Division of Monetary Affairs, Board of Governors
Burcu Duygan-Bump, Senior Project Manager, Division of Monetary Affairs, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Andrew Figura, Group Manager, Division of Research and Statistics, Board of Governors
Michele Cavallo, Senior Economist, Division of International Finance, Board of Governors
Yuriy Kitsul, Economist, Division of Monetary Affairs, Board of Governors
Randall A. Williams, Records Project Manager, Division of Monetary Affairs, Board of Governors
Kenneth C. Montgomery, First Vice President, Federal Reserve Bank of Boston
David Altig, Glenn D. Rudebusch, and Daniel G. Sullivan, Executive Vice Presidents, Federal Reserve Banks of Atlanta, San Francisco, and Chicago, respectively
Troy Davig, Geoffrey Tootell, and Christopher J. Waller, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Boston, and St. Louis, respectively
Robert L. Hetzel, Senior Economist, Federal Reserve Bank of Richmond
Annual Organizational Matters1
In the agenda for this meeting, it was reported that advices of the election of the following members and alternate members of the Federal Open Market Committee (the "Committee") for a term beginning January 28, 2014, had been received and that these individuals had executed their oaths of office.
The elected members and alternate members were as follows:
William C. Dudley, President of the Federal Reserve Bank of New York, with Christine Cumming, First Vice President of the Federal Reserve Bank of New York, as alternate
Charles I. Plosser, President of the Federal Reserve Bank of Philadelphia, with Jeffrey M. Lacker, President of the Federal Reserve Bank of Richmond, as alternate
Sandra Pianalto, President of the Federal Reserve Bank of Cleveland, with Charles L. Evans, President of the Federal Reserve Bank of Chicago, as alternate
Richard W. Fisher, President of the Federal Reserve Bank of Dallas, with Dennis P. Lockhart, President of the Federal Reserve Bank of Atlanta, as alternate
Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis, with John C. Williams, President of the Federal Reserve Bank of San Francisco, as alternate
By unanimous vote, the Committee selected Ben Bernanke to serve as Chairman through January 31, 2014, and Janet L. Yellen to serve as Chairman, effective February 1, 2014, until the selection of her successor at the first regularly scheduled meeting of the Committee in 2015.
By unanimous vote, the following officers of the Committee were selected to serve until the selection of their successors at the first regularly scheduled meeting of the Committee in 2015:
William C. Dudley
Vice Chairman
William B. English
Secretary and Economist
Matthew M. Luecke
Deputy Secretary
Michelle A. Smith
Assistant Secretary
Scott G. Alvarez
General Counsel
Thomas C. Baxter
Deputy General Counsel
Richard M. Ashton
Assistant General Counsel
Steven B. Kamin
Economist
David W. Wilcox
Economist
James A. Clouse
Thomas A. Connors
Evan F. Koenig
Thomas Laubach
Michael P. Leahy
Loretta J. Mester
Paolo A. Pesenti
Samuel Schulhofer-Wohl
Mark E. Schweitzer
William Wascher
Associate Economists
By unanimous vote, the Federal Reserve Bank of New York was selected to execute transactions for the System Open Market Account.
By unanimous vote, the Authorization for Domestic Open Market Operations was approved with an amendment that makes the structure of paragraphs 1.A and 1.B more similar. The Guidelines for the Conduct of System Open Market Operations in Federal-Agency Issues remained suspended.
AUTHORIZATION FOR DOMESTIC OPEN MARKET OPERATIONS
(As amended effective January 28, 2014)
1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, to the extent necessary to carry out the most recent domestic policy directive adopted at a meeting of the Committee:
A. To buy or sell in the open market U.S. government securities, including securities of the Federal Financing Bank, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, from or to securities dealers and foreign and international accounts maintained at the Federal Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the System Open Market Account at market prices, and, for such Account, to exchange maturing U.S. government and federal agency securities with the Treasury or the individual agencies or to allow them to mature without replacement; and
B. To buy or sell in the open market U.S. government securities, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, for the System Open Market Account under agreements to resell or repurchase such securities or obligations (including such transactions as are commonly referred to as repo and reverse repo transactions) in 65 business days or less, at rates that, unless otherwise expressly authorized by the Committee, shall be determined by competitive bidding, after applying reasonable limitations on the volume of agreements with individual counterparties.
2. The Federal Open Market Committee authorizes the Federal Reserve Bank of New York to undertake transactions of the type described in paragraphs 1.A and 1.B from time to time for the purpose of testing operational readiness. The aggregate par value of such transactions of the type described in paragraph 1.A shall not exceed $5 billion per calendar year. The outstanding amount of such transactions of the type described in paragraph 1.B shall not exceed $5 billion at any given time. These transactions shall be conducted with prior notice to the Committee.
3. In order to ensure the effective conduct of open market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to use agents in agency MBS-related transactions.
4. In order to ensure the effective conduct of open market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to lend on an overnight basis U.S. government securities and securities that are direct obligations of any agency of the United States, held in the System Open Market Account, to dealers at rates that shall be determined by competitive bidding. The Federal Reserve Bank of New York shall set a minimum lending fee consistent with the objectives of the program and apply reasonable limitations on the total amount of a specific issue that may be auctioned and on the amount of securities that each dealer may borrow. The Federal Reserve Bank of New York may reject bids that could facilitate a dealer's ability to control a single issue as determined solely by the Federal Reserve Bank of New York. The Federal Reserve Bank of New York may lend securities on longer than an overnight basis to accommodate weekend, holiday, and similar trading conventions.
5. In order to ensure the effective conduct of open market operations, while assisting in the provision of short-term investments or other authorized services for foreign and international accounts maintained at the Federal Reserve Bank of New York and accounts maintained at the Federal Reserve Bank of New York as fiscal agent of the United States pursuant to section 15 of the Federal Reserve Act, the Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York:
A. For the System Open Market Account, to sell U.S. government securities and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States to such accounts on the bases set forth in paragraph 1.A under agreements providing for the resale by such accounts of those securities in 65 business days or less on terms comparable to those available on such transactions in the market;
B. For the New York Bank account, when appropriate, to undertake with dealers, subject to the conditions imposed on purchases and sales of securities in paragraph l.B, repurchase agreements in U.S. government securities and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, and to arrange corresponding sale and repurchase agreements between its own account and such foreign, international, and fiscal agency accounts maintained at the Federal Reserve Bank; and
C. For the New York Bank account, when appropriate, to buy U.S. government securities and obligations that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States from such foreign and international accounts maintained at the Federal Reserve Bank under agreements providing for the repurchase by such accounts of those securities on the same business day.
Transactions undertaken with such accounts under the provisions of this paragraph may provide for a service fee when appropriate.
6. In the execution of the Committee's decision regarding policy during any intermeeting period, the Committee authorizes and directs the Federal Reserve Bank of New York, upon the instruction of the Chairman of the Committee, to (i) adjust somewhat in exceptional circumstances the degree of pressure on reserve positions and hence the intended federal funds rate and to take actions that result in material changes in the composition and size of the assets in the System Open Market Account other than those anticipated by the Committee at its most recent meeting or (ii) undertake transactions of the type described in paragraphs 1.A and 1.B in order to appropriately address temporary disruptions of an operational or highly unusual nature in U.S. dollar funding markets. Any such adjustment as described in clause (i) shall be made in the context of the Committee's discussion and decision at its most recent meeting and the Committee's long-run objectives to foster maximum employment and price stability, and shall be based on economic, financial, and monetary developments during the intermeeting period. Consistent with Committee practice, the Chairman, if feasible, will consult with the Committee before making any instruction under this paragraph.
The Committee voted unanimously to amend the Authorization for Foreign Currency Operations, the Foreign Currency Directive, and the Procedural Instructions with Respect to Foreign Currency Operations in the form shown below. The approval of these documents included approval of the System's warehousing agreement with the U.S. Treasury. These documents were modified to incorporate the dollar and foreign currency liquidity swap arrangements authorized by a resolution on October 29, 2013. Changes were made to the Authorization for Foreign Currency Operations and the Procedural Instructions with Respect to Foreign Currency Operations to align the treatment of the liquidity swap arrangements and that of the reciprocal currency arrangements that have been in place with the central banks of Mexico and Canada since 1994 as part of the North American Framework Agreement. The Authorization for Foreign Currency Operations was amended to remove language regarding the transmission of pertinent information on System foreign currency operations to appropriate officials of the Treasury Department because this language duplicated language in the Program for Security of FOMC Information.
AUTHORIZATION FOR FOREIGN CURRENCY OPERATIONS
(As amended effective January 28, 2014)
1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, for the System Open Market Account, to the extent necessary to carry out the Committee's foreign currency directive and express authorizations by the Committee pursuant thereto, and in conformity with such procedural instructions as the Committee may issue from time to time:
A. To purchase and sell the following foreign currencies in the form of cable transfers through spot or forward transactions on the open market at home and abroad, including transactions with the U.S. Treasury, with the U.S. Exchange Stabilization Fund established by section 10 of the Gold Reserve Act of 1934, with foreign monetary authorities, with the Bank for International Settlements, and with other international financial institutions:
Australian dollars
Brazilian reais
Canadian dollars
Danish kroner
euro
Japanese yen
Korean won
Mexican pesos
New Zealand dollars
Norwegian kroner
Pounds sterling
Singapore dollars
Swedish kronor
Swiss francs
B. To hold balances of, and to have outstanding forward contracts to receive or to deliver, the foreign currencies listed in paragraph A above.
C. To draw foreign currencies and to permit foreign banks to draw dollars under the arrangements listed in paragraph 2 below, in accordance with the Procedural Instructions with Respect to Foreign Currency Operations.
D. To maintain an overall open position in all foreign currencies not exceeding $25.0 billion. For this purpose, the overall open position in all foreign currencies is defined as the sum (disregarding signs) of net positions in individual currencies, excluding changes in dollar value due to foreign exchange rate movements and interest accruals. The net position in a single foreign currency is defined as holdings of balances in that currency, plus outstanding contracts for future receipt, minus outstanding contracts for future delivery of that currency, i.e., as the sum of these elements with due regard to sign.
2. The Federal Open Market Committee directs the Federal Reserve Bank of New York to maintain for the System Open Market Account (subject to the requirements of section 214.5 of Regulation N, Relations with Foreign Banks and Bankers):
A. Reciprocal currency arrangements with the following foreign banks:
Foreign bank
Amount of arrangement
(millions of dollars equivalent)
Bank of Canada
2,000
Bank of Mexico
3,000
B. Standing dollar liquidity swap arrangements with the following foreign banks:
Bank of Canada
Bank of England
Bank of Japan
European Central Bank
Swiss National Bank
C. Standing foreign currency liquidity swap arrangements with the following foreign banks:
Bank of Canada
Bank of England
Bank of Japan
European Central Bank
Swiss National Bank
Dollar and foreign currency liquidity swap arrangements have no pre-set size limits. Any new swap arrangements shall be referred for review and approval to the Committee. All swap arrangements are subject to annual review and approval by the Committee.
3. All transactions in foreign currencies undertaken under paragraph 1.A above shall, unless otherwise expressly authorized by the Committee, be at prevailing market rates. For the purpose of providing an investment return on System holdings of foreign currencies or for the purpose of adjusting interest rates paid or received in connection with swap drawings, transactions with foreign central banks may be undertaken at non-market exchange rates.
4. It shall be the normal practice to arrange with foreign central banks for the coordination of foreign currency transactions. In making operating arrangements with foreign central banks on System holdings of foreign currencies, the Federal Reserve Bank of New York shall not commit itself to maintain any specific balance, unless authorized by the Federal Open Market Committee. Any agreements or understandings concerning the administration of the accounts maintained by the Federal Reserve Bank of New York with the foreign banks designated by the Board of Governors under section 214.5 of Regulation N shall be referred for review and approval to the Committee.
5. Foreign currency holdings shall be invested to ensure that adequate liquidity is maintained to meet anticipated needs and so that each currency portfolio shall generally have an average duration of no more than 18 months (calculated as Macaulay duration). Such investments may include buying or selling outright obligations of, or fully guaranteed as to principal and interest by, a foreign government or agency thereof; buying such securities under agreements for repurchase of such securities; selling such securities under agreements for the resale of such securities; and holding various time and other deposit accounts at foreign institutions. In addition, when appropriate in connection with arrangements to provide investment facilities for foreign currency holdings, U.S. government securities may be purchased from foreign central banks under agreements for repurchase of such securities within 30 calendar days.
6. All operations undertaken pursuant to the preceding paragraphs shall be reported promptly to the Foreign Currency Subcommittee and the Committee. The Foreign Currency Subcommittee consists of the Chairman and Vice Chairman of the Committee, the Vice Chairman of the Board of Governors, and such other member of the Board as the Chairman may designate (or in the absence of members of the Board serving on the Subcommittee, other Board members designated by the Chairman as alternates, and in the absence of the Vice Chairman of the Committee, the Vice Chairman's alternate). Meetings of the Subcommittee shall be called at the request of any member, or at the request of the manager, System Open Market Account ("manager"), for the purposes of reviewing recent or contemplated operations and of consulting with the manager on other matters relating to the manager's responsibilities. At the request of any member of the Subcommittee, questions arising from such reviews and consultations shall be referred for determination to the Federal Open Market Committee.
7. The Chairman is authorized:
A. With the approval of the Committee, to enter into any needed agreement or understanding with the Secretary of the Treasury about the division of responsibility for foreign currency operations between the System and the Treasury;
B. To keep the Secretary of the Treasury fully advised concerning System foreign currency operations, and to consult with the Secretary on policy matters relating to foreign currency operations;
C. From time to time, to transmit appropriate reports and information to the National Advisory Council on International Monetary and Financial Policies.
8. All Federal Reserve Banks shall participate in the foreign currency operations for System Account in accordance with paragraph 3G(1) of the Board of Governors' Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks dated January 1, 1944.
9. The Federal Open Market Committee authorizes the Federal Reserve Bank of New York to undertake transactions of the type described in paragraphs 1, 2, and 5, and foreign exchange and investment transactions that it may be otherwise authorized to undertake from time to time for the purpose of testing operational readiness. The aggregate amount of such transactions shall not exceed $2.5 billion per calendar year. These transactions shall be conducted with prior notice to the Committee.
FOREIGN CURRENCY DIRECTIVE
(As amended effective January 28, 2014)
1. System operations in foreign currencies shall generally be directed at countering disorderly market conditions, provided that market exchange rates for the U.S. dollar reflect actions and behavior consistent with IMF Article IV, Section 1.
2. To achieve this end the System shall:
A. Undertake spot and forward purchases and sales of foreign exchange.
B. Maintain reciprocal currency arrangements with foreign central banks in accordance with the Authorization for Foreign Currency Operations.
C. Maintain standing dollar liquidity swap arrangements with foreign banks in accordance with the Authorization for Foreign Currency Operations.
D. Maintain standing foreign currency liquidity swap arrangements with foreign banks in accordance with the Authorization for Foreign Currency Operations.
E. Cooperate in other respects with central banks of other countries and with international monetary institutions.
3. Transactions may also be undertaken:
A. To adjust System balances in light of probable future needs for currencies.
B. To provide means for meeting System and Treasury commitments in particular currencies, and to facilitate operations of the Exchange Stabilization Fund.
C. For such other purposes as may be expressly authorized by the Committee.
4. System foreign currency operations shall be conducted:
A. In close and continuous consultation and cooperation with the United States Treasury;
B. In cooperation, as appropriate, with foreign monetary authorities; and
C. In a manner consistent with the obligations of the United States in the International Monetary Fund regarding exchange arrangements under IMF Article IV.
PROCEDURAL INSTRUCTIONS WITH RESPECT TO FOREIGN CURRENCY OPERATIONS
(As amended effective January 28, 2014)
In conducting operations pursuant to the authorization and direction of the Federal Open Market Committee (the "Committee") as set forth in the Authorization for Foreign Currency Operations and the Foreign Currency Directive, the Federal Reserve Bank of New York, through the manager, System Open Market Account ("manager"), shall be guided by the following procedural understandings with respect to consultations and clearances with the Committee, the Foreign Currency Subcommittee (the "Subcommittee"), and the Chairman of the Committee, unless otherwise directed by the Committee. All operations undertaken pursuant to such clearances shall be reported promptly to the Committee.
1. For the reciprocal currency arrangements authorized in paragraphs 2.A of the Authorization for Foreign Currency Operations:
A. Drawings must be approved by the Subcommittee (or by the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available) if the swap drawing proposed by a foreign bank does not exceed the larger of (i) $200 million or (ii) 15 percent of the size of the swap arrangement.
B. Drawings must be approved by the Committee (or by the Subcommittee, if the Subcommittee believes that consultation with the full Committee is not feasible in the time available, or by the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available) if the swap drawing proposed by a foreign bank exceeds the larger of (i) $200 million or (ii) 15 percent of the size of the swap arrangement.
C. The manager shall also consult with the Subcommittee or the Chairman about proposed swap drawings by the System.
D. Any changes in the terms of existing swap arrangements shall be referred for review and approval to the Chairman. The Chairman shall keep the Committee informed of any changes in terms, and the terms shall be consistent with principles discussed with and guidance provided by the Committee.
2. For the dollar and foreign currency liquidity swap arrangements authorized in paragraphs 2.B and 2.C of the Authorization for Foreign Currency Operations:
A. Drawings must be approved by the Chairman in consultation with the Subcommittee. The Chairman or the Subcommittee will consult with the Committee prior to the initial drawing on the dollar or foreign currency liquidity swap lines if possible under the circumstances then prevailing; authority to approve subsequent drawings for either the dollar or foreign currency liquidity swap lines may be delegated to the manager by the Chairman.
B. Any changes in the terms of existing swap arrangements shall be referred for review and approval to the Chairman. The Chairman shall keep the Committee informed of any changes in terms, and the terms shall be consistent with principles discussed with and guidance provided by the Committee.
3. Any operation must be approved by:
A. The Subcommittee (or by the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available) if it:
i. Would result in a change in the System's overall open position in foreign currencies exceeding $300 million on any day or $600 million since the most recent regular meeting of the Committee.
ii. Would result in a change on any day in the System's net position in a single foreign currency exceeding $150 million, or $300 million when the operation is associated with repayment of swap drawings.
iii. Might generate a substantial volume of trading in a particular currency by the System, even though the change in the System's net position in that currency (as defined in paragraph 1.D of the Authorization for Foreign Currency Operations) might be less than the limits specified in 3.A.ii.
B. The Committee (or by the Subcommittee, if the Subcommittee believes that consultation with the full Committee is not feasible in the time available, or by the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available) if it would result in a change in the System's overall open position in foreign currencies exceeding $1.5 billion since the most recent regular meeting of the Committee.
4. The Committee authorizes the Federal Reserve Bank of New York to undertake transactions of the type described in paragraphs 1, 2, and 5 of the Authorization for Foreign Currency Operations and foreign exchange and investment transactions that it may be otherwise authorized to undertake from time to time for the purpose of testing operational readiness. The aggregate amount of such transactions shall not exceed $2.5 billion per calendar year. These transactions shall be conducted with prior notice to the Committee.
In its annual reconsideration of the Statement on Longer-Run Goals and Monetary Policy Strategy, participants generally agreed that only minor updates were required at this meeting. It was noted, however, that because this was the third year in which the statement was being issued, the coming year would be an appropriate time to consider whether the statement could be enhanced in any way. For example, some participants advocated an explicit indication that inflation persistently below the Committee's 2 percent longer-run objective and inflation persistently above that objective would be equally undesirable. Some others suggested that the statement could more clearly describe how the mandated goals of maximum employment and price stability are linked with the objective of financial stability. Following the discussion, the Committee voted to approve minor wording changes to the statement and to update the statement's reference to participants' estimates of the longer-run normal unemployment rate. Mr. Tarullo abstained from the vote because he continued to think that the statement had not advanced the cause of communicating or achieving greater consensus in the policy views of the Committee.
STATEMENT ON LONGER-RUN GOALS AND MONETARY POLICY STRATEGY
(As amended effective January 28, 2014)
"The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.
Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee's policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee's goals.
The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances.
The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants' estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC's Summary of Economic Projections. For example, in the most recent projections, FOMC participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 5.8 percent.
In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate.
The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January."
By unanimous vote, the Committee amended its Rules of Organization to add the position of deputy manager of the System Open Market Account.
By unanimous vote, the Committee amended its Program for Security of FOMC Information with minor changes to the review and reporting process for breaches in the information security rules and with several other minor updates and clarifications.
By unanimous vote, the Committee selected Simon Potter and Lorie K. Logan to serve at the pleasure of the Committee as manager and deputy manager of the System Open Market Account, respectively, on the understanding that their selection was subject to their being satisfactory to the Federal Reserve Bank of New York.
Secretary's note: Advice subsequently was received that the manager and deputy manager selections indicated above were satisfactory to the Federal Reserve Bank of New York.
Developments in Financial Markets and the Federal Reserve's Balance Sheet
The manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets as well as System open market operations during the period since the Federal Open Market Committee met on December 17-18, 2013. The manager also presented an update on the ongoing overnight reverse repurchase agreement (ON RRP) exercise. All operations to date had proceeded smoothly. The number of participating counterparties and total allotment in the daily operations increased in late December, in part reflecting the fact that overnight secured rates were low compared with the fixed rate offered in the operations as well as the increase in the cap on individual counterparty bids to $3 billion from $1 billion that was implemented on December 23, 2013. Counterparties' year-end balance sheet adjustments also boosted participation for a time; the ON RRP operations reportedly helped limit downward pressure on money market rates around year-end.
Following the manager's report, meeting participants discussed a proposal to extend the Desk's authority to conduct the ON RRP exercise for 12 months and to lift the per-counterparty bid limit. Under the terms of the proposal, the interest rate on ON RRPs would remain between 0 and 5 basis points. The Chair of the FOMC would authorize any changes in the offered rate or per-counterparty bid limit. Adjustments to the bid limit would be made in gradual steps, and the Committee would be consulted before the exercise would move to full allotment. The proposed changes were intended to allow the Committee to obtain additional information about the potential usefulness of ON RRP operations for affecting market interest rates when that step becomes appropriate. Most meeting participants supported the proposal, with a couple emphasizing that the period for which the exercise would be extended was likely sufficiently long that counterparties would be willing to adjust their current money market practices, thereby providing better information on the possible market effects of such operations. It was remarked that the additional insights obtained from the exercise could be useful in the context of the Committee's future discussions about monetary policy implementation over the medium and longer term. A number of participants, however, indicated a preference for retaining a cap on the per-counterparty bid limit until the Committee has discussed possible approaches to medium-term policy implementation, and a few of these participants preferred to extend the exercise for a shorter period.
Following the discussion, the Committee approved the following resolution:
"The Federal Open Market Committee (FOMC) authorizes the Federal Reserve Bank of New York to conduct a series of fixed-rate, overnight reverse repurchase operations involving U.S. Government securities, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, for the purpose of further assessing the potential role for such operations in supporting the implementation of monetary policy. The reverse repurchase operations authorized by this resolution shall be offered at a fixed rate that may vary from zero to five basis points, and for an overnight term, or such longer term as is warranted to accommodate weekend, holiday, and similar trading conventions. Any change to the offered rate within the range specified above or the per-counterparty bid limits will require approval of the Chairman. The System Open Market Account manager will notify the FOMC in advance about any changes to the terms of operations. These operations shall be authorized through January 30, 2015."
Messrs. Fisher and Plosser dissented because of their preference for retaining a cap on the maximum size of counterparties' offers during the extension; Mr. Plosser also preferred a shorter extension of the exercise.
By unanimous vote, the Committee ratified the Open Market Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the January 28-29 meeting indicated that the rate of economic growth picked up in the second half of 2013. Total payroll employment increased in December, but at a slower pace than in previous months, and the unemployment rate declined but was still elevated. Consumer price inflation continued to run below the Committee's longer-run objective, while measures of longer-term inflation expectations remained stable.
Overall, labor market indicators appeared consistent with a gradual ongoing improvement in labor market conditions. Total nonfarm payroll employment expanded by less in December than in the previous two months, perhaps partly because of unusually bad weather. The unemployment rate declined to 6.7 percent in December. The labor force participation rate also decreased, and the employment-to-population ratio was little changed. The rate of long-duration unemployment declined, but the share of workers employed part time for economic reasons was little changed, and both measures remained elevated. Among other indicators of labor market conditions, the rate of job openings edged up in recent months, and the share of small businesses reporting that they had hard-to-fill positions trended up. Measures of firms' hiring plans were higher than a year earlier, but the rate of gross private-sector hiring was still low. Initial claims for unemployment insurance moved down, on balance, over the intermeeting period, and household expectations of the labor market situation improved, on net, in December and early January.
Manufacturing production increased at a robust pace in the fourth quarter, with broad-based gains across industries. Indicators of manufacturing production, such as the readings on new orders from national and regional manufacturing surveys, were consistent with a further expansion in factory output early this year, but automakers' production schedules indicated that the pace of light motor vehicle assemblies would decline in the first quarter.
Real personal consumption expenditures (PCE) rose at a faster pace in October and November than in the third quarter. In December, the components of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimate of PCE increased strongly, although sales of light motor vehicles declined after posting a large gain in November. Recent information on several important factors that influence household spending was somewhat mixed. Households' real disposable income was little changed in October and November, and the expiration of the emergency unemployment compensation program at the end of 2013 was expected to reduce aggregate income growth early this year. However, households' net worth likely continued to expand in recent months as a result of rising equity prices and home values. Consumer sentiment in the Thomson Reuters/University of Michigan Surveys of Consumers improved, on balance, in December and early January after a decline in the fall of 2013.
The pace of activity in the housing sector showed some tentative signs of stabilizing, as the effects of the past year's rise in mortgage rates appeared to wane. Single-family housing starts increased in November and only partly reversed that gain in December, while permits for new construction rose a little, on balance, in the fourth quarter. New home sales declined in November and December but were nonetheless higher than in the third quarter, and existing home sales flattened out in December after decreasing for several months.
Real private expenditures for business equipment and intellectual property products appeared to strengthen in the fourth quarter, as nominal shipments of nondefense capital goods rose at a solid pace. Although nominal new orders for these capital goods declined in December and November's increase was revised down, the level of orders remained above that of shipments, pointing to further increases in shipments in subsequent months. Other forward-looking indicators, such as surveys of business conditions and capital spending plans, were also generally consistent with near-term gains in business equipment spending. Nominal expenditures for nonresidential construction, which had been flat in October, moved higher in November. Data on book-value inventories suggested little change in the pace of nonfarm inventory investment in the fourth quarter, and the available information did not point to significant inventory imbalances in most industries.
Real federal government purchases likely fell sharply in the fourth quarter because of continued declines in defense spending and the temporary partial shutdown of the federal government in October. Increases in real state and local government purchases appeared to have moderated in the fourth quarter. The payrolls of these governments were about unchanged during the fourth quarter, and nominal state and local construction expenditures for October and November increased at a slower pace, on net, than in the third quarter.
The U.S. international trade deficit narrowed substantially in November, as exports increased and imports fell. The higher value of exports stemmed in large part from an increase in sales of petroleum products, while the fall in imports was primarily due to a decline in purchases of crude oil.
Total U.S. consumer price inflation, as measured by the PCE price index, was a little under 1 percent over the 12 months ending in November, well below the Committee's 2 percent longer-term objective. Over that period, consumer energy prices declined, consumer food prices rose modestly, and core PCE prices--which exclude consumer food and energy prices--increased slightly more than 1 percent. In December, the consumer price index (CPI) rose somewhat faster than in recent months, primarily reflecting an upturn in consumer energy prices; core CPI inflation remained low. Both near-term and longer-term inflation expectations from the Michigan survey were little changed, on net, in December and early January. Over the 12 months ending in December, nominal average hourly earnings for all employees increased slightly faster than consumer price inflation.
Foreign economic activity continued to improve, with economic growth in the third quarter of 2013 higher than in the first half of the year and more recent indicators suggesting further gains. The pickup was widespread, as the euro area registered a second consecutive quarter of positive economic growth, the Mexican economy bounced back from a second-quarter contraction, and stronger external demand boosted growth in emerging market economies more generally. At the same time, inflation continued to run below central bank targets in several advanced economies, and monetary policy remained expansionary in these economies. Inflation in emerging market economies remained moderate on average, although Brazil, India, and Turkey again tightened monetary policy during the intermeeting period in response to concerns about inflation and currency depreciation. The policy tightening in Turkey was particularly sharp and followed several days of heightened financial market pressures toward the end of the intermeeting period. Similar pressures were evident in some other emerging market economies as well.
Staff Review of the Financial Situation
Financial market conditions over the intermeeting period were importantly influenced by Federal Reserve communications, somewhat better-than-expected economic data releases, and developments in emerging market economies. On net, financial conditions in the United States remained supportive of growth in economic activity and employment: Equity prices increased a bit, longer-term interest rates declined, and the dollar appreciated against most other currencies.
While investors were somewhat surprised by the FOMC's decision at its December meeting to reduce the pace of its asset purchases, the policy action and associated communications appeared to have only a limited effect on market participants' outlook for the Federal Reserve's balance sheet. Indeed, the Committee's decision to cut the pace of purchases and its rationale for doing so seemed to increase investors' confidence in the economic outlook, a shift that was further supported by subsequent U.S. economic data releases. However, those effects were reversed late in the period when investors appeared to pull back from riskier assets in reaction to rising concern about developments in some emerging market economies and their possible implications for global economic growth.
Results from the Desk's survey of primary dealers conducted prior to the January meeting indicated that dealers anticipated only minor changes to the Committee's postmeeting statement. In addition, the median dealer expected a $10 billion reduction in the monthly pace of asset purchases to be announced at each meeting in the first three quarters of 2014, with the purchase program ending with a final $15 billion reduction at the October 2014 meeting.
On balance, 10-and 30-year nominal Treasury yields declined about 10 basis points and 20 basis points, respectively, over the intermeeting period, in part because of an increase in safe-haven demands toward the end of the period. The December policy action and subsequent muted market reaction led to decreased uncertainty about future longer-term interest rates, perhaps contributing to the decline in longer-term rates. The measure of 5-year inflation compensation based on Treasury inflation-protected securities increased a little, while inflation compensation 5 to 10 years ahead decreased somewhat.
Conditions in short-term dollar funding markets generally remained stable. Year-end funding pressures were modest, and overnight money market rates declined about in line with their typical behavior in past years. Repo rates were quite low at the end of the year and remained low through most of January, leading to increased participation in the Federal Reserve's ON RRP operations, with a substantial temporary increase in take-up at year-end. Primarily reflecting the increased participation in the exercise, reserve balances expanded more slowly and the rate of increase in the monetary base slowed in December. M2 continued to expand moderately.
Reflecting the improved outlook for economic activity and despite mixed fourth-quarter earnings results, the stock prices of bank holding companies rose notably and spreads on credit default swaps for the largest bank holding companies narrowed somewhat. According to the January Senior Loan Officer Opinion Survey on Bank Lending Practices, domestic banks continued to ease their lending standards and some loan terms on balance; they also experienced an increase in demand, on net, in most major loan categories in the fourth quarter.
Broad U.S. equity price indexes edged higher, on net, over the intermeeting period, and equity issuance by nonfinancial corporations increased. Credit remained widely available to large nonfinancial corporations. Corporate bond spreads continued to narrow over the intermeeting period, with investment-grade bond spreads reaching their lowest levels in several years and those on speculative-grade corporate bonds approaching pre-crisis levels. Bond issuance by domestic corporations generally stayed strong, commercial and industrial loans on banks' books increased by a notable amount late in the fourth quarter, and issuance of leveraged loans and collateralized loan obligations generally continued apace.
Conditions in the commercial real estate sector recovered further in the fourth quarter, with rising property prices and fewer distressed sales. In the market for commercial mortgage-backed securities, investor demand remained strong and spreads continued to be tight despite high issuance near year-end. Commercial real estate loans on banks' books expanded moderately.
Credit conditions in municipal bond markets generally remained stable, although a few issuers continued to experience substantial strain. Available data suggest that, for the first time in several years, the ratings agency Moody's Investors Service made more upgrades than downgrades to municipal debt in the fourth quarter. However, Moody's put Puerto Rico on watch for a downgrade.
Households continued to face mixed credit conditions in the fourth quarter. Consumer credit expanded again in November, boosted by further gains in auto and student loans, and bank credit data indicate that this expansion likely continued through December. In contrast, credit card balances were little changed, on net, through November, as underwriting appeared to remain quite tight. The volume of mortgage applications for home purchases held about steady since the previous FOMC meeting while refinance applications remained at very low levels. Mortgage rates declined slightly, in line with modestly lower yields on agency mortgage-backed securities. Despite tight mortgage availability and subdued borrowing, house prices continued to increase in November, although not as quickly as earlier in 2013.
Financial market conditions in the advanced foreign economies over the intermeeting period generally became more supportive of growth. Long-term government bond yields declined and headline equity indexes increased, on net, in most of these countries, with bank stock prices in the euro area rising more than broader indexes. In addition, debt issuance by both governments and banks in the European periphery picked up, and sovereign yield spreads in those countries were flat to down, on balance, over the period. In contrast, amid a ratcheting-up of financial market strains in some emerging market economies, headline stock price indexes in most emerging market economies declined, outflows from emerging market mutual funds continued, and yield spreads on dollar-denominated emerging market bonds increased. Local-currency yields rose in some emerging market economies, such as Brazil, South Africa, and Turkey, and short-term interbank rates in China were volatile and trended higher over the period. The foreign exchange value of the dollar appreciated against most other currencies over the period, with particularly large increases against the Argentine peso and the Turkish lira.
Staff Economic Outlook
In the economic projection prepared by the staff for the January FOMC meeting, growth of real gross domestic product (GDP) in the second half of 2013 was estimated to have been stronger than the staff had expected, though some of the strength in inventory investment and net exports was possibly transitory. The staff's medium-term forecast for real GDP growth was little revised, on balance, as the momentum implied by faster GDP growth in the second half of 2013 was largely offset by a higher projected path for the foreign exchange value of the dollar. In addition, the staff revised downward its view of the pace at which potential output had increased over recent years and would increase this year and next. The staff continued to project that real GDP would expand more quickly over the next few years than in 2013 and that real GDP would rise faster than potential output. This acceleration in economic activity was expected to be supported by still-accommodative monetary policy and an easing in the effects of fiscal policy restraint on economic growth, as well as by increases in consumer and business confidence, further improvements in credit availability and financial conditions, and continued gains in foreign economic growth. The expansion in economic activity was anticipated to lead to a slow reduction in resource slack over the projection period, and the unemployment rate was expected to decline gradually, reaching the staff's estimate of its longer-run natural rate in 2016.
The staff's forecast for inflation was little changed from the projection prepared for the previous FOMC meeting, although the near-term forecast was revised down a little to reflect recent declines in energy prices. The staff continued to forecast that inflation would run well below the Committee's 2 percent objective early this year but above the low level observed over much of 2013. Over the medium term, with longer-run inflation expectations assumed to remain stable, changes in commodity and import prices expected to be muted, and slack in labor and product markets receding gradually, inflation was projected to move back slowly toward the Committee's objective.
In considering recent events in emerging market economies, the staff judged that the effects of recent financial market volatility had not been large enough to have a material effect on the overall outlook for those economies and, similarly, that the spillover effects on the United States of developments to date were likely to be modest. Because conditions were in flux, however, these markets would require careful monitoring.
The staff continued to see a number of risks around its outlook. The downside risks to the forecast for real GDP growth were thought to have diminished, but the risks were still seen as tilted a little to the downside because, with the target federal funds rate at its effective lower bound, the economy was not well positioned to withstand future adverse shocks. At the same time, the staff viewed the risks around its outlook for the unemployment rate and for inflation as roughly balanced.
Participants' Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, participants generally noted that economic activity had strengthened more in the second half of 2013 than they had expected at the time of the December meeting. In particular, consumer spending had strengthened, and business investment appeared to be on a more solid uptrend. Although the government shutdown likely damped economic growth somewhat, the extent of restraint on growth from fiscal policy diminished late in the year. However, several participants observed that temporary factors had helped boost real GDP during the second half, pointing specifically to the substantial contributions from net exports and increased inventory investment. As a result, participants generally did not expect the recent pace of economic growth to be sustained, but they nonetheless anticipated that the economy would expand at a moderate pace in coming quarters. That expansion was expected to be supported by highly accommodative monetary policy, a further easing of fiscal restraint, and a modest additional pickup in global economic growth, as well as continued improvement in credit conditions and the ongoing strengthening in household balance sheets. A number of participants noted that recent economic news had reinforced their confidence in their projection of moderate economic growth over the medium run. It was also noted that recent developments in several emerging market economies, if they continued, could pose downside risks to the outlook. Overall, most participants still viewed the risks to the outlook for the economy and the labor market as having become more nearly balanced in recent months.
Consumer spending had advanced strongly in late 2013, contributing importantly to the pickup in growth of economic activity. This picture was reinforced by survey data that suggested that consumers had become more optimistic about future income gains. While noting that households remained cautious, participants cited a number of factors that were likely to continue to underpin gains in household spending, including rising house prices, growing confidence in the sustainability of the economic expansion, increasing payrolls, and the high ratio of household wealth to disposable income.
Although the recovery in the housing sector had slowed somewhat in recent months, a number of participants reported solid activity in their Districts. Moreover, various factors were seen as likely to support stronger growth in the sector going forward, including favorable housing affordability, which was in turn partly due to still-low mortgage rates, and demographic trends. However, there were also reasons for being cautious about the prospects for housing construction, such as recent disappointing news on permits for new construction and the possibility that investors' interest in purchasing properties for the rental market would recede.
Business contacts in many parts of the country reported that they were guardedly optimistic about prospects for 2014. While inventory investment would likely come down from its recent unusually high level, participants heard more reports that the business sector was willing to increase spending on capital projects. A number of factors were cited as likely to support such an increase, including the high level of profits, the low level of interest rates, a reduction in policy uncertainty, the easing of lending standards, and large holdings of liquid assets by corporations.
In discussing financial developments over the intermeeting period, several participants noted that the Committee's December decision to make a modest reduction in the monthly pace of asset purchases had not resulted in an adverse market reaction. Several participants observed that current market expectations for asset purchases and the future course of the federal funds rate were reasonably well aligned with participants' own expectations of the path for policy. However, one participant expressed concern that longer-term interest rates could rise sharply if market participants' expectations of future monetary policy came to deviate from those of policymakers, as appeared to have happened last summer, while a couple of others argued that the current highly accommodative stance of monetary policy could lead investors to take on excessive risk and so undermine longer-term financial stability. Recent volatility in emerging markets appeared to have had only a limited effect to date on U.S. financial markets. Nevertheless, participants agreed that a number of developments in financial markets needed to be watched carefully, including the financing situation of the Puerto Rican government and particularly the unfolding events in emerging markets.
In their discussion of recent labor market developments, many participants commented on the relatively small increase in payrolls in December and the further decline in the unemployment rate. A number of participants indicated that the December payrolls figure may have been an anomaly, perhaps importantly reflecting bad weather, and it was noted that the initial readings on payrolls in recent years had subsequently tended to be revised up. In addition, some participants reported that their business contacts had become more positive about hiring in the year ahead. Participants continued to debate the reliability of the unemployment rate as an indicator of overall labor market conditions, taking into account the further decline in labor force participation in recent quarters, still-elevated levels of underemployment and long-term unemployment, and the apparent absence of wage pressures. Much of the downward trend in the labor force participation rate since the start of the recession was seen as the result of shifts in the demographic composition of the workforce and the retirement of older workers; the extent of the cyclical portion of the decline was viewed by some as difficult to gauge at present. A few participants judged that the decline in participation for younger and prime-age workers likely reflected the slow recovery in jobs and wages and so might be reversed as labor market conditions strengthened. In addition, several others pointed out that broader concepts of the unemployment rate, such as those that include nonparticipants who report that they want a job and those working part time who want full-time work, remained well above the official unemployment rate, suggesting that considerable labor market slack remained despite the reduction in the unemployment rate. A few participants noted worker shortages in specific regions and occupations, with one District reporting widespread shortages of skilled labor leading to emerging labor cost pressures. However, a number of participants saw the low rates of increase in most measures of wages as consistent with continued labor market slack.
Inflation remained below the Committee's longer-run objective over the intermeeting period. Participants still anticipated that, with longer-run inflation expectations stable, transitory factors that had been damping inflation likely to recede, and economic activity picking up, inflation would move back toward the Committee's 2 percent objective over the medium run. However, several factors that cast doubt on this outcome were also mentioned, including slow growth in labor costs, the lack of pricing power reported by business contacts in various parts of the country, the low level of inflation in other advanced economies, and the danger that inflation expectations at short and medium horizons might not be as well anchored as longer-run inflation expectations. Participants noted that inflation persistently below the Committee's objective would pose risks to economic performance and that inflation developments would need to be monitored carefully.
In their discussion of the path for monetary policy, most participants judged that the incoming information about the economy was broadly in line with their expectations and that a further modest step down in the pace of purchases was appropriate. A couple of participants observed that continued low readings on inflation and considerable slack in the labor market raised questions about the desirability of reducing the pace of purchases; these participants judged, however, that a pause in the reduction of purchases was not justified at this stage, especially in light of the strength of the economy in the second half of 2013. Several participants argued that, in the absence of an appreciable change in the economic outlook, there should be a clear presumption in favor of continuing to reduce the pace of purchases by a total of $10 billion at each FOMC meeting. That said, a number of participants noted that if the economy deviated substantially from its expected path, the Committee should be prepared to respond with an appropriate adjustment to the trajectory of its purchases.
Participants agreed that, with the unemployment rate approaching 6-1/2 percent, it would soon be appropriate for the Committee to change its forward guidance in order to provide information about its decisions regarding the federal funds rate after that threshold was crossed. A range of views was expressed about the form that such forward guidance might take. Some participants favored quantitative guidance along the lines of the existing thresholds, while others preferred a qualitative approach that would provide additional information regarding the factors that would guide the Committee's policy decisions. Several participants suggested that risks to financial stability should appear more explicitly in the list of factors that would guide decisions about the federal funds rate once the unemployment rate threshold is crossed, and several participants argued that the forward guidance should give greater emphasis to the Committee's willingness to keep rates low if inflation were to remain persistently below the Committee's 2 percent longer-run objective. Additional proposals included relying to a greater extent on the Summary of Economic Projections as a communications device and including in the guidance an indication of the Committee's willingness to adjust policy to lean against undesired changes in financial conditions.
A few participants raised the possibility that it might be appropriate to increase the federal funds rate relatively soon. One participant cited evidence that the equilibrium real interest rate had moved higher, and a couple of them noted that some standard policy rules tended to suggest that the federal funds rate should be raised above its effective lower bound before the middle of this year. Other participants, however, suggested that prescriptions from standard policy rules were not appropriate in current circumstances, either because the target federal funds rate had been constrained by the lower bound for some time or because the equilibrium real rate of interest was likely still being held down by various factors, including the lingering effects of the financial crisis, and was significantly below the value of the longer-run rate built into standard policy rules.
Committee Policy Action
Committee members saw the information received over the intermeeting period as indicating that growth in economic activity had picked up in recent quarters. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate had declined but remained elevated when judged against members' estimates of the longer-run normal rate of unemployment. Household spending and business fixed investment had advanced more quickly in recent months than earlier in 2013, while the recovery in the housing sector had slowed somewhat. Fiscal policy was restraining economic growth, although the extent of the restraint had diminished. The Committee expected that, with appropriate policy accommodation, the economy would expand at a moderate pace and the unemployment rate would gradually decline toward levels consistent with the dual mandate. Moreover, members continued to judge that the risks to the outlook for the economy and the labor market had become more nearly balanced. Inflation was running below the Committee's longer-run objective, and this was seen as posing possible risks to economic performance, but members anticipated that stable inflation expectations and strengthening economic activity would, over time, return inflation to the Committee's 2 percent objective. However, in light of their concerns about the persistence of low inflation, many members saw a need for the Committee to monitor inflation developments carefully for evidence that inflation was moving back toward its longer-run objective.
In their discussion of monetary policy in the period ahead, all members agreed that the cumulative improvement in labor market conditions and the likelihood of continuing improvement indicated that it would be appropriate to make a further measured reduction in the pace of its asset purchases at this meeting. Members again judged that, if the economy continued to develop as anticipated, further reductions would be undertaken in measured steps. Members also underscored that the pace of asset purchases was not on a preset course and would remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the efficacy and costs of purchases. Accordingly, the Committee agreed that, beginning in February, it would add to its holdings of agency mortgage-backed securities at a pace of $30 billion per month rather than $35 billion per month, and would add to its holdings of longer-term Treasury securities at a pace of $35 billion per month rather than $40 billion per month. While making a further measured reduction in its pace of purchases, the Committee emphasized that its holdings of longer-term securities were sizable and would still be increasing, which would promote a stronger economic recovery by maintaining downward pressure on longer-term interest rates, supporting mortgage markets, and helping to make broader financial conditions more accommodative. The Committee also reiterated that it would continue its asset purchases, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.
In considering forward guidance about the target federal funds rate, all members agreed to retain the thresholds-based language employed in recent statements. In addition, the Committee decided to repeat the qualitative guidance, introduced in December, clarifying that a range of labor market indicators would be used when assessing the appropriate stance of policy once the unemployment rate threshold had been crossed. Members also agreed to reiterate language indicating the Committee's anticipation, based on its current assessment of additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments, that it would be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's longer-run objective.
Members also discussed other elements of the policy statement to be issued following the meeting. Members agreed on updating the description of the state of the economy to reflect the recent strength of household and business spending and to note that, although the labor market showed further improvement on balance, the recent indicators were mixed. Members did not see an appreciable change in the balance of risks and so left the statement's description of risks unchanged.
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 SOMA in accordance with the following domestic policy directive:
"Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. Beginning in February, the Desk is directed to purchase longer-term Treasury securities at a pace of about $35 billion per month and to purchase agency mortgage-backed securities at a pace of about $30 billion per month. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."
The vote encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in December indicates that growth in economic activity picked up in recent quarters. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate declined but remains elevated. Household spending and business fixed investment advanced more quickly in recent months, while the recovery in the housing sector slowed somewhat. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.
Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee continues to see the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in February, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $30 billion per month rather than $35 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $35 billion per month rather than $40 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to ¼ percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent."
Voting for this action: Ben Bernanke, William C. Dudley, Richard W. Fisher, Narayana Kocherlakota, Sandra Pianalto, Charles I. Plosser, Jerome H. Powell, Jeremy C. Stein, Daniel K. Tarullo, and Janet L. Yellen.
Voting against this action: None.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, March 18-19, 2014. The meeting adjourned at 10:55 a.m. on January 29, 2014.
Notation Vote
By notation vote completed on January 7, 2014, the Committee unanimously approved the minutes of the Committee meeting held on December 17-18, 2013.
_____________________________
William B. English
Secretary
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1. Versions of the current Committee documents are available at www.federalreserve.gov/monetarypolicy/rules_authorizations.htm. Return to text |
2013-12-18T00:00:00 | 2014-01-08 | Minute | Minutes of the Federal Open Market Committee
December 17-18, 2013
A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, December 17, 2013, at 1:00 p.m. and continued on Wednesday, December 18, 2013, at 8:30 a.m.
PRESENT:
Ben Bernanke, Chairman
William C. Dudley, Vice Chairman
James Bullard
Charles L. Evans
Esther L. George
Jerome H. Powell
Eric Rosengren
Jeremy C. Stein
Daniel K. Tarullo
Janet L. Yellen
Christine Cumming, Richard W. Fisher, Narayana Kocherlakota, Sandra Pianalto, and Charles I. Plosser, Alternate Members of the Federal Open Market Committee
Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively
William B. English, Secretary and Economist
Matthew M. Luecke, Assistant Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Steven B. Kamin, Economist
David W. Wilcox, Economist
Thomas A. Connors, Troy Davig, Michael P. Leahy, Stephen A. Meyer, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors
Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors
James A. Clouse and William Nelson, Deputy Directors, Division of Monetary Affairs, Board of Governors
Jon W. Faust, Special Adviser to the Board, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Trevor A. Reeve, Senior Associate Director, Division of International Finance, Board of Governors
Ellen E. Meade and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors
Eric M. Engen, Thomas Laubach, David E. Lebow, and Michael G. Palumbo, Associate Directors, Division of Research and Statistics, Board of Governors; Gretchen C. Weinbach, Associate Director, Division of Monetary Affairs, Board of Governors
Marnie Gillis DeBoer, Deputy Associate Director, Division of Monetary Affairs, Board of Governors; Diana Hancock, Deputy Associate Director, Division of Research and Statistics, Board of Governors
Stacey Tevlin, Assistant Director, Division of Research and Statistics, Board of Governors
Eric Engstrom, Section Chief, Division of Research and Statistics, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Peter M. Garavuso, Records Management Analyst, Division of Monetary Affairs, Board of Governors
John F. Moore, First Vice President, Federal Reserve Bank of San Francisco
David Altig, Jeff Fuhrer, Loretta J. Mester, and Mark S. Sniderman, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Boston, Philadelphia, and Cleveland, respectively
Evan F. Koenig, Lorie K. Logan, and Samuel Schulhofer-Wohl, Senior Vice Presidents, Federal Reserve Banks of Dallas, New York, and Minneapolis, respectively
David Andolfatto, James P. Bergin, Jonas D. M. Fisher, Sylvain Leduc, and Paolo A. Pesenti, Vice Presidents, Federal Reserve Banks of St. Louis, New York, Chicago, San Francisco, and New York, respectively
Robert L. Hetzel, Senior Economist, Federal Reserve Bank of Richmond
Developments in Financial Markets and the Federal Reserve's Balance Sheet
The Manager of the System Open Market Account reported on developments in domestic and foreign financial markets as well as System open market operations during the period since the Federal Open Market Committee (FOMC) met on October 29-30, 2013. The staff also presented an update on the ongoing testing of overnight reverse repurchase agreement (ON RRP) operations that the Committee approved at its September meeting and that is scheduled to end on January 29, 2014. All operations to date had proceeded smoothly. Participation in ON RRP operations varied somewhat from day to day, in part reflecting changes in the spread between market rates on repurchase agreement transactions and the rate offered in the Federal Reserve's ON RRP operations. The staff reported that they saw potential benefits to extending the exercise and in January would likely recommend a continuation along with possible adjustments to program parameters that could provide additional insights into the demand for a potential facility and its efficacy in putting a floor on money market rates.
Following the Manager's report, the Committee considered a proposal to increase the caps on individual allocations in the ON RRP test operations from $1 billion to $3 billion per counterparty. The proposed increase in caps was intended to test the Desk's ability to manage somewhat larger operational flows and to provide additional information about the potential usefulness of ON RRP operations to affect market interest rates when doing so becomes appropriate. Participants generally supported the proposal, with one participant emphasizing the usefulness of extending the end date of the program beyond the end of January. However, some participants questioned the extent to which the proposed limited increase in the caps would provide additional insights about the operational aspects of the ON RRP program or the potential market effects of ON RRP operations. A few participants suggested that it would be useful to evaluate the potential role of an ON RRP facility in the context of the Committee's plans for monetary policy implementation over the medium and longer term.
Following the discussion, the Committee unanimously approved the following resolution:
"The Federal Open Market Committee authorizes an increase in the maximum allotment cap for the series of fixed-rate, overnight reverse repurchase operations approved on September 17, 2013, to $3 billion per counterparty per day from its previous level of $1 billion per counterparty per day. All other aspects of the resolution remain unchanged."
By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
The staff presented a short briefing summarizing a survey that was conducted over the intermeeting period regarding participants' views of the marginal costs and marginal efficacy of asset purchases. Most participants judged the marginal costs of asset purchases as unlikely to be sufficient, relative to their marginal benefits, to justify ending the purchases now or relatively soon; a few participants identified some possible costs as being more substantial, indicating that the costs could justify ending purchases now or relatively soon even if the Committee's macroeconomic goals for the purchase program had not yet been achieved. Participants were most concerned about the marginal cost of additional asset purchases arising from risks to financial stability, pointing out that a highly accommodative stance of monetary policy could provide an incentive for excessive risk-taking in the financial sector. It was noted that the risks to financial stability could be somewhat larger in the case of asset purchases than in the case of interest rate policy because purchases work in part by affecting term premiums and policymakers have less experience with term premium effects than with more conventional interest rate policy. Participants also expressed some concern that additional asset purchases increase the likelihood that the Federal Reserve might at some point suffer capital losses. But it was pointed out that the Federal Reserve's asset purchases would almost certainly provide significant net income to the Treasury over the life of the program, especially when the effects of the program on the broader economy were taken into account, and that potential reputational risks to the Federal Reserve arising from any future capital losses could be mitigated by communicating that point to the public. Further, participants noted that ongoing asset purchases could increase the difficulty of managing exit from the current highly accommodative policy stance when the time came. Many participants, however, expressed confidence in the tools at the Federal Reserve's disposal for managing its balance sheet and for normalizing the stance of policy at the appropriate time. Regarding the marginal efficacy of the purchase program, most participants viewed the program as continuing to support accommodative financial conditions, with a number of them pointing to the importance of purchases in serving to enhance the credibility of the Committee's forward guidance about the target federal funds rate. A majority of participants judged that the marginal efficacy of purchases was likely declining as purchases continue, although some noted the difficulty inherent in making such an assessment. A couple of participants thought that the marginal efficacy of the program was not declining, as evidenced by the substantial effects in financial markets in recent months of news about the likely path of purchases.
Staff Review of the Economic Situation
The information reviewed for the December 17-18 meeting indicated that economic activity was expanding at a moderate pace. Total payroll employment increased further, and the unemployment rate declined but remained elevated. Consumer price inflation continued to run below the Committee's objective, although measures of longer-run inflation expectations remained stable.
Total nonfarm payroll employment rose in October and November at a faster monthly pace than in the previous two quarters. The unemployment rate declined, on net, from 7.2 percent in September to 7.0 percent in November. The labor force participation rate also decreased, on balance, and the employment-to-population ratio in November was the same as in September. The share of workers employed part time for economic reasons declined slightly while the rate of long-duration unemployment was little changed, but both measures were still high. Other indicators were generally consistent with gradually improving conditions in the labor market. The rate of job openings edged up in recent months, the share of small businesses reporting that they had hard-to-fill positions increased, and the four-week moving average of initial claims for unemployment insurance trended down, on net, over the intermeeting period, although the rate of gross private-sector hiring was still somewhat low. Measures of firms' hiring plans remained higher than a year earlier, and household expectations of the labor market situation improved in early December.
Manufacturing production accelerated briskly in October and November after increasing at a subdued pace in the third quarter, and the gains were broad based across industries. Automakers' schedules indicated that the pace of light motor vehicle assemblies would rise in December, and broader indicators of manufacturing production, such as the readings on new orders from the national and regional manufacturing surveys, were consistent with a further expansion in factory output in the coming months.
Real personal consumption expenditures (PCE) increased modestly in the third quarter but rose at a faster pace in September and October. The components of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimate of PCE increased at a strong pace in November, and light motor vehicle sales moved up significantly. Moreover, recent information for key factors that support household spending was consistent with further solid gains in PCE in the coming months. Households' net worth likely expanded as equity values and home prices increased further in recent months; real disposable income rose, on net, in September and October; and consumer sentiment in the Thomson Reuters/University of Michigan Surveys of Consumers improved significantly in early December.
The pace of activity in the housing sector appeared to continue to slow somewhat, likely reflecting the higher level of mortgage rates since the spring. Starts for both new single-family homes and multifamily units increased, on balance, from August to November, but permits--which are typically a better indicator of the underlying pace of construction--rose more gradually than starts over the same period. Sales of existing homes and pending home sales decreased further in October, although new home sales rose in October after falling markedly in the third quarter.
Growth in real private expenditures for business equipment and intellectual property products was subdued in the third quarter. In October, nominal shipments of nondefense capital goods excluding aircraft edged down. However, nominal new orders for these capital goods remained above the level of shipments, pointing to increases in shipments in subsequent months, and other forward-looking indicators, such as surveys of business conditions, were generally consistent with moderate gains in business equipment spending in the near term. Real business spending for nonresidential structures rose substantially in the third quarter, but nominal expenditures for new business buildings declined slightly in October. Real nonfarm inventory investment increased noticeably in the third quarter, but recent book-value data for inventory-to-sales ratios, along with readings on inventories from national and regional manufacturing surveys, did not point to significant inventory imbalances in most industries.
Real federal government purchases declined somewhat in the third quarter but appeared likely to decrease more substantially in the fourth quarter, reflecting the effect of the temporary partial government shutdown in October and further cuts in defense spending in October and November. Real state and local government purchases rose markedly in the third quarter. Moreover, the payrolls of these governments continued to expand, on net, in October and November, and nominal state and local construction expenditures increased in October.
The U.S. international trade deficit narrowed in October as exports rose more than imports. The gains in exports were fairly widespread across categories and were led by sales of consumer goods, industrial supplies, and agricultural products. The higher value of imports reflected increases in services, consumer goods, and petroleum products that more than offset lower purchases of computers, semiconductors, and automotive products.
Total U.S. consumer price inflation, as measured by the PCE price index, was less than 1 percent over the 12 months ending in October, in part because consumer energy prices declined over the same 12-month period. In addition, core PCE price inflation--which excludes consumer energy and food prices--was only a little above 1 percent, partly reflecting subdued increases in medical services prices and recent declines in the prices of many nonfuel imported goods. In November, the consumer price index (CPI) was flat, and core CPI prices rose slightly faster than in the preceding few months. Both near-term and longer-term inflation expectations from the Michigan survey were little changed, on net, in November and early December.
Measures of labor compensation indicated that increases in nominal wages continued to be modest. Compensation per hour in the nonfarm business sector rose moderately over the year ending in the third quarter, and unit labor costs moved up at a similar pace as gains in productivity were small. The employment cost index expanded a little more slowly than the compensation per hour measure over the same yearlong period. The increase in nominal average hourly earnings for all employees over the 12 months ending in November was also modest.
Foreign economic activity strengthened in the third quarter, as the euro area continued to recover from its recent recession, economic growth picked up in China after slowing in the first half of the year, and the Mexican economy rebounded from a second-quarter contraction. Inflation slowed recently in many advanced foreign economies, partly as a result of a deceleration in prices for energy and other commodities. Monetary policy remained very accommodative in most advanced economies, but central banks in some emerging market economies recently tightened policy further to contain inflation and support the foreign exchange value of their currencies.
Staff Review of the Financial Situation
Financial market developments over the intermeeting period appeared to be driven largely by incoming data on employment and economic activity that exceeded investor expectations as well as by Federal Reserve communications.
Investors appeared to read the economic data releases over the intermeeting period as better than had been expected and therefore as raising the odds that the FOMC might decide to reduce the pace of asset purchases at its December meeting. Survey evidence suggested that market participants now saw roughly similar probabilities of the first reduction in the pace of asset purchases occurring at the December, January, or March meeting. Market expectations regarding the timing of liftoff of the federal funds rate seemed to be little changed over the period. In part, a variety of Federal Reserve communications were seen as strengthening the Committee's forward guidance for the federal funds rate and contributing to the stability of expectations for the near-term path of the federal funds rate in the face of an improved economic outlook.
On net, judging by financial market quotes on interest rate futures, the expected federal funds rate path through the end of 2015 moved only slightly since the October FOMC meeting. The expected federal funds rate path at longer horizons rose somewhat, and the Treasury yield curve steepened, with the 2-year Treasury yield about unchanged but the 5- and 10-year yields higher by 21 and 34 basis points, respectively. The measure of 5-year inflation compensation based on Treasury inflation-protected securities dipped 5 basis points, while the 5-year forward measure increased 7 basis points. The 30-year current-coupon yield on agency mortgage-backed securities increased a bit more than the 10-year Treasury yield.
Stock prices were about unchanged, on net, over the intermeeting period, even though some broad equity price indexes temporarily touched all-time nominal highs. Corporate risk spreads narrowed somewhat.
Business finance flows were robust over the intermeeting period. Gross equity issuance by the nonfinancial corporate sector in October and November reached levels not seen in a decade. Gross bond issuance by nonfinancial corporations picked up again after a dip related to the fiscal standoff in October. Similarly, institutional issuance of leveraged loans rose in October and November, and collateralized loan obligation issuance remained strong.
Financing conditions in commercial real estate (CRE) markets were consistent with increased confidence. Year-to-date issuance of commercial mortgage-backed securities (CMBS) remained strong, but far below levels seen before the financial crisis. Responses to the December 2013 Senior Credit Officer Opinion Survey on Dealer Financing Terms (SCOOS) suggested that demand for funding for CMBS picked up since September. CRE loans on banks' books expanded in October and November at an increasing pace.
Automobile loans continued to expand in October, and available data suggested that this trend was sustained in November. Automobile asset-backed securities (ABS) issuance accelerated in November, and issuance of paper backed by subprime automobile loans stayed strong. In contrast, credit card balances moved sideways, and ABS issuance in that sector stayed flat.
In the residential mortgage market, several large lenders were reported to have eased their underwriting standards slightly, but data suggested that mortgage lenders generally continued to be reluctant to lend to borrowers with less-than-pristine credit scores. Mortgage rates rose over the intermeeting period to levels about 100 basis points above their early-May lows. On balance, refinancing applications were down substantially since May while purchase applications declined much less. House prices rose significantly in October, but some indicators suggested that the pace of house price gains continued to decelerate relative to earlier in the year.
Responses to the December SCOOS generally showed little change in dealer-intermediated financing since September. Credit terms for most classes of counterparties were little changed. One-third of respondents reported a decline in the use of financial leverage by trading real estate investment trusts, whereas the use of financial leverage by other classes of counterparties was basically unchanged. In response to special questions in the survey, dealers indicated that the current use of repurchase agreements or other forms of short-term funding for longer-duration assets was roughly in line with or somewhat below the levels seen early in 2013.
Bank credit rose slightly in October and November, as growth in commercial and industrial loans, CRE loans, and consumer loans was partially offset by declines in the outstanding balances of closed-end residential mortgages on banks' books. Stock prices for large and regional domestic banking firms outperformed the broad equity market over the intermeeting period amid better-than-expected economic data and the settlement of mortgage-related litigation by some large banking organizations. Spreads on credit default swaps for the largest bank holding companies also moved lower, on net.
M2 contracted in November, likely reflecting in part portfolio reallocations by investors that had temporarily placed funds in bank deposits as a safe haven during the recent federal debt limit impasse. Meanwhile, the monetary base continued to expand rapidly, primarily reflecting the increase in reserve balances resulting from the Federal Reserve's asset purchases.
The foreign exchange value of the dollar appreciated following the October FOMC meeting and the October employment report and ended the intermeeting period higher on balance. A shift in market expectations toward easier monetary policy abroad may have also boosted the exchange value of the dollar, most notably against the Japanese yen, and equity prices in Japan rose substantially further during the period. By contrast, equity prices declined in many emerging market economies; in some cases, those declines were large and accompanied by sizable decreases in currency values and sovereign bond prices. European equity prices were also lower over the period. Long-term benchmark sovereign yields in the United Kingdom and Canada increased, in line with, but somewhat less than, the rise in yields on comparable U.S. Treasury securities. Yields on German sovereign bonds, which reacted to a policy rate cut by the European Central Bank and the release of data showing lower-than-expected euro-area inflation, were only slightly higher on net.
The staff's periodic report on potential risks to financial stability concluded that the vulnerability of the financial system to adverse shocks remained at moderate levels overall. Relatively strong capital profiles of large domestic banking firms, low levels and moderate growth of aggregate credit in the nonfinancial sectors, and some reduction in reliance on short-term wholesale funding across the financial sector were seen as factors supporting financial stability in the current environment. Valuations in most asset markets seemed broadly in line with historical norms. However, the staff report noted that the complexity and interconnectedness of large financial institutions, along with some apparent increases in investor appetite for higher-yielding assets and associated pressures on underwriting standards remained potential sources of risk to the financial system.
Staff Economic Outlook
In the economic projection prepared by the staff for the December FOMC meeting, the forecast for growth in real gross domestic product (GDP) in the second half of this year was revised up a little from the one prepared for the previous meeting, as the recent information on private domestic final demand--particularly consumer spending--was somewhat better, on balance, than the staff had anticipated. The staff's medium-term forecast for real GDP growth was also revised up slightly, reflecting a small reduction in fiscal restraint from the recent federal budget agreement, which the staff assumed would be enacted; a lower anticipated trajectory for longer-term interest rates; and higher paths for equity values and home prices. Those factors, in total, more than offset a higher path for the foreign exchange value of the dollar. The staff continued to project that real GDP would expand more quickly over the next few years than it has this year and would rise significantly faster than the growth rate of potential output. This acceleration in economic activity was expected to be supported by an easing in the effects of fiscal policy restraint on economic growth, increases in consumer and business sentiment, continued improvements in credit availability and financial conditions, a further easing of the economic stresses in Europe, and still-accommodative monetary policy. The expansion in economic activity was anticipated to slowly reduce resource slack over the projection period, and the unemployment rate was expected to decline gradually to the staff's estimate of its longer-run natural rate.
The staff's forecast for inflation was quite similar to the projection prepared for the previous FOMC meeting. The near-term forecast for inflation was revised down slightly to reflect some recent softer-than-expected data. The staff continued to forecast that inflation would be modest, on net, through early next year but higher than its low level in the first half of this year. The staff's projection for inflation over the medium term was essentially unchanged. With longer-run inflation expectations assumed to remain stable, changes in commodity and import prices expected to be measured, and slack in labor and product markets persisting over most of the projection period, inflation was projected to be subdued through 2016.
The staff viewed the uncertainty around the projection for economic activity as similar to its average over the past 20 years. Nonetheless, the risks to the forecast for real GDP growth were viewed as tilted to the downside, reflecting concerns that the extent of supply-side damage to the economy since the recession could prove greater than assumed; that the tightening in mortgage rates since last spring could exert greater restraint on the housing recovery than had been projected; that economic and financial stresses in emerging market economies and the euro area could intensify; and that, with the target federal funds rate already near its lower bound, the U.S. economy was not well positioned to weather future adverse shocks. However, the staff viewed the risks around the projection for the unemployment rate as roughly balanced, with the risk of a higher unemployment rate resulting from adverse developments roughly countered by the possibility that the unemployment rate could continue to fall more than expected, as it had in recent years. The staff did not see the uncertainty around its outlook for inflation as unusually high, and the risks to that outlook were viewed as broadly balanced.
Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, the meeting participants--5 members of the Board of Governors and the presidents of the 12 Federal Reserve Banks, all of whom participated in the deliberations--submitted their assessments of real output growth, the unemployment rate, inflation, and the target federal funds rate for each year from 2013 through 2016 and over the longer run, under each participant's judgment of appropriate monetary policy. The longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These economic projections and policy assessments are described in the Summary of Economic Projections (SEP), which is attached as an addendum to these minutes.
In their discussion of the economic situation and the outlook, meeting participants viewed the information received over the intermeeting period as suggesting that the economy was expanding at a moderate pace. They generally indicated that the broad contours of their outlook for real activity, the labor market, and inflation had not changed materially since their October meeting, but most expressed greater confidence in the outlook and saw the risks associated with their forecasts of real GDP growth and the unemployment rate as more nearly balanced than earlier in the year. Almost all participants continued to project that the rate of growth of economic activity would strengthen in coming years, and all anticipated that the unemployment rate would gradually decline toward levels consistent with their current assessments of its longer-run normal value. The projected improvement in economic activity was expected to be supported by highly accommodative monetary policy, diminished fiscal policy restraint, and a pickup in global economic growth, as well as a further easing of credit conditions and continued improvements in household balance sheets. Inflation remained below the Committee's longer-run objective over the intermeeting period. Nevertheless, participants still anticipated that with longer-run inflation expectations stable and economic activity picking up, inflation would move back toward its objective over the medium run. But they noted that inflation persistently below the Committee's objective would pose risks to economic performance and so saw a need to monitor inflation developments carefully.
Consumer spending appeared to be strengthening, with solid gains in retail sales in recent months and a rebound in motor vehicle sales in November. On balance, retail contacts reportedly were fairly optimistic about holiday sales. Participants cited a number of factors that likely contributed to the recent pickup in spending, including the waning effects of the payroll tax increase that had trimmed disposable income earlier in the year, the drop in energy costs, and the recent improvement in consumer sentiment. More broadly, spending was being supported by gains in household wealth associated with rising house prices and equity values, the still-low level of interest rates, and the progress that households have made in reducing debt and strengthening their balance sheets. These favorable trends were generally anticipated to continue and to be accompanied by stronger real disposable income as labor market conditions improve and inflation remains low.
Activity in the housing sector slowed in recent months. Some participants noted that the increase in mortgage interest rates since the spring was having a greater effect on that sector than they had anticipated earlier. Despite the recent softening, participants discussed a number of factors that should support a continued recovery in housing going forward. These included expectations that mortgage interest rates would remain relatively favorable, that rising home values would boost household wealth and further reduce the number of borrowers with underwater mortgages, that consumer incomes and confidence would continue to rise as employment expanded, and that a pickup in household formation would support the demand for housing.
Business investment appeared to be advancing at a moderate rate. A number of the fundamental determinants of business investment were positive: Business balance sheets remained in good shape, cash flow was ample, and input costs were subdued. Business contacts in a number of Districts were reportedly somewhat more confident about the outlook than they had been earlier in the fall, but a couple of participants reported that their contacts continued to focus on investments intended to reduce costs and were still cautious regarding investment to expand capacity, or that concerns about health care costs were holding back hiring. In the manufacturing sector, production appeared to be increasing at a solid rate according to both national and most of the regional surveys of activity, and the available indexes of future activity continued to suggest optimism among firms. Renewed export demand and a buildup in auto inventories, which may be reversed in 2014, were cited as contributing to the recent gains in production. Participants heard positive reports from their contacts in the technology, rail, freight, and airline industries, and activity in the energy sector remained strong. In agriculture, record yields were reported for corn and soybeans, but farm income was being reduced by lower crop prices. Measures of farmland values were still rising, but anecdotal reports suggested softening in some areas.
Fiscal policy continued to restrain economic growth. However, participants generally judged that the extent of the restraint may have begun to diminish as the effects of the payroll tax increases earlier in the year seem to have waned, and the drag on real activity from restrictive fiscal policies was expected to decline further going forward. Moreover, a number of participants observed that the prospect that the Congress would shortly reach an accord on the budget seemed to be reducing uncertainty and lowering the risks that might be associated with a disruptive political impasse.
Committee participants generally viewed the increases in nonfarm payroll employment of more than 200,000 per month in October and November and the decline in the unemployment rate to 7 percent as encouraging signs of ongoing improvement in labor market conditions. Several cited other indicators of progress in the labor market, such as the decline in new claims for unemployment insurance, the uptrend in quits, or the rise in the number of small businesses reporting job openings that were hard to fill. Participants exchanged views on the extent to which the decrease in labor force participation over recent years represented cyclical weakness in the labor market that was not adequately captured by the unemployment rate. Some participants cited research that found that demographic and other structural factors, particularly rising retirements by older workers, accounted for much of the recent decline in participation. However, several others continued to see important elements of cyclical weakness in the low labor force participation rate and cited other indicators of considerable slack in the labor market, including the still-high levels of long-duration unemployment and of workers employed part time for economic reasons and the still-depressed ratio of employment to population for workers ages 25 to 54. In addition, although a couple of participants had heard reports of labor shortages, particularly for workers with specialized skills, most measures of wages had not accelerated. A few participants noted the risk that the persistent weakness in labor force participation and low rates of productivity growth might indicate lasting structural economic damage from the financial crisis and ensuing recession.
Inflation continued to run noticeably below the Committee's longer-run objective of 2 percent, but participants anticipated that it would move back toward 2 percent over time as the economic recovery strengthened and longer-run inflation expectations remained steady. Several participants suggested that some of the factors that had held down inflation recently, such as the slowing in price increases for medical care and banking services, were likely to prove transitory. Some participants suggested that inflation, while low, was unlikely to slow further, pointing to core, trimmed mean, or sticky-price inflation measures as indicative of fairly steady underlying price trends; most measures of wage gains were also steady. Nonetheless, many participants expressed concern about the deceleration in consumer prices over the past year, and a couple pointed out that a number of other advanced economies were also experiencing very low inflation. Among the costs of very low or declining inflation that were cited were its effects in raising real interest rates and debt burdens. A few participants raised the possibility that recent declines in inflation might suggest that the economic recovery was not as strong as some thought.
Domestic financial markets were influenced importantly over the intermeeting period by Federal Reserve communications and by economic data that were generally better than market participants expected. These factors apparently led market participants to raise the odds they assigned to a reduction in the pace of asset purchases at the December meeting, and to leave roughly unchanged their expectations for the timing of the first increase in the target federal funds rate. A number of participants noted that current market expectations were reasonably well aligned with the Committee's recent policy communications.
Participants also reviewed indicators of financial vulnerabilities that could pose risks to financial stability and the broader economy. These indicators generally suggested that such risks were moderate, in part because of the reduction in leverage and maturity transformation that has occurred in the financial sector since the onset of the financial crisis. In their discussion of potential risks, several participants commented on the rise in forward price-to-earnings ratios for some small-cap stocks, the increased level of equity repurchases, or the rise in margin credit. One pointed to the increase in issuance of leveraged loans this year and the apparent decline in the average quality of such loans. A couple of participants offered views on the role of financial stability in monetary policy decisionmaking more broadly. One proposed that the Committee analyze more explicitly the potential consequences of specific risks to the financial system for its dual-mandate objectives and take account of the possible effects of monetary policy on such risks in its assessment of appropriate policy. Another suggested that the importance of financial stability considerations in the Committee's deliberations would likely increase over time as progress is made toward the Committee's objectives, and that such considerations should be incorporated into forward guidance for the federal funds rate and asset purchases.
In their discussion of the appropriate path for monetary policy, participants considered whether the cumulative improvement in labor market conditions since the asset purchase program began in September 2012 and the associated improvement in the outlook for the labor market warranted a reduction in the pace of asset purchases. The most recent data showed that increases in nonfarm payroll employment had averaged around 190,000 per month for the past 15 months, and the unemployment rate had fallen more quickly over that period than most participants had expected. Moreover, participants generally anticipated that the improvement in labor market conditions would continue, and most had become more confident in that outlook. Against this backdrop, most participants saw a reduction in the pace of purchases as appropriate at this meeting and consistent with the Committee's previous policy communications. Many commented that progress to date had been meaningful, and some expressed the view that the criterion of substantial improvement in the outlook for the labor market was likely to be met in the coming year if the economy evolved as expected. However, several participants stressed that the unemployment rate remained elevated, that a range of other indicators had shown less progress toward levels consistent with a full recovery in the labor market, and that the projected pickup in economic growth was not assured. Some participants also questioned whether slowing the pace of purchases at a time when inflation was running well below the Committee's longer-run objective was appropriate. For some, the considerable slack remaining in the labor market and shortfall of inflation from the Committee's longer-run objective warranted continuing asset purchases at the current pace for a time in order to wait for additional information confirming sustained progress toward the Committee's objectives or to promote faster progress toward those objectives. Among those inclined to begin to reduce the pace of asset purchases at this meeting, many favored a modest initial reduction accompanied by guidance indicating that decisions regarding future reductions would depend on economic and financial developments as well as the efficacy and costs of purchases. Some other participants preferred a larger reduction in purchases at this meeting and future reductions that would bring the program to a close relatively quickly. A few proposed that the Committee lay out, either at this meeting or subsequently, a more deterministic path for winding down the program or that it announce a fixed amount of additional purchases and an expected completion date, thereby reducing uncertainty about the trajectory of the purchase program.
Participants also considered the potential for clarifying or strengthening the Committee's forward guidance for the federal funds rate. In general, participants who favored amending the forward guidance saw a need to more fully communicate how, if the unemployment rate threshold was reached first, the Committee would likely set monetary policy after that threshold was crossed. A number of participants pointed out that the federal funds rate paths underlying the economic forecasts that they prepared for this meeting, as well as expectations for the funds rate path priced into financial markets, were consistent with the view that the Committee would not raise the federal funds rate until well after the time that the threshold was crossed. A few participants discussed the potential advantages and disadvantages of using medians of the projections of the federal funds rate from the SEP as a means of communicating the likely path of short-term interest rates. Some worried that, if the Committee began to reduce asset purchases, market expectations might shift, and they wanted to reinforce the forward guidance to mitigate the risks of an undesired tightening of financial conditions that could have adverse effects on the economy. In light of their concern that inflation might continue to run well below the Committee's longer-run objective, several participants saw the need to clearly convey that inflation remains an important consideration in adjusting the target funds rate. Participants debated the advantages and disadvantages of lowering the unemployment rate threshold provided in the forward guidance. In the view of the few participants who advocated such a change, a lower threshold would be a clear signal of the Committee's intentions and was an appropriate adjustment in light of recent labor market and inflation trends. In contrast, a few others expressed concern that any change in the threshold might be confusing and could undermine the credibility of the Committee's forward guidance. Most were inclined to retain the current thresholds for the unemployment and inflation rates and to instead provide qualitative guidance regarding the Committee's likely behavior after a threshold was crossed.
Committee Policy Action
Committee members viewed the information received over the intermeeting period as indicating that the economy was expanding at a moderate pace. Labor market conditions had improved in recent months, with monthly gains in payroll employment of more than 200,000 in October and November. The unemployment rate had declined but remained elevated. Household spending and business fixed investment advanced, while the recovery in the housing market slowed somewhat in recent months. Fiscal policy was restraining economic growth, although the extent of the restraint may have begun to diminish. The Committee expected that, with appropriate policy accommodation, economic growth would strengthen and the unemployment rate would gradually decline toward levels consistent with its dual mandate. Moreover, members judged that the risks to the outlook for the economy and the labor market had become more nearly balanced, reflecting in part an easing of fiscal policy concerns and an improvement in the prospects for global economic growth. Inflation was running below the Committee's longer-run objective, and this was seen as posing possible risks to economic performance. Members anticipated that inflation would, over time, return to the Committee's 2 percent objective, supported by stable inflation expectations and stronger economic activity. However, in light of their concerns about the persistence of low inflation, many members saw a need for the Committee to monitor inflation developments carefully for evidence that inflation was moving back toward its longer-run objective.
In their discussion of monetary policy in the period ahead, most members agreed that the cumulative improvement in labor market conditions and the likelihood that the improvement would be sustained indicated that the Committee could appropriately begin to slow the pace of its asset purchases at this meeting. However, members also weighed a number of considerations regarding such an action, including their degree of confidence in prospects for sustained above-potential economic growth, continued improvement in labor market conditions, and a return of inflation to its mandate-consistent level over time. Some also expressed concern about the potential for an unintended tightening of financial conditions if a reduction in the pace of asset purchases was misinterpreted as signaling that the Committee was likely to withdraw policy accommodation more quickly than had been anticipated. As a consequence, many members judged that the Committee should proceed cautiously in taking its first action to reduce the pace of asset purchases and should indicate that further reductions would be undertaken in measured steps. Members also stressed the need to underscore that the pace of asset purchases was not on a preset course and would remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the efficacy and costs of purchases. Consistent with this approach, the Committee agreed that, beginning in January, it would add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month. While deciding to modestly reduce its pace of purchases, the Committee emphasized that its holdings of longer-term securities were sizable and would still be increasing, which would promote a stronger economic recovery by maintaining downward pressure on longer-term interest rates, supporting mortgage markets, and helping to make broader financial conditions more accommodative. The Committee also reiterated that it will continue its asset purchases, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In the view of one member, a reduction in the pace of purchases was premature and, before taking such a step, the Committee should wait for more convincing evidence that economic growth was rising faster than its potential and that inflation would return to the Committee's 2 percent objective.
In their discussion of forward guidance about the target federal funds rate, a few members suggested that lowering the unemployment threshold to 6 percent could effectively convey the Committee's intention to keep the target federal funds rate low for an extended period. However, most members wanted to make no change to the threshold and instead preferred to provide qualitative guidance to clarify that a range of labor market indicators would be used when assessing the appropriate stance of policy once the threshold had been crossed. A number of members thought that the forward guidance should emphasize the importance of inflation as a factor in their decisions. Accordingly, almost all members agreed to add language indicating the Committee's anticipation, based on its current assessment of additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments, that it would be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's longer-run objective. It was noted that this language might appear calendar-based rather than conditional on economic and financial developments, and one member objected to having forward guidance that might be seen as relatively inflexible in response to changes in members' views about the appropriate path of the target federal funds rate. However, those concerns generally were seen as outweighed by the benefit of avoiding tying the Committee's decision too closely to the unemployment rate alone, while still being clear about the Committee's intention to provide the monetary accommodation needed to support a return to maximum employment and stable prices.
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:
"Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. Beginning in January, the Desk is directed to purchase longer-term Treasury securities at a pace of about $40 billion per month and to purchase agency mortgage-backed securities at a pace of about $35 billion per month. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."
The vote encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in October indicates that economic activity is expanding at a moderate pace. Labor market conditions have shown further improvement; the unemployment rate has declined but remains elevated. Household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth, although the extent of restraint may be diminishing. Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.
Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee sees the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases. Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent."
Voting for this action: Ben Bernanke, William C. Dudley, James Bullard, Charles L. Evans, Esther L. George, Jerome H. Powell, Jeremy C. Stein, Daniel K. Tarullo, and Janet L. Yellen.
Voting against this action: Eric Rosengren.
Mr. Rosengren dissented because he viewed the decision to slow the pace of asset purchases at this meeting as premature. In his view, with the unemployment rate still elevated and the inflation rate well below the Committee's longer-run objective of 2 percent, changes in the asset purchase program should be postponed until incoming data more clearly indicate that economic growth is likely to be sustained above its potential rate. He saw the costs of delaying action at this meeting as likely to be small relative to the gains from promoting a faster return of both elements of the Committee's dual mandate to their longer-run objectives.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, January 28-29, 2014. The meeting adjourned at 11:00 a.m. on December 18, 2013.
Notation Vote
By notation vote completed on November 19, 2013, the Committee unanimously approved the minutes of the FOMC meeting held on October 29-30, 2013.
_____________________________
William B. English
Secretary |
2013-12-18T00:00:00 | 2013-12-18 | Statement | Information received since the Federal Open Market Committee met in October indicates that economic activity is expanding at a moderate pace. Labor market conditions have shown further improvement; the unemployment rate has declined but remains elevated. Household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth, although the extent of restraint may be diminishing. Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.
Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee sees the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases. Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Charles L. Evans; Esther L. George; Jerome H. Powell; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Eric S. Rosengren, who believes that, with the unemployment rate still elevated and the inflation rate well below the target, changes in the purchase program are premature until incoming data more clearly indicate that economic growth is likely to be sustained above its potential rate.
Statement Regarding Purchases of Treasury Securities and Agency Mortgage-Backed Securities |
2013-10-30T00:00:00 | 2013-10-30 | Statement | Information received since the Federal Open Market Committee met in September generally suggests that economic activity has continued to expand at a moderate pace. Indicators of labor market conditions have shown some further improvement, but the unemployment rate remains elevated. Available data suggest that household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.
Taking into account the extent of federal fiscal retrenchment over the past year, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. Asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's economic outlook as well as its assessment of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Charles L. Evans; Jerome H. Powell; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations. |
2013-10-30T00:00:00 | 2013-11-20 | Minute | Minutes of the Federal Open Market Committee
October 29-30, 2013
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, October 29, 2013, at 1:00 p.m. and continued on Wednesday, October 30, 2013, at 9:00 a.m.
PRESENT:
Ben Bernanke, Chairman
William C. Dudley, Vice Chairman
James Bullard
Charles L. Evans
Esther L. George
Jerome H. Powell
Eric Rosengren
Jeremy C. Stein
Daniel K. Tarullo
Janet L. Yellen
Richard W. Fisher, Narayana Kocherlakota, Sandra Pianalto, and Charles I. Plosser, Alternate Members of the Federal Open Market Committee
Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively
William B. English, Secretary and Economist
Deborah J. Danker, Deputy Secretary
Matthew M. Luecke, Assistant Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Thomas C. Baxter, Deputy General Counsel
Steven B. Kamin, Economist
David W. Wilcox, Economist
Thomas A. Connors, Michael P. Leahy, Stephen A. Meyer, Daniel G. Sullivan, Christopher J. Waller, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors
James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors
Jon W. Faust, Special Adviser to the Board, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Trevor A. Reeve, Senior Associate Director, Division of International Finance, Board of Governors
Ellen E. Meade and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors
Eric M. Engen, Michael T. Kiley, Thomas Laubach, and David E. Lebow, Associate Directors, Division of Research and Statistics, Board of Governors
Marnie Gillis DeBoer, Deputy Associate Director, Division of Monetary Affairs, Board of Governors
Rochelle M. Edge, Assistant Director, Office of Financial Stability Policy and Research, Board of Governors
Eric Engstrom, Section Chief, Division of Research and Statistics, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Mark A. Carlson, Senior Economist, Division of Monetary Affairs, Board of Governors; Robert J. Tetlow, Senior Economist, Division of Research and Statistics, Board of Governors
Blake Prichard, First Vice President, Federal Reserve Bank of Philadelphia
David Altig, Glenn D. Rudebusch, and Mark S. Sniderman, Executive Vice Presidents, Federal Reserve Banks of Atlanta, San Francisco, and Cleveland, respectively
Craig S. Hakkio, Evan F. Koenig, Lorie K. Logan, and Kei-Mu Yi, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Dallas, New York, and Minneapolis, respectively
Anna Nordstrom and Giovanni Olivei, Vice Presidents, Federal Reserve Banks of New York and Boston, respectively
Argia M. Sbordone, Assistant Vice President, Federal Reserve Bank of New York
Andreas L. Hornstein, Senior Advisor, Federal Reserve Bank of Richmond
Satyajit Chatterjee, Senior Economic Advisor, Federal Reserve Bank of Philadelphia
Developments in Financial Markets and the Federal Reserve's Balance Sheet
The Manager of the System Open Market Account reported on developments in domestic and foreign financial markets as well as System open market operations, including the progress of the overnight reverse repurchase agreement operational exercise, during the period since the Federal Open Market Committee (FOMC) met on September 17-18, 2013. By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
The Committee considered a proposal to convert the existing temporary central bank liquidity swap arrangements to standing arrangements with no preset expiration dates. The Manager described the proposed arrangements, noting that the Committee would still be asked to review participation in the arrangements annually. A couple of participants expressed reservations about the proposal, citing opposition to swap lines with foreign central banks in general or questioning the governance implications of these standing arrangements in particular. Following the discussion, the Committee unanimously approved the following resolution:
"The Federal Open Market Committee directs the Federal Reserve Bank of New York to convert the existing temporary dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank to standing facilities, with the modifications approved by the Committee. In addition, the Federal Open Market Committee directs the Federal Reserve Bank of New York to convert the existing temporary foreign currency liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank to standing facilities, also with the modifications approved by the Committee.
Drawings on the dollar and foreign currency liquidity swap lines will be approved by the Chairman in consultation with the Foreign Currency Subcommittee. The Foreign Currency Subcommittee will consult with the Federal Open Market Committee prior to the initial drawing on the dollar or foreign currency liquidity swap lines if possible under the circumstances then prevailing; authority to approve subsequent drawings of a more routine character for either the dollar or foreign currency liquidity swap lines may be delegated to the Manager, in consultation with the Chairman.
The Chairman may change the rates and fees on the swap arrangements by mutual agreement with the foreign central banks and in consultation with the Foreign Currency Subcommittee. The Chairman shall keep the Federal Open Market Committee informed of any changes in rates or fees, and the rates and fees shall be consistent with principles discussed with and guidance provided by the Committee."
Staff Review of the Economic Situation
In general, the data available at the time of the October 29-30 meeting suggested that economic activity continued to rise at a moderate pace; the set of information reviewed for this meeting, however, was reduced somewhat by delays in selected statistical releases associated with the partial shutdown of the federal government earlier in the month. In the labor market, total payroll employment increased further in September, but the unemployment rate was still high. Consumer price inflation continued to be modest, and measures of longer-run inflation expectations remained stable.
Private nonfarm employment rose in September but at a slower pace than in the previous month, while total government employment increased at a solid rate. The unemployment rate edged down to 7.2 percent in September; both the labor force participation rate and the employment-to-population ratio were unchanged. Other recent indicators of labor market activity were mixed. Measures of firms' hiring plans improved, the rate of job openings increased slightly, and the rate of long-duration unemployment declined a little. However, household expectations of the labor market situation deteriorated somewhat, the rate of gross private-sector hiring remained flat, and the share of workers employed part time for economic reasons was essentially unchanged and continued to be elevated. In addition, initial claims for unemployment insurance rose in the first few weeks of October, likely reflecting, in part, some spillover effects from the government shutdown.
Manufacturing production expanded modestly in September, but output was flat outside of the motor vehicle sector and the rate of total manufacturing capacity utilization was unchanged. Automakers' schedules indicated that the pace of light motor vehicle assemblies would be slightly lower in the coming months, but broader indicators of manufacturing production, such as the readings on new orders from the national and regional manufacturing surveys, pointed to further gains in factory output in the near term.
Real personal consumption expenditures (PCE) rose moderately in August. In September, nominal retail sales, excluding those at motor vehicle and parts outlets, increased significantly, while sales of light motor vehicles declined. Recent readings on key factors that influence consumer spending were somewhat mixed: Households' net worth likely expanded further as both equity values and home prices rose in recent months, and real disposable incomes increased solidly in August, but measures of consumer sentiment declined in September and October.
The recovery in the housing sector appeared to continue, although recent data in this sector were limited. Starts and permits of new single-family homes increased in August, but starts and permits of multifamily units declined. After falling significantly in July, sales of new homes increased in August, but existing home sales decreased, on balance, in August and September, and pending home sales also contracted.
Growth in real private expenditures for business equipment and intellectual property products appeared to be tepid in the third quarter. Nominal shipments of nondefense capital goods excluding aircraft rose modestly, on balance, in August and September after declining in July. However, nominal new orders for these capital goods continued to be above the level of shipments, pointing to increases in shipments in subsequent months, and other forward-looking indicators, such as surveys of business conditions, were consistent with some gains in business equipment spending in the near term. Nominal business expenditures for nonresidential construction were essentially unchanged in August. Recent book-value data for inventory-to-sales ratios, along with readings on inventories from national and regional manufacturing surveys, did not point to notable inventory imbalances.
Real federal government purchases likely declined as federal employment edged down further in September and many federal employees were temporarily furloughed during the partial government shutdown in October. Real state and local government purchases, however, appeared to increase; the payrolls of these governments expanded briskly in September, and nominal state and local construction expenditures rose in August.
The U.S. international trade deficit remained about unchanged in August, as both exports and imports were flat.
Available measures of total U.S. consumer prices--the PCE price index for August and the consumer price index for September--increased modestly, as did the core measures, which exclude prices of food and energy. Both near- and longer-term inflation expectations from the Thomson Reuters/University of Michigan Surveys of Consumers were little changed, on balance, in September and October. Nominal average hourly earnings for all employees increased slowly in September.
Foreign economic growth appeared to improve in the third quarter following a sluggish first half, largely reflecting stronger growth estimated for China and a rebound in Mexico from contraction in the previous quarter. Growth also picked up in the third quarter in the United Kingdom, and available indicators suggested an increase in growth in Canada and continued mild recovery in the euro area. Economic activity in Japan appeared to have decelerated somewhat from its first-half pace but continued to expand, and inflation measured on a 12-month basis turned positive in the middle of this year. Inflation elsewhere generally remained subdued. Monetary policy stayed highly accommodative in advanced foreign economies. In addition, the Bank of Mexico continued to ease monetary policy, citing concerns about the strength of the economy, but central banks in certain other emerging market economies, including Brazil and India, tightened policy and intervened in currency markets in response to concerns about the potential effect of currency depreciation on inflation.
Staff Review of the Financial Situation
On balance over the intermeeting period, longer-term interest rates declined and equity prices rose, largely in response to expectations for more-accommodative monetary policy. In addition, financial markets were affected for a time by uncertainties about raising the federal debt limit and resolving the government shutdown.
Financial market views about the outlook for monetary policy shifted notably following the September FOMC meeting, as the outcome and communications from that meeting were seen as more accommodative than expected. Investors pushed out their anticipated timing of both the first reduction in the pace of FOMC asset purchases and the first hike in the target federal funds rate. The path of the federal funds rate implied by financial market quotes shifted down over the period, as did the path based on the results from the Desk's survey of primary dealers. The Desk's survey also indicated that the dealers had revised up their expectations of the total size of the Committee's asset purchase program. Concerns about the fiscal situation and somewhat weaker-than-expected economic data releases also contributed to the change in expectations about the timing of monetary policy actions.
Five- and 10-year yields on both nominal and inflation-protected Treasury securities declined 30 basis points or more over the intermeeting period. The reduction in longer-term Treasury yields was also reflected in other longer-term rates, such as those on agency mortgage-backed securities (MBS) and corporate securities.
Short-term funding markets were adversely affected for a time by concerns about potential delays in raising the federal debt limit. The Treasury bill market was particularly affected as yields on bills maturing between mid-October and early November rose sharply and some bill auctions saw reduced demand. Conditions in other short-term markets, such as the market for repurchase agreements, were also strained. However, these effects eased quickly after an agreement to raise the debt limit was reached in mid-October.
Credit flows to nonfinancial businesses appeared to slow somewhat during the fiscal standoff amid increased market volatility; however, access to credit generally remained ample for large firms. Gross issuance of nonfinancial corporate bonds and commercial paper, which had been particularly strong in September, slowed a bit in October. In September, leveraged loan issuance was also robust. Commercial and industrial (C&I) loans at banks continued to advance, on balance, in the third quarter at about the pace posted in the previous quarter, and commercial real estate (CRE) loans at banks rose moderately. In response to the October Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), banks generally indicated that they had eased standards on C&I and CRE loans over the past three months.
Developments affecting financing for the household sector were generally favorable. House prices posted further gains in August. Mortgage rates declined over the intermeeting period, although they were still above their early-May lows. Mortgage refinancing applications were down dramatically compared with May, but purchase applications were only a bit below their earlier level. Some large banks responding to the October SLOOS reported having eased standards on home-purchase loans to prime borrowers on net. In nonmortgage credit, automobile loans and student loans continued to expand at a robust pace, while balances on revolving consumer credit were again about flat.
In the municipal bond market, issuance of bonds for new capital projects remained solid. Yields on 20-year general obligation municipal bonds decreased about in line with other longer-term market rates over the intermeeting period.
Bank credit declined slightly during the third quarter. Growth of core loans slowed, primarily because of a sizable decline in outstanding balances of residential mortgages on banks' books. Third-quarter earnings reports for large banks generally met or exceeded analysts' modest expectations.
M2 grew moderately in September. Preliminary data indicated that growth in M2 picked up temporarily in early October amid uncertainty about the passage of debt limit legislation; deposits increased sharply as institutional investors appeared to shift from money fund shares to bank deposits, and as money funds increased their bank deposits in anticipation of possible redemptions. These inflows to deposits were estimated to have reversed shortly after the debt limit agreement was reached.
Foreign stock prices rose, foreign yields and yield spreads declined, and the dollar depreciated against most other currencies. A large portion of these asset price changes occurred immediately following the September FOMC announcement. In addition, yields and the value of the dollar fell further after the debt ceiling agreement was reached and in response to the U.S. labor market report. Mutual fund flows to emerging markets stabilized, following large outflows earlier this year.
Staff Economic Outlook
In the economic projection prepared by the staff for the October FOMC meeting, the forecast for growth in real gross domestic product (GDP) in the near term was revised down somewhat from the one prepared for the previous meeting, primarily reflecting the effects of the federal government shutdown and some data on consumer spending that were softer than anticipated. In contrast, the staff's medium-term forecast for real GDP was revised up slightly, mostly reflecting lower projected paths for the foreign exchange value of the dollar and longer-term interest rates, along with somewhat higher projected paths for equity prices and home values. The staff anticipated that the pace of expansion in real GDP this year would be about the same as the growth rate of potential output but continued to project that real GDP would accelerate in 2014 and 2015, supported by an easing in the effects of fiscal policy restraint on economic growth, increases in consumer and business sentiment, further improvements in credit availability and financial conditions, and accommodative monetary policy. Real GDP growth was projected to begin to slow a little in 2016 but to remain above potential output growth. The expansion in economic activity was anticipated to slowly reduce resource slack over the projection period, and the unemployment rate was expected to decline gradually.
The staff's forecast for inflation was little changed from the projection prepared for the previous FOMC meeting. The staff continued to expect that inflation would be modest in the second half of this year, but higher than its level in the first half. Over the medium term, with longer-run inflation expectations assumed to remain stable, changes in commodity and import prices expected to be relatively small, and slack in labor and product markets persisting over most of the projection period, inflation was projected to run somewhat below the FOMC's longer-run inflation objective of 2 percent through 2016.
The staff continued to see a number of risks around the forecast. The downside risks to economic activity included the uncertain effects and future course of fiscal policy, concerns about the outlook for consumer spending growth, and the potential effects on residential construction of the increase in mortgage rates since the spring. With regard to inflation, the staff saw risks both to the downside, that the low rates of core consumer price inflation posted earlier this year could be more persistent than anticipated, and to the upside, that unanticipated increases in energy or other commodity prices could emerge.
Participants' Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants generally indicated that the broad contours of their medium-term economic projections had not changed materially since the September meeting. Although the incoming data suggested that growth in the second half of 2013 might prove somewhat weaker than many of them had previously anticipated, participants broadly continued to project the pace of economic activity to pick up. The acceleration over the medium term was expected to be bolstered by the gradual abatement of headwinds that have been slowing the pace of economic recovery--such as household-sector deleveraging, tight credit conditions for some households and businesses, and fiscal restraint--as well as improved prospects for global growth. While downside risks to the outlook for the economy and the labor market were generally viewed as having diminished, on balance, since last fall, several significant risks remained, including the uncertain effects of ongoing fiscal drag and of the continuing fiscal debate.
Consumer spending appeared to have slowed somewhat in the third quarter. A number of participants noted that their outlook for stronger economic activity was contingent on a pickup in growth of consumer spending and reviewed the factors that might contribute to such a development, including low interest rates, easing of debt burdens, continued gains in employment, lower gasoline prices, higher real incomes, and higher household wealth boosted by rising home prices and equity values. Nonetheless, consumer sentiment remained unusually low, posing a downside risk to the forecast, and uncertainty surrounding prospective fiscal deliberations could weigh further on consumer confidence. A few participants commented that a pickup in the growth rates of economic activity or real disposable income could require improvements in productivity growth. However, it was noted that slower growth in productivity might have become the norm.
Business contacts generally reported continued moderate growth in sales, but remained cautious about expanding payrolls and capital expenditures. Manufacturing activity in parts of the country was reported to have picked up, and auto sales remained strong. Reports from several Districts indicated that commercial real estate and housing-related business activity continued to advance. In the agricultural sector, crop yields were healthy, farmland values were up, and lower crop prices were increasing the affordability of livestock feed. Wage and cost pressures remained limited, but business contacts in some Districts mentioned that selected labor markets were tight or expressed concerns about a shortage of skilled workers. Reports from the retail sector were mixed, with remarks about higher luxury sales and expectations for reduced hiring of seasonal workers over the upcoming holiday season. Uncertainty about future fiscal policy and the regulatory environment, including changes in health care, were mentioned as weighing on business planning.
Participants generally saw the direct economic effects of the partial shutdown of the federal government as temporary and limited, but a number of them expressed concern about the possible economic effects of repeated fiscal impasses on business and consumer confidence. More broadly, fiscal policy, which has been exerting significant restraint on economic growth, was expected to become somewhat less restrictive over the forecast period. Nonetheless, it was noted that the stance of fiscal policy was likely to remain one of the most important headwinds restraining growth over the medium term.
Although a number of participants indicated that the September employment report was somewhat disappointing, they judged that the labor market continued to improve, albeit slowly. The limited pace of gains in wages and payrolls, as well as the number of employees working part time for economic reasons, were mentioned as evidence of substantial remaining slack in the labor market. The drop in the unemployment rate over the past year, while welcome and significant, could overstate the degree of improvement in labor market conditions, in part because of the decline in the labor force participation rate. However, a few participants offered reasons why recent readings on the unemployment rate might provide an accurate assessment, on balance, of the extent of improvement in the labor market. For instance, if the decline in labor force participation reflected decisions to retire, it was unlikely to be reversed, because retirees were unlikely to return to the labor force. Furthermore, a secular decline in labor market dynamism, or turnover, might have contributed to a reduction in the size of normal monthly payroll gains. Finally, revised data showed that the historical relationship between real GDP growth and changes in the unemployment rate had remained broadly in place in recent years, suggesting that the unemployment rate continued to provide a reasonably accurate signal about the strength of the labor market and the degree of slack in the economy.
Available information suggested that inflation remained subdued and below the Committee's longer-run objective of 2 percent. Similarly, longer-run inflation expectations remained stable and, by some measures, below 2 percent.
Financial conditions eased notably over the intermeeting period, with declines in longer-term interest rates and increases in equity values. Financial quotes suggested that markets moved out the date at which they expected to see the Committee first increase the federal funds rate target. It was noted that interest rate volatility was substantially lower than at the time of the September meeting, and a couple of participants pointed to signs suggesting that reaching-for-yield behavior might be increasing again. Nevertheless, term premiums appeared to only partially retrace their rise of earlier in the year, and longer-term interest rates remained well above their levels in the spring. A few participants expressed concerns about the eventual economic impact of the change in financial conditions since the spring; in particular, increases in mortgage rates and home prices had reduced the affordability of housing, and the higher rates were at least partly responsible for some slowing in that sector. One participant stated that the extended period of near-zero interest rates continued to create challenges for the banking industry, as net interest margins remained under pressure.
Policy Planning
After an introductory briefing by the staff, meeting participants had a wide-ranging discussion of topics related to the path of monetary policy over the medium term, including strategic and communication issues associated with the Committee's asset purchase program as well as possibilities for clarifying or strengthening its forward guidance for the federal funds rate. In this context, participants discussed the financial market response to the Committee's decisions at its June and September meetings and, more generally, the complexities associated with communications about the Committee's current policy tools. A number of participants noted that recent movements in interest rates and other indicators suggested that financial markets viewed the Committee's tools--asset purchases and forward guidance regarding the federal funds rate--as closely linked. One possible explanation for this view was an inference on the part of investors that a change in asset purchases reflected a change in the Committee's outlook for the economy, which would be associated with adjustments in both the purchase program and the expected path of policy rates; another was a perspective that a change in asset purchases would be read as providing information about the willingness of the Committee to pursue its economic objectives with both tools. A couple of participants observed that the decision at the September FOMC meeting might have strengthened the credibility of monetary policy, as suggested by the downward shift in the expected path of short-term interest rates that had brought the path more closely into alignment with the Committee's forward guidance. Participants broadly endorsed making the Committee's communications as simple, clear, and consistent as possible, and discussed ways of doing so. With regard to the asset purchase program, one suggestion was to repeat a set of principles in public communications; for example, participants could emphasize that the program was data dependent, that any reduction in the pace of purchases would depend on both the cumulative progress in labor markets since the start of the program as well as the outlook for future gains, and that a continuing assessment of the efficacy and costs of asset purchases might lead the Committee to decide at some point to change the mix of its policy tools while maintaining a high degree of accommodation. Another suggestion for enhancing communications was to use the Summary of Economic Projections to provide more information about participants' views.
During this general discussion of policy strategy and tactics, participants reviewed issues specific to the Committee's asset purchase program. They generally expected that the data would prove consistent with the Committee's outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pace of purchases in coming months. However, participants also considered scenarios under which it might, at some stage, be appropriate to begin to wind down the program before an unambiguous further improvement in the outlook was apparent. A couple of participants thought it premature to focus on this latter eventuality, observing that the purchase program had been effective and that more time was needed to assess the outlook for the labor market and inflation; moreover, international comparisons suggested that the Federal Reserve's balance sheet retained ample capacity relative to the scale of the U.S. economy. Nonetheless, some participants noted that, if the Committee were going to contemplate cutting purchases in the future based on criteria other than improvement in the labor market outlook, such as concerns about the efficacy or costs of further asset purchases, it would need to communicate effectively about those other criteria. In those circumstances, it might well be appropriate to offset the effects of reduced purchases by undertaking alternative actions to provide accommodation at the same time.
Participants generally expressed reservations about the possibility of introducing a simple mechanical rule that would adjust the pace of asset purchases automatically based on a single variable such as the unemployment rate or payroll employment. While some were open to considering such a rule, others viewed that approach as unlikely to reliably produce appropriate policy outcomes. As an alternative, some participants mentioned that it might be preferable to adopt an even simpler plan and announce a total size of remaining purchases or a timetable for winding down the program. A calendar-based step-down would run counter to the data-dependent, state-contingent nature of the current asset purchase program, but it would be easier to communicate and might help the public separate the Committee's purchase program from its policy for the federal funds rate and the overall stance of policy. With regard to future reductions in asset purchases, participants discussed how those might be split across asset classes. A number of participants believed that making roughly equal adjustments to purchases of Treasury securities and MBS would be appropriate and relatively straightforward to communicate to the public. However, some others indicated that they could back trimming the pace of Treasury purchases more rapidly than those of MBS, perhaps to signal an intention to support mortgage markets, and one participant thought that trimming MBS first would reduce the potential for distortions in credit allocation.
As part of the planning discussion, participants also examined several possibilities for clarifying or strengthening the forward guidance for the federal funds rate, including by providing additional information about the likely path of the rate either after one of the economic thresholds in the current guidance was reached or after the funds rate target was eventually raised from its current, exceptionally low level. A couple of participants favored simply reducing the 6-1/2 percent unemployment rate threshold, but others noted that such a change might raise concerns about the durability of the Committee's commitment to the thresholds. Participants also weighed the merits of stating that, even after the unemployment rate dropped below 6-1/2 percent, the target for the federal funds rate would not be raised so long as the inflation rate was projected to run below a given level. In general, the benefits of adding this kind of quantitative floor for inflation were viewed as uncertain and likely to be rather modest, and communicating it could present challenges, but a few participants remained favorably inclined toward it. Several participants concluded that providing additional qualitative information on the Committee's intentions regarding the federal funds rate after the unemployment threshold was reached could be more helpful. Such guidance could indicate the range of information that the Committee would consider in evaluating when it would be appropriate to raise the federal funds rate. Alternatively, the policy statement could indicate that even after the first increase in the federal funds rate target, the Committee anticipated keeping the rate below its longer-run equilibrium value for some time, as economic headwinds were likely to diminish only slowly. Other factors besides those headwinds were also mentioned as possibly providing a rationale for maintaining a low trajectory for the federal funds rate, including following through on a commitment to support the economy by maintaining more-accommodative policy for longer. These or other modifications to the forward guidance for the federal funds rate could be implemented in the future, either to improve clarity or to add to policy accommodation, perhaps in conjunction with a reduction in the pace of asset purchases as part of a rebalancing of the Committee's tools.
Participants also discussed a range of possible actions that could be considered if the Committee wished to signal its intention to keep short-term rates low or reinforce the forward guidance on the federal funds rate. For example, most participants thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considering at some stage, although the benefits of such a step were generally seen as likely to be small except possibly as a signal of policy intentions. By contrast, participants expressed a range of concerns about using open market operations aimed at affecting the expected path of short-term interest rates, such as a standing purchase facility for shorter-term Treasury securities or the provision of term funding through repurchase agreements. Among the concerns voiced was that such operations would inhibit price discovery and remove valuable sources of market information; in addition, such operations might be difficult to explain to the public, complicate the Committee's communications, and appear inconsistent with the economic thresholds for the federal funds rate. Nevertheless, a number of participants noted that such operations were worthy of further study or saw them as potentially helpful in some circumstances.
At the end of the discussion, participants agreed that it would be helpful to continue reviewing these issues of longer-run policy strategy at upcoming meetings. No decisions on the substance were taken, and participants generally noted the usefulness of planning for various contingencies.
Committee Policy Action
Committee members saw the information received over the intermeeting period as suggesting that economic activity was continuing to expand at a moderate pace. Although indicators of labor market conditions had shown some further improvement, the unemployment rate remained elevated. Household spending and business fixed investment advanced, but the recovery in the housing sector slowed somewhat in recent months, and fiscal policy was restraining economic growth. The Committee expected that, with appropriate policy accommodation, economic growth would pick up from its recent pace, resulting in a gradual decline in the unemployment rate toward levels consistent with the Committee's dual mandate. Members generally continued to see the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall. Inflation was running below the Committee's longer-run objective, but longer-term inflation expectations were stable, and the Committee anticipated that inflation would move back toward its objective over the medium term. Members recognized, however, that inflation persistently below the Committee's 2 percent objective could pose risks to economic performance.
In their discussion of monetary policy for the period ahead, members generally noted that there had been little change in the economic outlook since the September meeting, and all members but one again judged that it would be appropriate for the Committee to await more evidence that progress toward its economic objectives would be sustained before adjusting the pace of asset purchases. In the view of one member, the cumulative improvement in the economy indicated that the continued easing of monetary policy at the current pace was no longer necessary. Many members stressed the data-dependent nature of the current asset purchase program, and some pointed out that, if economic conditions warranted, the Committee could decide to slow the pace of purchases at one of its next few meetings. A couple of members also commented that it would be important to continue laying the groundwork for such a reduction in pace through public statements and speeches, while emphasizing that the overall stance of monetary policy would remain highly accommodative as needed to meet the Committee's objectives.
At the conclusion of the discussion, the Committee decided to continue adding policy accommodation by purchasing additional MBS at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month and to maintain its existing reinvestment policies. In addition, the Committee reaffirmed its intention to keep the target federal funds rate at 0 to 1/4 percent and retained its forward guidance that it anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.
Members also discussed the wording of the policy statement to be issued following the meeting. In addition to updating its description of the state of the economy, the Committee considered whether to note that the effects of the temporary government shutdown had made economic conditions more difficult to assess, but judged that this might overemphasize the role of the shutdown in the Committee's policy deliberations. Members noted the improvement in financial conditions since the time of the September meeting and agreed that it was appropriate to drop the reference, which was included in the September statement, to the tightening of financial conditions seen over the summer. Members also discussed whether to add to the forward guidance in the policy statement an indication that the headwinds restraining the economic recovery were likely to abate only gradually, with the federal funds rate target anticipated to remain below its longer-run normal value for a considerable time. While there was some support for adding this language at some stage, a range of concerns were expressed about including it at this meeting. In particular, given its complexity, many members felt that it would be difficult to communicate this point succinctly in the statement. In addition, there was not complete consensus within the Committee that headwinds were the only explanation for the low expected future path of policy rates.
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:
"Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. The Desk is directed to continue purchasing longer-term Treasury securities at a pace of about $45 billion per month and to continue purchasing agency mortgage-backed securities at a pace of about $40 billion per month. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."
The vote encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in September generally suggests that economic activity has continued to expand at a moderate pace. Indicators of labor market conditions have shown some further improvement, but the unemployment rate remains elevated. Available data suggest that household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.
Taking into account the extent of federal fiscal retrenchment over the past year, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. Asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's economic outlook as well as its assessment of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent."
Voting for this action: Ben Bernanke, William C. Dudley, James Bullard, Charles L. Evans, Jerome H. Powell, Eric Rosengren, Jeremy C. Stein, Daniel K. Tarullo, and Janet L. Yellen.
Voting against this action: Esther L. George.
Ms. George dissented because she did not see the continued aggressive easing of monetary policy as warranted in the face of both actual and forecasted improvements in the economy. In her view, the cumulative progress in labor markets justified taking steps toward slowing the pace of the Committee's asset purchases. Moreover, market expectations for the size of the purchase program had continued to escalate despite that progress, increasing her concerns about communications challenges and the potential costs associated with asset purchases.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, December 17-18, 2013. The meeting adjourned at 12:05 p.m. on October 30, 2013.
Notation Vote
By notation vote completed on October 8, 2013, the Committee unanimously approved the minutes of the FOMC meeting held on September 17-18, 2013.
Videoconference meeting of October 16
On October 16, 2013, the Committee met by video-conference to discuss issues associated with contingencies in the event that the Treasury was temporarily unable to meet its obligations because the statutory federal debt limit was not raised. The meeting covered issues similar to those discussed at the Committee's videoconference meeting of August 1, 2011. The staff provided an update on legislative developments bearing on the debt ceiling and the funding of the federal government, recent conditions in financial markets, technical aspects of the processing of federal payments, potential implications for bank supervision and regulatory policies, and possible actions that the Federal Reserve could take if disruptions to market functioning posed a threat to the Federal Reserve's economic objectives. Meeting participants saw no legal or operational need in the event of delayed payments on Treasury securities to make changes to the conduct or procedures employed in currently authorized Desk operations, such as open market operations, large-scale asset purchases, or securities lending, or to the operation of the discount window. They also generally agreed that the Federal Reserve would continue to employ prevailing market values of securities in all its transactions and operations, under the usual terms. With respect to potential additional actions, participants noted that the appropriate responses would depend importantly on the actual conditions observed in financial markets. Under certain circumstances, the Desk might act to facilitate the smooth transmission of monetary policy through money markets and to address disruptions in market functioning and liquidity. Supervisory policy would take into account and make appropriate allowance for unusual market conditions. The need to maintain the traditional separation of the Federal Reserve's actions from the Treasury's debt management decisions was noted. Participants agreed that while the Federal Reserve should take whatever steps it could, the risks posed to the financial system and to the broader economy by a delay in payments on Treasury securities would be potentially catastrophic, and thus such a situation should be avoided at all costs.
_____________________________
William B. English
Secretary |
2013-10-16T00:00:00 | N/A | Minute | Minutes of the Federal Open Market Committee
October 29-30, 2013
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, October 29, 2013, at 1:00 p.m. and continued on Wednesday, October 30, 2013, at 9:00 a.m.
PRESENT:
Ben Bernanke, Chairman
William C. Dudley, Vice Chairman
James Bullard
Charles L. Evans
Esther L. George
Jerome H. Powell
Eric Rosengren
Jeremy C. Stein
Daniel K. Tarullo
Janet L. Yellen
Richard W. Fisher, Narayana Kocherlakota, Sandra Pianalto, and Charles I. Plosser, Alternate Members of the Federal Open Market Committee
Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively
William B. English, Secretary and Economist
Deborah J. Danker, Deputy Secretary
Matthew M. Luecke, Assistant Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Thomas C. Baxter, Deputy General Counsel
Steven B. Kamin, Economist
David W. Wilcox, Economist
Thomas A. Connors, Michael P. Leahy, Stephen A. Meyer, Daniel G. Sullivan, Christopher J. Waller, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors
James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors
Jon W. Faust, Special Adviser to the Board, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Trevor A. Reeve, Senior Associate Director, Division of International Finance, Board of Governors
Ellen E. Meade and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors
Eric M. Engen, Michael T. Kiley, Thomas Laubach, and David E. Lebow, Associate Directors, Division of Research and Statistics, Board of Governors
Marnie Gillis DeBoer, Deputy Associate Director, Division of Monetary Affairs, Board of Governors
Rochelle M. Edge, Assistant Director, Office of Financial Stability Policy and Research, Board of Governors
Eric Engstrom, Section Chief, Division of Research and Statistics, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Mark A. Carlson, Senior Economist, Division of Monetary Affairs, Board of Governors; Robert J. Tetlow, Senior Economist, Division of Research and Statistics, Board of Governors
Blake Prichard, First Vice President, Federal Reserve Bank of Philadelphia
David Altig, Glenn D. Rudebusch, and Mark S. Sniderman, Executive Vice Presidents, Federal Reserve Banks of Atlanta, San Francisco, and Cleveland, respectively
Craig S. Hakkio, Evan F. Koenig, Lorie K. Logan, and Kei-Mu Yi, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Dallas, New York, and Minneapolis, respectively
Anna Nordstrom and Giovanni Olivei, Vice Presidents, Federal Reserve Banks of New York and Boston, respectively
Argia M. Sbordone, Assistant Vice President, Federal Reserve Bank of New York
Andreas L. Hornstein, Senior Advisor, Federal Reserve Bank of Richmond
Satyajit Chatterjee, Senior Economic Advisor, Federal Reserve Bank of Philadelphia
Developments in Financial Markets and the Federal Reserve's Balance Sheet
The Manager of the System Open Market Account reported on developments in domestic and foreign financial markets as well as System open market operations, including the progress of the overnight reverse repurchase agreement operational exercise, during the period since the Federal Open Market Committee (FOMC) met on September 17-18, 2013. By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
The Committee considered a proposal to convert the existing temporary central bank liquidity swap arrangements to standing arrangements with no preset expiration dates. The Manager described the proposed arrangements, noting that the Committee would still be asked to review participation in the arrangements annually. A couple of participants expressed reservations about the proposal, citing opposition to swap lines with foreign central banks in general or questioning the governance implications of these standing arrangements in particular. Following the discussion, the Committee unanimously approved the following resolution:
"The Federal Open Market Committee directs the Federal Reserve Bank of New York to convert the existing temporary dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank to standing facilities, with the modifications approved by the Committee. In addition, the Federal Open Market Committee directs the Federal Reserve Bank of New York to convert the existing temporary foreign currency liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank to standing facilities, also with the modifications approved by the Committee.
Drawings on the dollar and foreign currency liquidity swap lines will be approved by the Chairman in consultation with the Foreign Currency Subcommittee. The Foreign Currency Subcommittee will consult with the Federal Open Market Committee prior to the initial drawing on the dollar or foreign currency liquidity swap lines if possible under the circumstances then prevailing; authority to approve subsequent drawings of a more routine character for either the dollar or foreign currency liquidity swap lines may be delegated to the Manager, in consultation with the Chairman.
The Chairman may change the rates and fees on the swap arrangements by mutual agreement with the foreign central banks and in consultation with the Foreign Currency Subcommittee. The Chairman shall keep the Federal Open Market Committee informed of any changes in rates or fees, and the rates and fees shall be consistent with principles discussed with and guidance provided by the Committee."
Staff Review of the Economic Situation
In general, the data available at the time of the October 29-30 meeting suggested that economic activity continued to rise at a moderate pace; the set of information reviewed for this meeting, however, was reduced somewhat by delays in selected statistical releases associated with the partial shutdown of the federal government earlier in the month. In the labor market, total payroll employment increased further in September, but the unemployment rate was still high. Consumer price inflation continued to be modest, and measures of longer-run inflation expectations remained stable.
Private nonfarm employment rose in September but at a slower pace than in the previous month, while total government employment increased at a solid rate. The unemployment rate edged down to 7.2 percent in September; both the labor force participation rate and the employment-to-population ratio were unchanged. Other recent indicators of labor market activity were mixed. Measures of firms' hiring plans improved, the rate of job openings increased slightly, and the rate of long-duration unemployment declined a little. However, household expectations of the labor market situation deteriorated somewhat, the rate of gross private-sector hiring remained flat, and the share of workers employed part time for economic reasons was essentially unchanged and continued to be elevated. In addition, initial claims for unemployment insurance rose in the first few weeks of October, likely reflecting, in part, some spillover effects from the government shutdown.
Manufacturing production expanded modestly in September, but output was flat outside of the motor vehicle sector and the rate of total manufacturing capacity utilization was unchanged. Automakers' schedules indicated that the pace of light motor vehicle assemblies would be slightly lower in the coming months, but broader indicators of manufacturing production, such as the readings on new orders from the national and regional manufacturing surveys, pointed to further gains in factory output in the near term.
Real personal consumption expenditures (PCE) rose moderately in August. In September, nominal retail sales, excluding those at motor vehicle and parts outlets, increased significantly, while sales of light motor vehicles declined. Recent readings on key factors that influence consumer spending were somewhat mixed: Households' net worth likely expanded further as both equity values and home prices rose in recent months, and real disposable incomes increased solidly in August, but measures of consumer sentiment declined in September and October.
The recovery in the housing sector appeared to continue, although recent data in this sector were limited. Starts and permits of new single-family homes increased in August, but starts and permits of multifamily units declined. After falling significantly in July, sales of new homes increased in August, but existing home sales decreased, on balance, in August and September, and pending home sales also contracted.
Growth in real private expenditures for business equipment and intellectual property products appeared to be tepid in the third quarter. Nominal shipments of nondefense capital goods excluding aircraft rose modestly, on balance, in August and September after declining in July. However, nominal new orders for these capital goods continued to be above the level of shipments, pointing to increases in shipments in subsequent months, and other forward-looking indicators, such as surveys of business conditions, were consistent with some gains in business equipment spending in the near term. Nominal business expenditures for nonresidential construction were essentially unchanged in August. Recent book-value data for inventory-to-sales ratios, along with readings on inventories from national and regional manufacturing surveys, did not point to notable inventory imbalances.
Real federal government purchases likely declined as federal employment edged down further in September and many federal employees were temporarily furloughed during the partial government shutdown in October. Real state and local government purchases, however, appeared to increase; the payrolls of these governments expanded briskly in September, and nominal state and local construction expenditures rose in August.
The U.S. international trade deficit remained about unchanged in August, as both exports and imports were flat.
Available measures of total U.S. consumer prices--the PCE price index for August and the consumer price index for September--increased modestly, as did the core measures, which exclude prices of food and energy. Both near- and longer-term inflation expectations from the Thomson Reuters/University of Michigan Surveys of Consumers were little changed, on balance, in September and October. Nominal average hourly earnings for all employees increased slowly in September.
Foreign economic growth appeared to improve in the third quarter following a sluggish first half, largely reflecting stronger growth estimated for China and a rebound in Mexico from contraction in the previous quarter. Growth also picked up in the third quarter in the United Kingdom, and available indicators suggested an increase in growth in Canada and continued mild recovery in the euro area. Economic activity in Japan appeared to have decelerated somewhat from its first-half pace but continued to expand, and inflation measured on a 12-month basis turned positive in the middle of this year. Inflation elsewhere generally remained subdued. Monetary policy stayed highly accommodative in advanced foreign economies. In addition, the Bank of Mexico continued to ease monetary policy, citing concerns about the strength of the economy, but central banks in certain other emerging market economies, including Brazil and India, tightened policy and intervened in currency markets in response to concerns about the potential effect of currency depreciation on inflation.
Staff Review of the Financial Situation
On balance over the intermeeting period, longer-term interest rates declined and equity prices rose, largely in response to expectations for more-accommodative monetary policy. In addition, financial markets were affected for a time by uncertainties about raising the federal debt limit and resolving the government shutdown.
Financial market views about the outlook for monetary policy shifted notably following the September FOMC meeting, as the outcome and communications from that meeting were seen as more accommodative than expected. Investors pushed out their anticipated timing of both the first reduction in the pace of FOMC asset purchases and the first hike in the target federal funds rate. The path of the federal funds rate implied by financial market quotes shifted down over the period, as did the path based on the results from the Desk's survey of primary dealers. The Desk's survey also indicated that the dealers had revised up their expectations of the total size of the Committee's asset purchase program. Concerns about the fiscal situation and somewhat weaker-than-expected economic data releases also contributed to the change in expectations about the timing of monetary policy actions.
Five- and 10-year yields on both nominal and inflation-protected Treasury securities declined 30 basis points or more over the intermeeting period. The reduction in longer-term Treasury yields was also reflected in other longer-term rates, such as those on agency mortgage-backed securities (MBS) and corporate securities.
Short-term funding markets were adversely affected for a time by concerns about potential delays in raising the federal debt limit. The Treasury bill market was particularly affected as yields on bills maturing between mid-October and early November rose sharply and some bill auctions saw reduced demand. Conditions in other short-term markets, such as the market for repurchase agreements, were also strained. However, these effects eased quickly after an agreement to raise the debt limit was reached in mid-October.
Credit flows to nonfinancial businesses appeared to slow somewhat during the fiscal standoff amid increased market volatility; however, access to credit generally remained ample for large firms. Gross issuance of nonfinancial corporate bonds and commercial paper, which had been particularly strong in September, slowed a bit in October. In September, leveraged loan issuance was also robust. Commercial and industrial (C&I) loans at banks continued to advance, on balance, in the third quarter at about the pace posted in the previous quarter, and commercial real estate (CRE) loans at banks rose moderately. In response to the October Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), banks generally indicated that they had eased standards on C&I and CRE loans over the past three months.
Developments affecting financing for the household sector were generally favorable. House prices posted further gains in August. Mortgage rates declined over the intermeeting period, although they were still above their early-May lows. Mortgage refinancing applications were down dramatically compared with May, but purchase applications were only a bit below their earlier level. Some large banks responding to the October SLOOS reported having eased standards on home-purchase loans to prime borrowers on net. In nonmortgage credit, automobile loans and student loans continued to expand at a robust pace, while balances on revolving consumer credit were again about flat.
In the municipal bond market, issuance of bonds for new capital projects remained solid. Yields on 20-year general obligation municipal bonds decreased about in line with other longer-term market rates over the intermeeting period.
Bank credit declined slightly during the third quarter. Growth of core loans slowed, primarily because of a sizable decline in outstanding balances of residential mortgages on banks' books. Third-quarter earnings reports for large banks generally met or exceeded analysts' modest expectations.
M2 grew moderately in September. Preliminary data indicated that growth in M2 picked up temporarily in early October amid uncertainty about the passage of debt limit legislation; deposits increased sharply as institutional investors appeared to shift from money fund shares to bank deposits, and as money funds increased their bank deposits in anticipation of possible redemptions. These inflows to deposits were estimated to have reversed shortly after the debt limit agreement was reached.
Foreign stock prices rose, foreign yields and yield spreads declined, and the dollar depreciated against most other currencies. A large portion of these asset price changes occurred immediately following the September FOMC announcement. In addition, yields and the value of the dollar fell further after the debt ceiling agreement was reached and in response to the U.S. labor market report. Mutual fund flows to emerging markets stabilized, following large outflows earlier this year.
Staff Economic Outlook
In the economic projection prepared by the staff for the October FOMC meeting, the forecast for growth in real gross domestic product (GDP) in the near term was revised down somewhat from the one prepared for the previous meeting, primarily reflecting the effects of the federal government shutdown and some data on consumer spending that were softer than anticipated. In contrast, the staff's medium-term forecast for real GDP was revised up slightly, mostly reflecting lower projected paths for the foreign exchange value of the dollar and longer-term interest rates, along with somewhat higher projected paths for equity prices and home values. The staff anticipated that the pace of expansion in real GDP this year would be about the same as the growth rate of potential output but continued to project that real GDP would accelerate in 2014 and 2015, supported by an easing in the effects of fiscal policy restraint on economic growth, increases in consumer and business sentiment, further improvements in credit availability and financial conditions, and accommodative monetary policy. Real GDP growth was projected to begin to slow a little in 2016 but to remain above potential output growth. The expansion in economic activity was anticipated to slowly reduce resource slack over the projection period, and the unemployment rate was expected to decline gradually.
The staff's forecast for inflation was little changed from the projection prepared for the previous FOMC meeting. The staff continued to expect that inflation would be modest in the second half of this year, but higher than its level in the first half. Over the medium term, with longer-run inflation expectations assumed to remain stable, changes in commodity and import prices expected to be relatively small, and slack in labor and product markets persisting over most of the projection period, inflation was projected to run somewhat below the FOMC's longer-run inflation objective of 2 percent through 2016.
The staff continued to see a number of risks around the forecast. The downside risks to economic activity included the uncertain effects and future course of fiscal policy, concerns about the outlook for consumer spending growth, and the potential effects on residential construction of the increase in mortgage rates since the spring. With regard to inflation, the staff saw risks both to the downside, that the low rates of core consumer price inflation posted earlier this year could be more persistent than anticipated, and to the upside, that unanticipated increases in energy or other commodity prices could emerge.
Participants' Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants generally indicated that the broad contours of their medium-term economic projections had not changed materially since the September meeting. Although the incoming data suggested that growth in the second half of 2013 might prove somewhat weaker than many of them had previously anticipated, participants broadly continued to project the pace of economic activity to pick up. The acceleration over the medium term was expected to be bolstered by the gradual abatement of headwinds that have been slowing the pace of economic recovery--such as household-sector deleveraging, tight credit conditions for some households and businesses, and fiscal restraint--as well as improved prospects for global growth. While downside risks to the outlook for the economy and the labor market were generally viewed as having diminished, on balance, since last fall, several significant risks remained, including the uncertain effects of ongoing fiscal drag and of the continuing fiscal debate.
Consumer spending appeared to have slowed somewhat in the third quarter. A number of participants noted that their outlook for stronger economic activity was contingent on a pickup in growth of consumer spending and reviewed the factors that might contribute to such a development, including low interest rates, easing of debt burdens, continued gains in employment, lower gasoline prices, higher real incomes, and higher household wealth boosted by rising home prices and equity values. Nonetheless, consumer sentiment remained unusually low, posing a downside risk to the forecast, and uncertainty surrounding prospective fiscal deliberations could weigh further on consumer confidence. A few participants commented that a pickup in the growth rates of economic activity or real disposable income could require improvements in productivity growth. However, it was noted that slower growth in productivity might have become the norm.
Business contacts generally reported continued moderate growth in sales, but remained cautious about expanding payrolls and capital expenditures. Manufacturing activity in parts of the country was reported to have picked up, and auto sales remained strong. Reports from several Districts indicated that commercial real estate and housing-related business activity continued to advance. In the agricultural sector, crop yields were healthy, farmland values were up, and lower crop prices were increasing the affordability of livestock feed. Wage and cost pressures remained limited, but business contacts in some Districts mentioned that selected labor markets were tight or expressed concerns about a shortage of skilled workers. Reports from the retail sector were mixed, with remarks about higher luxury sales and expectations for reduced hiring of seasonal workers over the upcoming holiday season. Uncertainty about future fiscal policy and the regulatory environment, including changes in health care, were mentioned as weighing on business planning.
Participants generally saw the direct economic effects of the partial shutdown of the federal government as temporary and limited, but a number of them expressed concern about the possible economic effects of repeated fiscal impasses on business and consumer confidence. More broadly, fiscal policy, which has been exerting significant restraint on economic growth, was expected to become somewhat less restrictive over the forecast period. Nonetheless, it was noted that the stance of fiscal policy was likely to remain one of the most important headwinds restraining growth over the medium term.
Although a number of participants indicated that the September employment report was somewhat disappointing, they judged that the labor market continued to improve, albeit slowly. The limited pace of gains in wages and payrolls, as well as the number of employees working part time for economic reasons, were mentioned as evidence of substantial remaining slack in the labor market. The drop in the unemployment rate over the past year, while welcome and significant, could overstate the degree of improvement in labor market conditions, in part because of the decline in the labor force participation rate. However, a few participants offered reasons why recent readings on the unemployment rate might provide an accurate assessment, on balance, of the extent of improvement in the labor market. For instance, if the decline in labor force participation reflected decisions to retire, it was unlikely to be reversed, because retirees were unlikely to return to the labor force. Furthermore, a secular decline in labor market dynamism, or turnover, might have contributed to a reduction in the size of normal monthly payroll gains. Finally, revised data showed that the historical relationship between real GDP growth and changes in the unemployment rate had remained broadly in place in recent years, suggesting that the unemployment rate continued to provide a reasonably accurate signal about the strength of the labor market and the degree of slack in the economy.
Available information suggested that inflation remained subdued and below the Committee's longer-run objective of 2 percent. Similarly, longer-run inflation expectations remained stable and, by some measures, below 2 percent.
Financial conditions eased notably over the intermeeting period, with declines in longer-term interest rates and increases in equity values. Financial quotes suggested that markets moved out the date at which they expected to see the Committee first increase the federal funds rate target. It was noted that interest rate volatility was substantially lower than at the time of the September meeting, and a couple of participants pointed to signs suggesting that reaching-for-yield behavior might be increasing again. Nevertheless, term premiums appeared to only partially retrace their rise of earlier in the year, and longer-term interest rates remained well above their levels in the spring. A few participants expressed concerns about the eventual economic impact of the change in financial conditions since the spring; in particular, increases in mortgage rates and home prices had reduced the affordability of housing, and the higher rates were at least partly responsible for some slowing in that sector. One participant stated that the extended period of near-zero interest rates continued to create challenges for the banking industry, as net interest margins remained under pressure.
Policy Planning
After an introductory briefing by the staff, meeting participants had a wide-ranging discussion of topics related to the path of monetary policy over the medium term, including strategic and communication issues associated with the Committee's asset purchase program as well as possibilities for clarifying or strengthening its forward guidance for the federal funds rate. In this context, participants discussed the financial market response to the Committee's decisions at its June and September meetings and, more generally, the complexities associated with communications about the Committee's current policy tools. A number of participants noted that recent movements in interest rates and other indicators suggested that financial markets viewed the Committee's tools--asset purchases and forward guidance regarding the federal funds rate--as closely linked. One possible explanation for this view was an inference on the part of investors that a change in asset purchases reflected a change in the Committee's outlook for the economy, which would be associated with adjustments in both the purchase program and the expected path of policy rates; another was a perspective that a change in asset purchases would be read as providing information about the willingness of the Committee to pursue its economic objectives with both tools. A couple of participants observed that the decision at the September FOMC meeting might have strengthened the credibility of monetary policy, as suggested by the downward shift in the expected path of short-term interest rates that had brought the path more closely into alignment with the Committee's forward guidance. Participants broadly endorsed making the Committee's communications as simple, clear, and consistent as possible, and discussed ways of doing so. With regard to the asset purchase program, one suggestion was to repeat a set of principles in public communications; for example, participants could emphasize that the program was data dependent, that any reduction in the pace of purchases would depend on both the cumulative progress in labor markets since the start of the program as well as the outlook for future gains, and that a continuing assessment of the efficacy and costs of asset purchases might lead the Committee to decide at some point to change the mix of its policy tools while maintaining a high degree of accommodation. Another suggestion for enhancing communications was to use the Summary of Economic Projections to provide more information about participants' views.
During this general discussion of policy strategy and tactics, participants reviewed issues specific to the Committee's asset purchase program. They generally expected that the data would prove consistent with the Committee's outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pace of purchases in coming months. However, participants also considered scenarios under which it might, at some stage, be appropriate to begin to wind down the program before an unambiguous further improvement in the outlook was apparent. A couple of participants thought it premature to focus on this latter eventuality, observing that the purchase program had been effective and that more time was needed to assess the outlook for the labor market and inflation; moreover, international comparisons suggested that the Federal Reserve's balance sheet retained ample capacity relative to the scale of the U.S. economy. Nonetheless, some participants noted that, if the Committee were going to contemplate cutting purchases in the future based on criteria other than improvement in the labor market outlook, such as concerns about the efficacy or costs of further asset purchases, it would need to communicate effectively about those other criteria. In those circumstances, it might well be appropriate to offset the effects of reduced purchases by undertaking alternative actions to provide accommodation at the same time.
Participants generally expressed reservations about the possibility of introducing a simple mechanical rule that would adjust the pace of asset purchases automatically based on a single variable such as the unemployment rate or payroll employment. While some were open to considering such a rule, others viewed that approach as unlikely to reliably produce appropriate policy outcomes. As an alternative, some participants mentioned that it might be preferable to adopt an even simpler plan and announce a total size of remaining purchases or a timetable for winding down the program. A calendar-based step-down would run counter to the data-dependent, state-contingent nature of the current asset purchase program, but it would be easier to communicate and might help the public separate the Committee's purchase program from its policy for the federal funds rate and the overall stance of policy. With regard to future reductions in asset purchases, participants discussed how those might be split across asset classes. A number of participants believed that making roughly equal adjustments to purchases of Treasury securities and MBS would be appropriate and relatively straightforward to communicate to the public. However, some others indicated that they could back trimming the pace of Treasury purchases more rapidly than those of MBS, perhaps to signal an intention to support mortgage markets, and one participant thought that trimming MBS first would reduce the potential for distortions in credit allocation.
As part of the planning discussion, participants also examined several possibilities for clarifying or strengthening the forward guidance for the federal funds rate, including by providing additional information about the likely path of the rate either after one of the economic thresholds in the current guidance was reached or after the funds rate target was eventually raised from its current, exceptionally low level. A couple of participants favored simply reducing the 6-1/2 percent unemployment rate threshold, but others noted that such a change might raise concerns about the durability of the Committee's commitment to the thresholds. Participants also weighed the merits of stating that, even after the unemployment rate dropped below 6-1/2 percent, the target for the federal funds rate would not be raised so long as the inflation rate was projected to run below a given level. In general, the benefits of adding this kind of quantitative floor for inflation were viewed as uncertain and likely to be rather modest, and communicating it could present challenges, but a few participants remained favorably inclined toward it. Several participants concluded that providing additional qualitative information on the Committee's intentions regarding the federal funds rate after the unemployment threshold was reached could be more helpful. Such guidance could indicate the range of information that the Committee would consider in evaluating when it would be appropriate to raise the federal funds rate. Alternatively, the policy statement could indicate that even after the first increase in the federal funds rate target, the Committee anticipated keeping the rate below its longer-run equilibrium value for some time, as economic headwinds were likely to diminish only slowly. Other factors besides those headwinds were also mentioned as possibly providing a rationale for maintaining a low trajectory for the federal funds rate, including following through on a commitment to support the economy by maintaining more-accommodative policy for longer. These or other modifications to the forward guidance for the federal funds rate could be implemented in the future, either to improve clarity or to add to policy accommodation, perhaps in conjunction with a reduction in the pace of asset purchases as part of a rebalancing of the Committee's tools.
Participants also discussed a range of possible actions that could be considered if the Committee wished to signal its intention to keep short-term rates low or reinforce the forward guidance on the federal funds rate. For example, most participants thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considering at some stage, although the benefits of such a step were generally seen as likely to be small except possibly as a signal of policy intentions. By contrast, participants expressed a range of concerns about using open market operations aimed at affecting the expected path of short-term interest rates, such as a standing purchase facility for shorter-term Treasury securities or the provision of term funding through repurchase agreements. Among the concerns voiced was that such operations would inhibit price discovery and remove valuable sources of market information; in addition, such operations might be difficult to explain to the public, complicate the Committee's communications, and appear inconsistent with the economic thresholds for the federal funds rate. Nevertheless, a number of participants noted that such operations were worthy of further study or saw them as potentially helpful in some circumstances.
At the end of the discussion, participants agreed that it would be helpful to continue reviewing these issues of longer-run policy strategy at upcoming meetings. No decisions on the substance were taken, and participants generally noted the usefulness of planning for various contingencies.
Committee Policy Action
Committee members saw the information received over the intermeeting period as suggesting that economic activity was continuing to expand at a moderate pace. Although indicators of labor market conditions had shown some further improvement, the unemployment rate remained elevated. Household spending and business fixed investment advanced, but the recovery in the housing sector slowed somewhat in recent months, and fiscal policy was restraining economic growth. The Committee expected that, with appropriate policy accommodation, economic growth would pick up from its recent pace, resulting in a gradual decline in the unemployment rate toward levels consistent with the Committee's dual mandate. Members generally continued to see the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall. Inflation was running below the Committee's longer-run objective, but longer-term inflation expectations were stable, and the Committee anticipated that inflation would move back toward its objective over the medium term. Members recognized, however, that inflation persistently below the Committee's 2 percent objective could pose risks to economic performance.
In their discussion of monetary policy for the period ahead, members generally noted that there had been little change in the economic outlook since the September meeting, and all members but one again judged that it would be appropriate for the Committee to await more evidence that progress toward its economic objectives would be sustained before adjusting the pace of asset purchases. In the view of one member, the cumulative improvement in the economy indicated that the continued easing of monetary policy at the current pace was no longer necessary. Many members stressed the data-dependent nature of the current asset purchase program, and some pointed out that, if economic conditions warranted, the Committee could decide to slow the pace of purchases at one of its next few meetings. A couple of members also commented that it would be important to continue laying the groundwork for such a reduction in pace through public statements and speeches, while emphasizing that the overall stance of monetary policy would remain highly accommodative as needed to meet the Committee's objectives.
At the conclusion of the discussion, the Committee decided to continue adding policy accommodation by purchasing additional MBS at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month and to maintain its existing reinvestment policies. In addition, the Committee reaffirmed its intention to keep the target federal funds rate at 0 to 1/4 percent and retained its forward guidance that it anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.
Members also discussed the wording of the policy statement to be issued following the meeting. In addition to updating its description of the state of the economy, the Committee considered whether to note that the effects of the temporary government shutdown had made economic conditions more difficult to assess, but judged that this might overemphasize the role of the shutdown in the Committee's policy deliberations. Members noted the improvement in financial conditions since the time of the September meeting and agreed that it was appropriate to drop the reference, which was included in the September statement, to the tightening of financial conditions seen over the summer. Members also discussed whether to add to the forward guidance in the policy statement an indication that the headwinds restraining the economic recovery were likely to abate only gradually, with the federal funds rate target anticipated to remain below its longer-run normal value for a considerable time. While there was some support for adding this language at some stage, a range of concerns were expressed about including it at this meeting. In particular, given its complexity, many members felt that it would be difficult to communicate this point succinctly in the statement. In addition, there was not complete consensus within the Committee that headwinds were the only explanation for the low expected future path of policy rates.
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:
"Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. The Desk is directed to continue purchasing longer-term Treasury securities at a pace of about $45 billion per month and to continue purchasing agency mortgage-backed securities at a pace of about $40 billion per month. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."
The vote encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in September generally suggests that economic activity has continued to expand at a moderate pace. Indicators of labor market conditions have shown some further improvement, but the unemployment rate remains elevated. Available data suggest that household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.
Taking into account the extent of federal fiscal retrenchment over the past year, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. Asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's economic outlook as well as its assessment of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent."
Voting for this action: Ben Bernanke, William C. Dudley, James Bullard, Charles L. Evans, Jerome H. Powell, Eric Rosengren, Jeremy C. Stein, Daniel K. Tarullo, and Janet L. Yellen.
Voting against this action: Esther L. George.
Ms. George dissented because she did not see the continued aggressive easing of monetary policy as warranted in the face of both actual and forecasted improvements in the economy. In her view, the cumulative progress in labor markets justified taking steps toward slowing the pace of the Committee's asset purchases. Moreover, market expectations for the size of the purchase program had continued to escalate despite that progress, increasing her concerns about communications challenges and the potential costs associated with asset purchases.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, December 17-18, 2013. The meeting adjourned at 12:05 p.m. on October 30, 2013.
Notation Vote
By notation vote completed on October 8, 2013, the Committee unanimously approved the minutes of the FOMC meeting held on September 17-18, 2013.
Videoconference meeting of October 16
On October 16, 2013, the Committee met by video-conference to discuss issues associated with contingencies in the event that the Treasury was temporarily unable to meet its obligations because the statutory federal debt limit was not raised. The meeting covered issues similar to those discussed at the Committee's videoconference meeting of August 1, 2011. The staff provided an update on legislative developments bearing on the debt ceiling and the funding of the federal government, recent conditions in financial markets, technical aspects of the processing of federal payments, potential implications for bank supervision and regulatory policies, and possible actions that the Federal Reserve could take if disruptions to market functioning posed a threat to the Federal Reserve's economic objectives. Meeting participants saw no legal or operational need in the event of delayed payments on Treasury securities to make changes to the conduct or procedures employed in currently authorized Desk operations, such as open market operations, large-scale asset purchases, or securities lending, or to the operation of the discount window. They also generally agreed that the Federal Reserve would continue to employ prevailing market values of securities in all its transactions and operations, under the usual terms. With respect to potential additional actions, participants noted that the appropriate responses would depend importantly on the actual conditions observed in financial markets. Under certain circumstances, the Desk might act to facilitate the smooth transmission of monetary policy through money markets and to address disruptions in market functioning and liquidity. Supervisory policy would take into account and make appropriate allowance for unusual market conditions. The need to maintain the traditional separation of the Federal Reserve's actions from the Treasury's debt management decisions was noted. Participants agreed that while the Federal Reserve should take whatever steps it could, the risks posed to the financial system and to the broader economy by a delay in payments on Treasury securities would be potentially catastrophic, and thus such a situation should be avoided at all costs.
_____________________________
William B. English
Secretary |
2013-09-18T00:00:00 | 2013-09-18 | Statement | Information received since the Federal Open Market Committee met in July suggests that economic activity has been expanding at a moderate pace. Some indicators of labor market conditions have shown further improvement in recent months, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and fiscal policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.
Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. Asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's economic outlook as well as its assessment of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Charles L. Evans; Jerome H. Powell; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations. |
2013-09-18T00:00:00 | 2013-10-09 | Minute | Minutes of the Federal Open Market Committee
September 17-18, 2013
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, September 17, 2013, at 1:00 p.m. and continued on Wednesday, September 18, 2013, at 8:30 a.m.
PRESENT:
Ben Bernanke, Chairman
William C. Dudley, Vice Chairman
James Bullard
Charles L. Evans
Esther L. George
Jerome H. Powell
Eric Rosengren
Jeremy C. Stein
Daniel K. Tarullo
Janet L. Yellen
Christine Cumming, Richard W. Fisher, Narayana Kocherlakota, Sandra Pianalto, and Charles I. Plosser, Alternate Members of the Federal Open Market Committee
Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively
Deborah J. Danker, Deputy Secretary
Matthew M. Luecke, Assistant Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Steven B. Kamin, Economist
David W. Wilcox, Economist
Thomas A. Connors, Troy Davig, Michael P. Leahy, Stephen A. Meyer, Geoffrey Tootell, Christopher J. Waller, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors
Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors
James A. Clouse and William Nelson, Deputy Directors, Division of Monetary Affairs, Board of Governors
Jon W. Faust, Special Adviser to the Board, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Ellen E. Meade and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors
Eric M. Engen, Michael T. Kiley, Thomas Laubach, David E. Lebow, and Michael G. Palumbo, Associate Directors, Division of Research and Statistics, Board of Governors; Fabio M. Natalucci, Associate Director, Division of Monetary Affairs, Board of Governors
Joshua Gallin, Deputy Associate Director, Division of Research and Statistics, Board of Governors
Jeremy B. Rudd, Adviser, Division of Research and Statistics, Board of Governors
Christopher J. Gust and Elizabeth Klee, Section Chiefs, Division of Monetary Affairs, Board of Governors
Gordon Werkema, First Vice President, Federal Reserve Bank of Chicago
David Altig, Loretta J. Mester, and Harvey Rosenblum,1 Executive Vice Presidents, Federal Reserve Banks of Atlanta, Philadelphia, and Dallas, respectively
Joyce Hansen, Evan F. Koenig, Spencer Krane, Lorie K. Logan, Mark E. Schweitzer, John A. Weinberg, and Kei-Mu Yi, Senior Vice Presidents, Federal Reserve Banks of New York, Dallas, Chicago, New York, Cleveland, Richmond, and Minneapolis, respectively
Chris Burke and Jonathan P. McCarthy, Vice Presidents, Federal Reserve Bank of New York
Eric T. Swanson, Senior Research Advisor, Federal Reserve Bank of San Francisco
Developments in Financial Markets and the Federal Reserve's Balance Sheet
The Manager of the System Open Market Account reported on developments in domestic and foreign financial markets as well as the System open market operations during the period since the Federal Open Market Committee (FOMC) met on July 30-31, 2013. The review included a report that the System's purchases of longer-term assets did not appear to have had an adverse effect on the functioning of the markets for Treasury securities or agency mortgage-backed securities (MBS), and that the Open Market Desk's operations in both sectors had proceeded smoothly. By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
In support of the Committee's longer-run planning for improvements in the implementation of monetary policy, the staff presented an update on the potential for establishing a fixed-rate, full-allotment overnight reverse repurchase agreement (RRP) facility. The presentation summarized initial discussions with financial market firms about how such a facility might affect money market interest rates and intermediation flows, what the relationship might be between the facility rate and other money market rates, and how the different types of firms might view the facility. Overall, the inquiries suggested that the facility could be an effective additional tool for managing money market interest rates and helping to support a floor on those rates. Meeting participants discussed the potential role for an overnight RRP facility, the possible effects on the functioning of the federal funds market or the structure of money markets, and the usefulness of expanding the Desk's test operations in RRPs. Meeting participants generally supported a proposal to authorize the Desk to conduct a limited exercise in order to provide some insight into the potential usage of an overnight RRP facility as well as additional experience with operational aspects of such a facility. One participant, however, preferred that further analysis be undertaken before proceeding with the exercise. A number of meeting participants emphasized that their interest in these operations reflected an ongoing effort to improve the technical execution of policy and did not signal any change in the Committee's views about policy going forward. Following the discussion, the Committee unanimously approved the following resolution:
"The Federal Open Market Committee (FOMC) authorizes the Federal Reserve Bank of New York to conduct a series of fixed-rate, overnight reverse repurchase operations involving U.S. Government securities, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, for the purpose of assessing operational readiness. The reverse repurchase operations authorized by this resolution shall be (i) offered at a fixed rate that may vary from zero to five basis points, (ii) offered at up to a capped allotment per counterparty of $1 billion per day and (iii) for an overnight term, or such longer term as is warranted to accommodate weekend, holiday, and similar trading conventions. The System Open Market Account Manager will inform the FOMC in advance of the terms of the planned operations. These operations may be announced when authorized by the Chairman, may begin when authorized by the Chairman on or after September 23, 2013, and shall be authorized through the FOMC meeting that ends on January 29, 2014."
Staff Review of the Economic Situation
The information reviewed for the September 17-18 meeting suggested that economic activity continued to increase at a moderate rate. Private-sector employment rose further in July and August, but the unemployment rate was still elevated. Total consumer price inflation picked up in recent months but continued to be modest, and measures of longer-run inflation expectations remained stable.
Private nonfarm employment continued to expand in July and August, but at a somewhat slower pace than in the first half of the year, while total government employment edged down on balance. The unemployment rate declined further to 7.3 percent in August. The labor force participation rate also decreased, leaving the employment-to-population ratio essentially unchanged in recent months. Other indicators of labor market activity also were mixed. Measures of firms' hiring plans moved up, initial claims for unemployment insurance declined, and the share of workers employed part time for economic reasons decreased a little. However, household expectations of the labor market situation deteriorated somewhat, rates of job openings and gross private-sector hiring were little changed, on net, and the rate of long-duration unemployment rose slightly.
Manufacturing production increased in August after a decline in July, and the rate of manufacturing capacity utilization was unchanged, on balance, over those two months. Automakers' schedules indicated that the pace of motor vehicle assemblies would remain roughly flat in the coming months, but broader indicators of manufacturing production, such as the readings on new orders from the national and regional manufacturing surveys, pointed to moderate increases in factory output in the near term.
Real personal consumption expenditures (PCE) were flat in July. In August, nominal retail sales, excluding those at motor vehicle and parts outlets, edged up, while sales of light motor vehicles rose notably. Recent information on key factors that influence consumer spending were mixed: Households' net worth likely expanded further as home prices posted additional gains through July, but real disposable incomes increased only a little in July and consumer sentiment in the Thomson Reuters/University of Michigan Surveys of Consumers moved lower in August and early September.
Improvements in housing-sector activity appeared to slow, possibly reflecting the rise in mortgage rates since the spring. Starts and permits of new single-family homes moved down in July, but the level of permit issuance was still somewhat above that for starts and pointed to moderate increases in construction in subsequent months. In the multifamily sector, both starts and permits rose in July but construction remained around the same level as early in the year. Sales of existing homes increased, but new home sales declined.
Growth in real private expenditures for business equipment and intellectual property products appeared to be subdued going into the third quarter. Nominal shipments of nondefense capital goods excluding aircraft declined again in July. However, nominal new orders for these capital goods continued to be above the level of shipments, pointing to increases in shipments in subsequent months, and other forward-looking indicators, such as surveys of business conditions, were consistent with moderate gains in spending for business equipment in the near term. Nominal business expenditures for nonresidential construction increased in July but were still at a low level. Recent book-value data for inventory-sales ratios, along with readings on inventories from national and regional manufacturing surveys, did not point to significant inventory imbalances.
Reductions in real federal government purchases appeared to persist: Defense spending continued to decrease in July and August, while federal employment edged down further. Real state and local government purchases looked to be about flat--the payrolls of these governments expanded slightly, on balance, in July and August, and state and local construction expenditures seemed to be leveling off.
The U.S. international trade deficit narrowed substantially in June before widening in July to a level near its second-quarter average. Exports expanded in June, with particular strength in industrial supplies and capital goods, before stepping down somewhat in July. Imports fell in June but then largely recovered in July, driven by swings in imports of oil and consumer goods.
Total U.S. inflation, as measured by the PCE price index through July and by the consumer price index through August, was about 1-1/2 percent over the preceding 12-month period for each series. Consumer food prices only edged up in July and August, while energy prices were little changed, on net, over those two months, and retail gasoline prices moved down in the first half of September. Core consumer price inflation, which excludes food and energy, was modest in July and August. Both near-term and longer-term inflation expectations from the Michigan survey were little changed in August and early September.
Measures of labor compensation indicated that increases in nominal wages were still subdued. Both compensation per hour and unit labor costs in the nonfarm business sector rose modestly over the year ending in the second quarter, as there were only slight gains in productivity. In July and August, increases in average hourly earnings for all employees were fairly slow on balance.
Average foreign economic growth remained muted in the first half of the year, although there were some notable divergences across countries. Growth in real gross domestic product (GDP) picked up in the second quarter in the United Kingdom and remained strong in Japan, recent data suggested that the euro-area economy was coming out of recession, and economic indicators were positive for China and several other emerging market economies (EMEs) in Asia. However, real GDP fell in the second quarter in Mexico and decelerated notably in India. Foreign inflation was generally subdued. Monetary policy remained highly accommodative in the advanced economies, but some EME central banks moved toward tighter monetary policy in the face of capital outflows and depreciation pressures. An exception was the Bank of Mexico, which cut its policy rate in response to economic weakness.
Staff Review of the Financial Situation
Longer-term interest rates rose over the intermeeting period, while equity prices were fairly volatile but ended the period modestly higher. The move in interest rates appeared to be importantly influenced by shifting expectations about monetary policy.
The path of the federal funds rate implied by financial market quotes steepened notably during the period, in part reflecting some increase in uncertainty about the outlook for monetary policy as indicated by option-implied measures of uncertainty about the future path of the policy rate. In contrast to market-based quotes, the results from the Desk's September survey of primary dealers showed little change in the projected path of the policy rate relative to that in the July survey. However, the survey also suggested that primary dealers marked up somewhat the odds that the FOMC would begin to cut the pace of asset purchases at its September meeting, a result generally in line with other surveys of market participants.
Five- and 10-year Treasury yields increased about 25 basis points over the intermeeting period. Yields on corporate bonds, agency MBS, and Treasury inflation-protected securities rose about in line with those on nominal Treasury securities.
Conditions in short-term dollar funding markets were generally stable during the period since the July FOMC meeting. Responses to the September Senior Credit Officer Opinion Survey on Dealer Financing Terms suggested little change over the preceding three months in the credit terms applicable to most classes of counterparties covered by the survey. A moderate net fraction of respondents reported a decline in the use of financial leverage by hedge funds, and a more substantial net fraction reported a decrease in financial leverage used by real estate investment trusts. In response to special questions in the survey, dealers indicated that, during the period of heightened volatility beginning in May and extending into early July, liquidity and functioning had deteriorated in a number of fixed-income markets.
Stock prices for financial-sector firms underperformed the broad equity market somewhat over the intermeeting period. However, spreads on credit default swaps (CDS) for the largest bank holding companies remained stable at levels near the bottom of their range over the past few years.
Credit flows to nonfinancial businesses remained solid in the face of higher longer-term interest rates. Relative to the typical summer lull, gross issuance of corporate bonds and leveraged loans was robust in August; commercial and industrial (C&I) loans on banks' books continued to expand moderately, on average, in July and August. Commercial real estate (CRE) loans at banks accelerated over the summer, and issuance of commercial mortgage-backed securities remained strong despite slightly wider spreads on those securities.
Recent information about household credit was mixed. Mortgage rates increased further over the intermeeting period, and credit standards for mortgage loans remained tight. Nonetheless, applications for new mortgages declined only modestly, apparently supported by improvements in labor market conditions and some pent-up demand. Higher mortgage rates weighed more heavily on applications to refinance existing mortgages, which decreased significantly. The pace of home price appreciation moderated a bit in July, although it was still strong. In nonmortgage credit, automobile loans and student loans both continued to expand rapidly, while balances on revolving consumer credit stayed about flat. Issuance of consumer asset-backed securities remained robust in July and August.
In the municipal bond market, despite the ongoing bankruptcy proceedings for Detroit and greater scrutiny of Puerto Rico's fiscal problems, broader market sentiment was reportedly supported by the lessening in budget pressures for many other state and local governments. Gross issuance of long-term municipal bonds was solid in August, and yield ratios on general-obligation municipal bonds over comparable Treasury securities were about unchanged, on balance, over the intermeeting period.
Bank credit declined in July and August amid the general rise in longer-term interest rates. While banks' holdings of assets with longer duration, such as residential mortgages, decreased, growth in C&I, CRE, and automobile loans--which are more likely to have floating interest rates or relatively short maturities, and therefore less duration risk--tended to hold up in recent months.
M2 increased significantly in July and August, as the selloff in fixed-income markets that began in May, along with the associated outflows from bond funds, likely continued to support reallocations into liquid M2 assets. The monetary base continued to expand rapidly, primarily reflecting the rise in reserve balances resulting from the Federal Reserve's asset purchases.
Against a backdrop of higher interest rates in the advanced economies and slowing economic growth in the EMEs, several EME currencies came under downward pressure in August; yields and CDS premiums on EME sovereign debt increased, particularly for those economies experiencing sharp currency depreciations; and investors continued to decrease their holdings in EME mutual funds. In response, some EME authorities took actions to support their currencies, including tightening monetary policy, modifying capital controls, and purchasing their currencies in foreign exchange markets. On net over the period, the dollar ended little changed on a trade-weighted basis against a broad set of currencies, but it appreciated notably against the currencies of India, Indonesia, and Turkey. Equity prices in Germany increased substantially and sovereign yields in the United Kingdom and Germany continued to rise as data on economic activity in Europe generally improved over the period, while yield spreads of Spanish and Italian sovereign securities relative to German government debt declined a bit further.
The staff reported on potential risks to financial stability, including those highlighted by the rise in yields and volatility on longer-term fixed-income securities since the spring. The increase in yields appeared to reduce investors' appetite for taking duration risk, but if a significant volume of bond investors moved to sell at a future time, issues surrounding dealer capacity and willingness to make markets in volatile conditions could again amplify price movements. On balance, the vulnerability of the financial system appeared moderate, as loss-absorbing capital had increased and the reliance on short-term funding and the exposure of financial institutions to nonfinancial credit risk had decreased. Nonetheless, a number of potential shocks could prove challenging to markets and institutions, including a failure to raise the U.S. federal debt limit, financial instability in EMEs, and geopolitical events in the Middle East.
Staff Economic Outlook
In the economic forecast prepared by the staff for the September FOMC meeting, the projection for real GDP growth in the second half of this year was revised down a little from the one prepared for the previous meeting. The staff's forecast for real GDP over the medium term also was revised down somewhat, reflecting higher projected paths for both longer-term interest rates and the foreign exchange value of the dollar, along with slightly lower projected paths for equity and home prices. The staff still anticipated that the pace of expansion in real GDP this year would only moderately exceed the growth rate of potential output but continued to forecast that real GDP would accelerate in 2014 and 2015, supported by an eventual easing in the effects of fiscal policy restraint on economic growth, increases in consumer and business sentiment, further improvements in credit availability and financial conditions, and accommodative monetary policy. In 2016, real GDP growth was projected to begin to edge down toward the growth rate of potential output. Over the projection period, the expansion in economic activity was anticipated to slowly reduce the slack in labor and product markets, and the unemployment rate was expected to decline gradually.
The staff's forecast for inflation was little changed from the projection prepared for the previous FOMC meeting. In the near term, the staff continued to project that inflation would be modest in the second half of this year but higher than the readings posted in the first half. Over the medium term, with longer-run inflation expectations assumed to remain stable, changes in commodity and import prices expected to be modest, and resource slack persisting over most of the projection period, inflation was forecast to be subdued through 2016.
The staff viewed the uncertainty around the forecast for economic activity as similar to its normal level over the past 20 years. However, the risks were viewed as skewed to the downside, reflecting concerns about the economic effects of the recent tightening in U.S. financial market conditions, the resolution of federal fiscal policy issues in the coming months, the economic and financial stresses in the EMEs, and the ability of the U.S. economy to weather potential future adverse shocks. The staff did not see the uncertainty around its outlook for inflation as unusually high, and the risks were viewed as balanced.
Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, meeting participants--5 members of the Board of Governors and the presidents of the 12 Federal Reserve Banks, all of whom participated in the deliberations--submitted their assessments of real output growth, the unemployment rate, inflation, and the target federal funds rate for each year from 2013 through 2016 and over the longer run, under each participant's judgment of appropriate monetary policy. The longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These economic projections and policy assessments are described in the Summary of Economic Projections (SEP), which is attached as an addendum to these minutes.
In their discussion of the economic situation and outlook, meeting participants regarded the information received during the intermeeting period as indicating that economic activity had continued to expand at a moderate pace, albeit somewhat more slowly than earlier anticipated, and they generally indicated that the broad contours of the outlook further out had not changed materially since their July meeting. Participants continued to project the rate of growth of economic activity to strengthen over coming years, supported by highly accommodative monetary policy and the gradual abatement of the headwinds that have been slowing the pace of economic recovery, such as household-sector deleveraging, tight credit conditions for some households and businesses, and fiscal restraint. Accordingly, the unemployment rate was projected to continue to decline over time toward levels judged to be consistent with the Committee's dual mandate. While downside risks to the outlook for the economy and the labor market were generally viewed as having diminished, on balance, since last fall, a number of significant risks remained, including those related to the potential economic effects of the sizable increases in interest rates since the spring, ongoing fiscal drag, and the possible fallout from near-term fiscal debates. Inflation continued to run below the Committee's longer-run objective, apart from fluctuations that largely reflected changes in energy prices, and participants generally saw it as moving back gradually to 2 percent in the medium term.
In the household sector, consumer spending continued to advance, but incoming data on retail sales were somewhat weaker than expected. Auto sales, however, remained strong, supported in part by steady interest rates on auto loans, which, unlike mortgage rates, did not rise substantially in recent months. Despite the continued improvement in household balance sheets, a number of factors were mentioned as possible restraints on spending, including declines in consumer confidence, concerns about job security and availability, and the lingering effects of this year's payroll tax increase. While the housing sector continued to strengthen, supported by improving fundamentals and gains in house prices, the increases in mortgage rates since the spring were seen as a potential risk. The extent to which the higher mortgage rates had materially affected that sector remained unclear, with the exception of the sharp decline in refinancing activity. But it was noted that recent softness in housing starts and home sales might well reflect some restraint from those higher rates.
Business contacts in selected parts of the country were reported to be cautiously optimistic, consistent with encouraging responses to a number of business surveys. Nonetheless, uncertainties regarding the outlook for the economy and fiscal and regulatory policies were reportedly continuing to weigh on business decisionmaking, with firms focused on improving their balance sheets and enhancing productivity and still quite cautious about expanding their workforces. Reports on manufacturing activity pointed to some rebound, with production related to autos the most notable area of strength, and activity in the energy sector continued to expand at a steady pace. In the agricultural sector, farmland values increased further, even though farm income was reported to be declining. Some business contacts indicated that wage and price pressures were subdued; however, in one District, contacts pointed to rising wage pressures and labor shortages.
Participants discussed the extent to which the ongoing tightening in fiscal policy was likely to further restrain economic activity in the second half of this year, with one participant noting that the effects of the federal sequestration appeared to be less pronounced than previously anticipated. However, a number of others pointed to heightened uncertainty about the course of federal fiscal policy over coming months, including the potential for a government shutdown or strains related to the debt ceiling debate, which posed downside risks to the economic outlook.
In discussing labor market developments, a number of participants indicated that gains in payrolls in the July and August employment reports were disappointing, but one participant also noted that seasonal adjustment tended to be challenging during the summer months. Taking a range of data into account, participants generally agreed that labor market conditions had improved meaningfully since the start of the asset purchase program in September 2012. Participants discussed how to reconcile the notable decline in the unemployment rate over the past year with the only moderate pace of expansion in real GDP. One possible explanation was that, to the extent the decline in the unemployment rate was primarily driven by a fall in the labor force participation rate and low productivity growth, such a decline might overstate the degree of improvement in broader labor market conditions. Indeed, the continued low readings on the employment-to-population ratio were supportive of this explanation, suggesting that overall labor market conditions had not improved as much as the unemployment rate would indicate. An alternative explanation for the significant improvement in the labor market performance despite the moderate growth in real GDP over the past year was that growth had been understated somewhat; notably, some research suggested that real gross domestic income, which expanded at a somewhat faster pace than real GDP, may provide better information about overall economic activity. Despite recent declines in the unemployment rate, one participant noted the risk that the longer the duration of elevated unemployment, the more likely it was that the labor market and economy would experience some lasting structural damage. While judging the extent of structural damage continued to be quite difficult, one piece of evidence consistent with this view was the apparent decline in the job-finding rate of the long-term unemployed.
Despite the reversal of some transitory factors that had contributed to the earlier softness in inflation, recent readings continued to be below the Committee's longer-run objective of 2 percent. However, participants generally expected inflation to pick up over the coming year as the pace of economic growth accelerated and slack in resource utilization diminished further, although to a rate still below the Committee's longer-run objective.
Participants discussed financial market developments, including their views on the extent to which the rise in longer-term interest rates since May reflected growing confidence about the economic outlook or a perception by financial markets that monetary policy would be less accommodative going forward than had been previously anticipated. Several participants judged that overall financial conditions had tightened notably over the past few months, as seen most importantly in the rise in mortgage rates. While acknowledging that it was too early to assess the effects of such an increase, they expressed concerns that tighter financial conditions might weigh on the recovery in the housing sector. A few others observed that the increase in longer-term yields in recent months had not seemed to leave a meaningful imprint on other asset prices, suggesting that the effects on the economy were likely to be relatively muted. While recognizing the potentially significant impact of higher mortgage rates on the housing market, these same participants pointed to higher equity prices, the further gradual loosening of terms in bank lending, and the continued availability of credit at inexpensive terms in corporate debt markets as signs that financial conditions more generally had not tightened materially. In any case, however, the assessment of the adverse effects of the increase in longer-term rates on financial conditions and ultimately on economic activity would depend importantly upon the extent to which rates stabilized at current levels or instead continued to rise.
Participants also touched on the implications for financial stability resulting from the increase in interest rates, focusing on the effects on securities held by banking and other nonbank institutions, the unwinding of leveraged trades, and the liquidity and functioning of a number of fixed-income markets. One participant noted that, notwithstanding the recent rise in interest rates, net interest margins remained under pressure at community and regional banks, and as a result many of these banks continued to add to risk exposures. Another participant raised the possibility that financial stability risks might arise from recent adverse developments in municipal bond markets. It was also noted that financial conditions in a number of EMEs had tightened as a result of some depreciation of their currencies, an increase in yields and borrowing costs, and some capital outflows as measured by withdrawals from bond funds. More broadly, a couple of participants noted the complexities related to the interaction between the stance of monetary policy and the vulnerabilities in the financial system.
In their discussion of the path for monetary policy, participants debated the advantages and disadvantages of reducing the pace of the Committee's asset purchases at this meeting, focusing importantly on whether the conditions presented to the public in June for reducing the pace of asset purchases had yet been met. In general, those who preferred to maintain for now the pace of purchases viewed incoming data as having been on the disappointing side and, despite clear improvements in labor market conditions since the purchase program's inception in September 2012, were not yet adequately confident of continued progress. Many of these participants had revised down their forecasts for economic activity or pointed to near-term risks and uncertainties. For example, questions were raised about the effects on the housing sector and on the broader economy of the tightening in financial conditions in recent months, as well as about the considerable risks surrounding fiscal policy. Moreover, the announcement of a reduction in asset purchases at this meeting might trigger an additional, unwarranted tightening of financial conditions, perhaps because markets would read such an announcement as signaling the Committee's willingness, notwithstanding mixed recent data, to take an initial step toward exit from its highly accommodative policy. As a result of such concerns, a number of participants thought that risk-management considerations called for a cautious approach and that, in light of the ambiguous cast of recent readings on the economy, it would be prudent to await further evidence of progress before reducing the pace of asset purchases. Consistent with the framework discussed by the Chairman during the June press conference, asset purchases were contingent on the Committee's ongoing assessment of the economic outlook and were not on a preset course; this approach implied a need to adapt and to adjust asset purchases in response to changes in economic conditions in order to preserve the Committee's credibility. With many outside observers expecting a decision to reduce purchases at this meeting, some participants emphasized a need to clearly communicate the rationale behind any decision not to do so, in order to avoid conveying a message of pessimism regarding the economic outlook or to reinforce the distinction between decisions concerning the pace of purchases and those concerning the federal funds rate. One participant suggested that postponing the reduction in the pace of asset purchases would also allow time for the Committee to further discuss and to implement a clarification or strengthening of its forward guidance for the federal funds rate, which could temper the risk that a future downward adjustment in asset purchases would cause an undesirable tightening of financial conditions.
The participants who spoke in favor of moderating the pace of securities purchases at this meeting also cited the incoming data, but viewed those data as broadly consistent with the Committee's outlook for the labor market at the time of the June FOMC meeting when the contingent expectation that the pace of asset purchases would be reduced later in the year was first presented to the public. Moreover, they highlighted what they saw as meaningful cumulative progress in labor market conditions since the purchase program began. Those participants generally were satisfied that investors had come to understand the data-dependent nature of the Committee's thinking about asset purchases, and, because they judged that the conditions laid out in June had been met, they believed that the credibility of the Committee would best be served by announcing a downward adjustment in asset purchases at this meeting. With the markets apparently viewing a cut in purchases as the most likely outcome, it was noted that the postponement of such an announcement to later in the year or beyond could have significant implications for the effectiveness of Committee communications. In particular, concerns were expressed that a delay could potentially undermine the credibility or predictability of monetary policy by, for example, increasing uncertainty about the Committee's reaction function and about its commitment to the forward guidance for the federal funds rate, with the result of an increase in volatility in financial markets. Moreover, maintaining the pace of purchases could be perceived as a sign that the FOMC had turned more pessimistic about the economic outlook. Finally, it was noted that if the Committee did not pare back its purchases in these circumstances, it might be difficult to explain a cut in coming months, absent clearly stronger data on the economy and a swift resolution of federal fiscal uncertainties. Most of the participants leaning toward a downward adjustment in the pace of asset purchases also indicated that they favored a relatively small reduction to signal the Committee's intention to proceed cautiously.
With regard to adjustments in the pace of asset purchases, whether at this or a future meeting, a few participants expressed a preference for not cutting MBS purchases but reducing purchases only of Treasury securities initially, with the intent of continuing to support the recovery in the housing sector. However, the appeal of including both types of securities in any reduction was also mentioned. In addition, in an effort to reduce uncertainty about how the Committee might adjust its purchases in response to economic developments and to alleviate some of the related communications issues, one participant suggested an approach that would mechanically link the reduction in asset purchases to numerical values for the unemployment rate, with the goal of ending the program when the unemployment rate reached a stated level.
Participants also discussed the potential for clarifying or strengthening the Committee's forward guidance for the federal funds rate. To the extent that financial markets have at times interpreted the Committee's communications regarding the asset purchase program as also signaling information about the federal funds rate target, participants thought it might be important to reiterate the distinction between the two, and a clarification or strengthening of the forward guidance might help to reinforce this message. In part toward this end, participants mentioned several possible steps that might be considered, including stating that the Committee would not raise its target for the federal funds rate if the inflation rate was expected to run below a given level or providing additional information on the Committee's intentions regarding the federal funds rate after the 6-1/2 percent unemployment threshold was reached. One participant stressed that the Committee could use the full range of its tools, including forward guidance, to further improve the alignment of the medium-term outlook for employment and inflation with its longer-term goals. In light of the importance of credibility for the effectiveness of the forward guidance for the federal funds rate, participants noted the possible implications of uncertainties related to the Federal Reserve leadership transition in considering the appropriate timing of any enhancements to the guidance.
In discussing the projections for the target federal funds rate at the end of 2016 as reported in the SEP, some participants highlighted the importance of communicating to the public the reasons why the policy rates that were projected by most, but not all, participants appeared to remain at low levels even as the unemployment rate and inflation by then were expected to be close to their longer-run values. In particular, if economic headwinds died away only slowly, as a number of participants expected, the achievement of the Committee's employment and price stability objectives would likely require keeping the federal funds rate below its longer-run equilibrium value for some time even as economic conditions improved. In light of the potential difficulties in succinctly conveying this information in the Committee's policy statement, the Chairman's postmeeting press conference and the minutes were mentioned as more appropriate vehicles for providing this information. A couple of participants also remarked that they viewed their projections of a low federal funds rate in 2016 as reflecting a commitment to support the economy by maintaining a more accommodative policy for longer.
Committee Policy Action
Committee members saw the information received over the intermeeting period as suggesting that economic activity was expanding at a moderate pace. Some indicators of labor market conditions showed further improvement in recent months, but the unemployment rate remained elevated. Household spending and business fixed investment advanced, and the housing sector was strengthening, but mortgage rates had risen further and fiscal policy was restraining growth. The Committee expected that, with appropriate policy accommodation, economic growth would pick up from its recent pace, resulting in a gradual decline in the unemployment rate toward levels consistent with the Committee's dual mandate. Members generally continued to see the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but indicated that the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market. Apart from fluctuations due to changes in energy prices, inflation was running below the Committee's longer-run objective, but longer-term inflation expectations were stable, and the Committee anticipated that inflation would move back toward its objective over the medium term. Members recognized, however, that inflation persistently below the Committee's 2 percent objective could pose risks to economic performance.
In their discussion of monetary policy for the period ahead, members reviewed the degree of improvement in economic activity and labor market conditions since the asset purchase program began a year ago and judged that, taking into account the extent of federal fiscal retrenchment, the improvement was consistent with growing underlying strength in the broader economy. However, all members but one judged that it would be appropriate for the Committee to await more evidence that progress would be sustained before adjusting the pace of asset purchases. In the view of one member, the progress to date in labor markets and in broader economic conditions amply supported a reduction in purchases. During the exchange of views on whether to trim the flow of asset purchases at this meeting, a number of members emphasized the contingent and data-dependent nature of the Committee's purchase program. In light of the mixed data recently, including inflation readings that remained below the Committee's longer-run objective, and the concerns over near-term fiscal uncertainties, some members indicated that they preferred to await more evidence that their expectation of continuing improvement would be realized. But with financial markets appearing to expect a reduction in purchases at this meeting, concerns were raised about the effectiveness of FOMC communications if the Committee did not take that step. For several members, the various considerations made the decision to maintain an unchanged pace of asset purchases at this meeting a relatively close call. At the conclusion of the discussion, the Committee decided to continue adding policy accommodation by purchasing additional MBS at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month and to maintain its existing reinvestment policies. In addition, the Committee reaffirmed its intention to keep the target federal funds rate at 0 to 1/4 percent and retained its forward guidance that it anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.
Members also discussed the wording of the policy statement to be issued following the meeting. In addition to updating its description of the state of the economy, the Committee decided to underline its concern about the tightening of financial conditions observed in recent months. It also acknowledged the improvement in economic activity and labor market conditions since its asset purchase program began, while emphasizing that it was prepared to be patient and await more evidence that progress would be sustained before adjusting downward the pace of purchases. The Committee also adopted language to the effect that, in judging when to moderate the pace of asset purchases at its coming meetings, it would assess whether incoming information continued to support its expectation of ongoing improvement in labor market conditions and of inflation moving back toward its longer-run objective. Finally, the Committee reiterated the contingent nature of the outlook for asset purchases, indicating that asset purchases were not on a preset course and that the Committee's decisions about their pace would continue to depend on its economic outlook as well as its assessment of the likely efficacy and costs of such purchases.
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:
"Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. The Desk is directed to continue purchasing longer-term Treasury securities at a pace of about $45 billion per month and to continue purchasing agency mortgage-backed securities at a pace of about $40 billion per month. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."
The vote encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in July suggests that economic activity has been expanding at a moderate pace. Some indicators of labor market conditions have shown further improvement in recent months, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and fiscal policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.
Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. Asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's economic outlook as well as its assessment of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent."
Voting for this action: Ben Bernanke, William C. Dudley, James Bullard, Charles L. Evans, Jerome H. Powell, Eric Rosengren, Jeremy C. Stein, Daniel K. Tarullo, and Janet L. Yellen.
Voting against this action: Esther L. George.
Ms. George dissented because she saw recent information on the economy as sufficiently positive to warrant a reduction in the pace of the Committee's asset purchases at this meeting. In her view, waiting for more evidence of progress discounted the cumulative improvement in the economy as well as the potential costs of ongoing purchases. Accordingly, not only would a reduction be appropriate in light of the ongoing improvement in labor market conditions, but it also would support the credibility and predictability of monetary policy because it would be seen as following through on the Committee's earlier communications about the outlook for the asset purchase program.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, October 29-30, 2013. The meeting adjourned at 11:15 a.m. on September 18, 2013.
Notation Vote
By notation vote completed on August 20, 2013, the Committee unanimously approved the minutes of the FOMC meeting held on July 30-31, 2013.
_____________________________
William B. English
Secretary
1. Attended introductory remarks at Tuesdayâs session only. Return to text |
2013-07-31T00:00:00 | 2013-08-21 | Minute | Minutes of the Federal Open Market Committee
July 30-31, 2013
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, July 30, 2013, at 2:00 p.m. and continued on Wednesday, July 31, 2013, at 9:00 a.m.
PRESENT:
Ben Bernanke, Chairman
William C. Dudley, Vice Chairman
James Bullard
Elizabeth Duke
Charles L. Evans
Esther L. George
Jerome H. Powell
Sarah Bloom Raskin
Eric Rosengren
Jeremy C. Stein
Daniel K. Tarullo
Janet L. Yellen
Christine Cumming, Richard W. Fisher, Narayana Kocherlakota, Sandra Pianalto, and Charles I. Plosser, Alternate Members of the Federal Open Market Committee
Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively
William B. English, Secretary and Economist
Deborah J. Danker, Deputy Secretary
Matthew M. Luecke, Assistant Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Thomas C. Baxter, Deputy General Counsel
Steven B. Kamin, Economist
David W. Wilcox, Economist
Thomas A. Connors, Troy Davig, Michael P. Leahy, Stephen A. Meyer, Daniel G. Sullivan, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors
James A. Clouse and William Nelson, Deputy Directors, Division of Monetary Affairs, Board of Governors; Maryann F. Hunter, Deputy Director, Division of Banking Supervision and Regulation, Board of Governors
Jon W. Faust, Special Adviser to the Board, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Joyce K. Zickler, Senior Adviser, Division of Monetary Affairs, Board of Governors
Michael T. Kiley, Thomas Laubach, and David E. Lebow, Associate Directors, Division of Research and Statistics, Board of Governors
Joshua Gallin, Deputy Associate Director, Division of Research and Statistics, Board of Governors
Edward Nelson, Assistant Director, Division of Monetary Affairs, Board of Governors; Stacey Tevlin, Assistant Director, Division of Research and Statistics, Board of Governors
Laura Lipscomb, Section Chief, Division of Monetary Affairs, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Marie Gooding, First Vice President, Federal Reserve Bank of Atlanta
David Altig, Jeff Fuhrer, and Loretta J. Mester, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Boston, and Philadelphia, respectively
Lorie K. Logan, Senior Vice President, Federal Reserve Bank of New York
Todd E. Clark, William Gavin, Evan F. Koenig, Paolo A. Pesenti, Julie Ann Remache,1 and Mark Spiegel, Vice Presidents, Federal Reserve Banks of Cleveland, St. Louis, Dallas, New York, New York, and San Francisco, respectively
Robert L. Hetzel and Samuel Schulhofer-Wohl, Senior Economists, Federal Reserve Banks of Richmond and Minneapolis, respectively
Developments in Financial Markets and the Federal Reserve's Balance Sheet
The Manager of the System Open Market Account reported on developments in domestic and foreign financial markets as well as the System open market operations during the period since the Federal Open Market Committee (FOMC) met on June 18-19, 2013. By unanimous vote, the Committee ratified the Open Market Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
In support of the Committee's longer-run planning for improvements in the implementation of monetary policy, the Desk report also included a briefing on the potential for establishing a fixed-rate, full-allotment overnight reverse repurchase agreement facility as an additional tool for managing money market interest rates. The presentation suggested that such a facility would allow the Committee to offer an overnight, risk-free instrument directly to a relatively wide range of market participants, perhaps complementing the payment of interest on excess reserves held by banks and thereby improving the Committee's ability to keep short-term market rates at levels that it deems appropriate to achieve its macroeconomic objectives. The staff also identified several key issues that would require consideration in the design of such a facility, including the choice of the appropriate facility interest rate and possible additions to the range of eligible counterparties. In general, meeting participants indicated that they thought such a facility could prove helpful; they asked the staff to undertake further work to examine how it might operate and how it might affect short-term funding markets. A number of them emphasized that their interest in having the staff conduct additional research reflected an ongoing effort to improve the technical execution of policy and did not signal any change in the Committee's views about policy going forward.
Staff Review of the Economic Situation
The information reviewed for the July 30-31 meeting indicated that economic activity expanded at a modest pace in the first half of the year. Private-sector employment increased further in June, but the unemployment rate was still elevated. Consumer price inflation slowed markedly in the second quarter, likely restrained in part by some transitory factors, but measures of longer-term inflation expectations remained stable. The Bureau of Economic Analysis (BEA) released its advance estimate for second-quarter real gross domestic product (GDP), along with revised data for earlier periods, during the second day of the FOMC meeting. The staff's assessment of economic activity and inflation in the first half of 2013, based on information available before the meeting began, was broadly consistent with the new information from the BEA.
Private nonfarm employment rose at a solid pace in June, as in recent months, while total government employment decreased further. The unemployment rate was 7.6 percent in June, little changed from its level in the prior few months. The labor force participation rate rose slightly, as did the employment-to-population ratio. The rate of long-duration unemployment decreased somewhat, but the share of workers employed part time for economic reasons moved up; both of these measures remained relatively high. Forward-looking indicators of labor market activity in the near term were mixed: Although household expectations for the labor market situation generally improved and firms' hiring plans moved up, initial claims for unemployment insurance were essentially flat over the intermeeting period, and measures of job openings and the rate of gross private-sector hiring were little changed.
Manufacturing production expanded in June, and the rate of manufacturing capacity utilization edged up. Auto production and sales were near pre-recession levels, and automakers' schedules indicated that the rate of motor vehicle assemblies would continue at a similar pace in the coming months. Broader indicators of manufacturing production, such as the readings on new orders from the national and regional manufacturing surveys, were generally consistent with further modest gains in factory output in the near term.
Real personal consumption expenditures (PCE) increased more slowly in the second quarter than in the first. However, some key factors that tend to support household spending were more positive in recent months; in particular, gains in equity values and home prices boosted household net worth, and consumer sentiment in the Thomson Reuters/University of Michigan Surveys of Consumers rose in July to its highest level since the onset of the recession.
Conditions in the housing sector generally improved further, as real expenditures for residential investment continued to expand briskly in the second quarter. However, construction activity was still at a low level, with demand restrained in part by tight credit standards for mortgage loans. Starts of new single-family homes were essentially flat in June, but the level of permit issuance was consistent with gains in construction in subsequent months. In the multifamily sector, where activity is more variable, starts and permits both decreased. Home prices continued to rise strongly through May, and sales of both new and existing homes increased, on balance, in May and June. The recent rise in mortgage rates did not yet appear to have had an adverse effect on housing activity.
Growth in real private investment in equipment and intellectual property products was greater in the second quarter than in the first quarter.2 Nominal new orders for nondefense capital goods excluding aircraft continued to trend up in May and June and were running above the level of shipments. Other recent forward-looking indicators, such as surveys of business conditions and capital spending plans, were mixed and pointed to modest gains in business equipment spending in the near term. Real business expenditures for nonresidential construction increased in the second quarter after falling in the first quarter. Business inventories in most industries appeared to be broadly aligned with sales in recent months.
Real federal government purchases contracted less in the second quarter than in the first quarter as reductions in defense spending slowed. Real state and local government purchases were little changed in the second quarter; the payrolls of these governments expanded somewhat, but state and local construction expenditures continued to decrease.
The U.S. international trade deficit widened in May as exports fell slightly and imports rose. The decline in exports was led by a sizable drop in consumer goods, while most other categories of exports showed modest gains. Imports increased in a wide range of categories, with particular strength in oil, consumer goods, and automotive products.
Overall U.S. consumer prices, as measured by the PCE price index, were unchanged from the first quarter to the second and were about 1 percent higher than a year earlier. Consumer energy prices declined significantly in the second quarter, although retail gasoline prices, measured on a seasonally adjusted basis, moved up in June and July. The PCE price index for items excluding food and energy rose at a subdued rate in the second quarter and was around 1-1/4 percent higher than a year earlier. Near-term inflation expectations from the Michigan survey were little changed in June and July, as were longer-term inflation expectations, which remained within the narrow range seen in recent years. Measures of labor compensation indicated that gains in nominal wages and employee benefits remained modest.
Foreign economic growth appeared to remain subdued in comparison with longer-run trends. Nonetheless, there were some signs of improvement in the advanced foreign economies. Production and business confidence turned up in Japan, real GDP growth picked up to a moderate pace in the second quarter in the United Kingdom, and recent indicators suggested that the euro-area recession might be nearing an end. In contrast, Chinese real GDP growth moderated in the first half of this year compared with 2012, and indicators for other emerging market economies (EMEs) also pointed to less-robust growth. Foreign inflation generally remained well contained. Monetary policy stayed highly accommodative in the advanced foreign economies, but some EME central banks tightened policy in reaction to capital outflows and to concerns about inflationary pressures from currency depreciation.
Staff Review of the Financial Situation
Financial markets were volatile at times during the intermeeting period as investors reacted to Federal Reserve communications and to incoming economic data and as market dynamics appeared to amplify some asset price moves. Broad equity price indexes ended the period higher, and longer-term interest rates rose significantly. Sizable increases in rates occurred following the June FOMC meeting, as investors reportedly saw Committee communications as suggesting a less accommodative stance of monetary policy than had been expected going forward; however, a portion of the increases was reversed as subsequent policy communications lowered these concerns. U.S. economic data, particularly the June employment report, also contributed to the rise in yields over the period.
On balance, yields on intermediate- and longer-term Treasury securities rose about 30 to 45 basis points since the June FOMC meeting, with staff models attributing most of the increase to a rise in term premiums and the remainder to an upward revision in the expected path of short-term rates. The federal funds rate path implied by financial market quotes steepened slightly, on net, but the results from the Desk's July survey of primary dealers showed little change in dealers' views of the most likely timing of the first increase in the federal funds rate target. Market-based measures of inflation compensation were about unchanged.
Over the period, rates on primary mortgages and yields on agency mortgage-backed securities (MBS) rose about in line with the 10-year Treasury yield. The option-adjusted spread for production-coupon MBS widened somewhat, possibly reflecting a downward revision in investors' expectations for Federal Reserve MBS purchases, an increase in uncertainty about longer-term interest rates, and convexity-related MBS selling.
Spreads between yields on 10-year nonfinancial corporate bonds and yields on Treasury securities narrowed somewhat on net. Early in the period, yields on corporate bonds increased, and bond mutual funds and bond exchange-traded funds experienced large net redemptions in June; the rate of redemptions then slowed in July.
Market sentiment toward large domestic banking organizations appeared to improve somewhat over the intermeeting period, as the largest banks reported second-quarter earnings that were above analysts' expectations. Stock prices of large domestic banks outperformed broader equity indexes, and credit default swap spreads for the largest bank holding companies moved about in line with trends in broad credit indexes.
Municipal bond yields rose sharply over the intermeeting period, increasing somewhat more than yields on Treasury securities. In June, gross issuance of long-term municipal bonds remained solid and was split roughly evenly between refunding and new-capital issuance. The City of Detroit's bankruptcy filing reportedly had only a limited effect on the market for municipal securities as it had been widely anticipated by market participants.
Credit flows to nonfinancial businesses showed mixed changes. Reflecting the reduced incentive to refinance as longer-term interest rates rose, the pace of gross issuance of investment- and speculative-grade corporate bonds dropped in June and July, compared with the elevated pace earlier this year. In contrast, gross issuance of equity by nonfinancial firms maintained its recent strength in June. Leveraged loan issuance also continued to be strong amid demand for floating-rate instruments by investors. Financing conditions for commercial real estate continued to recover slowly. In response to the July Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), banks generally indicated that they had eased standards on both commercial and industrial (C&I) and commercial real estate loans over the past three months. For C&I loans, standards were currently reported to be somewhat easy compared with longer-term norms, while for commercial real estate loans, standards remained somewhat tighter than longer-term norms. Banks reported somewhat stronger demand for most types of loans.
Financing conditions in the household sector improved further in recent months. Mortgage purchase applications declined modestly through July even as refinancing applications fell off sharply with the rise in mortgage rates. The outstanding amounts of student and auto loans continued to expand at a robust pace in May. Credit card debt remained about flat on a year-over-year basis. In the July SLOOS, banks reported that they had eased standards on most categories of loans to households in the second quarter, but that standards on all types of mortgages, and especially on subprime mortgage loans and home equity lines of credit, remained tight when judged against longer-run norms.
Increases in total bank credit slowed in the second quarter, as the book value of securities holdings fell slightly and C&I loan balances at large banks increased only modestly in April and May. M2 grew at an annual rate of about 7 percent in June and July, supported by flows into liquid deposits and retail money market funds. Both of these components of M2 may have been boosted recently by the sizable redemptions from bond mutual funds. The monetary base continued to expand rapidly in June and July, driven mainly by the increase in reserve balances resulting from the Federal Reserve's asset purchases.
Ten-year sovereign yields in the United Kingdom and Germany rose with U.S. yields early in the intermeeting period but fell back somewhat after statements by the European Central Bank and the Bank of England were both interpreted by market participants as signaling that their policy rates would be kept low for a considerable time. On net, the U.K. 10-year sovereign yield increased, though by less than the comparable yield in the United States, while the yield on German bunds was little changed. Peripheral euro-area sovereign spreads over German bunds were also little changed on net. Japanese government bond yields were relatively stable over the period, after experiencing substantial volatility in May. The staff's broad nominal dollar index moved up as the dollar appreciated against the currencies of the advanced foreign economies, consistent with the larger increase in U.S. interest rates. The dollar was mixed against the EME currencies. Foreign equity prices generally increased, although equity prices in China declined amid investor concerns regarding further signs that the economy was slowing and over volatility in Chinese interbank funding markets. Outflows from EME equity and bond funds, which had been particularly rapid in June, moderated in July.
Staff Economic Outlook
The data received since the forecast was prepared for the previous FOMC meeting suggested that real GDP growth was weaker, on net, in the first half of the year than had been anticipated.3 Nevertheless, the staff still expected that real GDP would accelerate in the second half of the year. Part of this projected increase in the rate of real GDP growth reflected the staff's expectation that the drag on economic growth from fiscal policy would be smaller in the second half as the pace of reductions in federal government purchases slowed and as the restraint on growth in consumer spending stemming from the higher taxes put in place at the beginning of the year diminished. For the year as a whole, the staff anticipated that the rate of growth of real GDP would only slightly exceed that of potential output. The staff's projection for real GDP growth over the medium term was essentially unrevised, as higher equity prices were seen as offsetting the restrictive effects of the increase in longer-term interest rates. The staff continued to forecast that the rate of real GDP growth would strengthen in 2014 and 2015, supported by a further easing in the effects of fiscal policy restraint on economic growth, increases in consumer and business confidence, additional improvements in credit availability, and accommodative monetary policy. The expansion in economic activity was anticipated to lead to a slow reduction in the slack in labor and product markets over the projection period, and the unemployment rate was expected to decline gradually.
The staff's forecast for inflation was little changed from the projection prepared for the previous FOMC meeting. The staff continued to judge that much of the recent softness in consumer price inflation would be transitory and that inflation would pick up somewhat in the second half of this year. With longer-run inflation expectations assumed to remain stable, changes in commodity and import prices expected to be modest, and significant resource slack persisting over the forecast period, inflation was forecast to be subdued through 2015.
The staff continued to see numerous risks around the forecast. Among the downside risks for economic activity were the uncertain effects and future course of fiscal policy, the possibility of adverse developments in foreign economies, and concerns about the ability of the U.S. economy to weather potential future adverse shocks. The most salient risk for the inflation outlook was that the recent softness in inflation would not abate as anticipated.
Participants' Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation, meeting participants noted that incoming information on economic activity was mixed. Household spending and business fixed investment continued to advance, and the housing sector was strengthening. Private domestic final demand continued to increase in the face of tighter federal fiscal policy this year, but several participants pointed to evidence suggesting that fiscal policy had restrained spending in the first half of the year more than they previously thought. Perhaps partly for that reason, a number of participants indicated that growth in economic activity during the first half of this year was somewhat below their earlier expectations. In addition, subpar economic activity abroad was a negative factor for export growth. Conditions in the labor market improved further as private payrolls rose at a solid pace in June, but the unemployment rate remained elevated. Inflation continued to run below the Committee's longer-run objective.
Participants generally continued to anticipate that the growth of real GDP would pick up somewhat in the second half of 2013 and strengthen further thereafter. Factors cited as likely to support a pickup in economic activity included highly accommodative monetary policy, improving credit availability, receding effects of fiscal restraint, continued strength in housing and auto sales, and improvements in household and business balance sheets. A number of participants indicated, however, that they were somewhat less confident about a near-term pickup in economic growth than they had been in June; factors cited in this regard included recent increases in mortgage rates, higher oil prices, slow growth in key U.S. export markets, and the possibility that fiscal restraint might not lessen.
Consumer spending continued to advance, but spending on items other than motor vehicles was relatively soft. Recent high readings on consumer confidence and boosts to household wealth from increased equity and real estate prices suggested that consumer spending would gather momentum in the second half of the year. However, a few participants expressed concern that higher household wealth might not translate into greater consumer spending, cautioning that household income growth remained slow, that households might not treat the additions to wealth arising from recent equity price increases as lasting, or that households' scope to extract housing equity for the purpose of increasing their expenditures was less than in the past.
The housing sector continued to pick up, as indicated by increases in house prices, low inventories of homes for sale, and strong demand for construction. While recent mortgage rate increases might serve to restrain housing activity, several participants expressed confidence that the housing recovery would be resilient in the face of the higher rates, variously citing pent-up housing demand, banks' increasing willingness to make mortgage loans, strong consumer confidence, still-low real interest rates, and expectations of continuing rises in house prices. Nonetheless, refinancing activity was down sharply, and the incoming data would need to be watched carefully for signs of a greater-than-anticipated effect of higher mortgage rates on housing activity more broadly.
In the business sector, the outlook still appeared to be mixed. Manufacturing activity was reported to have picked up in a number of Districts, and activity in the energy sector remained at a high level. Although a step-up in business investment was likely to be a necessary element of the projected pickup in economic growth, reports from businesses ranged from those contacts who expressed heightened optimism to those who suggested that little acceleration was likely in the second half of the year.
Participants reported further signs that the tightening in federal fiscal policy restrained economic activity in the first half of the year: Cuts in government purchases and grants reportedly had been a factor contributing to slower growth in sales and equipment orders in some parts of the country, and consumer spending seemed to have been held back by tax increases. Moreover, uncertainty about the effects of the federal spending sequestration and related furloughs clouded the outlook. It was noted, however, that fiscal restriction by state and local governments seemed to be easing.
The June employment report showed continued solid gains in payrolls. Nonetheless, the unemployment rate remained elevated, and the continuing low readings on the participation rate and the employment-to-population ratio, together with a high incidence of workers being employed part time for economic reasons, were generally seen as indicating that overall labor market conditions remained weak. It was noted that employment growth had been stronger than would have been expected given the recent pace of output growth, reflecting weak gains in productivity. Some participants pointed out that once productivity growth picked up, faster economic growth would be required to support further increases in employment along the lines seen of late. However, one participant thought that sluggish productivity performance was likely to persist, implying that the recent pace of output growth would be sufficient to maintain employment gains near current rates.
Recent readings on inflation were below the Committee's longer-run objective of 2 percent, in part reflecting transitory factors, and participants expressed a range of views about how soon inflation would return to 2 percent. A few participants, who felt that the recent low inflation rates were unlikely to persist or that the low PCE inflation readings might be marked up in future data revisions, suggested that, as transitory factors receded and the pace of recovery improved, inflation could be expected to return to 2 percent reasonably quickly. A number of others, however, viewed the low inflation readings as largely reflecting persistently deficient aggregate demand, implying that inflation could remain below 2 percent for a protracted period and further supporting the case for highly accommodative monetary policy.
Both domestic and foreign asset markets were volatile at times during the intermeeting period, reacting to policy communications and data releases. In discussing the increases in U.S. longer-term interest rates that occurred in the wake of the June FOMC meeting and the associated press conference, meeting participants pointed to heightened financial market uncertainty about the path of monetary policy and a shift of market expectations toward less policy accommodation. A few participants suggested that this shift occurred in part because Committee participants' economic projections, released following the June meeting, generally showed a somewhat more favorable outlook than those of private forecasters, or because the June policy statement and press conference were seen as indicating relatively little concern about inflation readings, which had been low and declining. Moreover, investors may have perceived that Committee communications about the possibility of slowing the pace of asset purchases also implied a higher probability of an earlier firming of the federal funds rate. Subsequent Federal Reserve communications, which emphasized that decisions about the two policy tools were distinct and underscored that a highly accommodative stance of monetary policy would remain appropriate for a considerable period after purchases are completed, were seen as having helped clarify the Committee's policy strategy. A number of participants mentioned that, by the end of the intermeeting period, market expectations of the future course of monetary policy, both with regard to asset purchases and with regard to the path of the federal funds rate, appeared well aligned with their own expectations. Nonetheless, some participants felt that, as a result of recent financial market developments, overall financial market conditions had tightened significantly, importantly reflecting larger term premiums, and they expressed concern that the higher level of longer-term interest rates could be a significant factor holding back spending and economic growth. Several others, however, judged that the rise in rates was likely to exert relatively little restraint, or that the increase in equity prices and easing in bank lending standards would largely offset the effects of the rise in longer-term interest rates. Some participants also stated that financial developments during the intermeeting period might have helped put the financial system on a more sustainable footing, insofar as those developments were associated with an unwinding of unsustainable speculative positions or an increase in term premiums from extraordinarily low levels.
In looking ahead, meeting participants commented on several considerations pertaining to the course of monetary policy. First, almost all participants confirmed that they were broadly comfortable with the characterization of the contingent outlook for asset purchases that was presented in the June postmeeting press conference and in the July monetary policy testimony. Under that outlook, if economic conditions improved broadly as expected, the Committee would moderate the pace of its securities purchases later this year. And if economic conditions continued to develop broadly as anticipated, the Committee would reduce the pace of purchases in measured steps and conclude the purchase program around the middle of 2014. At that point, if the economy evolved along the lines anticipated, the recovery would have gained further momentum, unemployment would be in the vicinity of 7 percent, and inflation would be moving toward the Committee's 2 percent objective. While participants viewed the future path of purchases as contingent on economic and financial developments, one participant indicated discomfort with the contingent plan on the grounds that the references to specific dates could be misinterpreted by the public as suggesting that the purchase program would be wound down on a more-or-less preset schedule rather than in a manner dependent on the state of the economy. Generally, however, participants were satisfied that investors had come to understand the data-dependent nature of the Committee's thinking about asset purchases. A few participants, while comfortable with the plan, stressed the need to avoid putting too much emphasis on the 7 percent value for the unemployment rate, which they saw only as illustrative of conditions that could obtain at the time when the asset purchases are completed.
Second, participants considered whether it would be desirable to include in the Committee's policy statement additional information regarding the Committee's contingent outlook for asset purchases. Most participants saw the provision of such information, which would reaffirm the contingent outlook presented following the June meeting, as potentially useful; however, many also saw possible difficulties, such as the challenge of conveying the desired information succinctly and with adequate nuance, and the associated risk of again raising uncertainty about the Committee's policy intentions. A few participants saw other forms of communication as better suited for this purpose. Several participants favored including such additional information in the policy statement to be released following the current meeting; several others indicated that providing such information would be most useful when the time came for the Committee to begin reducing the pace of its securities purchases, reasoning that earlier inclusion might trigger an unintended tightening of financial conditions.
Finally, the potential for clarifying or strengthening the Committee's forward guidance for the federal funds rate was discussed. In general, there was support for maintaining the current numerical thresholds in the forward guidance. A few participants expressed concern that a decision to lower the unemployment threshold could potentially lead the public to view the unemployment threshold as a policy variable that could not only be moved down but also up, thereby calling into question the credibility of the thresholds and undermining their effectiveness. Nonetheless, several participants were willing to contemplate lowering the unemployment threshold if additional accommodation were to become necessary or if the Committee wanted to adjust the mix of policy tools used to provide the appropriate level of accommodation. A number of participants also remarked on the possible usefulness of providing additional information on the Committee's intentions regarding adjustments to the federal funds rate after the 6-1/2 percent unemployment rate threshold was reached, in order to strengthen or clarify the Committee's forward guidance. One participant suggested that the Committee could announce an additional, lower set of thresholds for inflation and unemployment; another indicated that the Committee could provide guidance stating that it would not raise its target for the federal funds rate if the inflation rate was expected to run below a given level at a specific horizon. The latter enhancement to the forward guidance might be seen as reinforcing the message that the Committee was willing to defend its longer-term inflation goal from below as well as from above.
Committee Policy Action
Committee members viewed the information received over the intermeeting period as suggesting that economic activity expanded at a modest pace during the first half of the year. Labor market conditions showed further improvement in recent months, on balance, but the unemployment rate remained elevated. Household spending and business fixed investment advanced, and the housing sector was strengthening, but mortgage rates had risen somewhat and fiscal policy was restraining economic growth. The Committee expected that, with appropriate policy accommodation, economic growth would pick up from its recent pace, resulting in a gradual decline in the unemployment rate toward levels consistent with the Committee's dual mandate. With economic activity and employment continuing to grow despite tighter fiscal policy, and with global financial conditions less strained overall, members generally continued to see the downside risks to the outlook for the economy and the labor market as having diminished since last fall. Inflation was running below the Committee's longer-run objective, partly reflecting transitory influences, but longer-run inflation expectations were stable, and the Committee anticipated that inflation would move back toward its 2 percent objective over the medium term. Members recognized, however, that inflation persistently below the Committee's 2 percent objective could pose risks to economic performance.
In their discussion of monetary policy for the period ahead, members judged that a highly accommodative stance of monetary policy was warranted in order to foster a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability. In considering the likely path for the Committee's asset purchases, members discussed the degree of improvement in the labor market outlook since the purchase program began last fall. The unemployment rate had declined considerably since then, and recent gains in payroll employment had been solid. However, other measures of labor utilization--including the labor force participation rate and the numbers of discouraged workers and those working part time for economic reasons--suggested more modest improvement, and other indicators of labor demand, such as rates of hiring and quits, remained low. While a range of views were expressed regarding the cumulative improvement in the labor market since last fall, almost all Committee members agreed that a change in the purchase program was not yet appropriate. However, in the view of the one member who dissented from the policy statement, the improvement in the labor market was an important reason for calling for a more explicit statement from the Committee that asset purchases would be reduced in the near future. A few members emphasized the importance of being patient and evaluating additional information on the economy before deciding on any changes to the pace of asset purchases. At the same time, a few others pointed to the contingent plan that had been articulated on behalf of the Committee the previous month, and suggested that it might soon be time to slow somewhat the pace of purchases as outlined in that plan. At the conclusion of its discussion, the Committee decided to continue adding policy accommodation by purchasing additional MBS at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month and to maintain its existing reinvestment policies. In addition, the Committee reaffirmed its intention to keep the target federal funds rate at 0 to 1/4 percent and retained its forward guidance that it anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.
Members also discussed the wording of the policy statement to be issued following the meeting. In addition to updating its description of the state of the economy, the Committee decided to underline its concern about recent shortfalls of inflation from its longer-run goal by including in the statement an indication that it recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, while also noting that it continues to anticipate that inflation will move back toward its objective over the medium term. The Committee also considered whether to add more information concerning the contingent outlook for asset purchases to the policy statement, but judged that doing so might prompt an unwarranted shift in market expectations regarding asset purchases. The Committee decided to indicate in the statement that it "reaffirmed its view"--rather than simply "expects"--that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.
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:
"Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. The Desk is directed to continue purchasing longer-term Treasury securities at a pace of about $45 billion per month and to continue purchasing agency mortgage-backed securities at a pace of about $40 billion per month. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."
The vote encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in June suggests that economic activity expanded at a modest pace during the first half of the year. Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen somewhat and fiscal policy is restraining economic growth. Partly reflecting transitory influences, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent."
Voting for this action: Ben Bernanke, William C. Dudley, James Bullard, Elizabeth Duke, Charles L. Evans, Jerome H. Powell, Sarah Bloom Raskin, Eric Rosengren, Jeremy C. Stein, Daniel K. Tarullo, and Janet L. Yellen.
Voting against this action: Esther L. George.
Ms. George dissented because she favored including in the policy statement a more explicit signal that the pace of the Committee's asset purchases would be reduced in the near term. She expressed concerns about the open-ended approach to asset purchases and viewed providing such a signal as important at this time, in light of the ongoing improvement in labor market conditions as well as the potential costs and uncertain benefits of large-scale asset purchases.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, September 17-18, 2013. The meeting adjourned at 12:30 p.m. on July 31, 2013.
Notation Vote
By notation vote completed on July 9, 2013, the Committee unanimously approved the minutes of the FOMC meeting held on June 18-19, 2013.
_____________________________
William B. English
Secretary
1. Attended Tuesday's session only. Return to text
2. With the most recent revision to the national accounts, the BEA introduced intellectual property products as a new category of investment that included software; research and development; and entertainment, literary, and artistic originals. Return to text
3. The staff's forecast for the July FOMC meeting was prepared before the BEA released its estimate for real GDP in the second quarter and the revisions for earlier periods. Return to text |
2013-07-31T00:00:00 | 2013-07-31 | Statement | Information received since the Federal Open Market Committee met in June suggests that economic activity expanded at a modest pace during the first half of the year. Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen somewhat and fiscal policy is restraining economic growth. Partly reflecting transitory influences, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations. |
2013-06-19T00:00:00 | 2013-06-19 | Statement | Information received since the Federal Open Market Committee met in May suggests that economic activity has been expanding at a moderate pace. Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth. Partly reflecting transitory influences, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was James Bullard, who believed that the Committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings, and Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations. |
2013-06-19T00:00:00 | 2013-07-10 | Minute | Minutes of the Federal Open Market Committee
June 18-19, 2013
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, June 18, 2013, at 1:30 p.m. and continued on Wednesday, June 19, 2013, at 9:00 a.m.
PRESENT:
Ben Bernanke, Chairman
William C. Dudley, Vice Chairman
James Bullard
Elizabeth Duke
Charles L. Evans
Esther L. George
Jerome H. Powell
Sarah Bloom Raskin
Eric Rosengren
Jeremy C. Stein
Daniel K. Tarullo
Janet L. Yellen
Christine Cumming, Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, Alternate Members of the Federal Open Market Committee
Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively
Gregory L. Stefani, First Vice President, Federal Reserve Bank of Cleveland
William B. English, Secretary and Economist
Matthew M. Luecke, Assistant Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Thomas C. Baxter, Deputy General Counsel
Steven B. Kamin, Economist
David W. Wilcox, Economist
Thomas A. Connors, Troy Davig, Michael P. Leahy, James J. McAndrews, Stephen A. Meyer, David Reifschneider, Geoffrey Tootell, Christopher J. Waller, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors
James A. Clouse and William Nelson, Deputy Directors, Division of Monetary Affairs, Board of Governors; Matthew J. Eichner, Deputy Director, Division of Research and Statistics, Board of Governors; Maryann F. Hunter, Deputy Director, Division of Banking Supervision and Regulation, Board of Governors
Jon W. Faust, Special Adviser to the Board, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Ellen E. Meade and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors
Daniel M. Covitz, Eric M. Engen, and Thomas Laubach, Associate Directors, Division of Research and Statistics, Board of Governors
Sean D. Campbell and Joshua Gallin, Deputy Associate Directors, Division of Research and Statistics, Board of Governors; Jane E. Ihrig and David López-Salido, Deputy Associate Directors, Division of Monetary Affairs, Board of Governors
Joseph W. Gruber, Assistant Director, Division of International Finance, Board of Governors
Jeremy B. Rudd, Adviser, Division of Research and Statistics, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Deborah J. Lindner, Group Manager, Division of Research and Statistics, Board of Governors
Patrice Robitaille, Senior Economist, Division of International Finance, Board of Governors
Seung J. Lee, Economist, Division of Monetary Affairs, Board of Governors
Peter M. Garavuso, Records Management Analyst, Division of Monetary Affairs, Board of Governors
James M. Lyon, First Vice President, Federal Reserve Bank of Minneapolis
David Altig and Loretta J. Mester, Executive Vice Presidents, Federal Reserve Banks of Atlanta and Philadelphia, respectively
Lorie K. Logan, David Marshall, Mark E. Schweitzer, and Kei-Mu Yi, Senior Vice Presidents, Federal Reserve Banks of New York, Chicago, Cleveland, and Minneapolis, respectively
Evan F. Koenig, Vice President, Federal Reserve Bank of Dallas
Andreas L. Hornstein, Senior Advisor, Federal Reserve Bank of Richmond
John Fernald, Senior Research Adviser, Federal Reserve Bank of San Francisco
Discussion of Guidelines for Policy Normalization
In light of the changes in the System Open Market Account (SOMA) portfolio over the past two years, the Committee again discussed its strategy for the eventual normalization of the stance of monetary policy and the size and composition of the Federal Reserve's balance sheet that was released in the minutes of the Committee's June 2011 meeting. Although most participants saw this review as prudent longer-range planning, some felt that the discussion was premature. Meeting participants, in general, continued to view the broad principles set out in 2011 as still applicable. Nonetheless, they agreed that many of the details of the eventual normalization process would likely differ from those specified two years ago, that the appropriate details would depend in part on economic and financial developments between now and the time when it becomes appropriate to begin normalizing monetary policy, and that the Committee would need to provide additional information about its intentions as that time approaches. Participants continued to think that the Federal Reserve should, in the long run, hold predominantly Treasury securities. Most, however, now anticipated that the Committee would not sell agency mortgage-backed securities (MBS) as part of the normalization process, although some indicated that limited sales might be warranted in the longer run to reduce or eliminate residual holdings. A couple of participants stated that they preferred that the Committee make no decision about sales of MBS until closer to the start of the normalization process. Participants agreed that the Committee's focus continued to be on providing appropriate monetary accommodation to promote a stronger recovery in the context of price stability and so judged that additional discussion regarding policy normalization should be deferred.
Developments in Financial Markets and the Federal Reserve's Balance Sheet
The Manager of the SOMA reported on developments in domestic and foreign financial markets as well as the System open market operations during the period since the Federal Open Market Committee (FOMC) met on April 30-May 1, 2013. The review included a report that the System's purchases of longer-term assets did not appear to have had an adverse effect on the functioning of the markets for Treasury securities or agency MBS, and that the Open Market Desk's operations in both sectors had proceeded smoothly. By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the June 18-19 meeting suggested that economic activity continued to increase at a moderate rate in the second quarter. Private-sector employment expanded further in recent months, and the unemployment rate in April and May was below its first-quarter average, although it continued to be elevated. Consumer price inflation was subdued, partly reflecting transitory influences. However, measures of longer-run inflation expectations remained stable.
Private nonfarm employment rose moderately in April and May, while total government employment continued to decline somewhat. The unemployment rate was 7.6 percent in May, little changed from its level in April. The labor force participation rate edged up in May, but was still slightly below its first-quarter average, and the employment-to-population ratio increased a bit in recent months. The rate of long-duration unemployment declined slightly, while the share of workers employed part time for economic reasons was little changed; both of these measures remained well above their pre-recession levels. Forward-looking indicators of near-term labor market activity were mixed but generally pointed to some further improvement in labor market conditions in the coming months: Household expectations of the labor market situation improved; initial claims for unemployment insurance were little changed, on net, over the intermeeting period; and firms' hiring plans edged up. However, measures of job openings and the rate of gross private-sector hiring were about flat, on balance, in recent months and remained near their levels of a year ago.
Manufacturing production increased slightly in May after declining in the previous two months, and the rate of manufacturing capacity utilization in May was lower than in the first quarter. Automakers' schedules indicated that the pace of motor vehicle assemblies would hold roughly steady in the coming months, and broader indicators of manufacturing production, such as the readings on new orders from national and regional manufacturing surveys, were generally at subdued levels that pointed to only modest increases in factory output in the near term.
Real personal consumption expenditures (PCE) rose in April. In May, nominal retail sales, excluding those at motor vehicle and parts outlets, increased briskly, while light motor vehicle sales moved up solidly. Some key factors that tend to support growth in household spending were positive in recent months. After decreasing in the first quarter when payroll and income taxes increased, households' real disposable income rose in April, in part reflecting a small decline in consumer prices. Households' net worth likely increased in recent months, as equity values and home prices rose further. Moreover, consumer sentiment in the Thomson Reuters/University of Michigan Surveys of Consumers improved notably, on balance, in May and early June and was at its most upbeat level since the onset of the recession.
Conditions in the housing sector generally improved further, but construction activity was still at a relatively low level, and demand continued to be restrained by tight credit standards for mortgage loans. Starts of new single-family homes declined, on net, in April and May, but permits rose, suggesting gains in construction in the coming months. Starts of new multifamily units decreased in April but increased in May. Home prices continued to rise rapidly through April, while sales of both new and existing homes advanced.
Real business expenditures on equipment and software appeared to slow somewhat going into the second quarter after expanding modestly earlier in the year. Nominal shipments of nondefense capital goods excluding aircraft decreased in April, but nominal new orders for these capital goods increased and were slightly above the level of shipments, pointing to modest gains in shipments in the near term. Other forward-looking indicators, such as surveys of business conditions and capital spending plans, also suggested that outlays for business equipment would continue to rise at only a modest pace in the coming months. Nominal business spending for nonresidential construction increased in April after it had declined in the first quarter. Business inventories in most industries appeared to be broadly aligned with sales in recent months.
Real federal government purchases appeared to be declining less rapidly going into the second quarter than they had during the first quarter, as decreases in defense spending slowed, on balance, in April and May. The ongoing declines in real state and local government purchases appeared to moderate over recent months; the payrolls of these governments expanded in April and May, but state and local construction expenditures continued to decline noticeably.
The U.S. international trade deficit narrowed in March but widened in April, leaving the level of the trade deficit in April similar to its average in the first quarter. Both imports and exports fell in March but largely recovered in April, although oil imports remained below their first-quarter average. Exports of consumer goods and automotive products reached new highs in April, but exports of agricultural products declined.
Overall U.S. consumer prices, as measured by the PCE price index, edged down in April, while the consumer price index (CPI) rose somewhat in May. Both the CPI and the PCE price index increased at a subdued rate over the most recent 12-month period for each series. After declining in the previous two months, consumer energy prices rose a little in May, and retail gasoline prices, measured on a seasonally adjusted basis, were up further in the first couple of weeks in June. Consumer food prices edged down in May after rising modestly in April. Partly reflecting some transitory factors, such as a one-time reduction in Medicare prices associated with the federal government spending sequestration, consumer prices excluding food and energy only edged up in April but rose slightly more in May. Near-term inflation expectations from the Michigan survey were little changed in May and early June; longer-term inflation expectations in the survey also were essentially flat and remained within the narrow range that they have occupied for a number of years.
Measures of labor compensation indicated that gains in nominal wages remained modest. Compensation per hour in the nonfarm business sector increased moderately over the year ending in the first quarter, and, with a small rise in productivity, unit labor costs advanced only a little. Gains in average hourly earnings for all employees were muted, on balance, in April and May.
Foreign economic growth remained sluggish so far this year. A slower pace of expansion in many emerging market economies (EMEs), including China, since the beginning of the year offset an increase in the average rate of economic growth in the advanced foreign economies. In Japan, where recent policy measures appeared to have boosted household confidence, economic growth picked up noticeably early in the year. Recent indicators of Canadian economic activity also strengthened. However, indicators for the euro-area economies remained weak. A decline in commodity prices and continued lackluster economic growth contributed to a decline in foreign inflation.
Staff Review of the Financial Situation
Financial markets were volatile during the intermeeting period as investors reacted to incoming economic data and Federal Reserve communications. Information about the U.S. economy was somewhat better, on balance, than investors had anticipated, apparently giving them greater confidence in the economic outlook. Federal Reserve communications over the period reportedly were interpreted by market participants as pointing to a less accommodative stance of future monetary policy than they previously had expected.
Market-based indicators suggested that investors revised up their expectations about the path of the federal funds rate in coming years. Forward rates two to three years ahead derived from overnight index swaps shifted up 25 to 40 basis points over the intermeeting period, likely reflecting both an increase in the expected path for the federal funds rate and an increase in term premiums. In contrast to the readings from financial market quotes, which suggested that investors had come to expect the FOMC to increase its target for the federal funds rate sooner than they previously had anticipated, the results from the Desk's survey of primary dealers conducted prior to the June meeting showed little material change, on balance, in the dealers' expectations of the most likely timing of the first increase in the federal funds rate target.
Nominal yields on Treasury securities rose sharply over the intermeeting period amid some better-than-expected U.S. economic data and Federal Reserve communications that were interpreted by market participants as signaling a possible earlier-than-expected reduction in the pace of purchases under the FOMC's flow-based asset purchase program. Nominal yields on 5- to 30-year Treasury securities increased about 35 to 55 basis points. Yields on agency MBS rose more than those on comparable-maturity Treasury securities, leaving option-adjusted spreads to Treasury securities notably wider. The rise in longer-term Treasury yields appeared to reflect both an increase in term premiums and a rise in expected future short-term rates. The rise in term premiums, in turn, likely reflected in part a reassessment of the pace and ultimate size of the Federal Reserve's asset purchase program, as well as increased uncertainty about the future path of monetary policy.
Measures of inflation compensation derived from yields on nominal and inflation-protected Treasury securities fell notably but ended the intermeeting period within their ranges over the past few years. Investor perceptions of a somewhat less accommodative tone of Federal Reserve communications, as well as the softer-than-expected reading for the April CPI, likely contributed to the decline in inflation compensation.
Conditions in domestic and offshore dollar funding markets were generally little changed, on balance, over the intermeeting period. In secured funding markets, rates on Treasury general collateral repurchase agreements decreased, on net, in large part because of the seasonal decline in the supply of Treasury securities.
Market sentiment toward large domestic banking organizations appeared to improve somewhat over the intermeeting period, likely related in part to further reductions in nonperforming loans and growing confidence in the economic outlook. Equity prices for large domestic banks outperformed broad equity indexes over the intermeeting period, as did the equity prices for most other types of financial institutions. In contrast, equity prices for agency mortgage real estate investment trusts declined, reflecting the rise in longer-term interest rates, the underperformance of agency MBS, and weaker-than-expected earnings reports.
Responses to the June Senior Credit Officer Opinion Survey on Dealer Financing Terms generally suggested little change over the past three months in the credit terms applicable to important classes of counterparties and in the use of financial leverage by most classes of counterparties covered by the survey. However, about one-fourth of dealers reported an increase in the use of leverage by hedge funds.
Corporate bond yields rose significantly over the intermeeting period, and their spreads relative to comparable-maturity Treasury yields edged higher on net. Credit flows to nonfinancial businesses remained strong in May, especially through bond issuance. Gross issuance of speculative-grade corporate bonds was particularly elevated early in the intermeeting period, but such issuance slowed after mid-May in response to the rise in interest rates and in market volatility. Meanwhile, the issuance of syndicated leveraged loans remained robust in April and May, supported by strong investor demand for floating-rate corporate debt instruments.
House prices continued to rise in recent months, with national home price indexes up between 5 and 12 percent over the 12-month period ending in April. As a result, the number of mortgages with negative equity was estimated to have decreased substantially. Primary mortgage rates increased with yields on MBS over the intermeeting period, and the spread between primary mortgage rates and MBS yields remained near the low end of its range over recent years. Consumer credit continued to expand at a solid pace because of the ongoing expansion in auto and student loans; credit card debt remained about flat. Issuance of consumer asset-backed securities increased strongly again in May.
Growth in total bank credit moderated in April and May compared with the first quarter, as core loans slowed and securities declined slightly. Growth in commercial and industrial loans at large banks decreased noticeably in recent months, reportedly reflecting both increased paydowns and reduced originations. In contrast, increases in commercial real estate loans picked up, especially at large banks.
The M2 monetary aggregate expanded at an annual rate of about 5 percent from April through mid-June. The monetary base grew at an annual rate exceeding 40 percent over the same period, driven mainly by the increase in reserve balances that resulted from the Federal Reserve's asset purchases.
Over the intermeeting period, yields on 10-year sovereign debt of the advanced foreign economies followed the yields on comparable-maturity U.S. Treasury securities higher, and volatility in sovereign bond markets rose, particularly in Japan. Japanese equity markets also displayed substantial volatility; equity prices fell sharply late in the period and erased the gains that had been registered since early April, when the Bank of Japan announced that it would expand its asset purchases in order to nearly double the size of its balance sheet. European equity indexes were little changed, on net, over the period, and euro-area financial conditions remained relatively stable. Spreads of yields on Italian and Spanish government debt over yields on German bunds increased only a few basis points, while comparable spreads for Greek sovereign debt declined notably. The foreign exchange value of the dollar was little changed, on average, relative to the currencies of the advanced foreign economies, but appreciated against EME currencies amid weak incoming data on economic activity and monetary policy easing in some EMEs, along with rising U.S. Treasury yields. Emerging market mutual funds experienced sharp outflows in recent weeks, while EME stock prices declined and EME credit spreads widened on net.
The staff reported on potential risks to financial stability, including the stability of banking firms, nonbank financial intermediaries, and asset markets. Most market-based measures of the health of the banking sector--such as banks' stock prices, credit default swap spreads, and equity correlations--pointed to an improvement in the stability of the banking sector, in part because of rising levels of liquidity and capital as well as diminished concerns about downside risks. However, a number of indicators pointed to a modest increase in risk-taking and leverage that was largely being intermediated through the shadow banking system. Signs of upward pressures on the valuations of some risky assets were also noted. Overall, the risks to financial stability were viewed as roughly unchanged since March.
Staff Economic Outlook
In the economic forecast prepared by the staff for the June FOMC meeting, the projection for near-term growth of real gross domestic product (GDP) was little changed from the one prepared for the previous meeting. However, the staff's medium-term projection for real GDP was revised up somewhat. The staff raised its projected paths for equity and home prices, which pushed up expected consumer spending over the medium term, and boosted its outlook for domestic oil production, which reduced oil imports in the forecast. These positive factors were partly offset in the staff's medium-term GDP projection by higher projected paths for both longer-term interest rates and the foreign exchange value of the dollar. Nevertheless, with fiscal policy expected to restrain economic growth this year, the staff still anticipated that the pace of expansion in real GDP would only moderately exceed the growth rate of potential output. The staff also continued to forecast that real GDP would accelerate gradually in 2014 and 2015, supported by accommodative monetary policy, an eventual easing in the effects of fiscal policy restraint on economic growth, increases in consumer and business sentiment, and further improvements in credit availability and financial conditions. The expansion in economic activity was anticipated to slowly reduce the slack in labor and product markets over the projection period, and the unemployment rate was expected to decline gradually. In addition, although the staff did not change its view of the longer-run level of the natural rate of unemployment, it judged that the natural rate was on a more pronounced downward trajectory back toward its longer-run level than previously assumed; as a result, the staff's projection for the unemployment rate over the next two years was revised down a little, relative to its previous forecast.
The staff's forecast for inflation in the near term was also revised down a little from the projection prepared for the previous FOMC meeting, reflecting in part some of the recent softer-than-expected readings on consumer prices. Nonetheless, the staff expected that much of the recent softness in inflation would be transitory, and thus did not materially change its medium-term projection. The staff projected that inflation would pick up in the second half of this year, but given the assumption of stable longer-run inflation expectations and only modest changes in commodity and import prices as well as forecasts of gradually diminishing resource slack over the projection period, inflation was projected to still be relatively subdued through 2015.
The staff viewed the uncertainty around the forecast for economic activity as normal relative to the experience of the past 20 years. However, the risks were still viewed as skewed to the downside, in part because of concerns about the situation in Europe and the ability of the U.S. economy to weather potential adverse shocks. Although the staff saw the outlook for inflation as uncertain, the risks were viewed as balanced and not unusually high.
Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, meeting participants--the 7 members of the Board of Governors and the presidents of the 12 Federal Reserve Banks, all of whom participate in the deliberations of the FOMC--submitted their assessments of real output growth, the unemployment rate, inflation, and the target federal funds rate for each year from 2013 through 2015 and over the longer run, under each participant's judgment of appropriate monetary policy.1 The longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These economic projections and policy assessments are described in the Summary of Economic Projections, which is attached as an addendum to these minutes.
In their discussion of the economic situation, meeting participants generally indicated that the information received during the intermeeting period continued to suggest that the economy was expanding at a moderate pace. A number of participants mentioned that they were encouraged by the apparent resilience of private spending so far this year despite considerable downward pressure from lower government spending and higher taxes. In particular, consumer spending rose at a moderate rate, and the housing sector continued to strengthen. Business investment advanced, although only modestly, and slower economic activity abroad restrained domestic production. Overall conditions in the labor market improved further in recent months, although the unemployment rate remained elevated. Inflation continued to run below the Committee's longer-run objective, but longer-term inflation expectations remained stable.
Most participants anticipated that growth of real GDP would pick up somewhat in the second half of 2013. Growth of economic activity was projected to strengthen further during 2014 and 2015, supported by accommodative monetary policy; waning fiscal restraint; and ongoing improvements in household and business balance sheets, credit availability, and labor market conditions. Accordingly, the unemployment rate was projected to gradually decline toward levels consistent with the Committee's dual mandate. Many participants saw the downside risks to the medium-run outlook for the economy and the labor market as having diminished somewhat in recent months, or expressed greater confidence that stronger economic activity was in train. However, some participants noted that they remained uncertain about the projected pickup in growth of economic activity in coming quarters, and thus about the prospects for further improvement in labor market conditions, given that, in recent years, forecasts of a sustained pickup in growth had not been realized.
Participants noted that consumer spending continued to increase at a moderate rate in recent months despite tax increases and only modest gains in wages. Among the factors viewed as supporting consumption were improvements in household balance sheets and in the job market, as well as low interest rates. In addition, consumer sentiment improved over the intermeeting period, which some participants attributed to rising house prices and gains in the stock market. It was noted that the mutually reinforcing dynamic of rising confidence, declining risk premiums, improving credit availability, increasing spending, and greater hiring was an important factor in the projected pickup in economic activity but also that this favorable dynamic could be vulnerable to an adverse shock. A few participants expressed some concern about the outlook for consumer spending, citing the weakness in labor income and households' cautious attitudes toward using debt.
Housing markets continued to strengthen, with participants variously reporting increases in house prices, sales, and building permits; low inventories of homes on the market; and rising demand for construction supplies. The improvement in the housing sector was seen as supporting the broader economy through related spending and employment, with rising real estate values boosting household wealth, confidence, and access to credit. Participants generally were optimistic that the recovery in housing activity would be sustained, although a couple of participants were concerned that the run-up in mortgage rates in recent weeks might begin to crimp demand. However, the recent increase in mortgage purchase applications was seen as suggesting that the demand for housing was being driven by factors beyond low mortgage rates.
Reports on business spending were mixed. A number of participants continued to hear that businesses were limiting their capital spending to projects intended to enhance productivity and that they remained reluctant to invest to expand capacity, or to step up hiring. Uncertainties about regulatory issues and fiscal policies as well as weak economic activity abroad were cited as factors weighing on business decisionmaking. Some businesses, particularly smaller firms, were again reported to be concerned about the implications of new health-care regulations for their labor costs. Nonetheless, a few participants reported that their business contacts expressed somewhat greater confidence in the economic outlook or reported plans to expand capacity. A pickup in bank lending to small businesses was also reported. Although the manufacturing sector slowed considerably during the spring, contacts in several Districts reported that activity turned up more recently. Reports on activity in the airline, trucking, and warehousing industries were uneven. Agriculture remained robust, supported in part by strong demand from emerging market economies. However, prospects for farm income were less positive as a result of the wet weather in the Midwest and expectations of lower prices for corn. The outlook for the energy sector remained positive.
While the federal sequestration and the tax increases that became effective earlier in the year were expected to be a substantial drag on economic activity this year, the magnitude and timing of the effects remained unclear. Several participants commented that the direct effects of the cutbacks in federal spending, to date, did not appear as great as had been expected, but that they anticipated that fiscal policy would continue to restrain economic growth in coming quarters. In particular, one pointed out that the furloughs scheduled for the second half of the year were likely to reduce household income and spending. A report on the favorable fiscal condition of one state was indicative of the improvement in the budget situation at state and local governments.
Participants generally agreed that labor market conditions had continued to improve, on balance, in recent months; many saw the cumulative decline in the unemployment rate and gains in nonfarm payrolls over the past nine months as considerable. Reflecting these developments, participants' forecasts for the unemployment rate at this meeting were lower than those prepared for the September 2012 meeting. Among the encouraging aspects of labor market developments since then were the step-up in average monthly gains in private employment, the breadth of job gains across industries, the decline in layoffs, and a rise in voluntary quits in some industries. However, some participants discussed a number of indicators that suggested that the improvement in broad labor market conditions was less than might be implied by the decline in the unemployment rate alone. Some pointed out that the rate of hiring still fell short of the pace that they saw as consistent with more-noticeable progress in labor market conditions, that a portion of the improvement in payroll employment since the September meeting was due to data revisions, or that there were no signs of an increase in wage pressures. Others expressed concern about the still-elevated level of long-duration joblessness and the weakness in labor force participation. Most participants still saw slack remaining in the labor market, although they differed on the extent to which the progress to date had reduced that slack and how confident they were about future labor market improvement.
Inflation was low in the months prior to the meeting, with the trends in all broad measures remaining below the Committee's 2 percent longer-run objective. Several transitory factors, including a one-time reduction in Medicare costs, contributed to the recent very low inflation readings. In addition, energy prices declined, and nonfuel commodity prices were soft. Over the past year, both core and overall consumer price inflation trended lower; participants cited various alternative measures of consumer price inflation, including the trimmed mean PCE and CPI as well as the sticky price CPI, that suggested that the slowing was broad based. Market-based measures of inflation expectations decreased over the intermeeting period but remained within their ranges over the past few years. Most participants expected inflation to begin to move up over the coming year as economic activity strengthened, but many anticipated that it would remain below the Committee's 2 percent objective for some time. One participant expressed concern about the risk of a more rapid rise in inflation over the medium term, given the highly accommodative stance of monetary policy. In contrast, many others worried about the low level of inflation, and a number indicated that they would be watching closely for signs that the shift down in inflation might persist or that inflation expectations were persistently moving lower.
In their discussion of financial market developments over the intermeeting period, participants weighed the extent to which the rise in market interest rates and increase in volatility reflected a reassessment of market participants' expectations for monetary policy and the extent to which it reflected growing confidence about the economic outlook. It was noted that corporate credit spreads had not widened substantially and that the stock market had posted further gains, suggesting that the higher rates reflected, at least in part, increasing confidence that moderate economic growth would be sustained. Several participants worried that higher mortgage rates and bond yields could slow the recovery in the housing market and restrain business expansion. However, some others commented that any adverse effects of the increase in rates on financial conditions more broadly appeared to be limited.
A number of participants offered views on risks to financial stability. A couple of participants expressed concerns that some financial institutions might not be well positioned to weather a rapid run-up in interest rates. Two others emphasized the importance of bolstering the resilience of money market funds against disorderly outflows. And a few stated their view that a prolonged period of low interest rates would encourage investors to take on excessive credit or interest rate risk and would distort some asset prices. However, others suggested that the recent rise in rates might have reduced such incentives. While market volatility had increased of late, it was noted that the rise in measured volatility, while noticeable, occurred from a low level, and that a broad index of financial stress remained below average. One participant felt that the Committee should explore ways to calibrate the magnitude of the risks to financial stability so that those considerations could be more fully incorporated into deliberations on monetary policy.
Participants discussed how best to communicate the Committee's approach to decisions about its asset purchase program and how to reduce uncertainty about how the Committee might adjust its purchases in response to economic developments. Importantly, participants wanted to emphasize that the pace, composition, and extent of asset purchases would continue to be dependent on the Committee's assessment of the implications of incoming information for the economic outlook, as well as the cumulative progress toward the Committee's economic objectives since the institution of the program last September. The discussion centered on the possibility of providing a rough description of the path for asset purchases that the Committee would anticipate implementing if economic conditions evolved in a manner broadly consistent with the outcomes the Committee saw as most likely. Several participants pointed to the challenge of making it clear that policymakers necessarily weigh a broad range of economic variables and longer-run economic trends in assessing the outlook. As an alternative, some suggested providing forward guidance about asset purchases based on numerical values for one or more economic variables, broadly akin to the Committee's guidance regarding its target for the federal funds rate, arguing that such guidance would be more effective in reducing uncertainty and communicating the conditionality of policy. However, participants also noted possible disadvantages of such an approach, including that such forward guidance might inappropriately constrain the Committee's decisionmaking, or that it might prove difficult to communicate to investors and the general public.
Since the September meeting, some participants had become more confident of sustained improvement in the outlook for the labor market and so thought that a downward adjustment in asset purchases had or would likely soon become appropriate; they saw a need to clearly communicate an intention to lower the pace of purchases before long. However, to some other participants, this approach appeared likely to limit the Committee's flexibility in adjusting asset purchases in response to changes in economic conditions, which they viewed as a key element in the design of the purchase program. Others were concerned that stating an intention to slow the pace of asset purchases, even if the intention were conditional on the economy developing about in line with the Committee's expectations, might be misinterpreted as signaling an end to the addition of policy accommodation or even be seen as the initial step toward exit from the Committee's highly accommodative policy stance. It was suggested that any statement about asset purchases make clear that decisions concerning the pace of purchases are distinct from decisions concerning the federal funds rate.
Participants generally agreed that the Committee should provide additional clarity about its asset purchase program relatively soon. A number thought that the postmeeting statement might be the appropriate vehicle for providing additional information on the Committee's thinking. However, some saw potential difficulties in being able to convey succinctly the desired information in the postmeeting statement. Others noted the need to ensure that any new statement language intended to provide more information about the asset purchase program be clearly integrated with communication about the Committee's other policy tools. At the conclusion of the discussion, most participants thought that the Chairman, during his postmeeting press conference, should describe a likely path for asset purchases in coming quarters that was conditional on economic outcomes broadly in line with the Committee's expectations. In addition, he would make clear that decisions about asset purchases and other policy tools would continue to be dependent on the Committee's ongoing assessment of the economic outlook. He would also draw the distinction between the asset purchase program and the forward guidance regarding the target for the federal funds rate, noting that the Committee anticipates that there will be a considerable time between the end of asset purchases and the time when it becomes appropriate to increase the target for the federal funds rate.
Committee Policy Action
Committee members viewed the information received over the intermeeting period as suggesting that economic activity had expanded at a moderate pace. Labor market conditions showed further improvement in recent months, on balance, but the unemployment rate remained elevated. Household spending and business fixed investment advanced, and the housing sector strengthened further, but fiscal policy was restraining economic growth. The Committee expected that, with appropriate policy accommodation, economic growth would proceed at a moderate pace and result in a gradual decline in the unemployment rate toward levels consistent with its dual mandate. With economic activity and employment continuing to grow at a moderate pace despite tighter fiscal policy, and with global financial conditions less strained, members generally saw the downside risks to the outlook for the economy and the labor market as having diminished since the fall. Inflation was running below the Committee's longer-run objective, partly reflecting transitory influences, but longer-run inflation expectations were stable, and the Committee anticipated that inflation over the medium term would move closer to its 2 percent objective.
In their discussion of monetary policy for the period ahead, all members but one judged that the outlook for economic activity and inflation warranted the continuation of the Committee's current highly accommodative stance of monetary policy in order to foster a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability. In the view of one member, the improvement in the outlook for the labor market warranted a more deliberate statement from the Committee that asset purchases would be reduced in the very near future. At the conclusion of its discussion, the Committee decided to continue adding policy accommodation by purchasing additional MBS at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month and to maintain its existing reinvestment policies. In addition, the Committee reaffirmed its intention to keep the target federal funds rate at 0 to 1/4 percent and retained its forward guidance that it anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.
Regarding the outlook for policy, members agreed that monetary policy in coming quarters would depend on the evolution of the economic outlook and progress toward the Committee's longer-run objectives of maximum employment and inflation of 2 percent. While recognizing the improvement in a number of indicators of economic activity and labor market conditions since the fall, many members indicated that further improvement in the outlook for the labor market would be required before it would be appropriate to slow the pace of asset purchases. Some added that they would, as well, need to see more evidence that the projected acceleration in economic activity would occur, before reducing the pace of asset purchases. For one member, such a decision would also depend importantly on evidence that inflation was moving back toward the Committee's 2 percent objective; that member urged the Committee to modify its postmeeting statement to say explicitly that the Committee will act to move inflation back toward its goal. A couple of other members also worried that the downside risks to inflation had increased, with one of them suggesting that the statement more explicitly reflect this increased risk. However, several members judged that a reduction in asset purchases would likely soon be warranted, in light of the cumulative decline in unemployment since the September meeting and ongoing increases in private payrolls, which had increased their confidence in the outlook for sustained improvement in labor market conditions. Two of these members also indicated that the Committee should begin curtailing its purchases relatively soon in order to prevent the potential negative consequences of the program from exceeding its anticipated benefits. Another member pointed out that if the program were ended because of concerns about such consequences, the Committee would need to explore other options for providing appropriate monetary accommodation. Many members indicated that decisions about the pace and composition of asset purchases were distinct from decisions about the appropriate level of the federal funds rate, which would continue to be guided by the thresholds in the Committee's statement. In general, members continued to anticipate that maintaining the current exceptionally low level of the federal funds rate was likely to remain appropriate for a considerable period after asset purchases are concluded.
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:
"Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. The Desk is directed to continue purchasing longer-term Treasury securities at a pace of about $45 billion per month and to continue purchasing agency mortgage-backed securities at a pace of about $40 billion per month. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."
The vote encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in May suggests that economic activity has been expanding at a moderate pace. Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth. Partly reflecting transitory influences, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent."
Voting for this action: Ben Bernanke, William C. Dudley, Elizabeth Duke, Charles L. Evans, Jerome H. Powell, Sarah Bloom Raskin, Eric Rosengren, Jeremy C. Stein, Daniel K. Tarullo, and Janet L. Yellen.
Voting against this action: James Bullard and Esther L. George.
Mr. Bullard dissented because he believed that, in light of recent low readings on inflation, the Committee should signal more strongly its willingness to defend its goal of 2 percent inflation. He pointed out that inflation had trended down since the beginning of 2012 and was now well below target. Going forward, he viewed it as particularly important for the Committee to monitor price developments closely and to adapt its policy in response to incoming economic information.
Ms. George dissented because she viewed the ongoing improvement in labor market conditions and in the outlook as warranting a deliberate statement from the Committee at this meeting that the pace of its asset purchases would be reduced in the very near future. She continued to have concerns about maintaining aggressive monetary stimulus in the face of a growing economy and pointed to the potential for financial imbalances to emerge as a result of the high level of monetary accommodation.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, July 30-31, 2013. The meeting adjourned at 11:25 a.m. on June 19, 2013.
Notation Vote
By notation vote completed on May 21, 2013, the Committee unanimously approved the minutes of the FOMC meeting held on April 30-May 1, 2013.
_____________________________
William B. English
Secretary
1. Although President Pianalto was unable to attend the June 18-19, 2013, FOMC meeting, she submitted economic projections. First Vice President Gregory L. Stefani represented the Federal Reserve Bank of Cleveland at the meeting. Return to text |
2013-05-01T00:00:00 | 2013-05-22 | Minute | Minutes of the Federal Open Market Committee
April 30-May 1, 2013
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, April 30, 2013, at 2:00 p.m. and continued on Wednesday, May 1, 2013, at 9:00 a.m.
PRESENT:
Ben Bernanke, Chairman
William C. Dudley, Vice Chairman
James Bullard
Elizabeth Duke
Charles L. Evans
Esther L. George
Jerome H. Powell
Sarah Bloom Raskin
Eric Rosengren
Jeremy C. Stein
Daniel K. Tarullo
Janet L. Yellen
Christine Cumming, Richard W. Fisher, Narayana Kocherlakota, Sandra Pianalto, and Charles I. Plosser, Alternate Members of the Federal Open Market Committee
Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively
Deborah J. Danker, Deputy Secretary
Matthew M. Luecke, Assistant Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Steven B. Kamin, Economist
David W. Wilcox, Economist
Thomas A. Connors, Troy Davig, Michael P. Leahy, Stephen A. Meyer, David Reifschneider, Daniel G. Sullivan, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors
James A. Clouse and William Nelson, Deputy Directors, Division of Monetary Affairs, Board of Governors
Andreas Lehnert, Deputy Director, Office of Financial Stability Policy and Research, Board of Governors
Jon W. Faust, Special Adviser to the Board, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Seth B. Carpenter, Senior Associate Director, Division of Monetary Affairs, Board of Governors
Joyce K. Zickler, Senior Adviser, Division of Monetary Affairs, Board of Governors
Michael T. Kiley and Thomas Laubach, Associate Directors, Division of Research and Statistics, Board of Governors
David Bowman, Deputy Associate Director, Division of International Finance, Board of Governors
Steven A. Sharpe and John J. Stevens, Assistant Directors, Division of Research and Statistics, Board of Governors; Min Wei, Assistant Director, Division of Monetary Affairs, Board of Governors
Stefania D'Amico, Senior Economist, Division of Monetary Affairs, Board of Governors
Randall A. Williams, Records Project Manager, Division of Monetary Affairs, Board of Governors
Kenneth C. Montgomery, First Vice President, Federal Reserve Bank of Boston
David Altig, Jeff Fuhrer, and Loretta J. Mester, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Boston, and Philadelphia, respectively
Lorie K. Logan and Mark E. Schweitzer, Senior Vice Presidents, Federal Reserve Banks of New York and Cleveland, respectively
Fred Furlong, Group Vice President, Federal Reserve Bank of San Francisco
Evan F. Koenig and David C. Wheelock, Vice Presidents, Federal Reserve Banks of Dallas and St. Louis, respectively
Robert L. Hetzel and Andrea Tambalotti, Senior Economists, Federal Reserve Banks of Richmond and New York, respectively
Jonathan Heathcote, Senior Research Economist, Federal Reserve Bank of Minneapolis
Developments in Financial Markets and the Federal Reserve's Balance Sheet
The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets as well as the System open market operations during the period since the Federal Open Market Committee (FOMC) met on March 19-20, 2013. By unanimous vote, the Committee ratified the Open Market Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
By unanimous vote, the Committee agreed to extend the reciprocal currency (swap) arrangements with the Bank of Canada and the Banco de México for an additional year beginning in mid-December 2013; these arrangements are associated with the Federal Reserve's participation in the North American Framework Agreement of 1994. The arrangement with the Bank of Canada allows for cumulative drawings of up to $2 billion equivalent, and the arrangement with the Banco de México allows for cumulative drawings of up to $3 billion equivalent. The vote to renew the System's participation in these swap arrangements was taken at this meeting because a provision in the Framework Agreement requires each party to provide six months' prior notice of an intention to terminate its participation.
Staff Review of the Economic Situation
The information reviewed at the April 30-May 1 meeting indicated that economic activity expanded at a moderate pace in the first quarter. In March, the unemployment rate edged down further, although it continued to be elevated, and employment growth slowed. Consumer price inflation was relatively low, while measures of longer-run inflation expectations remained stable.
After faster gains in January and February, private nonfarm employment increased at a subdued rate in March, and government employment declined slightly. The unemployment rate was 7.6 percent in March, a little below its average in the fourth quarter of last year. The labor force participation rate also edged down to below its fourth-quarter average. The rate of long-duration unemployment and the share of workers employed part time for economic reasons declined somewhat in March, but these measures remained well above their pre-recession levels. Indicators of near-term labor market conditions were consistent with projections of moderate increases in employment in the coming months: Measures of job openings generally moved up, but the rate of gross private-sector hiring and indicators of firms' hiring plans were subdued, on balance, and initial claims for unemployment insurance trended up a little over the intermeeting period.
Manufacturing production decreased slightly in March but expanded at a brisk rate in the first quarter as a whole, supported in part by a recovery in output following Hurricane Sandy, and the rate of manufacturing capacity utilization in March was somewhat higher than in the fourth quarter. The production of motor vehicles and parts rose solidly in March, but factory output outside of the motor vehicle sector declined. Automakers' schedules indicated that the pace of motor vehicle assemblies in the coming months would be a bit below that in March. Broad indicators of manufacturing production, such as the diffusion indexes of new orders from the national and regional manufacturing surveys, were at levels that pointed to small increases in factory output in the near term.
Real personal consumption expenditures (PCE) expanded at a solid pace in March and in the first quarter as a whole. Some factors that tend to influence household spending were generally positive in recent months. For example, real disposable income increased in February and March, supported in part by recent declines in retail gasoline prices that raised household purchasing power and offset to some extent the effects of this year's higher payroll and income taxes. In addition, household net worth likely rose in recent months as a result of higher equity values and home prices. In contrast, consumer sentiment in the Thomson Reuters/University of Michigan Surveys of Consumers was roughly flat, on balance, in March and April and remained relatively downbeat.
Conditions in the housing sector continued to improve, as real expenditures for residential investment expanded briskly in the first quarter, although from a low level. Total combined starts of new single-family homes and multifamily units increased in March to a level well above that at the beginning of the year. Home prices continued to rise through February, and sales of new homes rose in March, but sales of existing homes decreased a little.
Growth in real business expenditures on equipment and software slowed in the first quarter. Nominal shipments of nondefense capital goods excluding aircraft continued to rise gradually in February and March, but new orders were slightly below the level of shipments, pointing to modest gains in shipments in the near term. Other forward-looking indicators, such as surveys of business conditions and capital spending plans, also suggested that outlays for business equipment would rise at a subdued pace in the coming months. Real business spending for nonresidential construction declined a little in the first quarter. Real inventory investment increased in the first quarter, and business inventories in most industries appeared to be broadly aligned with sales in recent months.
Real federal government purchases declined markedly in the first quarter, led by a significant decrease in defense spending, which may have partially reflected the anticipated effects of the federal spending sequestration. Real state and local government purchases also decreased somewhat in the first quarter, as state and local construction expenditures continued to decline.
The advance release of first-quarter data for the national income and product accounts showed that real net exports of goods and services also subtracted moderately from real gross domestic product (GDP) growth, as real imports outpaced real exports.
Overall consumer prices, as measured by the price index for PCE, edged down in March and rose just 1 percent from a year earlier. Consumer energy prices declined in March, and retail gasoline prices fell further in the first few weeks of April. Consumer food prices only edged up in March. Consumer prices excluding food and energy were flat in March, and their increase from 12 months earlier was similar to that for total consumer prices. Near-term inflation expectations from the Thomson Reuters/University of Michigan Surveys of Consumers were slightly lower in April, and longer-term inflation expectations in the survey were little changed and remained within the narrow range that they have occupied for several years.
Measures of labor compensation indicated that gains in nominal wages remained subdued. Increases in the employment cost index were modest over the year ending in the first quarter. Average hourly earnings for all employees were unchanged in March, and hourly earnings gains in the first quarter as a whole were muted.
Economic growth in foreign economies overall in the first quarter of 2013 showed only a small improvement from that registered in the second half of 2012. Real GDP growth picked up in the United Kingdom, and recent indicators suggested that the pace of contraction moderated in the euro area. In contrast, economic growth in China slowed abruptly after surging late last year. Foreign inflation appeared to increase a little in the first quarter, partly as a result of higher food prices in several emerging market economies, but remained quite moderate.
Staff Review of the Financial Situation
Financial conditions improved a little, on balance, over the intermeeting period. Yields of longer-term Treasury securities and foreign benchmark sovereign bonds declined appreciably, reflecting the somewhat negative tone of U.S. and foreign economic data releases as well as policy actions by the Bank of Japan that were more accommodative than the markets had expected. Equity prices rose modestly, on net, supported in part by solid quarterly earnings reports.
The expected path of the federal funds rate implied by market quotes shifted down moderately over the intermeeting period. However, the Desk's survey of primary dealers, conducted prior to the April 30-May 1 meeting, indicated that the dealers continued to view the third quarter of 2015 as the most likely time for the initial increase in the target federal funds rate. The median dealer anticipated that the FOMC would maintain its current pace of asset purchases through December 2013 and saw the second quarter of 2014 as the most probable time for the end of asset purchases, implying a slight upward revision to the projected total size of the Federal Reserve's asset purchase program.
Over the intermeeting period, near-term measures of inflation compensation derived from yields on nominal and inflation-protected Treasury securities moved lower amid somewhat disappointing economic data and declines in energy and other commodity prices; forward measures of inflation compensation changed little at longer horizons. Yields on agency mortgage-backed securities (MBS) decreased about in line with those on nominal Treasury securities of comparable duration.
Conditions in domestic dollar funding markets were generally little changed, and offshore dollar funding markets reacted only modestly to the elevated uncertainty surrounding the negotiations, early in the intermeeting period, to resolve the banking crisis in Cyprus.
Some indicators of the condition of domestic financial institutions weakened slightly. Share prices for the largest domestic banking organizations declined somewhat, on balance, and bank credit default swap spreads edged a bit higher, on average, across the larger firms in the sector.
Broad equity price indexes increased, on net, over the intermeeting period, likely reflecting solid quarterly earnings reports, stable medium-term earnings expectations, and lower interest rates. Option-implied volatility for the S&P 500 index over the near term remained in a range that was low by historical standards.
Yields on corporate bonds fell roughly in line with those on Treasury securities of comparable maturity, generally leaving their spreads little changed. The rate of corporate bond issuance by nonfinancial firms remained robust in March and April. Consistent with recent trends, some companies reportedly retired a notable portion of their outstanding commercial paper and issued longer-term bonds in comparable amounts. Syndicated leveraged loans were issued at a record pace in the first quarter, supported by strong demand for this type of asset, particularly from nonbank institutions. Gross public issuance of equity by nonfinancial firms was solid over the same period.
Conditions in some segments of the commercial real estate (CRE) sector continued to improve in recent months. Outstanding CRE loans held by commercial banks edged up in the past two quarters following a prolonged period of decline, and commercial mortgage-backed security issuance was strong in the first quarter. According to the Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) conducted in April, the fraction of banks that eased standards on CRE loans over the past three months increased to a relatively high level, while demand for these loans strengthened further. CRE prices continued to move up slowly, and price indexes for various market segments reached levels last seen in late 2008.
Rates on conforming home mortgage loans declined over the intermeeting period, and the spread between the primary mortgage rate and MBS yields remained well below its peak during the second half of 2012. The estimated pace of mortgage refinancing originations continued to be high, supported by historically low mortgage rates. However, purchase mortgage applications stayed at low levels. Overall delinquencies trended lower for both prime and subprime mortgages, primarily reflecting the very tight underwriting standards imposed over the past several years.
Consumer credit continued to expand in January and February, mostly driven by sizable increases in nonrevolving credit. Growth was particularly strong in auto loans as well as in student loans extended through the Department of Education's Direct Loan Program. In contrast, total revolving credit was about flat amid continued tight underwriting standards and terms on credit card loans. Issuance of consumer asset-backed securities--in particular, those backed by subprime auto loans--remained robust in recent months.
Total bank credit expanded moderately during the first quarter of 2013. Gains continued to be concentrated in commercial and industrial (C&I) loans, which increased especially strongly at domestic banks. In the April SLOOS, relatively large net fractions of these banks reported having eased standards and reduced spreads on C&I loans to firms of all sizes.
M2 grew at a faster pace in March and April than earlier in the year, possibly boosted by the higher level of annual tax payments and refunds relative to recent years. Meanwhile, the monetary base expanded briskly over those two months, driven mainly by the increase in reserve balances resulting from the Federal Reserve's asset purchases.
Early in the intermeeting period, prices of a range of risky assets abroad fell in reaction to reports of the "bail-in" of depositors at banks in Cyprus and the imposition of an extended bank holiday in that country, but outside of Cyprus those movements generally proved temporary. Euro-area equity indexes, which fell as stresses in Cyprus intensified, ended the period up slightly. By contrast, stock prices in Japan rose sharply, as the Bank of Japan surprised investors with the scale of its new monetary policy program aimed at raising inflation to 2 percent. Yields on longer-term Japanese government bonds displayed considerable volatility in the days following the announcement, although they were little changed, on net, over the intermeeting period. Outside of Japan, foreign benchmark sovereign yields fell over the intermeeting period, with market commentary citing weak U.S. and foreign macroeconomic data releases, increased expectations for further monetary accommodation by some foreign central banks, and the announcement by the Bank of Japan. After appreciating, on balance, since early this year, the dollar depreciated against most currencies, although it continued to appreciate against the yen. Emerging market stock prices changed little, on net, and emerging market equity mutual funds experienced modest outflows.
Staff Economic Outlook
In the economic forecast prepared by the staff for the April 30-May 1 FOMC meeting, the projection for real GDP growth was little revised from that prepared for the March meeting. With fiscal policy expected to be tighter this year than last year, the staff still anticipated that the pace of expansion in real GDP would only somewhat exceed the growth rate of potential output in 2013. The staff also continued to project that real GDP would accelerate gradually in 2014 and 2015, supported by an eventual easing in the effects of fiscal policy restraint on economic growth, increases in consumer and business sentiment, further improvements in credit availability and financial conditions, and accommodative monetary policy. The expansion in economic activity was anticipated to slowly reduce the slack in labor and product markets over the projection period, and the unemployment rate was expected to decline gradually.
The staff's forecast for inflation was also little revised from the projection prepared for the March FOMC meeting. With longer-run inflation expectations assumed to remain stable, energy prices expected to continue to trend down, and significant resource slack persisting over the forecast period, the staff continued to project that inflation would remain subdued through 2015.
The staff viewed the uncertainty around its forecast for economic activity as similar to the average level over the past 20 years. However, the risks to this outlook were viewed as skewed to the downside, reflecting in part concerns about the situation in Europe. Although the staff saw the outlook for inflation as uncertain, the risks were viewed as balanced and not unusually high.
Participants' Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation, meeting participants generally indicated that they viewed the information received during the intermeeting period as suggesting that the economy was expanding at a moderate pace despite some softness in recent economic data. Conditions in the labor market showed some continued improvement, although the unemployment rate remained elevated. Spending by consumers continued to expand, supported by better credit conditions, rising equity and housing prices, and lower energy prices; and the housing sector improved further. However, growth in business investment spending slowed somewhat, and fiscal policy appeared to be exerting significant near-term restraint on the economy. Perhaps reflecting more subdued growth abroad, especially in Europe and China, net exports weakened in the first quarter.
Participants generally saw the economic outlook as little changed since they met in March. However, economic data releases over the intermeeting period were mixed, raising some concern that the recovery might be slowing after a solid start earlier this year, thereby repeating the pattern observed in recent years. Various views on this prospect were offered, from those participants who put more emphasis on the underlying momentum of the economy, noting the strengthening in private domestic final demand, to those who stressed the growing fiscal restraint or the other headwinds still facing the economy. Participants continued to anticipate that, with appropriate monetary policy, growth would proceed at a moderate pace over the medium run and that the unemployment rate would decline gradually toward levels consistent with the Committee's mandate. A number of participants noted that the balance of risks to growth remained to the downside, al-though a couple suggested that such risks had diminished appreciably since last fall. A few participants warned that, in light of ongoing fiscal restraint and a weak global outlook, economic data could remain soft for the next few months, regardless of the underlying strength of the economy.
Consumer spending was reported to be strong in a number of areas of the country and, more broadly, appeared to be supported by rising equity and house prices, improved household balance sheets, and easier credit conditions. However, concerns were expressed that this rate of growth in consumer expenditures might not be sustainable without the support of a notable pickup in business investment and hiring. Other factors that might affect spending also were mentioned. For example, the losses in income and wealth experienced during the crisis might lead households to be more cautious in their spending and to save at a higher rate; wealth gains in recent years appeared concentrated among higher-net-worth individuals, who may have a lower propensity to spend out of additional wealth; and retailers reported weakness in spending by lower-income households, who had been more affected by the increase in payroll taxes.
Participants saw the housing market as having strengthened further during the intermeeting period and pointed variously to rising house prices, growth in home sales, a lower inventory of houses for sale, a reduction in the average time houses stayed on the market, and encouraging reports from homebuilders. More all-cash or investor purchases were being reported, and the pace of home purchases overall appeared to be constrained less by a lack of demand than by a lack of homes for sale, in part reflecting fewer newly foreclosed houses coming onto the market. The rate of new delinquencies on mortgages declined nearly to pre-crisis levels, and the pipeline of properties in the foreclosure process was being slowly worked down, in part through modifications and short sales. Over time, the supply of homes for sale was expected to increase as new construction picked up and sellers saw more attractive opportunities to put their houses on the market. The improvement in the housing sector was also seen as contributing to a pickup in activity in related industries.
With some exceptions, business contacts were reporting continued caution about expanding investment or payrolls. Reports included some weakening in manufacturing activity, due in part to reduced demand from abroad, and farm exports in one District were projected to be flat following strong growth in previous years. However, the CRE sector showed some signs of recovery, and survey results indicated that the terms of CRE lending were easing and loan demand increasing.
The federal spending sequestration and recent tax increases were viewed as restraining aggregate demand. Participants differed somewhat in their assessments of the magnitude of these effects on the economy, with views ranging from an estimate of substantial fiscal drag to one of less restraint than previously expected. A few participants mentioned the sequestration's impact on hiring and spending by the defense industry or government contractors, but one participant noted that a decline in expected future tax liabilities of the private sector associated with lower federal spending might provide a partial offset to the economic effects of the budget cuts.
Participants generally saw signs of improvement in labor market conditions despite the weaker-than-expected March payroll employment figure. Employment growth in earlier months had been solid, and more-recent improvements included the further decline in the unemployment rate in March and the gradual progress being made in some other labor market indicators. However, several participants cautioned that the drop in the unemployment rate in the latest month was also accompanied by another reduction in the labor force participation rate; the decline in labor force participation over recent quarters could indicate that the reduction in overall labor market slack had been substantially smaller than suggested by the change in the unemployment rate over that period. One participant commented that assessing the shortfall of employment from its maximum level required taking account of not only the gap between the unemployment rate and its corresponding natural rate, but also the gap between the labor force participation rate and its longer-term trend--a trend which was admittedly subject to considerable uncertainty. A few participants mentioned that job growth may have been restrained to an extent by businesses postponing hiring because of uncertainties over the implementation of health-care legislation or because they were unable to find certain types of skilled workers.
Both headline and core PCE inflation in the first quarter came in below the Committee's longer-run goal of 2 percent, but these recent lower readings appeared to be due, in part, to temporary factors; other measures of inflation as well as inflation expectations had remained more stable. Accordingly, participants generally continued to expect that inflation would move closer to the 2 percent objective over the medium run. Nonetheless, a number of participants expressed concern that inflation was below the Committee's target and stressed that future price developments bore careful watching. Most of the recent reports from business contacts revealed little upward pressure on prices or wages. A couple of participants expressed the view that an additional monetary policy response might be warranted should inflation fall further. It was also pointed out that, even absent further disinflation, continued low inflation might pose a threat to the economic recovery by, for example, raising debt burdens. One participant focused instead on the upside risks to inflation over the longer term resulting from highly accommodative monetary policy.
Financial conditions appeared to have eased further over the intermeeting period: Longer-term interest rates declined significantly, banks loosened their C&I lending terms and standards on balance, and competition to make commercial and auto loans was strong. Businesses were reportedly still borrowing to refinance, but they had begun to take out more new loans as well. While the Committee's accommodative policy continued to provide support to financial conditions, events abroad also influenced U.S. markets over the intermeeting period. In particular, the Bank of Japan announced a new monetary policy program that was considerably more expansionary than markets had expected. Financial conditions in Europe improved somewhat over the period, but some participants still saw the situation in Europe as posing downside risks to U.S. growth. At this meeting, a few participants expressed concern that conditions in certain U.S. financial markets were becoming too buoyant, pointing to the elevated issuance of bonds by lower-credit-quality firms or of bonds with fewer restrictions on collateral and payment terms (so-called covenant-lite bonds). One participant cautioned that the emergence of financial imbalances could prove difficult for regulators to identify and address, and that it would be appropriate to adjust monetary policy to help guard against risks to financial stability.
In discussing the effects of the Committee's asset purchases, several participants pointed to the improvement in interest-sensitive sectors, such as consumer durables and housing, over the recent period as evidence that the purchases were having positive results for the economy. The effects on a range of asset prices of the Bank of Japan's recent announcement were cited as added evidence that large-scale asset purchases were effective in easing financial conditions and thereby helping stimulate economic activity. In evaluating the prospects for benefits from asset purchases, however, one participant viewed uncertainty about U.S. fiscal and regulatory policies as interfering with the transmission of monetary policy and as preventing asset purchases from having a meaningful effect on the real economy.
Participants also touched on the conditions under which it might be appropriate to change the pace of asset purchases. Most observed that the outlook for the labor market had shown progress since the program was started in September, but many of these participants indicated that continued progress, more confidence in the outlook, or diminished downside risks would be required before slowing the pace of purchases would become appropriate. A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome. One participant preferred to begin decreasing the rate of purchases immediately, while another participant preferred to add more monetary accommodation at the current meeting and mentioned that the Committee had several other tools it could potentially use to do so. Most participants emphasized that it was important for the Committee to be prepared to adjust the pace of its purchases up or down as needed to align the degree of policy accommodation with changes in the outlook for the labor market and inflation as well as the extent of progress toward the Committee's economic objectives. Regarding the composition of purchases, one participant expressed the view that, in light of the substantial improvement in the housing market and to avoid further credit allocation across sectors of the economy, the Committee should start to shift any asset purchases away from MBS and toward Treasury securities.
Committee Policy Action
Committee members saw the information received over the intermeeting period as suggesting that economic activity had been expanding at a moderate pace. Labor market conditions had shown some improvement in recent months, on balance, but the unemployment rate remained elevated. Household spending and business fixed investment advanced, and the housing sector had strengthened further, but fiscal policy was restraining economic growth. The Committee expected that, with appropriate monetary policy accommodation, economic growth would proceed at a moderate pace and result in a gradual decline in the unemployment rate toward levels that the Committee judged consistent with its dual mandate. Members generally continued to anticipate that, with longer-term inflation expectations stable and persisting slack in resource utilization, inflation over the medium term would likely run at or below the Committee's 2 percent objective.
In their discussion of monetary policy for the period ahead, all but one member judged that a highly accommodative stance of monetary policy was warranted in order to foster a stronger economic recovery in a context of price stability. The Committee agreed to continue purchases of MBS at a pace of $40 billion per month and purchases of longer-term Treasury securities at a pace of $45 billion per month, as well as to maintain the Committee's reinvestment policies. The Committee also retained its forward guidance about the federal funds rate, including the thresholds on the unemployment and inflation rates. One member dissented from the Committee's policy decision, expressing concern that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in inflation expectations.
A few members expressed concerns that investor expectations of the cumulative size of the asset purchase program appeared to have increased somewhat since it was launched last September despite a notable decline in the unemployment rate and other improvements in the labor market since then. In contrast, a few other members focused on evidence that market expectations about the total size of the program had changed little, on net, since the program was launched or had responded appropriately to incoming information. Members generally agreed on the need for the Committee to communicate clearly that the pace and ultimate size of its asset purchases would depend on the Committee's continued assessment of the outlook for the labor market and inflation in addition to its judgments regarding the efficacy and costs of additional purchases and the extent of progress toward its economic objectives. To highlight its willingness to adjust the flow of purchases in light of incoming information, the Committee included language in the statement to be released following the meeting that said the Committee was prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.
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:
"Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. The Desk is directed to continue purchasing longer-term Treasury securities at a pace of about $45 billion per month and to continue purchasing agency mortgage-backed securities at a pace of about $40 billion per month. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."
The vote encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in March suggests that economic activity has been expanding at a moderate pace. Labor market conditions have shown some improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth. Inflation has been running somewhat below the Committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6 1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent."
Voting for this action: Ben Bernanke, William C. Dudley, James Bullard, Elizabeth Duke, Charles L. Evans, Jerome H. Powell, Sarah Bloom Raskin, Eric Rosengren, Jeremy C. Stein, Daniel K. Tarullo, and Janet L. Yellen.
Voting against this action: Esther L. George.
Ms. George dissented because she continued to view monetary policy as overly accommodative and therefore as posing risks to the long-term sustainable growth of the economy. She expressed concern that the stance of policy might be fostering imbalances and excessive risk-taking in some financial markets and institutions, and she cited the potential for the Committee's ongoing asset purchases to complicate the future conduct of policy, raise uncertainty, and affect future inflation expectations. Accordingly, Ms. George preferred to signal a near-term tapering of asset purchases, which would begin to move policy toward a more appropriate stance.
Review of Exit Strategy Principles
After the policy vote, participants began a review of the exit strategy principles that were published in the minutes of the Committee's June 2011 meeting. Those principles, which the Committee issued to clarify how it intended to normalize the stance and conduct of monetary policy when doing so eventually became appropriate, included broad principles along with some details about the timing and sequence of specific steps the Committee expected to take. The participants' discussion touched on various aspects of the exit strategy principles and policy normalization more generally, including the size and composition of the SOMA portfolio in the longer run, the use of a range of reserve-draining tools, the approach to sales of securities, the eventual framework for policy implementation, and the relationship between the principles and the economic thresholds in the Committee's forward guidance on the federal funds rate. The broad principles adopted almost two years ago appeared generally still valid, but developments since then--including the change in the size and composition of SOMA asset holdings--suggested a need for greater flexibility regarding the details of implementing policy normalization, particularly because those details would appropriately depend at least in part upon future economic and financial developments. Also, because normalization still appeared to be well in the future, the Committee might wish to wait and acquire additional experience to inform its plans. In particular, the process of normalizing policy could yield information about the most effective framework for implementing monetary policy in the longer run, and thus about the appropriate size of the SOMA portfolio and level of reserve balances. In addition, several participants raised the possibility that the federal funds rate might not, in the future, be the best indicator of the general level of short-term interest rates, and supported further staff study of potential alternative approaches to implementing monetary policy in the longer term and of possible new tools to improve control over short-term interest rates.
Views differed regarding whether the best course at this point would be to simply acknowledge that certain components of the June 2011 principles had been overtaken by events or rather to formally revise the principles. Acknowledging that the principles need to be updated would help avoid possible confusion regarding the Committee's intentions; waiting to update the principles would allow the Committee to obtain additional information before revising them. It was also mentioned that the public's understanding of the likely exit process might not be improved if the Committee issued only a set of broad principles without providing detailed information on the steps anticipated for normalization. However, issuing revised principles relatively soon could give the public additional confidence that the Committee had the tools and a plan for eventually normalizing the conduct of policy. Moreover, one participant stressed that the Committee's ability to provide forward guidance about the normalization process was a key monetary policy tool, and revised principles would permit use of that tool to help adjust the stance of policy. Participants emphasized that their review of the June 2011 exit strategy principles did not suggest any change in their views about the economic conditions that would eventually warrant beginning the process of normalizing the stance of monetary policy. At the conclusion of the discussion, the Chairman directed the staff to undertake additional preparatory work on this issue for Committee consideration in the future.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, June 18-19, 2013. The meeting adjourned at 1:05 p.m. on May 1, 2013.
Notation Vote
By notation vote completed on April 9, 2013, the Committee unanimously approved the minutes of the FOMC meeting held on March 19-20, 2013.
_____________________________
William B. English
Secretary |
2013-05-01T00:00:00 | 2013-05-01 | Statement | Information received since the Federal Open Market Committee met in March suggests that economic activity has been expanding at a moderate pace. Labor market conditions have shown some improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth. Inflation has been running somewhat below the Committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations. |
2013-03-20T00:00:00 | 2013-04-10 | Minute | Minutes of the Federal Open Market Committee
March 19-20, 2013
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, March 19, 2013, at 10:00 a.m., and continued on Wednesday, March 20, 2013, at 9:00 a.m.
PRESENT:
Ben Bernanke, Chairman
William C. Dudley, Vice Chairman
James Bullard
Elizabeth Duke
Charles L. Evans
Esther L. George
Jerome H. Powell
Sarah Bloom Raskin
Eric Rosengren
Jeremy C. Stein
Daniel K. Tarullo
Janet L. Yellen
Christine Cumming, Richard W. Fisher, Narayana Kocherlakota, Sandra Pianalto, and Charles I. Plosser, Alternate Members of the Federal Open Market Committee
Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively
William B. English, Secretary and Economist
Deborah J. Danker, Deputy Secretary
Matthew M. Luecke, Assistant Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Thomas C. Baxter, Deputy General Counsel
Steven B. Kamin, Economist
David W. Wilcox, Economist
Thomas A. Connors, Troy Davig, Michael P. Leahy, Stephen A. Meyer, David Reifschneider, Christopher J. Waller, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors
Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors
James A. Clouse and William Nelson, Deputy Directors, Division of Monetary Affairs, Board of Governors
Jon W. Faust, Special Adviser to the Board, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Seth B. Carpenter, Senior Associate Director, Division of Monetary Affairs, Board of Governors
Ellen M. Meade, Senior Adviser, Division of Monetary Affairs, Board of Governors
Eric M. Engen, Thomas Laubach, David E. Lebow, and Michael G. Palumbo, Associate Directors, Division of Research and Statistics, Board of Governors
William F. Bassett, Deputy Associate Director, Division of Monetary Affairs, Board of Governors
Stacey Tevlin, Assistant Director, Division of Research and Statistics, Board of Governors; Min Wei, Assistant Director, Division of Monetary Affairs, Board of Governors
Jeremy B. Rudd, Adviser, Division of Research and Statistics, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Gregory L. Stefani, First Vice President, Federal Reserve Bank of Cleveland
David Altig, Loretta J. Mester, Glenn D. Rudebusch, and Mark S. Sniderman, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Philadelphia, San Francisco, and Cleveland, respectively
Spencer Krane, Lorie K. Logan, Kevin Stiroh, and Kei-Mu Yi, Senior Vice Presidents, Federal Reserve Banks of Chicago, New York, New York, and Minneapolis, respectively
Evan F. Koenig, Jonathan P. McCarthy, Giovanni Olivei, and Julie Ann Remache,1 Vice Presidents, Federal Reserve Banks of Dallas, New York, Boston, and New York, respectively
Robert L. Hetzel, Senior Economist, Federal Reserve Bank of Richmond
Developments in Financial Markets and the Federal Reserve's Balance Sheet
The Manager of the System Open Market Account reported on developments in domestic and foreign financial markets as well as the System open market operations during the period since the Federal Open Market Committee (FOMC) met on January 29-30, 2013. The Manager also reported on developments in foreign money markets and implications for the assets that the Federal Reserve holds in its foreign currency portfolio. By unanimous vote, the Committee ratified the Open Market Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
Staff Review of the Economic Situation
The information reviewed at the March 19-20 meeting suggested that economic activity was expanding at a moderate rate in the first quarter of this year after the slowdown late last year. Private-sector employment increased at a fairly solid pace, on balance, and the unemployment rate, though still elevated, was slightly lower in February than in the fourth quarter of last year. Consumer price inflation, excluding some temporary fluctuations in energy prices, was subdued, while measures of longer-run inflation expectations remained stable.
Private nonfarm employment increased at a modest rate in January but expanded more briskly in February, while government employment continued to decrease. The unemployment rate was 7.7 percent in February, slightly less than its fourth-quarter average; the labor force participation rate was also a bit below its fourth-quarter average. The rate of long-duration unemployment and the share of workers employed part time for economic reasons were little changed, on net, and both measures remained high. Initial claims for unemployment insurance trended down somewhat over the intermeeting period. The rate of private-sector hiring, along with indicators of job openings and firms' hiring plans, were generally subdued and were consistent with continued moderate increases in employment in the coming months.
Manufacturing production increased strongly in February after declining in January, and the rate of manufacturing capacity utilization in February was a little higher than in the fourth quarter. The production of motor vehicles and parts rose considerably in February, and there were also widespread increases in factory output in other sectors. Automakers' schedules, however, indicated that the pace of motor vehicle assemblies in the coming months would be a bit below that in February. Broader indicators of manufacturing production, such as the diffusion indexes of new orders from the national and regional manufacturing surveys, were at levels that pointed to moderate increases in factory production in the near term.
Real personal consumption expenditures rose modestly in January. In February, nominal retail sales, excluding those at motor vehicle and parts outlets, increased at a strong rate, while light motor vehicle sales edged up. Some key factors that tend to influence household spending were mixed: Households' real disposable incomes declined in January, reflecting in part the increases in both payroll and income taxes that went into effect at the beginning of the year and the previous pulling forward of taxable income from 2013 into 2012; in contrast, household net worth likely rose in recent months as a result of higher equity values and home prices. Consumer sentiment in the Thomson Reuters/University of Michigan Surveys of Consumers rose somewhat in February, but it declined in early March and remained relatively downbeat.
Conditions in the housing sector improved further, but construction activity was still at a relatively low level and continued to be restrained by tight credit standards for mortgages. Both starts and permits of new single-family homes increased, on net, over January and February. Starts of multifamily units declined, on balance, but permits rose, consistent with additional gains in construction in coming months. Sales of both new and existing homes advanced in January, and home prices increased further.
Real business expenditures on equipment and software appeared to slow somewhat early this year after rising at a brisk rate in the fourth quarter. Nominal shipments for nondefense capital goods excluding aircraft decreased in January, but nominal orders increased to a level above that of shipments, pointing to higher shipments in the near term. Other forward-looking indicators, such as surveys of business conditions and capital spending plans, also suggested that outlays for business equipment would rise in the coming months. Nominal business spending for nonresidential construction declined in January. Business inventories in most industries appeared to be generally aligned with sales in recent months.
Real federal government purchases appeared to decrease further in January and February, as defense spending continued to contract on balance. Real state and local government purchases looked to have declined as nonfederal government payrolls decreased in January and February and nominal construction expenditures fell in January.
The U.S. international trade deficit narrowed in December but widened in January. Imports rose in January, largely reflecting a rebound in the value of oil imports, and exports decreased, driven by a decline in the value of exports of petroleum products. Exports of capital goods increased; the other major categories of exports remained about unchanged.
Indexes of overall U.S. consumer prices were little changed in January but the consumer price index moved up briskly in February, largely reflecting a sharp rise in gasoline prices. Consumer food prices were flat in January and only edged up in February. Consumer prices excluding food and energy increased moderately in January and February. Near-term inflation expectations from the Michigan survey were unchanged in February and early March; longer-term inflation expectations in the survey were also little changed and remained within the narrow range that they have occupied for some time.
Measures of labor compensation indicated that gains in nominal wages remained relatively slow, only slightly above the rate of price inflation. Compensation per hour in the nonfarm business sector rose modestly over 2012, and, with small increases in productivity, unit labor costs also advanced only modestly. Gains in the employment cost index were even slower than for the measure of compensation per hour last year. In January and February, increases in average hourly earnings for all employees continued to be subdued.
Economic growth weakened in a number of the advanced foreign economies in the fourth quarter of 2012. In the euro area, real gross domestic product (GDP) contracted for a fifth consecutive quarter. Recent data for European economies, including retail sales and purchasing managers indexes, suggest that the rate of economic contraction may have diminished since the beginning of the year. In emerging market economies (EMEs), an increase in exports contributed to a pickup in the pace of economic growth in the fourth quarter, including for China. More-recent indicators suggest that economic activity in China has slowed some. Inflation remained generally contained in both advanced foreign economies and EMEs.
Staff Review of the Financial Situation
Generally favorable U.S. economic data releases, along with communications from Federal Reserve policymakers regarding the outlook for the economy and monetary policy, appeared to contribute to improved sentiment in domestic financial markets over the intermeeting period despite some renewed concerns about economic and financial conditions in Europe.
The expected path for the federal funds rate implied by market quotes moved down over the intermeeting period, likely reflecting policymakers' communications that reinforced market expectations of continued monetary policy accommodation. Results from the Desk's survey of primary dealers conducted prior to the March meeting showed that dealers continued to view the third quarter of 2015 as the most likely time of the first increase in the target federal funds rate. In addition, the median dealer continued to see the first quarter of 2014 as the most probable time for the Federal Reserve's asset purchases to end, and most dealers anticipated that the pace of purchases would be adjusted down before ending.
Yields on nominal Treasury securities were modestly lower, on net, over the intermeeting period. In late February, these yields declined notably following the inconclusive election outcomes in Italy but mostly retraced this decline as economic data releases in subsequent weeks exceeded expectations. Measures of inflation compensation derived from nominal and inflation-protected Treasury securities edged down over the period.
Conditions in domestic and offshore dollar funding markets were generally little changed, on balance, during the intermeeting period. The outstanding amount of unsecured commercial paper (CP) issued by financial institutions with European parents increased slightly on net, and CP issued by institutions with U.S. parents remained stable.
In the March Senior Credit Officer Opinion Survey on Dealer Financing Terms, respondents reported that leveraged investors seemed to have become somewhat more willing to take positions in risky assets since December.
Market reaction to the results of the Dodd-Frank Act annual stress tests and of the Comprehensive Capital Analysis and Review was limited. Overall, a broad index of U.S. bank equity prices rose, on net, over the intermeeting period, and credit default swap spreads for most large domestic banks edged down on balance.
Broad equity price indexes increased over the intermeeting period, bolstered by favorable incoming economic data. Option-implied volatility for the S&P 500 index over the near term rose slightly but remained low, at levels last seen in early 2007. Fourth-quarter earnings per share for S&P 500 firms were estimated to have increased modestly from the previous quarter.
Yields on investment- and speculative-grade corporate bonds rose a bit over the intermeeting period, leaving risk spreads a little wider. Corporate bond issuance by nonfinancial firms remained fairly robust in February; commercial and industrial (C&I) loans and nonfinancial CP also continued to expand. After picking up in January, gross public issuance of equity by nonfinancial firms remained strong in February, and issuance of collateralized loan obligations reached a post-financial-crisis high.
Conditions in the commercial real estate (CRE) sector improved somewhat. Commercial mortgage debt increased in the fourth quarter after having decreased in each quarter since the beginning of 2009, and commercial mortgage-backed security (CMBS) issuance continued to be robust over the intermeeting period. Nonetheless, delinquency rates on loans underlying existing CMBS remained near historically high levels in February, and CRE prices flattened out in the fourth quarter after several quarters of increases.
Both conforming home mortgage rates and yields on agency mortgage-backed securities (MBS) rose, on net, during the intermeeting period, and the spread between the primary mortgage rate and MBS yields narrowed a bit. Despite the increase in mortgage rates since the start of the year, mortgage refinancing originations declined only slightly.
Consumer credit sustained its moderate expansion in December and January. Nonrevolving credit continued to increase at a solid pace because of growth in student and auto loans, while revolving credit was roughly flat. Issuance of consumer asset-backed securities remained strong.
Driven largely by continued growth in C&I loans, total bank credit expanded in January and February at roughly its fourth-quarter pace. The February Survey of Terms of Business Lending indicated some easing in loan pricing.
The level of M2 was about unchanged, on net, over January and February. In contrast, the monetary base expanded briskly from January through mid-March, driven mainly by the increase in reserve balances resulting from the Federal Reserve's purchases of Treasury securities and agency MBS.
Financial market concerns regarding the euro area rose over the intermeeting period amid weaker-than-expected economic data releases and political uncertainties generated by the inconclusive election results in Italy. Adding to the concerns was the proposal in Cyprus to tax insured, along with uninsured, deposits as part of the country's effort to secure an aid package from the euro area and the International Monetary Fund. Ten-year sovereign yields in most peripheral euro-area countries rose relative to German bond yields, with spreads for Italian sovereign debt increasing noticeably; euro-area banking-sector share prices fell sharply. With economic data for the euro area, the United Kingdom, and Canada coming in weaker than anticipated, yields on bunds, gilts, and long-term Canadian government securities fell. In addition, market-based measures of expected overnight interest rates also declined in those countries, and the dollar appreciated against the euro, sterling, and the Canadian dollar. Expectations intensified that the Bank of Japan would pursue aggressive monetary easing after the new governor of the Bank of Japan was installed; over the intermeeting period, the yen depreciated further, 10-year Japanese government bond yields declined to near record lows, and the Nikkei stock price index rose substantially. Movements in the currencies of EMEs against the dollar were generally small. Although inflows into emerging market mutual funds continued, they slowed notably in recent weeks, and EME equity indexes were, on average, slightly lower. Some EME central banks cut interest rates, citing concerns about economic growth.
The staff also reported on potential risks to financial stability, including those associated with the current low interest rate environment. Some observers have suggested that a lengthy period of low long-term rates could encourage excessive risk-taking that could have adverse consequences for financial stability at some point in the future. The staff surveyed a wide range of asset markets and financial institutions for signs of excess valuations, leverage, or risk-taking that could pose systemic risks. Low interest rates likely have supported gains in asset prices and encouraged the flow of credit to households and businesses, but these changes to date do not appear to have been accompanied by significant financial imbalances. However, trends in a few specific markets bore watching, and the staff will continue to monitor for signs of developments that could pose risks to financial stability.
Staff Economic Outlook
In the economic forecast prepared by the staff for the March FOMC meeting, real GDP growth was revised down somewhat in the near term, largely reflecting the federal spending sequestration that went into effect on March 1 and the resulting drag from reduced government purchases. The staff's medium-term forecast for real GDP growth was little changed, on balance, as the effects of somewhat more fiscal policy restraint and a higher assumed path for the foreign exchange value of the dollar were essentially offset by a brighter outlook for domestic energy production and a higher projection for household wealth, which reflected upward revisions to the projected paths for both equity prices and home prices. On balance, with fiscal policy expected to be tighter in 2013 than in 2012, the staff expected that increases in real GDP this year would only modestly exceed the growth rate of potential output. Fiscal policy restraint on economic growth was assumed to ease over time, and real GDP was projected to accelerate gradually in 2014 and 2015, supported by increases in consumer and business sentiment, further improvements in credit availability and financial conditions, and accommodative monetary policy. The expansion in economic activity was anticipated to slowly reduce the slack in labor and product markets over the projection period, and progress in reducing the unemployment rate was expected to be gradual.
The staff's forecast for inflation was little changed from the projection prepared for the January FOMC meeting. With crude oil prices anticipated to trend down slowly from their current levels, long-run inflation expectations assumed to remain stable, and significant resource slack persisting over the forecast period, the staff continued to project that inflation would be subdued through 2015.
The staff viewed the uncertainty around its forecast for economic activity as similar to the average level over the past 20 years. However, the risks were viewed as skewed to the downside, reflecting in part the concerns about the situation in Europe and the possibility of a more severe tightening in U.S. fiscal policy than currently anticipated. The staff saw the uncertainty around its projection for inflation as about average, and it viewed the risks to the inflation outlook as roughly balanced.
Participants' Views on Current Conditions and Economic Outlook
In conjunction with this FOMC meeting, meeting participants--the 7 members of the Board of Governors and the presidents of the 12 Federal Reserve Banks, all of whom participate in the deliberations of the FOMC--submitted their assessments of real output growth, the unemployment rate, inflation, and the target federal funds rate for each year from 2013 through 2015 and over the longer run, under each participant's judgment of appropriate monetary policy. The longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These economic projections and policy assessments are described in the Summary of Economic Projections, which is attached as an addendum to these minutes.
Meeting participants generally indicated that they viewed the economic data received during the intermeeting period as somewhat more positive than had been expected, but that fiscal policy appeared to have become more restrictive, leaving the outlook for the economy little changed on balance since the January meeting. Participants judged that the economy had returned to moderate growth following a pause late last year, and a few noted that the downside risks may have diminished. Conditions in labor markets had shown signs of improvement, although the unemployment rate remained elevated. Spending by households and businesses was continuing to expand, perhaps reflecting some increased optimism. Participants noted that the housing market, in particular, had firmed somewhat further. Accommodative monetary policy was likely providing important support to these developments. In contrast, participants thought that fiscal policy was exerting significant near-term restraint on the economy. Participants generally anticipated that growth would proceed at a moderate pace and that the unemployment rate would decline gradually toward levels consistent with the Committee's mandate. Inflation had been running below the Committee's 2 percent objective for some time, and nearly all of the participants anticipated that it would run at or below 2 percent over the medium term.
In their discussion of the household sector, most participants noted that the data on spending were somewhat encouraging, particularly with regard to spending on automobiles, other consumer durables, and housing. Several participants stated that the moderate acceleration in spending might in part reflect pent-up demand following years of deleveraging and was importantly supported by the stance of monetary policy, which has reduced the cost of financing purchases and improved credit availability to some degree. A couple of participants noted that the increase in the payroll tax appeared to have not yet had a material effect on household spending; however, another suggested that the payroll tax increase, along with higher gasoline prices, may be one reason why spending by lower-income households appeared to be depressed, as those changes disproportionately cut into the disposable income of those households. A couple of other participants thought that overall consumer spending was likely still held back, at least in part, by ongoing concerns about future income and employment prospects. Both fiscal restraint and the high level of student debt were mentioned as risks to aggregate household spending over the forecast period.
Participants generally saw conditions in the housing market as having improved further over the intermeeting period. Rising house prices were strengthening household balance sheets by raising wealth and by increasing the ability of some homeowners to refinance their mortgages at lower rates. Such a dynamic was seen as potentially leading to a virtuous cycle that could help support household spending and financial market conditions over time. Reports from homebuilders in many parts of the country were encouraging. One participant pointed to ongoing changes in a range of factors--including demographics, credit conditions, business models, and consumer preferences--that were likely shifting both supply and demand in the housing sector and concluded that the outlook for the sector was quite uncertain and potentially subject to rapid changes.
Many participants reported that their business contacts were seeing some further improvement in the economic outlook. Firms reported increased planning for capital expenditures, supported by low interest rates and substantial cash holdings. Investment spending on productivity-enhancing technology was strong, as was pipeline construction in the energy sector. A few participants indicated that their contacts saw the level of uncertainty about the economic outlook as having declined recently, a development that could lead to increased investment expenditures.
Most participants remarked on the federal spending sequester and its potential effects on the economy; they judged that recent tax and spending changes were already restraining aggregate demand or would do so over the course of the year. A couple of participants, however, suggested that they had cut their estimates of the effect of recent federal austerity measures or had never considered the effects to be substantial.
Recent readings on private employment and the unemployment rate indicated some improvement in labor market conditions. Nonetheless, participants generally saw the unemployment rate as still elevated and were not yet confident that the recent progress toward the Committee's employment objective would be sustained. The need to use a range of indicators to gauge labor market conditions was noted. One participant highlighted that hiring rates and quit rates remained somewhat low. Another participant discussed evidence that the labor market may have become less dynamic over time, with the result that recent payroll gains might be more meaningful than would first appear. Inference about the labor force participation rate was complicated by its long-run downward trend. One participant cited research indicating that long-term unemployment, which is currently especially high, could lead to persistently lower income and wealth for those affected, even after they found jobs. More broadly, firms reportedly remained cautious about hiring, which some participants attributed in part to restrictive fiscal policy combined with growing regulatory burden. This caution appeared to have resulted in jobs remaining vacant for substantially longer than would normally be the case, given the unemployment rate.
Recent price developments were consistent with subdued inflation pressures and inflation remaining at or below the Committee's 2 percent objective over the medium run. Participants saw little near-term inflationary pressure, with a few noting that the appreciation of the dollar was holding down import costs or that the recent increases in gasoline prices did not appear to have passed through more broadly to prices of other goods. Pointing to inflation that had been running below their objective for some time, some participants saw downside risks to inflation, especially if economic activity did not pick up as projected. But a few participants noted that the risk remained that inflationary pressures could rise as the expansion continued, especially if monetary policy remained highly accommodative for too long.
Participants discussed their assessments of risks to financial stability, particularly in light of the Committee's highly accommodative stance of monetary policy. Many participants noted that in the current low-interest rate environment, investors in some financial markets were taking on additional risk--either credit risk or interest rate risk--in an effort to boost returns. As a result, vigilance on the part of policymakers and regulators was warranted, especially in light of episodic strains in European markets. A couple of participants noted that U.S. banks had expanded their capital positions and were generally in sound financial condition. Meeting participants generally agreed that there was an ongoing need to evaluate the possible interactions between monetary policy decisions and financial stability, with some noting that adverse shocks to financial stability can affect progress toward the Committee's dual mandate.
Review of Efficacy and Costs of Asset Purchases
The staff provided presentations covering the efficacy of the Federal Reserve's asset purchases, the effects of the purchases on security market functioning, the ways in which asset purchases might amplify or reduce risks to financial stability, and the fiscal implications of purchases. In their discussion of this topic, meeting participants generally judged the macroeconomic benefits of the current purchase program to outweigh the likely costs and risks, but they agreed that an ongoing assessment of the benefits and costs was necessary. Pointing to academic and Federal Reserve staff research, most participants saw asset purchases as having a meaningful effect in easing financial conditions and so supporting economic growth. Some expressed the view that these effects had likely been stronger during the Federal Reserve's initial large-scale asset purchases because that program also helped support market functioning during the financial crisis. Other participants, however, saw little evidence that the efficacy of asset purchases had declined over time, and a couple of these suggested that the effectiveness of purchases might even have increased more recently, as the easing of credit constraints allowed more borrowers to take advantage of lower interest rates. One participant emphasized the role of recent asset purchases in keeping inflation from declining further below the Committee's longer-run goal. A few participants felt that MBS purchases provided more support to the economy than purchases of longer-term Treasury securities because they stimulated the housing sector directly; however, a few preferred to focus any purchases in the Treasury market to avoid allocating credit to a specific sector of the economy. It was noted that, in addition to the standard channels through which monetary policy affects the economy, asset purchases could help signal the Committee's commitment to accommodative monetary policy, thereby making the forward guidance about the federal funds rate more effective. However, a few participants were not convinced of the benefits of asset purchases, stating that the effects on financial markets appeared to be short lived or that they saw little evidence of a significant macroeconomic effect. One participant suggested that the signaling effect of asset purchases may have been reduced by the adoption of threshold-based forward guidance. In general, reflecting the limited experience with large-scale asset purchases, participants recognized that estimates of the economic effects were necessarily imprecise and covered a wide range.
Participants generally agreed that asset purchases also have potential costs and risks. In particular, participants pointed to possible risks to the stability of the financial system, the functioning of particular financial markets, the smooth withdrawal of monetary accommodation when it eventually becomes appropriate, and the Federal Reserve's net income. Their views on the practical importance of these risks varied, as did their prescriptions for mitigating them. Asset purchases were seen by some as having a potential to contribute to imbalances in financial markets and asset prices, which could undermine financial stability over time. Moreover, to the extent that asset purchases push down longer-term interest rates, they potentially expose financial markets to a rapid rise in those rates in the future, which could impose significant losses on some investors and intermediaries. Several participants suggested that enhanced supervision could serve to limit, at least to some extent, the increased risk-taking associated with a lengthy period of low long-term interest rates, and that effective policy communication or balance sheet management by the Committee could reduce the probability of excessively rapid increases in longer-term rates. It was also noted that the accommodative stance of policy could be supporting financial stability by returning the economy to a stable footing sooner than would otherwise be the case and perhaps by allowing borrowers to secure longer-term financing and thereby reduce funding risks; by contrast, curtailing asset purchases could slow the recovery and so extend the period of very low interest rates. Nevertheless, a number of participants remained concerned about the potential for financial stability risks to build. One consequence of asset purchases has been the increase in the Federal Reserve's net income and its remittances to the Treasury, but those values were projected to decline, perhaps even to zero for a time, as the Committee eventually withdraws policy accommodation. Some participants were concerned that a substantial decline in remittances might lead to an adverse public reaction or potentially undermine Federal Reserve credibility or effectiveness. The possibility of such outcomes was seen as necessitating clear communications about the outlook for Federal Reserve net income. Several participants stated that such risks should not inhibit the Committee from pursuing its mandated objectives for inflation and employment. In any case, it was indicated that the fiscal benefits of a stronger economy would be much greater than any short-term fluctuations in remittances, and moreover, a couple of participants noted that cumulative remittances to the Treasury would likely be higher than would have been the case without any asset purchases. Some participants also were concerned that additional asset purchases could complicate the eventual firming of policy--for example, by impairing the Committee's control over the federal funds rate. A few participants raised the possibility of an undesirable rise in inflation. However, others expressed confidence in the Committee's exit tools and its resolve to keep inflation near its longer-run goal. Another exit-related concern was a possible adverse effect on market functioning from MBS sales during the normalization of the Federal Reserve's balance sheet. Although the Committee's asset purchases have had little apparent effect on securities market functioning to date, some participants felt that future asset sales could prove more challenging. In this regard, several participants noted that a decision by the Committee to hold its MBS to maturity instead of selling them would essentially eliminate this risk. A decision not to sell MBS, or to sell MBS only very slowly, would also mitigate some of the financial stability risks that could be associated with such sales as well as damp the decline in remittances to the Treasury at that time. Such a decision was also seen by some as a potential source of additional near-term policy accommodation. Overall, most meeting participants thought the risks and costs of additional asset purchases remained manageable, but also that continued close attention to these issues was warranted. A few participants noted that curtailing the purchase program was the most direct way to mitigate the costs and risks.
In light of their discussion of the benefits and costs of asset purchases, participants discussed their views on the appropriate course for the current asset purchase program. A few participants noted that they already viewed the costs as likely outweighing the benefits and so would like to bring the program to a close relatively soon. A few others saw the risks as increasing fairly quickly with the size of the Federal Reserve's balance sheet and judged that the pace of purchases would likely need to be reduced before long. Many participants, including some of those who were focused on the increasing risks, expressed the view that continued solid improvement in the outlook for the labor market could prompt the Committee to slow the pace of purchases beginning at some point over the next several meetings, while a few participants suggested that economic conditions would likely justify continuing the program at its current pace at least until late in the year. A range of views was expressed regarding the economic and labor market conditions that would call for an adjustment in the pace of purchases. Many participants emphasized that any decision to reduce the pace of purchases should reflect both an improvement in their overall outlook for labor market conditions, as implied by a wide range of available indicators, and their confidence in the sustainability of that improvement. A couple of these participants noted that if progress toward the Committee's economic goals were not maintained, the pace of purchases might appropriately be increased. A number of participants suggested that the Committee could change the mix of its policy tools if necessary to increase or maintain overall accommodation, including potentially adjusting its forward guidance or its balance sheet policies.
Committee Policy Action
Committee members saw the information received over the intermeeting period as suggesting that moderate economic growth had resumed following a pause late last year. Labor market conditions had shown signs of improvement, but the unemployment rate remained elevated. Household spending and business fixed investment had advanced, and the housing sector had strengthened further, but fiscal policy had become somewhat more restrictive. The Committee expected that, with appropriate monetary policy accommodation, economic growth would proceed at a moderate pace and result in a gradual decline in the unemployment rate toward levels that the Committee judges consistent with its dual mandate. Members generally continued to anticipate that, with longer-term inflation expectations stable and slack in resource utilization remaining, inflation over the medium term would likely run at or below the Committee's 2 percent objective.
In their discussion of monetary policy for the period ahead, members saw the economic outlook as little changed since the previous meeting, and, consequently, all but one member judged that a highly accommodative stance of monetary policy was warranted in order to foster a stronger economic recovery in a context of price stability. The Committee agreed that it would be appropriate to continue purchases of MBS at a pace of $40 billion per month and purchases of longer-term Treasury securities at a pace of $45 billion per month, as well as to maintain the Committee's reinvestment policies. The Committee also retained its forward guidance about the federal funds rate, including the thresholds on the unemployment and inflation rates. One member dissented from the Committee's policy decision, expressing concern that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in inflation expectations.
Members stressed that any changes to the purchase program should be conditional on continuing assessments both of labor market and inflation developments and of the efficacy and costs of asset purchases. In light of the current review of benefits and costs, one member judged that the pace of purchases should ideally be slowed immediately. A few members felt that the risks and costs of purchases, along with the improved outlook since last fall, would likely make a reduction in the pace of purchases appropriate around midyear, with purchases ending later this year. Several others thought that if the outlook for labor market conditions improved as anticipated, it would probably be appropriate to slow purchases later in the year and to stop them by year-end. Two members indicated that purchases might well continue at the current pace at least through the end of the year. It was also noted that were the outlook to deteriorate, the pace of purchases could be increased. In light of this discussion, the Committee included language in the statement to be released following the meeting in part to make explicit that the size, pace, and composition of its asset purchases were conditional not only on the likely efficacy and costs of those purchases, but also on the extent of progress toward the Committee's economic objectives.
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:
"Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. The Desk is directed to continue purchasing longer-term Treasury securities at a pace of about $45 billion per month and to continue purchasing agency mortgage-backed securities at a pace of about $40 billion per month. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."
The vote encompassed approval of the statement below to be released at 2:00 p.m.:
"Information received since the Federal Open Market Committee met in January suggests a return to moderate economic growth following a pause late last year. Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy has become somewhat more restrictive. Inflation has been running somewhat below the Committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent."
Voting for this action: Ben Bernanke, William C. Dudley, James Bullard, Elizabeth Duke, Charles L. Evans, Jerome H. Powell, Sarah Bloom Raskin, Eric Rosengren, Jeremy C. Stein, Daniel K. Tarullo, and Janet L. Yellen.
Voting against this action: Esther L. George.
Ms. George dissented because she continued to view monetary policy as too accommodative and therefore as posing risks to the achievement of the Committee's economic objectives in the long run. In particular, the current stance of policy could lead to financial imbalances, a mispricing of risk, and, over time, higher long-term inflation expectations. In her view, the Committee's asset purchases were providing relatively small benefits, and, given the risks that they posed as well as the improvement in the outlook for the labor market, she thought they should be wound down.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, April 30-May 1, 2013. The meeting adjourned at 11:30 a.m. on March 20, 2013.
Notation Vote
By notation vote completed on February 19, 2013, the Committee unanimously approved the minutes of the FOMC meeting held on January 29-30, 2013.
_____________________________
William B. English
Secretary
1. Attended Tuesday's session only. Return to text |
2013-03-20T00:00:00 | 2013-03-20 | Statement | Information received since the Federal Open Market Committee met in January suggests a return to moderate economic growth following a pause late last year. Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy has become somewhat more restrictive. Inflation has been running somewhat below the Committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations. |
2013-01-30T00:00:00 | 2013-01-30 | Statement | Information received since the Federal Open Market Committee met in December suggests that growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors. Employment has continued to expand at a moderate pace but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has shown further improvement. Inflation has been running somewhat below the Committeeâs longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. Although strains in global financial markets have eased somewhat, the Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committeeâs 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations. |
2013-01-30T00:00:00 | 2013-02-20 | Minute | Minutes of the Federal Open Market Committee
January 29-30, 2013
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, January 29, 2013, at 2:00 p.m., and continued on Wednesday, January 30, 2013, at 9:00 a.m.
PRESENT:
Ben Bernanke, Chairman
William C. Dudley, Vice Chairman
James Bullard
Elizabeth Duke
Charles L. Evans
Esther L. George
Jerome H. Powell
Sarah Bloom Raskin
Eric Rosengren
Jeremy C. Stein
Daniel K. Tarullo
Janet L. Yellen
Christine Cumming, Richard W. Fisher, Narayana Kocherlakota, Sandra Pianalto, and Charles I. Plosser, Alternate Members of the Federal Open Market Committee
Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively
William B. English, Secretary and Economist
Deborah J. Danker, Deputy Secretary
Matthew M. Luecke, Assistant Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Thomas C. Baxter, Deputy General Counsel
Steven B. Kamin, Economist
David W. Wilcox, Economist
Thomas A. Connors, Troy Davig, Michael P. Leahy, James J. McAndrews, Stephen A. Meyer, David Reifschneider, Daniel G. Sullivan, Christopher J. Waller, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Nellie Liang,1 Director, Office of Financial Stability Policy and Research, Board of Governors
Jon W. Faust, Special Advisor to the Board, Office of Board Members, Board of Governors
James A. Clouse and William Nelson, Deputy Directors, Division of Monetary Affairs, Board of Governors; Mark E. Van Der Weide, Deputy Director, Division of Banking Supervision and Regulation, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Joyce K. Zickler, Senior Adviser, Division of Monetary Affairs, Board of Governors
Eric M. Engen, Thomas Laubach, and David E. Lebow, Associate Directors, Division of Research and Statistics, Board of Governors
Beth Anne Wilson, Deputy Associate Director, Division of International Finance, Board of Governors
Karen M. Pence and Stacey Tevlin, Assistant Directors, Division of Research and Statistics, Board of Governors
Jeremy B. Rudd, Adviser, Division of Research and Statistics, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Andrew Figura, Group Manager, Division of Research and Statistics, Board of Governors
John C. Driscoll and Jennifer E. Roush, Senior Economists, Division of Monetary Affairs, Board of Governors; Ruth Judson, Senior Economist, Division of International Finance, Board of Governors
Jonathan D. Rose, Economist, Division of Monetary Affairs, Board of Governors
Sarah G. Green, First Vice President, Federal Reserve Bank of Richmond
David Altig, Jeff Fuhrer, Loretta J. Mester, Glenn D. Rudebusch, and Mark S. Sniderman, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Boston, Philadelphia, San Francisco, and Cleveland, respectively
Ron Feldman and Lorie K. Logan, Senior Vice Presidents, Federal Reserve Banks of Minneapolis and New York, respectively
Evan F. Koenig and Steven M. Friedman, Vice Presidents, Federal Reserve Banks of Dallas and New York, respectively
Matthew D. Raskin, Markets Officer, Federal Reserve Bank of New York
Robert L. Hetzel, Senior Economist, Federal Reserve Bank of Richmond
Annual Organizational Matters2
In the agenda for this meeting, it was reported that advices of the election of the following members and alternate members of the Federal Open Market Committee for a term beginning January 29, 2013, had been received and that these individuals had executed their oaths of office.
The elected members and alternate members were as follows:
William C. Dudley, President of the Federal Reserve Bank of New York, with Christine Cumming, First Vice President of the Federal Reserve Bank of New York, as alternate.
Eric Rosengren, President of the Federal Reserve Bank of Boston, with Charles I. Plosser, President of the Federal Reserve Bank of Philadelphia, as alternate.
Charles L. Evans, President of the Federal Reserve Bank of Chicago, with Sandra Pianalto, President of the Federal Reserve Bank of Cleveland, as alternate.
James Bullard, President of the Federal Reserve Bank of St. Louis, with Richard W. Fisher, President of the Federal Reserve Bank of Dallas, as alternate.
Esther L. George, President of the Federal Reserve Bank of Kansas City, with Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis, as alternate.
By unanimous vote, the following officers of the Federal Open Market Committee were selected to serve until the selection of their successors at the first regularly scheduled meeting of the Committee in 2014:
Ben Bernanke
Chairman
William C. Dudley
Vice Chairman
William B. English
Secretary and Economist
Deborah J. Danker
Deputy Secretary
Matthew M. Luecke
Assistant Secretary
David W. Skidmore
Assistant Secretary
Michelle A. Smith
Assistant Secretary
Scott G. Alvarez
General Counsel
Thomas C. Baxter
Deputy General Counsel
Richard M. Ashton
Assistant General Counsel
Steven B. Kamin
Economist
David W. Wilcox
Economist
Thomas A. Connors
Troy Davig
Michael P. Leahy
James J. McAndrews
Stephen A. Meyer
David Reifschneider
Daniel G. Sullivan
Geoffrey Tootell
Christopher J. Waller
William Wascher
Associate Economists
By unanimous vote, the Federal Reserve Bank of New York was selected to execute transactions for the System Open Market Account.
By unanimous vote, Simon Potter was selected to serve at the pleasure of the Committee as Manager, System Open Market Account, on the understanding that his selection was subject to being satisfactory to the Federal Reserve Bank of New York.
Secretary's note: Advice subsequently was received that the selection of Mr. Potter as Manager was satisfactory to the Federal Reserve Bank of New York.
By unanimous vote, the Authorization for Domestic Open Market Operations was approved with two amendments. The first broadened the actions that the Open Market Desk may take, at the Chairman's instruction during an intermeeting period, to include transactions to address temporary disruptions of an operational or highly unusual nature in U.S. dollar funding markets. For example, if secured funding rates were to increase to high levels in the wake of a natural disaster, the risk of a broader, more systemic disruption to the functioning of asset markets could result. In this case, the prospect that repurchase operations could potentially alleviate some of the market strains might warrant immediate action. Consistent with Committee practice, the Chairman, if feasible, would consult with the Committee before making any such instruction. The second amendment harmonized the language referring to the Committee's longer-run objectives with that in the Committee's Statement on Longer-Run Goals and Monetary Policy Strategy. The Guidelines for the Conduct of System Open Market Operations in Federal-Agency Issues remained suspended.
AUTHORIZATION FOR DOMESTIC OPEN MARKET OPERATIONS
(Amended effective on January 29, 2013)
1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, to the extent necessary to carry out the most recent domestic policy directive adopted at a meeting of the Committee:
A. To buy or sell U.S. government securities, including securities of the Federal Financing Bank, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States in the open market, from or to securities dealers and foreign and international accounts maintained at the Federal Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the System Open Market Account at market prices, and, for such Account, to exchange maturing U.S. government and federal agency securities with the Treasury or the individual agencies or to allow them to mature without replacement; and
B. To buy or sell in the open market U.S. government securities, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, for the System Open Market Account under agreements to resell or repurchase such securities or obligations (including such transactions as are commonly referred to as repo and reverse repo transactions) in 65 business days or less, at rates that, unless otherwise expressly authorized by the Committee, shall be determined by competitive bidding, after applying reasonable limitations on the volume of agreements with individual counterparties.
2. The Federal Open Market Committee authorizes the Federal Reserve Bank of New York to undertake transactions of the type described in paragraphs 1.A and 1.B from time to time for the purpose of testing operational readiness. The aggregate par value of such transactions of the type described in paragraph 1.A shall not exceed $5 billion per calendar year. The outstanding amount of such transactions of the type described in paragraph 1.B shall not exceed $5 billion at any given time. These transactions shall be conducted with prior notice to the Committee.
3. In order to ensure the effective conduct of open market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to use agents in agency MBS-related transactions.
4. In order to ensure the effective conduct of open market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to lend on an overnight basis U.S. government securities and securities that are direct obligations of any agency of the United States, held in the System Open Market Account, to dealers at rates that shall be determined by competitive bidding. The Federal Reserve Bank of New York shall set a minimum lending fee consistent with the objectives of the program and apply reasonable limitations on the total amount of a specific issue that may be auctioned and on the amount of securities that each dealer may borrow. The Federal Reserve Bank of New York may reject bids that could facilitate a dealer's ability to control a single issue as determined solely by the Federal Reserve Bank of New York. The Federal Reserve Bank of New York may lend securities on longer than an overnight basis to accommodate weekend, holiday, and similar trading conventions.
5. In order to ensure the effective conduct of open market operations, while assisting in the provision of short-term investments or other authorized services for foreign and international accounts maintained at the Federal Reserve Bank of New York and accounts maintained at the Federal Reserve Bank of New York as fiscal agent of the United States pursuant to section 15 of the Federal Reserve Act, the Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York:
A. For the System Open Market Account, to sell U.S. government securities and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States to such accounts on the bases set forth in paragraph 1.A under agreements providing for the resale by such accounts of those securities in 65 business days or less on terms comparable to those available on such transactions in the market;
B. For the New York Bank account, when appropriate, to undertake with dealers, subject to the conditions imposed on purchases and sales of securities in paragraph l.B, repurchase agreements in U.S. government securities and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, and to arrange corresponding sale and repurchase agreements between its own account and such foreign, international, and fiscal agency accounts maintained at the Bank; and
C. For the New York Bank account, when appropriate, to buy U.S. government securities and obligations that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States from such foreign and international accounts maintained at the Bank under agreements providing for the repurchase by such accounts of those securities on the same business day.
Transactions undertaken with such accounts under the provisions of this paragraph may provide for a service fee when appropriate.
6. In the execution of the Committee's decision regarding policy during any intermeeting period, the Committee authorizes and directs the Federal Reserve Bank of New York, upon the instruction of the Chairman of the Committee, to (i) adjust somewhat in exceptional circumstances the degree of pressure on reserve positions and hence the intended federal funds rate and to take actions that result in material changes in the composition and size of the assets in the System Open Market Account other than those anticipated by the Committee at its most recent meeting or (ii) undertake transactions of the type described in paragraphs 1.A and 1.B in order to appropriately address temporary disruptions of an operational or highly unusual nature in U.S. dollar funding markets. Any such adjustment as described in clause (i) shall be made in the context of the Committee's discussion and decision at its most recent meeting and the Committee's long-run objectives to foster maximum employment and price stability, and shall be based on economic, financial, and monetary developments during the intermeeting period. Consistent with Committee practice, the Chairman, if feasible, will consult with the Committee before making any instruction under this paragraph.
The Committee voted unanimously to amend the Authorization for Foreign Currency Operations and the Procedural Instructions with Respect to Foreign Currency Operations, and to reaffirm the Foreign Currency Directive in the form shown below. The approval of these documents included approval of the System's warehousing agreement with the U.S. Treasury. The Authorization for Foreign Currency Operations and the Procedural Instructions with Respect to Foreign Currency Operations were amended to include the authority to conduct small-value operations against the full range of foreign transactions that the Desk is authorized to conduct. This change was made to allow for prudent testing of operational readiness, and is similar in purpose to the amendment that the Committee approved in June 2012 to the Authorization for Domestic Open Market Operations.
AUTHORIZATION FOR FOREIGN CURRENCY OPERATIONS
(Amended effective on January 29, 2013)
1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, for the System Open Market Account, to the extent necessary to carry out the Committee's foreign currency directive and express authorizations by the Committee pursuant thereto, and in conformity with such procedural instructions as the Committee may issue from time to time:
A. To purchase and sell the following foreign currencies in the form of cable transfers through spot or forward transactions on the open market at home and abroad, including transactions with the U.S. Treasury, with the U.S. Exchange Stabilization Fund established by section 10 of the Gold Reserve Act of 1934, with foreign monetary authorities, with the Bank for International Settlements, and with other international financial institutions:
Australian dollars
Brazilian reais
Canadian dollars
Danish kroner
euro
Japanese yen
Korean won
Mexican pesos
New Zealand dollars
Norwegian kroner
Pounds sterling
Singapore dollars
Swedish kronor
Swiss francs
B. To hold balances of, and to have outstanding forward contracts to receive or to deliver, the foreign currencies listed in paragraph A above.
C. To draw foreign currencies and to permit foreign banks to draw dollars under the reciprocal currency arrangements listed in paragraph 2 below, provided that drawings by either party to any such arrangement shall be fully liquidated within 12 months after any amount outstanding at that time was first drawn, unless the Committee, because of exceptional circumstances, specifically authorizes a delay.
D. To maintain an overall open position in all foreign currencies not exceeding $25.0 billion. For this purpose, the overall open position in all foreign currencies is defined as the sum (disregarding signs) of net positions in individual currencies, excluding changes in dollar value due to foreign exchange rate movements and interest accruals. The net position in a single foreign currency is defined as holdings of balances in that currency, plus outstanding contracts for future receipt, minus outstanding contracts for future delivery of that currency, i.e., as the sum of these elements with due regard to sign.
2. The Federal Open Market Committee directs the Federal Reserve Bank of New York to maintain reciprocal currency arrangements ("swap" arrangements) for the System Open Market Account for periods up to a maximum of 12 months with the following foreign banks, which are among those designated by the Board of Governors of the Federal Reserve System under section 214.5 of Regulation N, Relations with Foreign Banks and Bankers, and with the approval of the Committee to renew such arrangements on maturity:
Foreign bank
Amount of arrangement
(millions of dollars equivalent)
Bank of Canada
2,000
Bank of Mexico
3,000
Any changes in the terms of existing swap arrangements, and the proposed terms of any new arrangements that may be authorized, shall be referred for review and approval to the Committee.
3. All transactions in foreign currencies undertaken under paragraph 1.A above shall, unless otherwise expressly authorized by the Committee, be at prevailing market rates. For the purpose of providing an investment return on System holdings of foreign currencies or for the purpose of adjusting interest rates paid or received in connection with swap drawings, transactions with foreign central banks may be undertaken at non-market exchange rates.
4. It shall be the normal practice to arrange with foreign central banks for the coordination of foreign currency transactions. In making operating arrangements with foreign central banks on System holdings of foreign currencies, the Federal Reserve Bank of New York shall not commit itself to maintain any specific balance, unless authorized by the Federal Open Market Committee. Any agreements or understandings concerning the administration of the accounts maintained by the Federal Reserve Bank of New York with the foreign banks designated by the Board of Governors under section 214.5 of Regulation N shall be referred for review and approval to the Committee.
5. Foreign currency holdings shall be invested to ensure that adequate liquidity is maintained to meet anticipated needs and so that each currency portfolio shall generally have an average duration of no more than 18 months (calculated as Macaulay duration). Such investments may include buying or selling outright obligations of, or fully guaranteed as to principal and interest by, a foreign government or agency thereof; buying such securities under agreements for repurchase of such securities; selling such securities under agreements for the resale of such securities; and holding various time and other deposit accounts at foreign institutions. In addition, when appropriate in connection with arrangements to provide investment facilities for foreign currency holdings, U.S. government securities may be purchased from foreign central banks under agreements for repurchase of such securities within 30 calendar days.
6. All operations undertaken pursuant to the preceding paragraphs shall be reported promptly to the Foreign Currency Subcommittee and the Committee. The Foreign Currency Subcommittee consists of the Chairman and Vice Chairman of the Committee, the Vice Chairman of the Board of Governors, and such other member of the Board as the Chairman may designate (or in the absence of members of the Board serving on the Subcommittee, other Board members designated by the Chairman as alternates, and in the absence of the Vice Chairman of the Committee, the Vice Chairman's alternate). Meetings of the Subcommittee shall be called at the request of any member, or at the request of the Manager, System Open Market Account ("Manager"), for the purposes of reviewing recent or contemplated operations and of consulting with the Manager on other matters relating to the Manager's responsibilities. At the request of any member of the Subcommittee, questions arising from such reviews and consultations shall be referred for determination to the Federal Open Market Committee.
7. The Chairman is authorized:
A. With the approval of the Committee, to enter into any needed agreement or understanding with the Secretary of the Treasury about the division of responsibility for foreign currency operations between the System and the Treasury;
B. To keep the Secretary of the Treasury fully advised concerning System foreign currency operations, and to consult with the Secretary on policy matters relating to foreign currency operations;
C. From time to time, to transmit appropriate reports and information to the National Advisory Council on International Monetary and Financial Policies.
8. Staff officers of the Committee are authorized to transmit pertinent information on System foreign currency operations to appropriate officials of the Treasury Department.
9. All Federal Reserve Banks shall participate in the foreign currency operations for System Account in accordance with paragraph 3G(1) of the Board of Governors' Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks dated January 1, 1944.
10. The Federal Open Market Committee authorizes the Federal Reserve Bank of New York to undertake transactions of the type described in paragraphs 1, 2, and 5, and foreign exchange and investment transactions that it may be otherwise authorized to undertake from time to time for the purpose of testing operational readiness. The aggregate amount of such transactions shall not exceed $2.5 billion per calendar year. These transactions shall be conducted with prior notice to the Committee.
PROCEDURAL INSTRUCTIONS WITH RESPECT TO FOREIGN CURRENCY OPERATIONS
(Amended effective on January 29, 2013)
In conducting operations pursuant to the authorization and direction of the Federal Open Market Committee as set forth in the Authorization for Foreign Currency Operations and the Foreign Currency Directive, the Federal Reserve Bank of New York, through the Manager, System Open Market Account ("Manager"), shall be guided by the following procedural understandings with respect to consultations and clearances with the Committee, the Foreign Currency Subcommittee, and the Chairman of the Committee, unless otherwise directed by the Committee. All operations undertaken pursuant to such clearances shall be reported promptly to the Committee.
1. The Manager shall clear with the Subcommittee (or with the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available):
A. Any operation that would result in a change in the System's overall open position in foreign currencies exceeding $300 million on any day or $600 million since the most recent regular meeting of the Committee.
B. Any operation that would result in a change on any day in the System's net position in a single foreign currency exceeding $150 million, or $300 million when the operation is associated with re-payment of swap drawings.
C. Any operation that might generate a substantial volume of trading in a particular currency by the System, even though the change in the System's net position in that currency might be less than the limits specified in 1.B.
D. Any swap drawing proposed by a foreign bank not exceeding the larger of (i) $200 million or (ii) 15 percent of the size of the swap arrangement.
2. The Manager shall clear with the Committee (or with the Subcommittee, if the Subcommittee believes that consultation with the full Committee is not feasible in the time available, or with the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available):
A. Any operation that would result in a change in the System's overall open position in foreign currencies exceeding $1.5 billion since the most recent regular meeting of the Committee.
B. Any swap drawing proposed by a foreign bank exceeding the larger of (i) $200 million or (ii) 15 percent of the size of the swap arrangement.
3. The Manager shall also consult with the Subcommittee or the Chairman about proposed swap drawings by the System and about any operations that are not of a routine character.
4. The Federal Open Market Committee authorizes the Federal Reserve Bank of New York to undertake transactions of the type described in paragraphs 1, 2, and 5 of the Foreign Authorization and foreign exchange and investment transactions that it may be otherwise authorized to undertake from time to time for the purpose of testing operational readiness. The aggregate amount of such transactions shall not exceed $2.5 billion per calendar year. These transactions shall be conducted with prior notice to the Committee.
FOREIGN CURRENCY DIRECTIVE
(Reaffirmed January 29, 2013)
1. System operations in foreign currencies shall generally be directed at countering disorderly market conditions, provided that market exchange rates for the U.S. dollar reflect actions and behavior consistent with IMF Article IV, Section 1.
2. To achieve this end the System shall:
A. Undertake spot and forward purchases and sales of foreign exchange.
B. Maintain reciprocal currency ("swap") arrangements with selected foreign central banks.
C. Cooperate in other respects with central banks of other countries and with international monetary institutions.
3. Transactions may also be undertaken:
A. To adjust System balances in light of probable future needs for currencies.
B. To provide means for meeting System and Treasury commitments in particular currencies, and to facilitate operations of the Exchange Stabilization Fund.
C. For such other purposes as may be expressly authorized by the Committee.
4. System foreign currency operations shall be conducted:
A. In close and continuous consultation and cooperation with the United States Treasury;
B. In cooperation, as appropriate, with foreign monetary authorities; and
C. In a manner consistent with the obligations of the United States in the International Monetary Fund regarding exchange arrangements under IMF Article IV.
All participants but one supported making only minor wording changes to the Statement on Longer-Run Goals and Monetary Policy Strategy. Mr. Tarullo abstained because he did not think the statement had advanced the cause of achieving or communicating greater consensus in the policy views of the Committee.
STATEMENT ON LONGER-RUN GOALS AND MONETARY POLICY STRATEGY
(Amended effective on January 29, 2013)
"The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.
Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee's policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee's goals.
The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances.
The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants' estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC's Summary of Economic Projections. For example, in the most recent projections, FOMC participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 6.0 percent, unchanged from one year ago but substantially higher than the corresponding interval several years earlier.
In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate.
The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January."
By unanimous vote, the Policy on External Communications of Committee Participants and the Policy on External Communications of Federal Reserve System Staff were amended to clarify the precise beginning and end of the communication blackout period surrounding regular meetings of the Federal Open Market Committee (FOMC).
By unanimous vote, the Rules of Procedure were amended to change the quorum requirements to state that a meeting of the FOMC could not be convened without a representative of a Reserve Bank.
By unanimous vote, the Committee reaffirmed its Program for Security of FOMC Information.
Developments in Financial Markets and the Federal Reserve's Balance Sheet
The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets as well as the System open market operations during the period since the FOMC met on December 11-12, 2012. By unanimous vote, the Committee ratified the Open Market Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
Staff Review of the Economic Situation
The information reviewed at the January 29-30 meeting indicated that the expansion in overall economic activity slowed in the fourth quarter of last year, reflecting weather-related disruptions and other transitory factors, but private domestic final demand grew at a solid rate. Employment continued to increase at a moderate pace, and the unemployment rate, though still high, was lower at the end of the fourth quarter than in the preceding quarter. Consumer price inflation was subdued, and measures of longer-run inflation expectations remained stable.
Private nonfarm employment expanded in December at about the same rate as in the fourth quarter as a whole, while government employment decreased. The unemployment rate was 7.8 percent in December, below its average in the third quarter, while the labor force participation rate was the same as its third-quarter average. The rate of long-duration unemployment and the share of workers employed part time for economic reasons edged down in December, but both measures were still elevated. The rate of private-sector hiring, along with indicators of job openings and firms' hiring plans, was generally muted but remained consistent with continued moderate increases in employment in the coming months.
Manufacturing production increased briskly in November and December after declining in October when activity was disrupted by Hurricane Sandy. As a result, factory output expanded only slightly in the fourth quarter as a whole, and the rate of manufacturing capacity utilization was only a little higher in December than in the third quarter. The production of motor vehicles and parts increased considerably in the fourth quarter, but factory output outside of the motor vehicle sector declined somewhat. Automakers' schedules indicated that the pace of motor vehicle assemblies in the first quarter would be roughly the same as in the fourth quarter. Broader indicators of manufacturing production, such as the diffusion indexes of new orders from the national and regional manufacturing surveys, were at levels consistent with only modest increases in factory output in the near term.
Increases in real personal consumption expenditures picked up somewhat in the fourth quarter, boosted importantly by higher spending on motor vehicles. After being roughly flat in the third quarter, households' real disposable income rose considerably, in part reflecting an acceleration of income payments in anticipation of increases in individual income tax rates after the turn of the year. In December and January, consumer sentiment was more downbeat than in the previous several months.
Conditions in the housing sector continued to improve, but construction activity remained at a relatively low level, restrained by tight underwriting standards for mortgage loans and the substantial inventory of foreclosed and distressed properties. Starts of both new single-family homes and multifamily units advanced in the fourth quarter, and permits also rose, which pointed to additional gains in construction in the coming months. Home prices increased further in November. In the fourth quarter, sales of both new and existing homes were higher than in the previous quarter.
Real business expenditures on equipment and software rose briskly in the fourth quarter after declining moderately in the preceding quarter. Although nominal new orders for nondefense capital goods excluding aircraft also increased markedly last quarter, the level of orders remained below shipments. Moreover, other recent forward-looking indicators, such as surveys of business conditions and capital spending plans, suggested that outlays for business equipment would rise only modestly in the coming months. Real business spending for nonresidential construction declined somewhat in the fourth quarter and remained at a relatively low level. A reduction in the accumulation of nonfarm business inventories subtracted a considerable amount from the change in real gross domestic product (GDP) in the fourth quarter.
Real federal government purchases decreased substantially in the fourth quarter, primarily because of a sharp decline in defense spending that followed a marked increase in the previous quarter. Real state and local government purchases decreased slightly in the fourth quarter.
The U.S. international trade deficit widened substantially in November, as imports rose more quickly than exports. The rise in imports was fairly broad-based, led by strong increases in consumer goods, while the increase in exports mainly reflected higher sales of capital goods and automotive products. Exports to Europe posted another significant decline in November. Based on data for October and November and an estimate of the trade data for December, the advance release of the national income and product accounts showed that real net exports of goods and services made a small negative arithmetic contribution to the change in U.S. real GDP in the fourth quarter, with exports declining more than imports.
Overall U.S. consumer prices increased more slowly in the fourth quarter than in the previous quarter. Consumer energy prices declined in November and December, and survey data indicated that retail gasoline prices fell further in the first few weeks of January. Consumer food prices continued to rise at a faster pace in November and December than in the third quarter, likely reflecting the ongoing effects of last summer's drought. In the fourth quarter, the rise in consumer prices excluding food and energy slowed. Near-term inflation expectations from the Thomson Reuters/University of Michigan Surveys of Consumers rose a little in December and early January; longer-term inflation expectations were unchanged.
Available measures of labor compensation indicated that recent gains in nominal wages remained relatively slow. Increases in average hourly earnings for all employees picked up a little in the fourth quarter but continued to be fairly subdued.
Economic growth in the advanced foreign economies appeared to remain weak in the fourth quarter. In the euro area, industrial production and retail sales were below their third-quarter levels through November, and real GDP contracted in the United Kingdom. In Japan, indicators of production and exports remained weak; however, household consumption showed some improvement, and the new government introduced a large fiscal stimulus program and called for aggressive monetary easing to end deflation. In emerging market economies, real GDP growth is estimated to have picked up in China in the fourth quarter, consistent with other Chinese indicators that pointed to an improvement in activity. Production and exports rebounded at year-end in a number of other emerging Asian economies as well. Inflation generally remained well contained in both advanced foreign economies and emerging market economies.
Staff Review of the Financial Situation
U.S. financial market conditions improved on net between the December and January FOMC meetings, largely in response to the partial resolution of the issues associated with the so-called fiscal cliff, a positive start to the corporate earnings reporting season, and some favorable policy developments in Europe.
The expected path of the federal funds rate based on market quotes moved up on balance over the intermeeting period, likely reflecting a somewhat more positive assessment of the economic outlook. Results from the Desk's survey of primary dealers conducted prior to the January meeting showed that dealers continued to view the third quarter of 2015 as the most likely time of the first increase in the target federal funds rate. In addition, the median dealer continued to see the first quarter of 2014 as the most likely time for the Committee's asset purchases to conclude, although fewer dealers than in December expected those purchases to continue beyond 2014.
Treasury coupon yields increased over the intermeeting period, including a notable rise just after year-end when passage of the American Taxpayer Relief Act of 2012 apparently lessened concerns about the risk of substantially higher fiscal drag on growth in the near term. More-positive investor sentiment regarding the outlook for global economic growth, along with some optimism about a federal debt ceiling deal, may also have contributed to the increase in yields. Measures of inflation compensation derived from nominal and inflation-protected Treasury securities rose slightly over the intermeeting period.
Conditions in short-term dollar funding markets were generally little changed on balance; year-end funding pressures were modest overall and roughly in line with market expectations. The outstanding amount of unsecured commercial paper issued by European financial institutions increased noticeably.
Indicators of the condition of domestic financial institutions generally improved over the intermeeting period. A broad index of bank stock prices rose, and the median spread on credit default swaps of the largest banking organizations moved lower.
Broad U.S. equity price indexes increased on net over the intermeeting period, buoyed by many of the same factors that contributed to the rise in Treasury yields. In addition, the fourth-quarter earnings reporting season started off well, as earnings and revenue results were above analysts' expectations for a higher-than-average number of firms. Option-implied volatility for the S&P 500 index over the near term dipped to its lowest level since early 2007. The option-implied price of insurance against downside risk on the index at longer horizons remained elevated.
Yields on speculative-grade corporate bonds decreased over the intermeeting period, and yields on investment-grade corporate bonds were up a bit. Risk spreads on speculative-grade bonds narrowed substantially, and spreads on investment-grade bonds decreased as well.
Net debt financing by nonfinancial firms increased in the fourth quarter. Outstanding volumes of corporate bonds, commercial and industrial loans, and nonfinancial commercial paper all expanded. The pace of gross public issuance of equity by nonfinancial firms remained solid in the fourth quarter, but it was subdued in January, likely because of seasonal factors.
Conditions in the commercial real estate sector continued to be strained amid elevated vacancy and delinquency rates. However, issuance of commercial mortgage-backed securities strengthened during the fourth quarter, and spreads on those securities narrowed over the intermeeting period.
Conforming home mortgage rates edged up, on net, after touching new lows during the intermeeting period. Yields on residential mortgage-backed securities (MBS) rose by more, leaving the spread between the primary mortgage rate and MBS yields narrower. Mortgage refinancing originations in December and January stayed near their highest levels since the housing market began to recover. The share of existing mortgages that were seriously delinquent edged down in October and November but remained high.
Consumer credit expanded briskly again in October and November. Nonrevolving credit continued to increase at a robust pace because of growth in student and auto loans, while revolving credit moved roughly sideways. Issuance of consumer asset-backed securities remained strong in the fourth quarter.
Growth of bank credit in the fourth quarter slowed to about half its pace compared with earlier in the year, as loan growth declined. According to the January Senior Loan Officer Opinion Survey on Bank Lending Practices, domestic banks continued to ease somewhat their lending standards and some loan terms, on balance; they also experienced an increase in demand, on net, in most major loan categories in the fourth quarter.
M2 and its largest component, liquid deposits, expanded robustly in December. Initial data suggested that the expiration of unlimited deposit insurance on noninterest-bearing transaction accounts at year-end had only a limited effect on bank deposits through early January. The monetary base expanded at a strong rate in December, reflecting growth in both currency and reserve balances.
Foreign financial conditions improved over the intermeeting period as markets responded favorably to the passage of fiscal policy legislation in the United States and to further progress in addressing euro-area strains. On net, global equity prices rose and euro-area peripheral spreads narrowed. As global risk sentiment improved, the dollar depreciated against the euro and most emerging market currencies. Against the yen, however, the dollar appreciated substantially. The yen's depreciation appeared to occur in part in response to statements from Japan's new prime minister, who urged the Bank of Japan to ease policy more aggressively. At its January meeting, the Bank of Japan restated its monetary policy framework, replacing its inflation goal of 1 percent with an inflation target of 2 percent, and announced it would commence a program of asset purchases in January 2014 with no predetermined limit on the maximum amount ultimately purchased. Yields on long-term Japanese sovereign bonds rose a few basis points on net over the intermeeting period, but yields on other foreign benchmark sovereign bonds increased more, reflecting both the improvement in global sentiment and reduced expectations for additional monetary accommodation, as the European Central Bank and the Bank of England kept their policy rates on hold and appeared to signal less likelihood of further easing.
Staff Economic Outlook
In the economic forecast prepared by the staff for the January meeting of the FOMC, the near-term projection for real GDP growth was revised up, in large part because the fiscal policy legislation enacted in early January was slightly less restrictive than the staff had assumed. The staff's medium-term forecast for real GDP growth was essentially unchanged. With fiscal policy still anticipated to be tighter this year than last year, the staff expected that increases in real GDP would only moderately exceed the growth rate of potential output. In 2014 and 2015, real GDP was projected to accelerate gradually, supported by an eventual lessening of fiscal policy restraint, increases in consumer and business sentiment, further improvements in credit availability and financial conditions, and accommodative monetary policy. The expansion in economic activity was expected to slowly reduce the slack in labor and product markets over the projection period, and progress in reducing the unemployment rate was anticipated to be gradual.
The staff's forecast for inflation was little changed from that prepared for the December FOMC meeting. The staff continued to project that inflation would be subdued through 2015. That forecast is based on the expectation that crude oil prices will trend down slowly from their current levels, the boost to retail food prices from last summer's drought will be temporary and relatively small, longer-run inflation expectations will remain stable, and significant resource slack will persist over the forecast period.
Participants' Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation, meeting participants indicated that they viewed the information received during the intermeeting period as suggesting that, apart from some temporary factors that had led to a pause in overall output growth in recent months, the economy remained on a moderate growth path. In particular, participants saw the economic outlook as little changed or modestly improved relative to the December meeting. Most participants judged that there had been some reduction in downside risks facing the economy: Strains in global financial markets had eased somewhat, and U.S. fiscal policymakers had come to a partial resolution of the so-called fiscal cliff. Supported by a highly accommodative stance of monetary policy, the housing sector was strengthening, and the unemployment rate appeared likely to continue its gradual decline. Nearly all participants anticipated that inflation over the medium-term would run at or below the Committee's 2 percent objective.
In their discussion of the household sector, participants noted various factors influencing consumer spending. Some participants stated that low interest rates appeared to be contributing to strong sales of autos or, more generally, of consumer durables. It was also noted that continued deleveraging by households was improving their financial positions, which would likely support increased spending. Holiday shopping reportedly was relatively solid, and, reflecting the improvement in the housing market, demand for home furnishings and construction materials was up. However, some participants were concerned that the recent increase in the payroll tax could have a significant negative effect on spending, particularly on the part of lower-income consumers.
Participants remarked on the ongoing recovery in the housing market, pointing variously to rising house prices, growth in residential construction and sales, and the lower inventory of homes for sale. A number of participants thought it likely that higher home values and low mortgage rates were helping support other sectors of the economy as well, and a couple saw the housing market as having the potential to cause overall growth to be stronger than expected this year. Nonetheless, it was noted that mortgage credit remained tight and the fraction of homeowners with mortgage balances exceeding the value of their homes remained high.
In general, participants indicated that, relative to the recent past, more business contacts reported an improvement in confidence and some cautious optimism about the economic outlook. Anecdotal reports suggested that uncertainty about the evolution of the economy and government policy continued to restrain firms' hiring and capital spending decisions, but the passage of fiscal legislation in early January helped resolve some of the uncertainty about federal tax policy. Moreover, it was noted that businesses were in a good position to expand once they came to view the economic environment as more favorable. Survey data from one District indicated that more than half of the respondents expected to increase employment this year, with many citing expected sales growth as the reason. Reports from a number of industries across the country also suggested a more positive assessment of future prospects, particularly in the automotive, energy, and technology sectors. However, reports from the non-automotive manufacturing sector were less positive. In agriculture, record payouts from crop insurance following last year's drought supported farm incomes, and land prices continued to rise. Reports on business conditions in the commercial real estate sector were more mixed but, on the whole, somewhat improved. The strength of exports reportedly varied, with indications of higher demand from Mexico but some relatively pessimistic readings from firms about business conditions in Europe. Participants generally welcomed an apparent pickup in economic growth in parts of Asia and saw reduced risk that the Chinese economy would slow abruptly, but it was noted that no economy was currently in a position to lead global growth higher.
The passage of legislation in early January resolved some of the uncertainties surrounding the federal fiscal outlook, but near-term uncertainties remained, including the prospect of automatic budget cuts. Participants generally agreed that fiscal negotiations could develop in a way that would result in significantly greater drag on economic growth than in their baseline outlook. One participant noted positive news about the fiscal position of the states; in some cases, revenues had risen sufficiently to enable increases in state government spending and employment.
In their comments on labor market developments, participants viewed the decline in the unemployment rate from the third quarter to the fourth and the continued moderate gains in payroll employment as consistent with a gradually improving job market. However, the unemployment rate remained well above estimates of its longer-run normal level, and other indicators, such as the share of long-term unemployed and the number of people working part time for economic reasons, suggested that the recovery in the labor market was far from complete. One participant reported that firms in his District continued to have difficulty finding workers with suitable skills, suggesting that labor market mismatch was a factor deterring job growth. A few others, however, pointed to evidence that weak aggregate demand was the primary factor restraining job growth, citing data and analyses in support of the view that there was still a substantial margin of slack in the labor market. For example, a couple of participants noted evidence suggesting that a shift in the relationship between the unemployment rate and the level of job vacancies in recent years was unlikely to persist as the economy recovered and unemployment benefits returned to customary levels. Similarly, one participant cited empirical analysis showing that employment growth was lower in the states where a greater share of small businesses identified lack of demand as their most important business problem. Several participants expressed concern that continuation of only slow job growth and persistently high long-duration unemployment could lead to permanent damage to the labor market.
Participants generally saw recent price developments as consistent with their projections that inflation would remain at or below the Committee's 2 percent objective over the medium run. There was little evidence of wage or cost pressures outside of isolated sectors, and measures of inflation expectations remained stable. However, a few participants expressed concerns that the current highly accommodative stance of monetary policy posed upside risks to inflation in the medium or longer term.
Participants also touched on the implications for monetary policy of changes in estimates of the economy's potential output. A number of participants thought that the growth of potential output had been reduced in recent years, possibly in part because restrictive financial conditions and weak economic activity in the aftermath of the financial crisis had reduced investment, business formation, and the pace of adoption of new technologies. Many of these participants worried that, should the economy continue to operate below potential for too long, reduced investment and underutilization of labor could further undermine the growth of potential output over time. A couple of participants noted that uncertainties concerning both the level of, and the source of shifts in, potential output made it difficult to base decisions about monetary policy on real-time measures of the output gap.
Participants noted that financial conditions appeared to have been supported by the recent fiscal agreement, a perceived reduction in the risk that the debt ceiling would not be raised in a timely manner, accommodative monetary policy, and actions taken by European authorities. With regard to Europe, participants continued to see downside risks to growth emanating from that region, given its unresolved imbalances and weak economic outlook. Several participants mentioned that domestic credit conditions appeared to have improved: Automobile loans were expanding rapidly and it was reported that competition to make commercial and industrial loans was robust. Although mortgage availability was still limited, a couple of participants indicated that they expected increased competition to bring about some lessening of the restraints on mortgage credit. In general, after having been depressed for some time, investor appetite for risk had increased. A few participants commented that the Committee's accommodative policies were intended in part to promote a more balanced approach to risk-taking, but several others expressed concern about the potential for excessive risk-taking and adverse consequences for financial stability. Some participants mentioned the potential for a sharp increase in longer-term interest rates to adversely affect financial stability and indicated their interest in further work on this topic.
The Committee again discussed the possible benefits and costs of additional asset purchases. Most participants commented that the Committee's asset purchases had been effective in easing financial conditions and helping stimulate economic activity, and many pointed, in particular, to the support that low longer-term interest rates had provided to housing or consumer durable purchases. In addition, the Committee's highly accommodative policy was seen as helping keep inflation over the medium term closer to its longer-run goal of 2 percent than would otherwise have been the case. Policy was also aimed at improving the labor market outlook. In this regard, several participants stressed the economic and social costs of high unemployment, as well as the potential for negative effects on the economy's longer-term path of a prolonged period of underutilization of resources. However, many participants also expressed some concerns about potential costs and risks arising from further asset purchases. Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behavior that could undermine financial stability. Several participants noted that a very large portfolio of long-duration assets would, under certain circumstances, expose the Federal Reserve to significant capital losses when these holdings were unwound, but others pointed to offsetting factors and one noted that losses would not impede the effective operation of monetary policy. A few also raised concerns about the potential effects of further asset purchases on the functioning of particular financial markets, although a couple of other participants noted that there had been little evidence to date of such effects. In light of this discussion, the staff was asked for additional analysis ahead of future meetings to support the Committee's ongoing assessment of the asset purchase program.
Several participants emphasized that the Committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved. For example, one participant argued that purchases should vary incrementally from meeting to meeting in response to incoming information about the economy. A number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred. Several others argued that the potential costs of reducing or ending asset purchases too soon were also significant, or that asset purchases should continue until a substantial improvement in the labor market outlook had occurred. A few participants noted examples of past instances in which policymakers had prematurely removed accommodation, with adverse effects on economic growth, employment, and price stability; they also stressed the importance of communicating the Committee's commitment to maintaining a highly accommodative stance of policy as long as warranted by economic conditions. In this regard, a number of participants discussed the possibility of providing monetary accommodation by holding securities for a longer period than envisioned in the Committee's exit principles, either as a supplement to, or a replacement for, asset purchases.
Participants also discussed the economic thresholds in the Committee's forward guidance on the path of the federal funds rate. On the whole, participants judged that financial markets had adapted to the shift from date-based communication to guidance based on economic thresholds without difficulty, although a few participants stated that communications challenges remained. For example, one participant commented that some market participants appeared to have incorrectly interpreted the thresholds as triggers that, when reached, would necessarily lead to an immediate rise in the federal funds rate. A couple of participants noted that this policy tool would be more effective if the Committee were able to communicate a consensus expectation for the path of the federal funds rate after a threshold was crossed. One participant also indicated a preference for lowering the threshold for the unemployment rate as a means of providing additional accommodation.
Committee Policy Action
Committee members saw the information received over the intermeeting period as suggesting that growth in economic activity had paused in recent months, in large part because of weather-related disruptions and other transitory factors. Employment had continued to expand at a moderate pace, but the unemployment rate remained elevated. However, members generally expected that, with appropriately accommodative monetary policy, economic growth would proceed at a moderate pace and the unemployment rate would gradually decline toward levels they judged to be consistent with the Committee's dual mandate. Although members saw strains in global financial markets as having eased somewhat, they continued to see an increase in such strains as well as slower global growth and a greater-than-expected fiscal tightening in the United States as downside risks to the economy. Members generally continued to anticipate that, with longer-term inflation expectations stable and slack in resource utilization remaining, inflation over the medium term would run at or below the Committee's longer-run objective of 2 percent.
In their discussion of monetary policy for the period ahead, members saw the economic outlook as relatively little changed since the previous meeting. Accordingly, all but one member judged that maintaining the highly accommodative stance of monetary policy was warranted in order to foster a stronger economic recovery in a context of price stability. The Committee agreed that it would be appropriate to continue purchases of MBS at a pace of $40 billion per month and purchases of longer-term Treasury securities at a pace of $45 billion per month, as well as to maintain the Committee's reinvestment policies. The Committee also retained its forward guidance about the federal funds rate, including the thresholds on the unemployment and inflation rates. Some members remarked favorably on the move away from providing calendar dates in the forward guidance and toward highlighting the economic conditionality of future monetary policy. One member dissented from the Committee's policy decision, expressing concern that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.
In the statement to be released following the meeting, the Committee made relatively small modifications to the language of its December statement, including to acknowledge both the pause in economic growth during the fourth quarter and some easing of the strains in global financial markets. In light of the importance of ongoing U.S. fiscal concerns, members discussed whether to include a reference to unresolved fiscal issues, but decided to refrain. Similarly, one member raised a question about whether the statement language adequately captured the importance of the Committee's assessment of the likely efficacy and costs in its asset purchase decisions, but the Committee decided to maintain the current language pending a review, planned for the March meeting, of its asset purchases.
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:
"Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. The Desk is directed to continue purchasing longer-term Treasury securities at a pace of about $45 billion per month and to continue purchasing agency mortgage-backed securities at a pace of about $40 billion per month. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."
The vote encompassed approval of the statement below to be released at 2:15 p.m.:
"Information received since the Federal Open Market Committee met in December suggests that growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors. Employment has continued to expand at a moderate pace but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has shown further improvement. Inflation has been running somewhat below the Committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. Although strains in global financial markets have eased somewhat, the Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent."
Voting for this action: Ben Bernanke, William C. Dudley, James Bullard, Elizabeth Duke, Charles L. Evans, Jerome H. Powell, Sarah Bloom Raskin, Eric Rosengren, Jeremy C. Stein, Daniel K. Tarullo, and Janet L. Yellen.
Voting against this action: Esther L. George.
Ms. George dissented out of concern that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in inflation expectations. In her view, the potential costs and risks posed by the Committee's asset purchases outweighed their uncertain benefits. Although she noted that monetary policy needed to remain supportive of the economy, Ms. George believed that policy had become too accommodative and that possible unintended side effects of ongoing asset purchases, posing risks to financial stability and complicating future monetary policy, argued against continuing on the Committee's current path.
Discussion of Communications Regarding Economic Projections
As a follow-up to the FOMC's discussion in October about providing more information on the Committee's collective judgment regarding the economic outlook and appropriate monetary policy, the staff presented several options for enhancing the Summary of Economic Projections (SEP). Most of the options involved displaying the information currently collected from participants in new ways by using different summary statistics or aggregations. In the ensuing discussion, participants expressed a range of views on the advantages and disadvantages of implementing changes to the SEP. For example, they generally judged that the addition of the median of participants' projections could be useful to better illustrate the central outlook of the Committee. Many participants also expressed interest in exploring the potential for using the SEP to convey information about issues related to the Committee's future asset purchases and the Federal Reserve's balance sheet. However, the discussion highlighted the complexity involved in providing this information, in part because participants' quantitative assessments of the likely evolution of the Federal Reserve's asset holdings under appropriate policy may not adequately convey the nature of the conditionality and the broader cost-benefit considerations guiding the Committee's actions in this area. At the end of the discussion, the Chairman asked the subcommittee on communications to explore potential approaches to providing more information about participants' individual views of appropriate balance sheet policy and its conditionality.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, March 19-20, 2013. The meeting adjourned at 1:45 p.m. on January 30, 2013.
Notation Vote
By notation vote completed on January 2, 2013, the Committee unanimously approved the minutes of the FOMC meeting held on December 11-12, 2012.
_____________________________
William B. English
Secretary
1. Attended Tuesday's session only. Return to text
2. Versions of the current Committee documents are available at http://www.federalreserve.gov/monetarypolicy/rules_authorizations.htm. Return to text |
2012-12-12T00:00:00 | 2013-01-03 | Minute | Minutes of the Federal Open Market Committee
December 11-12, 2012
A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, December 11, 2012, at 11:00 a.m. and continued on Wednesday, December 12, 2012, at 8:30 a.m.
PRESENT:
Ben Bernanke, Chairman
William C. Dudley, Vice Chairman
Elizabeth Duke
Jeffrey M. Lacker
Dennis P. Lockhart
Sandra Pianalto
Jerome H. Powell
Sarah Bloom Raskin
Jeremy C. Stein
Daniel K. Tarullo
John C. Williams
Janet L. Yellen
James Bullard, Christine Cumming, Charles L. Evans, Esther L. George, and Eric Rosengren, Alternate Members of the Federal Open Market Committee
Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, Presidents of the Federal Reserve Banks of Dallas, Minneapolis, and Philadelphia, respectively
William B. English, Secretary and Economist
Deborah J. Danker, Deputy Secretary
Matthew M. Luecke, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Steven B. Kamin, Economist
David W. Wilcox, Economist
David Altig, Thomas A. Connors, Michael P. Leahy, William Nelson, David Reifschneider, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors
Jon W. Faust, Special Advisor to the Board, Office of Board Members, Board of Governors
James A. Clouse and Stephen A. Meyer, Deputy Directors, Division of Monetary Affairs, Board of Governors; Maryann F. Hunter, Deputy Director, Division of Banking Supervision and Regulation, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Ellen E. Meade and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors
Eric M. Engen, Thomas Laubach, and David E. Lebow, Associate Directors, Division of Research and Statistics, Board of Governors; Michael T. Kiley,1 Associate Director, Office of Financial Stability Policy and Research, Board of Governors
Joshua Gallin, Deputy Associate Director, Division of Research and Statistics, Board of Governors; Jane E. Ihrig, Deputy Associate Director, Division of Monetary Affairs, Board of Governors; Beth Anne Wilson, Deputy Associate Director, Division of International Finance, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Jennifer E. Roush, Senior Economist, Division of Monetary Affairs, Board of Governors
Marie Gooding, First Vice President, Federal Reserve Bank of Atlanta
Loretta J. Mester and Daniel G. Sullivan, Executive Vice Presidents, Federal Reserve Banks of Philadelphia and Chicago, respectively
Troy Davig, Mark E. Schweitzer, Geoffrey Tootell, Christopher J. Waller, and Kei-Mu Yi, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Cleveland, Boston, St. Louis, and Minneapolis, respectively
Mary Daly, Group Vice President, Federal Reserve Bank of San Francisco
Evan F. Koenig, Lorie K. Logan, Julie Ann Remache, Alexander L. Wolman, and Nathaniel Wuerffel, Vice Presidents, Federal Reserve Banks of Dallas, New York, New York, Richmond, and New York, respectively
Argia M. Sbordone, Assistant Vice President, Federal Reserve Bank of New York
Developments in Financial Markets and the Federal Reserve's Balance Sheet
The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Federal Open Market Committee (FOMC) met on October 23-24, 2012. He also reported on System open market operations over the intermeeting period, including the ongoing reinvestment into agency-guaranteed mortgage-backed securities (MBS) of principal payments received on SOMA holdings of agency debt and agency-guaranteed MBS; the operations related to the maturity extension program authorized at the June 19-20, 2012, FOMC meeting; and the purchases of MBS authorized at the September 12-13, 2012, FOMC meeting. By unanimous vote, the Committee ratified the Open Market Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
The Committee considered a proposal to extend its liquidity swap arrangements with foreign central banks past February 1, 2013. All but one member approved the following resolution:
"The Federal Open Market Committee directs the Federal Reserve Bank of New York to extend the existing temporary dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2014. In addition, the Federal Open Market Committee directs the Federal Reserve Bank of New York to extend the existing temporary foreign currency liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2014."
Mr. Lacker dissented because of his opposition to arrangements that support Federal Reserve lending in foreign currencies, which he viewed as amounting to fiscal policy.
Options for the Continuation of Asset Purchases
The staff reviewed several options for purchasing longer-term securities after the planned completion at the end of the month of the maturity extension program. The presentation focused on the potential effects for the U.S. economy, based in part on simulations of a staff macroeconomic model, and for the Federal Reserve's balance sheet and income of continuing to buy MBS and longer-term Treasury securities over various time frames. In their discussion of the staff presentation, some participants asked about the possible consequences of the alternative purchase programs for the expected path of Federal Reserve remittances to the Treasury Department, and a few indicated the need for additional consideration of the implications of such purchases for the eventual normalization of the stance of monetary policy and the size and composition of the Federal Reserve's balance sheet.
Staff Review of the Economic Situation
The information reviewed at the December 11-12 meeting indicated that economic activity continued to increase at a moderate pace in recent months. Employment expanded further, and the unemployment rate declined slightly, on balance, from September to November but was still elevated. Consumer price inflation slowed as consumer energy costs fell, while measures of longer-run inflation expectations remained stable.
Private nonfarm employment increased at a slightly faster rate in October and November than in the third quarter, but government employment decreased somewhat. The unemployment rate declined to 7.7 percent in November, and the labor force participation rate in that month was at the same level as in the third quarter. The relatively large share of workers employed part time for economic reasons trended up a bit, on net, while the share of long-duration unemployment in total unemployment was essentially flat and remained elevated. Indicators of firms' job openings and hiring plans were little changed on balance. Initial claims for unemployment insurance were boosted in early November by the effects of Hurricane Sandy but returned within weeks to a level that was about the same as before the hurricane.
Manufacturing production declined in October, as output was held down at the end of the month by the disruptions and damage caused by Hurricane Sandy; the rate of manufacturing capacity utilization also declined. Automakers' schedules indicated that the pace of motor vehicle assemblies would rise somewhat in the coming months. Broader indicators of factory output, such as the diffusion indexes of new orders from the national and regional manufacturing surveys, continued to be subdued at levels consistent with only small gains in production in the near term.
Real personal consumption expenditures rose at a modest pace in the third quarter, but spending declined in October, likely in response in part to some disruptions caused by the hurricane. Probably reflecting those disruptions, sales of light motor vehicles fell in October but then increased notably in November. Some factors that tend to influence household spending became less supportive: Real disposable personal income moved up only slightly in the third quarter and declined in October. Moreover, consumer sentiment fell back in early December to about its level during the summer. In contrast, household net worth increased in the third quarter, partially a result of higher equity and home values.
Conditions in the housing market continued to improve gradually, but construction activity was still at a low level, restrained by the considerable inventory of foreclosed and distressed homes and the tight credit standards for mortgages. Starts and permits of new single-family homes were essentially flat in October after rising significantly in the preceding month. Starts of new multifamily units rose in October, although permits declined somewhat following their brisk increase in the previous month. Meanwhile, home prices advanced further and sales of existing homes continued to expand, but new home sales were little changed.
Real business expenditures on equipment and software decreased in the third quarter. In October, nominal new orders for nondefense capital goods excluding aircraft moved up a little, but shipments of these capital goods edged down and the level of orders remained below that of shipments. In addition, other forward-looking indicators of equipment investment by firms, such as surveys of business conditions and capital spending plans, were still subdued. Real business expenditures for nonresidential structures also decreased in the third quarter, although nominal construction spending by firms increased in October. Inventories in most industries appeared to be roughly aligned with sales in recent months.
Real federal government purchases increased markedly in the third quarter, led by a sharp rise in defense spending. However, data for nominal federal spending in October pointed toward a decline in real defense expenditures in the fourth quarter. Real state and local government purchases were little changed in the third quarter. State and local government payrolls decreased on net over October and November, and nominal construction spending by these governments edged lower in October.
The U.S. international trade deficit widened in October, and both exports and imports fell sharply from the previous month. The decrease in exports was widespread across categories, while the reduction in imports importantly reflected lower purchases of consumer goods and non-oil industrial supplies, although petroleum imports increased.
Consumer prices moved up more slowly in October than in the preceding few months, primarily because of a small decline in energy prices after several months of large gains. Moreover, survey data indicated that retail gasoline prices decreased further in November. Consumer food prices rose a little faster in October, as the effects of last summer's drought started to show through at the retail level. Increases in consumer prices excluding food and energy remained subdued. Near-term inflation expectations from the Thomson Reuters/University of Michigan Surveys of Consumers edged up, on balance, in November and early December, while longer-term inflation expectations in the survey were little changed and continued to run within the relatively narrow range that has prevailed for some time.
Measures of labor compensation indicated that gains in nominal wages remained slow. Compensation per hour in the nonfarm business sector increased slightly over the year ending in the third quarter, and with a moderate rise in productivity, unit labor costs were essentially unchanged. The employment cost index rose only a bit faster than the measure of compensation per hour over the same period. In October and November, increases in average hourly earnings for all employees were small.
Economic activity abroad remained subdued, especially in the advanced foreign economies. The euro-area economy contracted further in the third quarter, and consumer and business confidence remained low. Economic activity in Japan also declined in the third quarter, and a sharp drop in exports restrained economic growth in Canada. In emerging market economies, by contrast, recent data on exports and manufacturing improved somewhat. In most countries, inflation was still well contained, and monetary policy abroad generally remained accommodative.
Staff Review of the Financial Situation
U.S. financial conditions were little changed, on balance, over the intermeeting period. In early November, market concerns about the fiscal outlook and ongoing federal budget negotiations seemed to intensify, prompting a notable reduction in equity prices and yields on Treasury securities. But these concerns reportedly eased somewhat over subsequent weeks, and the initial move in equity prices was reversed. In contrast, yields on intermediate- and long-term nominal Treasury securities declined, on net, perhaps reflecting some increase in safe-haven demand associated with concerns about the potential economic effects of a substantial tightening in fiscal policy. Indicators of inflation compensation derived from nominal and inflation-protected Treasury securities showed mixed changes and remained within the ranges observed over recent years.
The expected path of the federal funds rate derived from overnight index swap rates flattened somewhat, on balance, over the intermeeting period, as longer-dated rates declined. Market-based measures of uncertainty about the path of the federal funds rate beyond the near term also declined. The survey of primary dealers conducted prior to the December meeting showed that they expected the FOMC to maintain purchases of longer-term securities after year-end at about the current pace of $85 billion per month.
Conditions in unsecured and secured short-term dollar funding markets remained stable, on net, over the intermeeting period, with reports of only limited disruptions to trading or operations following Hurricane Sandy. Yields on Treasury bills maturing beyond the year-end were noticeably lower than those on shorter-term bills; market participants pointed to the anticipated ending of the Federal Reserve's maturity extension program and the expiration of the Federal Deposit Insurance Corporation's unlimited insurance of noninterest-bearing transaction deposits at the end of the year as factors contributing to this pattern of yields.
In the December Senior Credit Officer Opinion Survey on Dealer Financing Terms, respondents reported little change in credit terms over the past three months for important classes of dealer counterparties. While respondents reported that the use of leverage by counterparties had remained basically unchanged, they noted greater demand for funding of various types of securitization products.
Broad U.S. equity price indexes edged up, on net, over the intermeeting period, while equity prices of large domestic banks decreased a little. Nevertheless, the credit default swap spreads of most large domestic bank holding companies continued to move lower. Option-implied volatility for the S&P 500 index over the next month declined moderately, on balance, while measures of equity market volatility for longer maturities remained above their historical averages, excluding the financial crisis period.
Yields on investment-grade corporate bonds were little changed over the intermeeting period, and their spreads over yields on comparable-maturity Treasury securities widened modestly. Yields on speculative-grade corporate bonds fell to historical lows, and their spreads decreased slightly.
The pace of bond issuance by nonfinancial firms increased further in October and November after rising robustly in the third quarter, as some firms reportedly sought to issue new debt before the end of the year. Commercial and industrial (C&I) loans outstanding also expanded notably in October and November. Nonfinancial commercial paper outstanding increased somewhat in November following a small decline in October. In the syndicated leveraged loan market, institutional issuance surged in October before subsiding somewhat in November, although it remained at a still-robust level.
Financial conditions in the commercial real estate (CRE) sector were still generally strained amid elevated vacancy and delinquency rates. However, prices for CRE properties continued to increase in the third quarter, and issuance of commercial mortgage-backed securities remained at a solid pace in the current quarter.
Residential mortgage rates declined modestly over the intermeeting period, largely in line with the decline in MBS yields. Refinancing expanded a bit further in October and November. House prices continued to increase despite a rise in the proportion of properties sold through foreclosures or short sales. The share of existing mortgages that were seriously delinquent fell in the third quarter but remained elevated.
Consumer credit continued to expand briskly in September, led by sizable increases in auto and student loans. Revolving credit decreased in September but was little changed, on net, over the previous few months. Issuance of consumer asset-backed securities continued to rise at a strong pace. Delinquency rates on consumer credit generally remained low, with the notable exception of student loans.
Bank credit was about flat, on balance, over October and November. Growth in C&I loans and consumer loans was offset by a decline in banks' residential real estate loans. The November Survey of Terms of Business Lending indicated some easing in loan pricing and terms.
M2 growth was rapid in October but slowed in November. Liquid deposits continued to grow at a strong pace, as yields available on alternative money market instruments remained low. Reserves increased over the intermeeting period, in part because of the settlement of the ongoing MBS purchases announced at the September FOMC meeting.
In many foreign financial markets, asset prices fluctuated as sentiment regarding negotiations over both the U.S. fiscal situation and official support for vulnerable euro-area countries shifted during the period. Spreads on Greek sovereign bonds over comparable German bunds fell, on balance, reflecting in part the agreement by European officials and the International Monetary Fund to grant further aid to Greece. However, spreads on Italian and Spanish bonds were little changed on balance over the period. On net, foreign equity prices rose slightly. The foreign exchange value of the dollar edged lower on balance. However, the dollar appreciated against the Brazilian real and the Japanese yen, which were held down by weak economic data and, in the case of the yen, by market reaction to statements suggesting that the country's likely next government would urge the Bank of Japan to seek a higher rate of inflation. Yields on foreign benchmark sovereign bonds declined, as central banks maintained or extended monetary accommodation. The Bank of Japan expanded its asset purchase program and announced a new lending scheme. The Bank of England announced that it would transfer cash holdings from its asset purchase fund to the U.K. Treasury, a measure that may exert some further downward pressure on gilt yields to the extent that gilt issuance by the government is reduced. The Reserve Bank of Australia and several emerging market central banks also eased monetary policy.
The staff also reported on potential risks to financial stability, including those associated with a disorderly resolution of the so-called fiscal cliff, a delayed increase in the federal debt ceiling, or a future deterioration of financial conditions in Europe. In addition, in monitoring for possible adverse effects of the current environment of low interest rates, the staff surveyed a wide range of asset markets and financial institutions for signs of excessive valuations, leverage, or risk-taking that could pose systemic risks. Valuations for broad asset classes did not appear stretched, or supported by excessive leverage. Indicators of risk-taking and leverage had moderately increased, on balance, over the past couple of years but remained notably below their levels before the financial crisis.
Staff Economic Outlook
In the economic projection prepared by the staff for the December FOMC meeting, real gross domestic product (GDP) growth in the near term was revised down slightly relative to the previous forecast. This downward revision primarily reflected weaker-than-expected data for consumer spending and household income that more than offset the somewhat better-than-anticipated news regarding employment and business equipment investment. The staff's medium-term forecast for real GDP growth also was revised down a little, as some of the recent weakness in household spending and income was carried forward in the projection. In addition, financial conditions were anticipated to be a little less supportive than expected in the staff's previous forecast. With federal fiscal policy assumed to be tighter next year than this year, the staff expected that the increase in real GDP would not materially exceed the growth rate of potential output in 2013. In 2014 and 2015, economic activity was projected to accelerate slowly, supported by a lessening in fiscal policy restraint, gains in consumer and business confidence, further improvements in financial conditions and credit availability, and accommodative monetary policy. The expansion in economic activity was anticipated to result in only a gradual decline in slack in labor and product markets over the forecast period, and progress in reducing unemployment was expected to be relatively slow.
The staff's projection for inflation in both the near term and the medium term was essentially unchanged from the forecast prepared for the previous FOMC meeting. With crude oil prices expected to continue to decrease slowly, the boost to retail food prices from last summer's drought anticipated to be only temporary and fairly small, long-run inflation expectations assumed to remain stable, and considerable resource slack persisting over the forecast period, the staff projected that inflation would be subdued through 2015.
The staff viewed the uncertainty around the projection for economic activity as somewhat elevated and the risks as skewed to the downside, largely reflecting the possibility of a more severe tightening in U.S. fiscal policy than expected, along with continued concerns about the economic and financial situation in Europe. Although the staff saw the outlook for inflation as uncertain, the risks were viewed as balanced and not unusually high.
Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, meeting participants--the 7 members of the Board of Governors and the presidents of the 12 Federal Reserve Banks, all of whom participate in the deliberations of the FOMC--submitted their assessments of real output growth, the unemployment rate, inflation, and the target federal funds rate for each year from 2012 through 2015 and over the longer run, under each participant's judgment of appropriate monetary policy. The longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These economic projections and policy assessments are described in the Summary of Economic Projections, which is attached as an addendum to these minutes.
In their discussion of the economic situation, participants regarded the information received during the intermeeting period as indicating that economic activity and employment continued to expand at a moderate pace, apart from weather-related disruptions. The unemployment rate had declined somewhat since the summer but remained elevated. Although household spending had continued to advance, growth in business fixed investment had slowed. The housing sector had shown further signs of improvement. Consumer price inflation had been running somewhat below the Committee's longer-run objective of 2 percent, apart from temporary variations that largely reflected fluctuations in energy prices, and longer-term inflation expectations had remained stable.
In their assessments of the economic outlook, many participants thought that the pace of economic expansion would remain moderate in 2013 before picking up gradually in 2014 and 2015. This outlook was little changed from their projections at recent meetings. Hurricane Sandy was expected to weigh on economic growth in the current quarter, but rebuilding could provide some temporary impetus early in 2013. Participants' forecasts, which generally were conditioned on the view that it would be appropriate to maintain a highly accommodative monetary policy for a considerable time, included an outlook for a continued gradual decline in the unemployment rate toward levels judged to be consistent with the Committee's mandate over the longer run, with inflation running near the Committee's 2 percent longer-run goal.
Participants observed that growth in economic activity continued to be restrained by several persistent headwinds, including ongoing deleveraging on the part of households and still-tight credit conditions for some borrowers, and that a major headwind facing the economy at present appeared to be uncertainty about U.S. fiscal policy and the outcome of the ongoing negotiations on federal spending and taxes. While participants generally saw it as likely that the Congress and the Administration would avert the full force of the tax increases and spending cuts scheduled to occur in 2013, almost all indicated that heightened uncertainty about fiscal policy probably was affecting economic activity adversely. For example, it likely had reduced household and business confidence and led firms to defer hiring and investment spending. Some participants noted that an early and constructive resolution to fiscal policy negotiations had the potential to release pent-up demand and therefore be followed by a boost to spending, investment, and employment; however, a few pointed out that an extended breakdown of negotiations could have significant adverse effects on economic growth. Other factors weighing on the economic outlook included the slowdown in global economic growth and continued uncertainty regarding the European fiscal and banking situation.
In their discussion of the household sector, many participants noted a recent drop in consumer sentiment and a softening in consumer spending. Some participants thought this reflected uncertainty about fiscal policy, including the prospect of higher taxes, and several noted that growth of households' real disposable income remained weak despite recent gains in employment. While indicators of spending were mixed, purchases of autos and other durables remained relatively strong. A couple of participants observed that businesses in a few areas had reported strong holiday-related activity. Many pointed out that reductions in households' debt, together with rising home prices, had led to an improvement in household balance sheets; it was noted that household net worth was approaching levels seen before the financial crisis.
Business contacts in many parts of the country were also said to be highly uncertain about the outlook for U.S. fiscal policy, and participants noted that this uncertainty appeared to have weighed on investment and hiring decisions. Although firms' balance sheets were generally strong and liquidity was ample, some business contacts reported that they had shifted toward a higher proportion of part-time employees and postponed plans to expand capacity. A number of participants suggested that the business sector was well positioned to expand spending and hiring quickly upon a positive resolution of the fiscal cliff negotiations. In a few regions, contacts reported concerns about the expense associated with new regulations, including those related to health care, and in some cases indicated a shift to the hiring of part-time workers in order to avoid these costs. There were reports of weaker manufacturing, particularly in the Northeast in the aftermath of Hurricane Sandy, and a slackening in economic activity in the Southwest related in part to cutbacks in defense spending. Export orders had softened, reflecting the slowdown in global growth. The energy sector continued to expand. In the agricultural sector, farm incomes were high, notwithstanding the drought, although elevated grain prices were cutting into profits on livestock.
Meeting participants generally agreed that the recovery in the housing sector had continued. Many commented that the headwinds facing the housing market appeared to have dissipated somewhat. The capacity constraints on the processing of new home-mortgage applications appeared to be easing, and gradually rising home prices had reduced the proportion of households with underwater mortgages. It was noted that the mix of new home sales seemed to have shifted from homes already completed to homes not yet built.
In discussing labor market developments, participants generally viewed the recent data as having been somewhat better than expected, with moderate gains in payroll employment and a decline in the unemployment rate. However, the unemployment rate remained elevated, and part of the decline in unemployment in November was attributable to a drop in labor force participation. A few participants noted that some exits from the labor force may have been related to the loss or prospective loss of eligibility for emergency unemployment insurance benefits. Several pointed to indicators suggesting that rates of hiring remained depressed relative to those observed before the financial crisis. A couple of participants noted that vacancies remained at a high level in terms of their historical relationship to the rate of unemployment, suggesting that at least some firms were having a hard time finding suitable workers; indeed, business contacts in a couple of regions had reported difficulty in locating and retaining workers with requisite skills. However, one participant suggested that employer-worker mismatch likely reflected longer-term problems and had probably not worsened materially as a result of the recent deep recession and slow recovery.
Incoming information pointed to stable, low inflation that was running a little below the Committee's longer-run goal of 2 percent. Crude oil prices had moved down since the October meeting amid accumulating inventories and market concerns about a weaker global outlook. Despite some reports of labor shortages in certain industries, compensation pressures had remained subdued, and unit labor costs were little changed over the previous four quarters. Most participants saw the risks to the inflation outlook as broadly balanced, and many noted that longer-term inflation expectations were well anchored. One participant, however, expressed concern that considerable uncertainty surrounded the relationship between unemployment and inflation, raising questions about the extent to which resource slack would keep inflation restrained over the medium term.
In their discussion of financial developments, a few participants commented that recent steps taken by European authorities had reduced volatility in sovereign debt markets over the intermeeting period; however, concerns remained about the fiscal and economic outlook in Europe. Many noted the ongoing deleveraging in the private nonfinancial sector of the U.S. economy and indicated that it was difficult to judge when that process would be complete. A few participants, observing that low interest rates had increased the demand for riskier financial products, pointed to the possibility that holding interest rates low for a prolonged period could lead to financial imbalances and imprudent risk-taking. One participant suggested that there were several historical episodes in the United States and other countries that might be used to build a better understanding of the financial strains that could develop from a long period of very low long-term interest rates. Pointing to a recent decision of the Financial Stability Oversight Council, one participant commented that further money market mutual fund reform would help reduce risk in the financial system.
Participants exchanged views on the likely benefits and costs of additional asset purchases in the context of an assessment of the ongoing purchases of MBS and possible additional purchases of longer-term Treasury securities to follow the conclusion of the maturity extension program. Regarding the benefits, it was noted that asset purchases provide support to the economic recovery by putting downward pressure on longer-term interest rates and promoting more-accommodative financial conditions. Participants discussed the effectiveness of purchasing different types of assets and the potential for the effects on yields from purchases in the market for one class of securities to spill over to other markets. If these spillovers are significant, then purchases of longer-term Treasury securities might be preferred, in light of the depth and liquidity of that market. However, if markets are more segmented, purchases of MBS might be preferred because they would provide more support to real activity through the housing sector. One participant commented that the best approach would be to continue purchases in both the Treasury and MBS markets, given the uncertainty about the precise channels through which asset purchases operated. Others emphasized the advantages of MBS purchases, including by noting the apparent effectiveness of recent MBS purchases on the housing market, while another participant objected and thought that Federal Reserve purchases should not direct credit to a specific sector. With regard to the possible costs and risks of purchases, a number of participants expressed the concern that additional purchases could complicate the Committee's efforts to eventually withdraw monetary policy accommodation, for example, by potentially causing inflation expectations to rise or by impairing the future implementation of monetary policy. Participants also discussed the implications of continued asset purchases for the size of the Federal Reserve's balance sheet. Depending on the path for the balance sheet and interest rates, the Federal Reserve's net income and its remittances to the Treasury could be significantly affected during the period of policy normalization. Participants noted that the Committee would need to continue to assess whether large purchases were having adverse effects on market functioning and financial stability. They expressed a range of views on the appropriate pace of purchases, both now and as the outlook evolved. It was agreed that both the efficacy and the costs would need to be carefully monitored and taken into account in determining the size, pace, and composition of asset purchases.
Meeting participants discussed the possibility of replacing the calendar date in the forward guidance for the federal funds rate with specific quantitative thresholds of 6-1/2 percent for the unemployment rate and 2-1/2 percent for projected inflation between one and two years ahead. Most participants favored replacing the calendar-date forward guidance with economic thresholds, and several noted that the consistency between the "mid-2015" reference in the Committee's October statement and the specific quantitative thresholds being considered at the current meeting provided an opportunity for a smooth transition. However, possible advantages of waiting a while to introduce the change to the Committee's forward guidance were also mentioned, including that a delay might simplify communications by keeping the introduction of thresholds separate from the announcement of additional asset purchases. Among the benefits of quantitative thresholds that were cited was that they could help the public more readily understand how the likely timing of an eventual increase in the federal funds rate would shift in response to unanticipated changes in economic conditions and the outlook. Accordingly, thresholds could increase the probability that market reactions to economic developments would move longer-term interest rates in a manner consistent with the Committee's view regarding the likely future path of short-term interest rates. A few participants expressed a preference for using a qualitative description of the economic indicators influencing the Committee's thinking about current and future monetary policy rather than quantitative guidance because they felt that qualitative guidance would be at least as effective as numerical thresholds while avoiding some potential disadvantages, including the possibility that the numerical thresholds would be mistakenly interpreted as the Committee's longer-run objectives. A few participants commented that the quantitative thresholds might be interpreted as triggers that, when reached, would prompt an immediate increase in short-term rates. However, a number of participants indicated that the Chairman's press conference and other avenues of communication could be used to emphasize, for example, the distinction between thresholds and the longer-run objectives as well as between thresholds and triggers. Participants also discussed the importance of clarifying that the thresholds would not be followed mechanically and that a variety of indicators of labor market conditions and inflation pressures, as well as financial developments, would be taken into account in setting policy.
Committee Policy Action
Committee members viewed the information received over the intermeeting period as suggesting that economic activity and employment continued to expand at a moderate pace in recent months, abstracting from weather-related disruptions. Household spending had continued to advance and the housing sector had shown further signs of improvement, but growth in the business sector had slowed. Anecdotal evidence indicated that uncertainty about U.S. fiscal policy weighed heavily on sentiment in the household and business sectors. Although the unemployment rate had declined somewhat since the summer, it was still elevated relative to levels that members viewed as normal in the longer run. Members generally agreed that the economic outlook was little changed since the previous meeting and judged that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continued to pose significant downside risks to the economic outlook. Inflation had been subdued, apart from some temporary variations that largely reflected fluctuations in energy prices. With longer-term inflation expectations stable, inflation over the medium term was anticipated to run at or below the Committee's longer-run objective of 2 percent.
In their discussion of monetary policy for the period ahead, all members but one judged that continued provision of monetary accommodation was warranted in order to support further progress toward the Committee's goals of maximum employment and price stability. The Committee judged that such accommodation should be provided in part by continuing to purchase MBS at a pace of $40 billion per month and by purchasing longer-term Treasury securities, initially at a pace of $45 billion per month, following the completion of the maturity extension program at the end of the year. The Committee also maintained its existing policy of reinvesting principal payments from its holdings of agency debt and agency MBS into agency MBS and decided that, starting in January, it will resume rolling over maturing Treasury securities at auction. While almost all members thought that the asset purchase program begun in September had been effective and supportive of growth, they also generally saw that the benefits of ongoing purchases were uncertain and that the potential costs could rise as the size of the balance sheet increased. Various members stressed the importance of a continuing assessment of labor market developments and reviews of the program's efficacy and costs at upcoming FOMC meetings. In considering the outlook for the labor market and the broader economy, a few members expressed the view that ongoing asset purchases would likely be warranted until about the end of 2013, while a few others emphasized the need for considerable policy accommodation but did not state a specific time frame or total for purchases. Several others thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet. One member viewed any additional purchases as unwarranted.
With regard to its forward guidance about the federal funds rate, the Committee decided to indicate in the statement language that it expects the highly accommodative stance of monetary policy to remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In addition, all but one member agreed to replace the date-based guidance with economic thresholds indicating that the exceptionally low range for the federal funds rate would remain appropriate at least as long as the unemployment rate remains above 6½ percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee thought it would be helpful to indicate in the statement that it viewed the economic thresholds as consistent with its earlier, date-based guidance. The new language noted that the Committee would also consider other information when determining how long to maintain the highly accommodative stance of monetary policy, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. One member dissented from the policy decision, opposing the new economic threshold language in the forward guidance, as well as the additional asset purchases and continued intervention in the MBS market.
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 seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to complete the maturity extension program it announced in June to purchase Treasury securities with remaining maturities of 6 years to 30 years with a total face value of about $267 billion by the end of December 2012, and to sell or redeem Treasury securities with remaining maturities of approximately 3 years or less with a total face value of about $267 billion. Following the completion of this program, the Committee directs the Desk to resume its policy of rolling over maturing Treasury securities into new issues. From the beginning of January, the Desk is directed to purchase longer-term Treasury securities at a pace of about $45 billion per month. The Committee directs the Desk to maintain its existing policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities. The Desk is also directed to continue purchasing agency mortgage-backed securities at a pace of about $40 billion per month. The Committee directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."
The vote encompassed approval of the statement below to be released at 12:30 p.m.:
"Information received since the Federal Open Market Committee met in October suggests that economic activity and employment have continued to expand at a moderate pace in recent months, apart from weather-related disruptions. Although the unemployment rate has declined somewhat since the summer, it remains elevated. Household spending has continued to advance, and the housing sector has shown further signs of improvement, but growth in business fixed investment has slowed. Inflation has been running somewhat below the Committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and, in January, will resume rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent."
Voting for this action: Ben Bernanke, William C. Dudley, Elizabeth Duke, Dennis P. Lockhart, Sandra Pianalto, Jerome H. Powell, Sarah Bloom Raskin, Jeremy C. Stein, Daniel K. Tarullo, John C. Williams, and Janet L. Yellen.
Voting against this action: Jeffrey M. Lacker.
Mr. Lacker dissented because he objected to the asset purchases and to the characterization of the conditions under which an exceptionally low range for the federal funds rate would remain appropriate. He continued to view asset purchases as unlikely to add to economic growth without unacceptably increasing the risk of future inflation, and to see purchases of MBS as inappropriate credit allocation. With regard to the funds rate, Mr. Lacker was concerned that linking the forward guidance to a specific numerical level of the unemployment rate would inhibit the effectiveness of the Committee's communications and increase the potential for inflationary policy errors; he preferred qualitative guidance instead.
It was agreed that the next meeting of the Committee would be held on TuesdayâWednesday, January 29-30, 2013. The meeting adjourned at 11:25 a.m. on December 12, 2012.
Notation Vote
By notation vote completed on November 9, 2012, the Committee unanimously approved the minutes of the FOMC meeting held on October 23-24, 2012.
_____________________________
William B. English
Secretary
1. Attended Tuesday's session only. Return to text |
2012-12-12T00:00:00 | 2012-12-12 | Statement | Information received since the Federal Open Market Committee met in October suggests that economic activity and employment have continued to expand at a moderate pace in recent months, apart from weather-related disruptions. Although the unemployment rate has declined somewhat since the summer, it remains elevated. Household spending has continued to advance, and the housing sector has shown further signs of improvement, but growth in business fixed investment has slowed. Inflation has been running somewhat below the Committeeâs longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and, in January, will resume rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committeeâs 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed the asset purchase program and the characterization of the conditions under which an exceptionally low range for the federal funds rate will be appropriate.
Statement Regarding Purchases of Treasury Securities and Agency Mortgage-Backed Securities |
2012-10-24T00:00:00 | 2012-11-14 | Minute | Minutes of the Federal Open Market Committee
October 23â24, 2012
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, October 23, 2012, at 1:00 p.m. and continued on Wednesday, October 24, 2012, at 9:00 a.m.
PRESENT:
Ben Bernanke, Chairman
William C. Dudley, Vice Chairman
Elizabeth Duke
Jeffrey M. Lacker
Dennis P. Lockhart
Sandra Pianalto
Jerome H. Powell
Sarah Bloom Raskin
Jeremy C. Stein
Daniel K. Tarullo
John C. Williams
Janet L. Yellen
James Bullard, Charles L. Evans, Esther L. George, and Eric Rosengren, Alternate Members of the Federal Open Market Committee
Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, Presidents of the Federal Reserve Banks of Dallas, Minneapolis, and Philadelphia, respectively
William B. English, Secretary and Economist
Deborah J. Danker, Deputy Secretary
Matthew M. Luecke, Assistant Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Thomas C. Baxter, Deputy General Counsel
Steven B. Kamin, Economist
David W. Wilcox, Economist
David Altig, Thomas A. Connors, Michael P. Leahy, William Nelson, David Reifschneider, Mark S. Sniderman, and William Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors
James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors
Andreas Lehnert, Deputy Director, Office of Financial Stability Policy and Research, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Thomas Laubach, Senior Adviser, Division of Research and Statistics, Board of Governors; Ellen E. Meade, Stephen A. Meyer, and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors
Eric M. Engen, Michael T. Kiley, and Michael G. Palumbo, Associate Directors, Division of Research and Statistics, Board of Governors
Joshua Gallin, Deputy Associate Director, Division of Research and Statistics, Board of Governors
Marnie Gillis DeBoer, Assistant Director, Division of Monetary Affairs, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Jeremy B. Rudd, Senior Economist, Division of Research and Statistics, Board of Governors
Helen E. Holcomb, First Vice President, Federal Reserve Bank of Dallas
Jeff Fuhrer and Loretta J. Mester, Executive Vice Presidents, Federal Reserve Banks of Boston and Philadelphia, respectively
Troy Davig, Spencer Krane, and Kevin Stiroh, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Chicago, and New York, respectively
William Gavin, Evan F. Koenig, Lorie K. Logan, and Paolo A. Pesenti, Vice Presidents, Federal Reserve Banks of St. Louis, Dallas, New York, and New York, respectively
Thomas D. Tallarini, Jr., Assistant Vice President, Federal Reserve Bank of Minneapolis
Andreas L. Hornstein, Senior Advisor, Federal Reserve Bank of Richmond
Eric T. Swanson, Senior Research Advisor, Federal Reserve Bank of San Francisco
Thresholds and Forward Guidance
A staff presentation focused on the potential effects of using specific threshold values of inflation and the unemployment rate to provide forward guidance regarding the timing of the initial increase in the federal funds rate. The presentation reviewed simulations from a staff macroeconomic model to illustrate the implications for policy and the economy of announcing various threshold values that would need to be attained before the Federal Open Market Committee (FOMC) would consider increasing its target for the federal funds rate. Meeting participants discussed whether such thresholds might usefully replace or perhaps augment the date-based guidance that had been provided in the policy statements since August 2011. Participants generally favored the use of economic variables, in place of or in conjunction with a calendar date, in the Committee's forward guidance, but they offered different views on whether quantitative or qualitative thresholds would be most effective. Many participants were of the view that adopting quantitative thresholds could, under the right conditions, help the Committee more clearly communicate its thinking about how the likely timing of an eventual increase in the federal funds rate would shift in response to unanticipated changes in economic conditions and the outlook. Accordingly, thresholds could increase the probability that market reactions to economic developments would move longer-term interest rates in a manner consistent with the Committee's view regarding the likely future path of short-term rates. A number of other participants judged that communicating a careful qualitative description of the indicators influencing the Committee's thinking about current and future monetary policy, or providing more information about the Committee's policy reaction function, would be more informative than either quantitative thresholds or date-based forward guidance. Several participants were concerned that quantitative thresholds could confuse the public by giving the impression that the FOMC focuses on a small number of economic variables in setting monetary policy, when the Committee in fact uses a wide range of information. Some other participants worried that the public might mistakenly interpret quantitative thresholds as equivalent to the Committee's longer-run objectives or as triggers that, when reached, would prompt an immediate rate increase; but it was noted that the Chairman's postmeeting press conference and other venues could be used to explain the distinction between thresholds and these other concepts.
Participants generally agreed that the Committee would need to resolve a number of practical issues before deciding whether to adopt quantitative thresholds to communicate its thinking about the timing of the initial increase in the federal funds rate. These issues included whether to specify such thresholds in terms of realized or projected values of inflation and the unemployment rate and, in either case, what values for those thresholds would best balance the Committee's objectives of promoting maximum employment and price stability. Another open question was whether to supplement thresholds expressed in terms of the unemployment rate and inflation with additional indicators of economic and financial conditions that might signal a need either to raise the federal funds rate before a threshold is crossed or to delay until well afterward. A final question was whether the statement should also provide forward guidance about the likely path of the federal funds rate after the initial increase. It was noted that such guidance could have significant effects on financial conditions and the economy. At the conclusion of the discussion, the Chairman asked the staff to provide additional background material, taking into account the range of participants' views.
Developments in Financial Markets and the Federal Reserve's Balance Sheet
The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the FOMC met on September 12-13, 2012. The Manager also reported on System open market operations over the intermeeting period, focusing on the ongoing reinvestment into agency-guaranteed mortgage-backed securities (MBS) of principal payments received on SOMA holdings of agency debt and agency-guaranteed MBS and the purchases of MBS authorized at the September FOMC meeting. By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.
Staff Review of the Economic Situation
The information reviewed at the October 23-24 meeting suggested that economic activity continued to increase at a moderate pace in recent months. The unemployment rate declined but was still elevated. Consumer price inflation picked up, reflecting higher consumer energy costs, but longer-run inflation expectations remained stable.
Private nonfarm employment expanded modestly in September, and government employment increased. The unemployment rate fell to 7.8 percent, and the labor force participation rate rose slightly. The share of workers employed part time for economic reasons increased somewhat and continued to be elevated, while the rate of long-duration unemployment edged down further but remained high. Other indicators of labor market conditions, such as surveys of firms' job openings and hiring plans and initial claims for unemployment insurance, did not show decided improvement over the intermeeting period.
Manufacturing production declined in the third quarter, and the rate of manufacturing capacity utilization edged down. Automakers' schedules pointed to a similar rate of motor vehicle assemblies in the fourth quarter as in the third quarter. Broader indicators of factory production, such as the diffusion indexes of new orders from the national and regional manufacturing surveys, remained subdued in recent months at levels consistent with only tepid increases in manufacturing output in the near term.
Real personal consumption expenditures rose at a solid pace in August. In September, nominal retail sales, excluding purchases at motor vehicle and parts outlets, increased considerably. Light motor vehicle sales also expanded. Recent data on factors that tend to support household spending were mixed. Real disposable income declined in August, largely reflecting the effect of higher consumer energy prices. In contrast, consumer sentiment rose in September and early October, and continued modest increases in house prices added to households' net worth.
Housing market conditions improved more generally in recent months. Starts and permits of both new single-family homes and multifamily units picked up in August and September. However, construction activity remained at a relatively low level, reflecting the restraint imposed by tight credit standards for mortgage borrowing and by the large inventory of foreclosed and distressed properties. Sales of existing homes continued to expand, on balance, in recent months, but new home sales were flat.
Real business expenditures on equipment and software appeared to edge down in the third quarter. Nominal shipments for nondefense capital goods excluding aircraft continued to decrease in August; the backlog of unfilled orders for these capital goods also declined. Other forward-looking indicators, such as subdued readings from surveys of business conditions and capital spending plans, also pointed toward roughly flat real expenditures for business equipment in the near term. Nominal business spending for new nonresidential construction decreased further in August. Meanwhile, inventories in most industries were about in line with sales. In the farm sector, however, drought conditions likely reduced inventory accumulation last quarter and subtracted from overall economic growth.
Real federal government purchases appeared to edge up in the third quarter, as data for nominal federal spending in August and September pointed to a slight increase in real defense expenditures. Real state and local government purchases likely moved essentially sideways in the third quarter. State and local government payrolls expanded, but nominal construction spending continued to decline in recent months.
The U.S. international trade deficit widened in August, as imports fell less than exports. Imports edged down, on net, with higher purchases of services and petroleum products more than offset by declines in all of the other major categories. Across export categories, exports of industrial supplies posted a particularly large decline, as the volume of petroleum product exports dropped sharply.
Consumer prices picked up in August and September, primarily reflecting sharp increases in retail gasoline prices. However, survey data indicated that retail gasoline prices were about flat in early October. Consumer food prices rose modestly in recent months. The somewhat better-than-expected crop harvest caused spot and futures prices of farm commodities to retrace some of their rise during the summer; however, farm commodity prices remained elevated and continued to point toward some temporary upward pressures on retail food prices later this year. Increases in consumer prices excluding food and energy were subdued in August and September. Near-term inflation expectations from the Thomson Reuters/University of Michigan Surveys of Consumers declined in September and early October, while longer-term inflation expectations in the survey moved down to near the lower end of the narrow range where they have remained for some time.
Available measures of labor compensation indicated that increases in nominal wages stayed relatively modest. The gains in average hourly earnings for all employees in the third quarter were subdued.
Foreign economic growth remained sluggish, restrained by weak activity in Europe and the associated spillovers--including through trade--to the rest of the world. Euro-area production indicators signaled continued contraction, and the area's unemployment rate in August stayed at a historical high. In Japan, exports and output declined in the summer months, and growth of real gross domestic product (GDP) for the first half of the year was revised down significantly. Data for exports from emerging market economies, especially in Asia, showed a drop, although recently released data for China indicated a pickup in economic activity in the third quarter. Foreign inflation rose slightly in some emerging market economies in response to higher food prices but was still generally well contained. Monetary policy remained accommodative in most advanced and emerging market economies.
Staff Review of the Financial Situation
Market participants reportedly read the September FOMC statement as pointing to a significant increase in monetary policy accommodation. As a result, financial conditions generally eased appreciably early in the intermeeting period. However, toward the end of the period investor sentiment deteriorated somewhat, in part because of concerns about corporate profitability.
Short- and medium-term nominal Treasury yields ended the intermeeting period up slightly, and long-term yields were about unchanged on net. At the same time, real yields on Treasury inflation-protected securities (TIPS) decreased somewhat, leaving inflation compensation higher. In part, the rise in inflation compensation may have reflected upward pressure on nominal Treasury yields associated with some unwinding of safe-haven demands.
The expected path of the federal funds rate based on money market futures was little changed between the September and October FOMC meetings. Market-based measures of uncertainty about the path of the federal funds rate over medium-to-long horizons declined over the period. The survey of primary dealers conducted prior to the October meeting showed that the expected size of the SOMA at the end of 2013 had risen significantly.
Indicators of the condition of domestic financial institutions were mixed over the intermeeting period. Indexes of equity prices for those institutions were modestly lower. But spreads on credit default swaps for large financial institutions declined in recent months, and third-quarter earnings of large bank holding companies that had reported by the time of the FOMC meeting were generally in line with expectations.
Conditions in unsecured dollar funding markets appeared to improve some. In secured funding markets, rates on repurchase agreements spiked around quarter-end but subsequently more than retraced that move, ending the intermeeting period down slightly.
Broad equity price indexes were a little lower, on balance, as gains following the September FOMC meeting and generally better-than-expected economic data releases were more than offset by concerns about corporate profitability. Option-implied volatility for the S&P 500 index fell noticeably following the September FOMC meeting but increased, on net, over the intermeeting period.
Yields on investment-grade corporate bonds reached a record low level, and their spreads to yields on comparable-maturity Treasury securities narrowed on net. Yields and spreads on speculative-grade corporate bonds also decreased.
The pace of investment- and speculative-grade bond issuance by nonfinancial firms picked up significantly in September from the already robust pace in previous months. In the syndicated leveraged loan market, issuance through the first three quarters of 2012 lagged that of the same period in 2011 but nonetheless remained solid. The pace of gross public equity issuance by nonfinancial firms moved up some in September from the subdued levels observed in prior months, but overall issuance in the third quarter stayed low compared with the first half of 2012.
Financial conditions in the commercial real estate sector remained weak amid elevated vacancy and delinquency rates. However, some indicators pointed to modest improvement in this sector, and issuance of commercial mortgage-backed securities was solid in the third quarter.
Residential mortgage rates declined over the intermeeting period. The decline in mortgage rates reflected a sizable drop in MBS yields following the September FOMC statement. Refinancing activity increased further in September and early October. House prices continued to rise, and some indicators of credit quality on residential real estate loans improved. The fraction of seriously delinquent existing mortgages remained elevated, but the rate at which mortgages entered delinquency continued to trend down in July.
Consumer credit expanded briskly in August. Nonrevolving credit continued to increase at a robust pace, mainly reflecting growth in student and auto loans. Revolving credit also rose in August but was little changed, on balance, over the past few months. Delinquency rates for consumer credit remained low, and issuance of consumer asset-backed securities was strong in the third quarter, close to the pace seen earlier this year.
Bank credit continued to expand at a moderate rate in the third quarter, with further growth in loans augmented by larger gains in securities holdings. Results from the October Senior Loan Officer Opinion Survey on Bank Lending Practices indicated that modest fractions of domestic banks, on net, continued to report having eased their lending standards on some categories of business and household loans. In addition, for the second straight quarter, reports of stronger demand were relatively widespread for many types of loans.
M2 growth picked up somewhat in September, as strong growth in liquid deposits and currency offset ongoing declines in small time deposits and retail money market funds.
The staff's broad nominal index of the foreign exchange value of the dollar was little changed, on net, over the intermeeting period. The dollar rose against the currencies of most advanced economies but declined against the euro and most Asian emerging market currencies. Of note, the Chinese renminbi appreciated further against the dollar. A number of central banks eased monetary policy during the period, including those of Australia, Brazil, Japan, Korea, and Thailand. Foreign equity indexes, which generally rose following the September FOMC statement, ended the intermeeting period higher in most markets, although stock prices in the euro area were down on net. Ten-year sovereign yields in Germany and the United Kingdom moved down just a few basis points. After declining significantly between late July and early September, the yield spread of 10-year sovereign debt in Italy over comparable German bunds declined only slightly further over the intermeeting period, and the Spanish sovereign spread edged up.
Staff Economic Outlook
In the economic forecast prepared by the staff for the October FOMC meeting, real GDP growth in the near term was revised up relative to the previous projection. The upward revision to the near-term forecast primarily reflected better-than-expected incoming information for consumer spending, residential construction, and labor market conditions that more than offset the recent data for business fixed investment and industrial production that were weaker than anticipated. The staff's medium-term projection for real GDP growth also was revised up, mostly reflecting the monetary policy actions announced by the FOMC after the September meeting and the resulting improved outlook for financial conditions. Nonetheless, with fiscal policy assumed to be tighter next year than this year, the staff anticipated that real GDP growth would not materially exceed increases in potential output in 2013. In 2014, economic activity was projected to accelerate gradually, supported by a lessening in fiscal policy restraint, gains in consumer and business confidence, further improvements in financial conditions and credit availability, and accommodative monetary policy. Progress in reducing unemployment over the projection period was expected to be relatively slow.
The staff's near-term forecast for inflation was little changed, on balance, from the projection prepared for the September FOMC meeting, notwithstanding recent increases in consumer energy prices. The staff's projection for inflation over the medium term was also essentially unchanged. Crude oil prices were anticipated to decline slowly from their current levels, the boost to retail food prices from the drought was expected to be only temporary and relatively small, long-run inflation expectations were assumed to remain stable, and significant resource slack was projected to persist over the projection period. As a result, the staff continued to forecast that inflation would be subdued through 2014.
Participants' Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants viewed the information received since the Committee met in September as indicating that economic activity continued to expand at a moderate pace. Employment was still rising slowly, and the unemployment rate remained elevated. Household spending advanced more quickly in recent months than during the spring, and housing activity showed further signs of improvement. However, business fixed investment slowed noticeably. Inflation recently picked up somewhat, reflecting higher energy prices, while longer-run inflation expectations remained stable.
Participants generally saw the economic outlook as little changed, on balance, from their projections prepared for the September Summary of Economic Projections (SEP), agreeing that the pace of the economic recovery was likely to stay moderate over coming quarters. The recent news on household spending, consumer sentiment, and the housing market was encouraging, and most participants expected that highly accommodative monetary policy would provide support for the recovery in the period ahead. However, many participants saw the uncertainty attending the unresolved U.S. fiscal situation and the ongoing fiscal and financial strains in the euro area as factors likely to restrain the pace of economic growth in coming months. Moreover, many participants cited significant downside risks to the outlook that might arise from more widespread weakness in global economic activity or an intensification of strains in global financial markets. Regarding inflation, the recent run-up in consumer energy prices was expected to subside over the next few months, while the effects of the drought were likely to show through to retail food prices. Over the medium term, most participants anticipated that inflation would run at or below the Committee's 2 percent objective.
Concerning developments in the household sector, participants observed that the recent news on consumer spending and confidence had been positive, with surveys reporting that households had become noticeably more optimistic about the outlook for unemployment and income. Sales of motor vehicles remained an area of strength, in part due to favorable credit conditions. The increase in consumer spending appeared to be relatively broadly based across the country, although retailers in a few areas reported that they had seen slower sales recently and expressed concerns about the near-term outlook. Among the factors mentioned that might support consumer confidence and a continuation of the somewhat stronger pace of spending were an expected decline in retail energy prices and continued gradual improvement in labor market conditions. In addition, lower mortgage rates had spurred a rise in refinancing activity, which, along with the increases in household wealth attributable to higher home values and equity prices, would provide support for consumer spending going forward.
Participants generally agreed that a recovery in housing activity now appeared to be under way, citing increases in house prices, sales, and construction in many areas. Most saw the low levels of mortgage interest rates as an important factor contributing to increased housing demand. Although the recovery in the housing sector appeared to be taking hold, several participants cited obstacles to more rapid improvement. For example, several participants reported that lenders' capacity for processing home-purchase mortgages was tight and backlogs were long, in part due to the current heavy pace of refinancings. These participants also noted that underwriting standards remained quite tight, particularly for borrowers with lower credit quality.
In contrast to the more favorable news on consumer spending and housing, contacts generally reported slower activity in the business sector. Some participants expressed concern about weaker manufacturing output and new orders in recent months, particularly in capital goods industries, although several pointed out that manufacturers' expectations for future orders and production were more positive. A few participants noted that shipping activity was down, and one participant added that energy production had decelerated. In contrast, a few participants had received reports of a pickup in nonresidential construction, and one indicated that high-tech firms were expecting gains in business going forward. In many instances, participants' business contacts stated that they were delaying or cutting back on hiring and capital spending because of the uncertain outlook for government spending, taxes, or regulatory policies. One participant, however, reported that contacts said that insufficient demand remained their principal concern. Several participants mentioned that the cautious posture of businesses was apparent in national and regional surveys of plans of both large and small firms. Some participants noted that the outlook for business spending would likely be difficult to assess until the direction of U.S. fiscal policy becomes clearer. A few suggested the possibility that a near-term resolution of the fiscal situation might lead to a significant increase in spending as projects now being deferred were undertaken; another worried that the uncertainty attending the outlook for fiscal policy might weigh on business planning for some time. In addition to the uncertainty about the fiscal outlook, manufacturing contacts attributed the weakness in orders and production to softer export demand; one participant added that agricultural exports had also softened. Several participants noted that their contacts were concerned not only about the economic slowdown in Europe, but also about whether the recent slowing in economic activity in Asia might persist.
In their comments on labor market developments, participants generally viewed the recent decline in the unemployment rate and continued modest gains in payroll employment, taken together, as consistent with a gradually improving job market. However, with economic growth anticipated to stay moderate, some participants expressed concern that the pace of job creation would generate only a slow decline in joblessness. Several pointed to a steep drop in the index of hiring plans by small businesses. A couple of participants mentioned that some firms planned to increase their use of part-time or temporary workers rather than full-time permanent employees, at least partly in order to limit health insurance costs.
Participants saw recent price developments as consistent with inflation remaining at or below the Committee's 2 percent objective over the medium run. Although energy prices had risen sharply in recent months, reflecting earlier increases in crude oil costs and supply disruptions, gasoline prices were anticipated to move back down in coming months as those pressures eased. Similarly, effects of the drought were expected to show through to retail food prices over the next few quarters but then subside. By various estimates, underlying inflation trends remained subdued, and indicators of longer-term inflation expectations were generally viewed as stable.
In their discussion of financial developments over the intermeeting period, participants commented on the effects of the policy actions taken at the September meeting to strengthen the Committee's forward guidance and to purchase additional MBS. The initial effects were generally viewed as consistent with a marked easing in financial conditions. For example, yields on MBS dropped noticeably, leading to a decline in mortgage interest rates, and corporate bond yields generally moved lower. Yields on nominal Treasury securities were little changed. Some participants suggested that more time would be required to assess the ultimate effects of the additional MBS purchases on primary mortgage rates and on financial conditions more broadly. The stability in nominal Treasury yields, paired with a decline in TIPS yields, implied a modest increase in inflation compensation, on net, over the intermeeting period. A couple of participants saw this increase as a sign that the open-ended asset purchases posed a risk to the stability of longer-term inflation expectations. However, others saw the effect on expected inflation as relatively muted or likely the result of reduced risks of undesirably low inflation. Participants remained concerned about risks to financial markets associated with the situation in the euro area and uncertain U.S. fiscal prospects, but a couple noted that measures of financial market uncertainty were still relatively low. Several participants pointed out that recent policy announcements by the European Central Bank were received favorably in markets. A number of participants mentioned other signs of greater optimism in financial markets, including a rise in merger and acquisition activity and a moderation in pressures on large U.S. financial institutions. A few participants observed that low interest rates had increased demand for riskier financial products, and a couple of participants saw a risk that holding interest rates low for a prolonged period could lead to financial imbalances and imprudent risk-taking. One participant, however, commented that risk aversion still seemed quite high, citing the very low yields on longer-term TIPS and a large estimated risk premium in equity markets.
Participants also discussed the efficacy and potential costs of the Committee's asset purchases. A number of participants offered the assessment that the Committee's policy actions, to date, had been effective in making financial conditions more accommodative and that lower interest rates were providing support to aggregate spending, most notably in areas such as housing, autos, and other consumer durables. In particular, some pointed out that the favorable developments in mortgage markets over the intermeeting period suggested that the MBS purchases were likely to reinforce the nascent recovery in the housing market. Several added that, based on the experience with earlier asset purchases, the broader effects on economic activity from more-accommodative financial conditions were likely to accrue over time. Looking ahead, a number of participants indicated that additional asset purchases would likely be appropriate next year after the conclusion of the maturity extension program in order to achieve a substantial improvement in the labor market. In that regard, a couple of participants noted the likely usefulness of clarifying the range of indicators that would be evaluated in assessing the outlook for the labor market. Participants generally agreed that in determining the appropriate size, pace, and composition of further purchases, they would need to carefully assess the efficacy of asset purchases in fostering stronger economic activity and consider the potential risks and costs of such purchases. Several participants questioned the effectiveness of the current purchases or whether a continuation of them would be warranted if the recent moderate pace of economic recovery were sustained. In addition, several participants expressed concerns that sizable asset purchases might eventually have adverse consequences for the functioning of asset markets or that they might complicate the Committee's ability to remove policy accommodation at the appropriate time and normalize the size and composition of the Federal Reserve's balance sheet. A couple of participants noted that an extended period of policy accommodation posed an upside risk to inflation.
Committee Policy Action
Members viewed the information on U.S. economic activity received over the intermeeting period as suggesting that the economy was, on balance, expanding moderately, with a pickup in household spending and further improvement in housing markets offset to some extent by a slowdown in the business sector. Although the unemployment rate declined in recent months, monthly gains in nonfarm payroll jobs remained modest, and many members noted that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in the labor market. Inflation rose recently because of a temporary run-up in energy prices. However, longer-term inflation expectations were stable, and over the medium run, inflation was anticipated to run at or below the Committee's 2 percent objective.
In their discussion of monetary policy for the period ahead, Committee members generally agreed that their overall assessments of the economic outlook were little changed since their previous meeting. Accordingly, all but one member judged that maintaining the current, highly accommodative stance of monetary policy was warranted in order to foster a stronger economic recovery in a context of price stability. The Committee judged that continuing both the purchases of MBS at a pace of $40 billion per month and the existing program to extend the average maturity of its Treasury securities holdings remained appropriate. The Committee also agreed to maintain its policy of reinvesting principal payments from its holdings of agency debt and agency MBS into agency MBS. One member opposed further asset purchases because he viewed them as unlikely to help the Committee achieve its goals and because he thought that purchases of MBS represented inappropriate credit allocation. Many members saw the adjustments in the Committee's forward guidance at the September meeting as having been effective in communicating its intention to maintain a highly accommodative stance of monetary policy for a considerable time after the economic recovery strengthens and judged that the guidance remained appropriate at this meeting. However, one member continued to object to the calendar-date-based forward guidance for the federal funds rate. With respect to the statement to be released following the meeting, members made only relatively small modifications to update the description of recent developments in consumer and business spending and in inflation. With the economic outlook little changed, they agreed that the remainder of the statement would reiterate the policy actions and intentions adopted at the September meeting.
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 seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to continue the maturity extension program it announced in June to purchase Treasury securities with remaining maturities of 6 years to 30 years with a total face value of about $267 billion by the end of December 2012, and to sell or redeem Treasury securities with remaining maturities of approximately 3 years or less with a total face value of about $267 billion. For the duration of this program, the Committee directs the Desk to suspend its policy of rolling over maturing Treasury securities into new issues. The Committee directs the Desk to maintain its existing policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities. The Desk is also directed to continue purchasing agency mortgage-backed securities at a pace of about $40 billion per month. The Committee directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."
The vote encompassed approval of the statement below to be released at 2:15 p.m.:
"Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has advanced a bit more quickly, but growth in business fixed investment has slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation recently picked up somewhat, reflecting higher energy prices. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of Treasury securities, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee's holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015."
Voting for this action: Ben Bernanke, William C. Dudley, Elizabeth Duke, Dennis P. Lockhart, Sandra Pianalto, Jerome H. Powell, Sarah Bloom Raskin, Jeremy C. Stein, Daniel K. Tarullo, John C. Williams, and Janet L. Yellen.
Voting against this action: Jeffrey M. Lacker.
Mr. Lacker dissented for the same reasons he had cited at the September FOMC meeting, including his view of the likely ineffectiveness of asset purchases and their potential inflationary effects, as well as the inappropriateness of credit allocation inherent in purchasing MBS. He also continued to disagree with the description of the time period over which a highly accommodative stance of monetary policy would remain appropriate and exceptionally low levels for the federal funds rate were likely to be warranted.
Discussion of Communications regarding Economic Projections
A staff presentation reviewed the results of the consensus forecast experiments that the Committee conducted in conjunction with its August and September meetings. The briefing highlighted the important role of the assumed path for monetary policy in constructing a consensus forecast and reviewed several alternative approaches for setting such a path. As a possible alternative to a consensus forecast, the staff presentation also discussed potential enhancements to the SEP. In their discussion, participants agreed that FOMC communications could be enhanced by clarifying the linkage between participants' economic forecasts, including the underlying policy assumptions, and the Committee's policy decision as expressed in the postmeeting statement. However, most participants judged that, given the diversity of their views about the economy's structure and dynamics, it would be difficult for the Committee to agree on a fully specified longer-term path for monetary policy to incorporate into a quantitative consensus forecast in a timely manner, especially under present conditions in which the policy decision comprises several elements. Participants agreed to continue to explore ways to increase transparency and clarity in the Committee's policy communications, and they indicated a willingness to look into modifications to the SEP. At the end of the discussion, the Chairman asked the subcommittee on communications to explore potential approaches to providing more information about the Committee's collective judgment regarding the economic outlook and appropriate monetary policy through the SEP.
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, December 11-12, 2012. The meeting adjourned at 12:50 p.m. on October 24, 2012.
Notation Vote
By notation vote completed on October 3, 2012, the Committee unanimously approved the minutes of the FOMC meeting held on September 12-13, 2012.
_____________________________
William B. English
Secretary |
2012-10-24T00:00:00 | 2012-10-24 | Statement | Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has advanced a bit more quickly, but growth in business fixed investment has slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation recently picked up somewhat, reflecting higher energy prices. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of Treasury securities, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committeeâs holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and disagreed with the description of the time period over which a highly accommodative stance of monetary policy will remain appropriate and exceptionally low levels for the federal funds rate are likely to be warranted. |
2012-09-13T00:00:00 | 2012-09-13 | Statement | Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committeeâs holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and preferred to omit the description of the time period over which exceptionally low levels for the federal funds rate are likely to be warranted.
Statement Regarding Transactions in Agency Mortgage-Backed Securities and Treasury Securities |
Subsets and Splits